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									                 INSTITUTE OF LOSS ADJUSTERS
                      OF SOUTHERN AFRICA


                              TECHNICAL BULLETIN
                                 AUGUST 2002

                                TABLE OF CONTENTS


Note: This table will be up-dated in future issues.

A.    EDITORIAL NOTES                                               PAGES
      Editor’s Comments                                 Nov ’99      A1-1
      Editor’s Comments                                 June ’00     A2-1
      Editor’s Comments                                 Apr ’01      A3-1
      Editor’s Comments                                 Oct ‘01      A4-1
      Editor’s Comments                                 May ’02      A5-1
      Editor’s Comments                                 Sept ’02     A6-1

B.    ILA NEWS
      Membership                                        Nov ’99      B1-1
      Membership News                                   Nov ’99      B1-2
      Membership News                                   June ’00     B2-1
      Membership News IMA                               June ’00     B2-4
      Membership News: Office Bearers                   May ’02      B3-1

C.    EDUCATION

D.    GENERAL PRINCIPLES OF LOSS ADJUSTING
      Y2K & Insurance Claims                            Nov ’99      D1-1
      Promotion of Access to Information
       Act 2 of 2000                                    April ‘01    D2-1
      Prescription                                      April ’01    D3-1
      Fraud Database                                    April ‘01    D4-1
      Burglar Alarm Systems – What to look for          Oct ‘01      D5-1
      Misrepresentation and Non-Disclosure –
      Insurance Amendment Bill 2001                     Oct ‘01      D6-1
      Fire and Electrical Wiring                        May ’02      D7-1

E.    FIRE AND ACCIDENT INSURANCE
      Basic Guide to Building Fire Investigations       Nov ’99      E1-3
      Meaning of Transit in a Goods in Transit Policy   April ’01    E2-1
                                          -2-



F.   LIABILITY INSURANCE
     Two employers, who is liable?                           Jun ’00     F1-1
     Is Employers Liability Insurance Necessary              Nov ’99     F1-2
     Two Employers, who is liable?                           April ’01   F1-4
     Contracting out of liability – Employer for Employees   Oct ‘01     F2-1
     Damages for psychological harm                          Oct ‘01     F3-1
     Slip and Trip                                           May ’02     F4-1
     Claims Made Revisited                                   May ’02     F5-1
     Breach of Professional Duty                             May ’02     F6-1
     Adjusters Legal Liability                               May ’02     F6-3

G.   CONSTRUCTION AND ENGINEERING
     Assessing the Cost of Building Foundations              Nov ’99     G1-2
     Analysing building quotations                           Nov ’99     G1-3
     Analysing Preliminary and General Items                 Jun ’00     G1-8

H.   GENERAL
     Fraud in General                                        Sept ’02    H1-7
     Truth Verification                                      Sept ’02    H2-3
EDITOR’S COMMENTS                                                                               A6-1




As I see it the task of the Technical Editor is to source and publish articles incorporating
information that is of interest and use to all of our members. In this capacity it is relatively easy to
accomplish this objective using ones own personal interests and affiliations. However, this might
not prove to be every body’s cup of tea and, as such, I appeal to all the readers to provide me with
concepts and ideas as to what type of subject should be covered in future issues.
In this issue I would like to express thanks to the authors of, what I believe, are most interesting
articles.


A thank you goes to Mr Wynand van Vuuren of SA Eagle Insurance Company, who has provided
a most interesting article on fraud in the Insurance Industry.


To compliment this, Mr Steve Chart, who was a former Detective Inspector at New Scotland Yard,
has provided an article on truth verification and methods of witness screening.


As we all know our Principals do not all subscribe to the use of truth verification techniques in
claims investigations, but there are occasions when the Insured has a particular problem with his
own staff members and requires some form of expert assistance in this regard, which I believe
does not conflict with Insurers requirements.

The next issue of the Technical Bulletin is scheduled for publication in November 2002 and I
request that if you have any ideas with regard topics that could be incorporated into this bulletin,
that you contact myself and/or Mandy Evans at the ILA office.

If there is anyone who would like to provide their own article or have some material available that
you believe would be of interest to our members, please send this through to assist formulating
future editions.

In closing I once again thank the authors of the articles included in this edition and hope that you
all enjoy the read.

Peter Jenkinson
FRAUD IN GENERAL                                                                              H1-6


                                         By W S van Vuuren
                                 Group Claims Manager, S A Eagle


The extensive publicity given to fraud, bribery and corruption in their many guises creates a chilling
awareness in the law-abiding citizen, that the 1990’s has seen a marked deterioration in the
standards of public and private morality. What is more, the cases that have featured so prominently
in the press, whether or not they have led to the appointment of commissions of enquiry, represent
only the tip of the iceberg, and there are undoubtedly vast numbers of frauds, greater and lesser,
that go undetected or, if discovered, for one reason or another are not brought into the open and
exposed to public censure.


Fraud, committed by policy holders against insurers constitutes a substantial proportion of this
hidden crime but, for obvious reasons, no statistical information is available and none can be
compiled, a lack making it impossible to assess with any accuracy the effect of this criminal activity
upon insurers, loss ratios and the premiums that have to be charged.


Policy holders who make honest claims – or none at all – and those members of the public who are
deterred by high premiums from effecting any or sufficient insurance are entitled to ask what
insurers, brokers and agents are doing or intend to do to reduce the present high incidence of
fraud and thus bring down the cost of cover. Unfortunately, there is no simple answer to this
question.


Accident


In number, if not in amount, attempts at cheating occur predominantly in the form of exaggerated
claims – the policy holder attaches inflated values to property that has been lost or destroyed. In
claims by business enterprises, this trend can often be detected if the loss adjuster examines the
books of account, but in the event of a fire, these records may also have been destroyed. Indeed, if
the policy holder is bent on fraud, he will make sure that they are.


Personal and domestic insurance present greater difficulty, because very few persons maintain
complete and accurate record of their possessions; nor are they obliged to do so. While it is true
that the onus is upon the claimant to prove the amount of his loss, he need produce only
                                                                                                   H1-2
reasonable evidence of value, and today, under "new for old" policies, this will usually be the
replacement cost of items similar to those allegedly lost.


Although in South African law, anyone who makes an exaggerated claim on an insurance company
risks prosecution for fraud, insurers are understandably very reluctant to pursue an action, mainly
because it will probably be very difficult for them to prove any deliberate misrepresentation and
fraudulent intent, which are not necessarily present whenever there has been some exaggeration.
The reasoning for those who inflate their claim is usually that they confidently expect the insurer to
offer less than the amount claimed, for example, because of the application of average, or because
a deduction is made for depreciation; the policy holder’s argument is that they are only anticipating
this reaction on the insurer’s part. Unhappily, this behaviour creates a vicious circle, from which it is
very difficult to escape.


The claimant may also be under a genuine misapprehension about the basis upon which he is
entitled to formulate the amount claimed, or he may be unaware, when he presents his claim, of
the true value of the property lost, with the result that he plays safe and allows himself a margin of
error.


In SA Fire Insurance Company – Dunstan Coetze CJ said:


“It is true that the fact that a claim is greater …… than the amount to which the plaintiff may really
be entitled per se, no proof of (fraud) although an exceptional over estimate, coupled with other
circumstances – as, for example, where the excessive valuation has been designedly made – may
well justify the conclusion that it has been done with the object of defrauding.”


In this decision (and several similar decisions), our courts have said that the settlement of the
amount of the claim is in effect a business matter, subject to negotiation and assessment of values
on both sides; differences of opinion and the taking up of bargaining positions are therefore
permitted. For this reason, most insurance companies deem it unwise or even dangerous to their
reputation to repudiate a claim solely on the grounds that it is exaggerated, even grossly so,
because the policy holder may contend that it was meant only as an opening gambit. This can,
however, be a risky procedure for the policy holder, since by reference to “other circumstances”,
the insurer may be able to establish fraudulent intent, bringing in the possibility of criminal
prosecution of the policy holder.
                                                                                                      H-3
Another method of inflating a claim, attempted by the more adventurous and less scrupulous policy
holder, is to take advantage of a genuine incident such as a theft or fire by including in the claim,
property that was not in fact stolen or destroyed or even property that was never in his possession
at all. This form of fabricated loss is, of course, blatantly fraudulent and is not submitted for the
purpose of bargaining or negotiation. It is often difficult, however, for the insurer to prove beyond a
reasonable doubt, to the satisfaction of a criminal court, that fraud had indeed been committed,
and without such proof, insurance companies have in the past refrained from pressing charges.
Nevertheless, if after detailed investigation and careful consideration of the probabilities, an insurer
is satisfied that there has been fraud on the part of the policy holder, it may repudiate liability for
the claim and cancel the policy. This step might, however, expose it to a civil action by the policy
holder for payment of his claim. If the claim should succeed, there may be serious repercussions
for the insurer.


Then again, it can be dangerous for the policy holder to falsify a claim in this way, because if he is
an “amateur”, trying it for the first time, he will not be aware of the nature of the enquiries that will
be made by adjuster and insurer should they smell a whiff of chicanery. If the claim is a large one,
the investigations will be intensive and thorough; on the other hand, if only a small amount is
involved, it is certainly not worth while for the policy holder to risk repudiation and the possibility of
criminal prosecution. Furthermore, the cancellation of his policy or a refusal to renew it by the
insurer would constitute a serious blot upon his record of insurability, making it nigh impossible for
him to obtain further insurance.


Doctor M Clark, a professor in criminology, sums up the position of the “amateur” fraudster thus:


“One would expect that the inexperienced fraudster, unfamiliar with events in a real loss, might
make errors and that she/he would not know much about claims handling procedure. Considerable
weight, however, is given in addition to the fact that fraudsters are foolish; they make silly mistakes
in their stories, contradict themselves at interviews, produce palpably false or altered
documentation, protest violently if not paid promptly, threaten insurers with publicity through
consumer organisations, and generally portray a lack of confidence in their supposedly rightful
expectations of being paid.”


A recent newspaper report stated “Due to the increase in interest rates South Africans will struggle
to pay their home bonds, vehicle financing, normal hire purchase and credit cards."
                                                                                                  H-4
As regards burglary claims under the domestic policy, it is imperative that you alert the loss
adjusters in your region to make contact with the sheriff’s office first to ensure that a claimant’s
goods have not been attached in terms of a warrant of execution.


We have recently encountered two such claims and in terms of company policy, we have taken
appropriate action to bring these offenders to book, both as an example to others, who might have
been tempted to do likewise, and in the interest of other policy holders.


Motor


The ubiquitous motor vehicle is found in every stratum of society and represents a substantial
proportion of the total assets of individual and corporate owners, of whom the vast majority regard
it as an essential item of equipment. For the most part, it is insured against loss or damage – if not
comprehensively, at lease against fire and theft.


Many different parties are involved in the overall operation and administration of motor insurance,
including the insured and his family or employees authorised to drive; agents; brokers; the
marketing, underwriting and claim staff of insurance companies; loss adjusters; tow truck
operators; panel beaters and repairers; purchasers of salvage, including scrap yards;
manufacturers; used vehicle and spare parts dealers; and, of course the police. Small wonder
then, that in the action and interaction of this large and economically powerful cross section of the
private and business world, fraud is perpetrated, both crudely and ingeniously, on a grand and –
apparently – increasing scale.


As with other types of insurance fraud, so with motor vehicle fraud, they are both amateur
swindlers and “professionals”, represented respectively by the one off, small time opportunists and
the sophisticated long term large scale operators.


Space is not available here – to give a detailed account of the manifold ways in which motor
vehicle insurers may be defrauded or of the counter measures that are employed, but the following
unembellished examples may help to emphasise the ingenuity of the fraudsters and the magnitude
of the problem.


Insurers do not usually inspect the vehicles that they are asked to insure, so that it is possible to
obtain cover on a wrecked car bought as salvage, but represented as being in good working order
that is later made to disappear and is reported stolen, never to be recovered. Alternatively,
                                                                                                  H-5
insurance may be effected upon the remains of a burnt out vehicle which, after being
“stolen/highjacked”, is “recovered” having allegedly been set on fire by the “thief”.


There are other variations on this scene, one of which stems from the fact that the substantial
increases in motor insurance premiums within the last few years has caused many vehicle owners
to reduce their own cover from comprehensive to third party, fire and theft. If a vehicle so insured
is involved in a collision and sustains damage for which the owner is unable to recover
compensation from another motorist, he may be tempted to report the car as stolen, so that when it
is “recovered”, the insurer is asked to pay for damage said to have been caused by the “thief”.
Fraud of this type, it is suspected, is frequently attempted. Furthermore, a high proportion of the
cars reported stolen are “old bangers”, which are not normally the target of thieves, who find it far
more profitable to steal newer and more valuable models. It is therefore believed that many of the
older cars reported stolen and never recovered end their lives in the chop shop.


The writer has recently been alerted that a certain individual insured the same vehicle with no
fewer than 5 different insurance companies. After he had arranged for its total loss, he claimed
from all of them, but he was too greedy and was exposed and convicted.


Subtler, but equally unsuccessful, were the husband and wife who each insured the same family
car with different insurers. The wife using her maiden name and accommodation address. The
vehicle was later reported stolen to both insurers. After an investigation by the police, the couple
confessed to this fraud and previous similar triumphs; and they had plans for more of the same.


In another case, a legitimately insured private car sustained major damage in a genuine collision.
The insurer paid a total loss, and sold the salvage to another person and delivered it to his home.
He then arranged a comprehensive policy, concocted a fictitious collision in a manner that, for
obvious reasons, was not disclosed, and lodged a claim, arranging for the wreck to be inspected
by a loss adjuster at this home, from which it had never moved. He accepted a total loss settlement
and persuaded the insurer to let him keep the “salvage” for his brother-in-law, who he said, wished
to use it for spares. He therefore did not surrender the registration papers to the insurer. Had he
not been caught at this stage, he could have repeated the same process with another insurer. This
miscreant had previously been employed by an insurance company and had used his knowledge
of procedure to try to cheat the system.


Motor insurance fraud, however, is by no means confined to policy holders. Many of the larger
losses and high percentage of all claims that are wholly or in part fraudulent are perpetrated by or
                                                                                                      H-6
with the connivance by a small number of unscrupulous panel beaters, repairers, third parties and
insurance company staff.


As of late, we have encountered a number of fraudulent claims involving fictitious third parties who,
in some instances produced false policy reports in order to support their (fraudulent) claims.


It is imperative:


1. That the branch claim staff obtain a policy report direct from the SA Police services and not
    accept ones produced by any third party
2. That any uninsured third party should supply a copy of its vehicle’s registration document in
    order to prove ownership
3. Before any uninsured third party claim is accepted, such claim should be assessed by a senior
    person in the branch who must do a file note to the effect that the merits have been properly
    assessed and thereby authorising the claims handler to obtain the third party signature to a
    release.
As regards “stolen / hijacked” vehicle claims, we don’t expect each and every claim to be
investigated, taking cognisance of the increase in interest rates, it will be necessary to investigate
some of the higher valued vehicles.


General


There is no presumption of fraud and any insurer must therefore clearly establish fraud on behalf of
the insured, proving not only that the insured knew that he was making a false statement, but also
did so with the intention of defrauding the insurer.


Insurer’s recourse when a fraudulent claim is lodged is to avoid liability for that claim alone and not
to avoid the entire contract. The lodging of a fraudulent claim is regarded as a breach of contract,
entitling the insurer to avoid liability only as from the time the claim is made. In Lembeckers Earth
Moving vs IGI 1984 (3) 51380 m the insurer sought to avoid the policy based upon the contractual
provision that all benefits shall be forfeited if the claim is fraudulent. The court held that in cases of
fraudulent claims, the clause rendered the policy voidable (contractually) as from the time such
claim was made at the option of the insurer and not ab initio void.


It is not sufficient for the insurer to prove that the insured lied, used fraudulent means, withheld
information, or mislead the insurer at the claim stage. The nature of the “fraud” must be material.
Any insurer may void a policy ab initio due to a material misrepresentation (i.e. the giving of false
information) or a material on disclosure (withholding of information). If this induced the insurer to
enter into or renew a contract on terms or for a premium it would not otherwise have agreed to.


If grounds exist for an insurer to void a policy ab initio, it does not necessarily have to do so.
However, should the insurer elect to void the policy ab initio, it must return all premiums paid and
may also reclaim payment for claims previously made under the policy for events that occurred
after the date from which the policy is declared void.
TRUTH VERIFICATION PROCESSES                                                              H2-3


                                             By Steve Chart
                                 Dip.Applied Psychology, F.I.P.I.(UK)
                                      Steve Chart and Associates
                           Former Detective Inspector, New Scotland Yard


INDIVIDUAL SUSPECT / WITNESS SCREENING PROCESS


In Radnor, Pensylvania, the police recently interrogated a suspect by placing a metal colander on
his head and connected it with wires to a photocopy machine. The message “HE’S LYING” was
placed in the copier and police pressed the copy button each time they thought the suspect wasn’t
telling the truth. Believing the “lie detector” was working, the suspect confessed!


Stories like this tend to put “lie detection instruments” into perspective. It also confirms that the
instruments (Polygraph etc.) are often used incorrectly in South Africa, where “blanket testing” of
suspects and witnesses alike, takes place.


In depth studies since 1990 into the subject of truth and deception show that “lie detection
instruments” are not a panacea, even though the Computer Voice Stress Analyser has been used
with much success. To quote Professors DA Louw and DJA Edwards (Psychology – An
Introduction for Students in Southern Africa 2nd Edition) – “does the polygraph record show a
distinct pattern of autonomic responses when someone is lying? Unfortunately, the answer is –
“No, not really”. The polygraph provides only a rather gross measure of arousal, and it is not
possible to distinguish reliably between patterns of arousal when a person is lying and patterns of
arousal that occur at other times”.


Indeed, most of the independent research (as opposed to the research conducted by the
Department of Defence Polygraph Institute in the USA) indicates that as a machine on its own, its
reliability in determining voracity is little more than chance.


It has also been found, that so-called “cold calls”, when another operator analyses the graphs
produced by a subject in an interview, without the benefit of seeing the interviewee, are even less
accurate.
                                                                                                H2-2
The Computer Voice Stress Analyser (CVSA™) has been used since 1990. The CVSA™ is sold
only to law enforcement agencies (there are over 1 000 law enforcement agencies in the USA
utilising the CVSA). Many of those police forces previously used the Polygraph, but have, for one
reason or another, “mothballed” their Polygraph machines in favour of using the CVSA. They prefer
the speed, accuracy and non-threatening nature of the CVSA.


The manufacturers of the CVSA made a conscious decision to sell the machine to law enforcement
agencies only, so that they could be sure the instrument would be used in the correct
circumstances only, i.e. pre-employment testing and when there is serious doubt about the voracity
of a witness, or there is a positive suspect denying the offence. They wanted to avoid the
possibility of “chart rolling” which would inevitably happen if the machine were sold commercially.


“Chart rolling” occurs when a number of individuals are subjected to a “lie detector test” and the
operator will look at the results of the test and determine that the person is truthful or deceptive
without taking cognisance of numerous other factors which influence an individual’s physiological
arousal. One only has to look at the number of commercial companies offering “Polygraph Tests”
to realise that the very situation which eventually caused the demise of the Polygraph machine in
the commercial sector in the USA is occurring in South Africa.


Inevitably, in discussions on Voice Stress Analysis, the first question asked is “how does it
compare with the Polygraph?” The answer is always the same. Both machines work on the same
principle, analysis of emotional arousal, but use different technology and interviewing techniques.
Both machines are very accurate indicators of emotional arousal, but it is the quality, background,
experience and commitment of the interviewer/operator which determines the success or failure of
the instrument they are using.


The second question is – “Does it hold up at CCMA? The answer is that there is no precedent with
regard to the CVSA, as the results have never been challenged. However, the CVSA, like the
Polygraph, is only an investigative tool. The results of a CVSA or a polygraph examination are
accepted by the CCMA, provided there is other evidence to support the findings and the
individual’s constitutional rights have been observed.


Evidence to support the examination results is crucial, and can be found in the form of admissions
or physical evidence. It can also be found in verbal, non-verbal and vocal clues.
                                                                                                 H2-2
Over the years, through studies relating to deceptive communication and applied psychology, a
process called a Suspect/Witness Screening Process has been developed. It is not a product, but
a system which is use to determine the truth, by carefully analysing verbal, non-verbal and vocal
clues. If necessary, the individual is asked to undergo a voice stress analysis test. However, this is
only as a last resort. It is generally found that if a person is going to make an admission, they will
do so before the test. If they are lying and still agree to the test, then the chances of getting an
admission after the test are greatly reduced. The purpose of the test, therefore, is to verify the
findings.


The study of deceptive communication is both art and science, and specialists in the field never
stop learning.


In the final analysis, the real question is – Are truth verification “instruments” a useful tool in the
investigation process, or are they just “psychological billyclubs”? The general opinion is that the
answer to both questions is “yes”. Therefore, they should only be used as a last resort, and
“blanket testing” should not be allowed.


There is a service that is offered to clients, a number of whom are loss adjusters. This is a “support
service”. A Forensic Interviewer provides the same support you would expect from a Forensic
Handwriting Analyst or Fingerprint expert. The tools used are – experience, commitment, a deep
understanding of human behaviour and an ability to analyse accurately, verbal, non-verbal and
vocal clues. The Computer Voice Stress Analyser or “lie detector machine” takes up perhaps no
more than 5% of the overall assessment.




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