After an accident at work that could have killed him, Gary Davis of De Soto discovered that he had purchased bogus health insurance policies for his auto repair shop from an agent who shouldn’t have been licensed.
After she turned 94 years old, Lina Dickerson of St. Louis realized her agent had duped her out of her life’s savings as a teacher.
And after her van crashed, single mother Donalda Martinez of Garden City, Kan., learned she had no coverage because her agent had put her premiums in his pockets.
Unfortunately, thousands of Americans are victimized just like Davis, Dickerson and Martinez. Insurance agent misconduct and fraud is widespread and getting worse, according to experts interviewed by The Kansas City Star.
Among the most common abuses: agents who steal a client’s premiums by failing to forward them to the insurance company. Bad agents also sell unlicensed products or coverage that is unsuitable. And some are just crooks, no better than a policyholder who commits insurance fraud.
“A disturbing and growing number (of agents) won’t hesitate to bilk their own clients in order to pad their own lifestyle or bail out an agency that’s in trouble,” said James Quiggle, a spokesman for the Coalition Against Insurance Fraud, a nationwide advocacy group supported by insurance companies, regulators and consumer groups. “It’s a front-and-center problem for regulators all over the country.”
To be sure, most agents are honest, according to experts who have studied the insurance industry.
“The great majority are highly competent and ethical agents,” said Jerry Todd, a risk management professor at St. Mary’s University in San Antonio, “but consumers need to be aware of the potential for fraud and deal with reputable, professional agents they can trust.”
But criminal background checks for agents are spotty. Kansas performs them only when a prospective agent files for a license, not on renewals. Missouri never checks.
And not all states require insurance companies to report agent fraud to authorities when they do find it. Kansas and 10 other states have no fraud reporting requirements at all, according to the Coalition Against Insurance Fraud. At least nine other states, Missouri among them, require reporting only when a customer files a fraudulent claim.
As a result, finding statistics on agent fraud is nearly impossible.
The Star’s database analysis of millions of insurance records, first reported Sunday, found that consumers filed 9,718 complaints with state regulators between 2003 and 2005 specifically about how their agents handled policies or premiums. However, the data collected by the National Association of Insurance Commissioners, based in Kansas City, fail to disclose how many of those complaints directly involved fraud.
“There are no significant data or formal studies on the subject and virtually nothing in journals of either academicians or insurance professionals,” according to a 2000 study published by four university professors in Texas.
Six years later, the Insurance Information Institute — the industry’s statistical clearinghouse — says it also has no reliable information on bad agents.
But The Star found in interviews that agent fraud is on the upswing, possibly because of a flood of new agents. In the last five years alone, the number of agents selling insurance increased by 58,640, according to federal labor statistics.
Utah authorities, for example, convicted 42 insurance agents of fraud last year, up from just one agent in 1995. In Kansas, Insurance Commissioner Sandy Praeger also is seeing an increase.
“Not only is consumer fraud on the rise, but there is also an increasing number of cases being investigated concerning agent fraud,” said Praeger, whose fraud unit has opened 1,042 new investigations since 2004.
Insurance now ranks fifth on a list of industries most frequently investigated by members of the Association of Certified Fraud Examiners. That’s up one notch from the association’s previous report in 2004. Agents probably were involved in more than half of the insurance scams examined, according to John Warren, the study’s author.
All of this comes at a time insurance agents are facing serious credibility issues. A Harris Interactive poll released in May found that only 9 percent of U.S. adults “completely trust” agents to give them good advice. That places them below mechanics, lawyers and six other professional groups.
Still, the number of agents disciplined by state authorities each year is small compared with the number of agents licensed. Since 2003, Missouri has filed disciplinary actions against only 67 agents, while licensing 102,242 to sell policies. Over the same period, Kansas disciplined 184 agents, while licensing 77,181.
Nationwide, state insurance departments discipline about 5,000 agents a year.
Experts, however, say the disciplinary numbers are deceptively low because insurance fraud is easier to commit than detect. And prosecutors often are reluctant to launch expensive financial investigations that can take years to untangle.
“If I had a child who told me he wanted to go into a life of crime, I’d advise him to go into insurance fraud,” said Barry Zalma, a California lawyer and insurance fraud consultant. “It’s fairly easy and the chance of prosecution is low. It’s a lot easier than using a gun to steal money from the 7-Eleven.”
If the local agent who peddles an insurance policy has a dark secret that regulators could have detected through a simple criminal background check, a consumer scarcely stands a chance.
Consider the case of Gary Davis.
Davis literally had no idea what was about to hit him as he worked at Leavenworth Automotive Services in August 2001. An employee dropped a truck tire that struck Davis, now 58, in the back. He needed costly surgery to repair a bowel injury that, if left untreated, was life threatening.
At least Davis had health insurance — or so he thought.
He’d purchased a new health plan for himself and his employees from TRG Marketing of Greenwood, Ind., which saved his company about $400 a month.
What Davis didn’t fully understand, until The Star told him, was that the three men who sold him the plan had something to hide. The top two officers of TRG later acknowledged in court that the health plan was a scam. And the Kansas insurance agent involved, Gregory Strand, is a convicted felon, which Kansas regulators didn’t know.
While Davis prepared for surgery, TRG board chairman Carmelo Zanfei spent his and other customers’ premiums on a luxury trip to Italy with his family. The highlight? A three-night, $4,147 stay at a magnificent hotel in Venice near St. Mark’s Square. While there, Zanfei also spent $1,230 in health premiums on a blown-glass knickknack for his office.
Zanfei wasn’t the only TRG officer living luxuriously off of customers’ premiums. Federal authorities allege that Chief Executive Officer William P. Crouse spent $546,732 in insurance company money to buy a five-bedroom home.
Davis emerged from successful surgery in September 2001. But TRG never paid a dime of his $15,000 in medical expenses.
“They kept stringing us along, saying it was slow paperwork,” Davis recalled.
Davis worked seven days a week, 12 hours a day to pay hospital bills and doctors. He said the physical and financial strain contributed to his decision this April to sell his business, which he had owned since 1982.
Crouse pleaded guilty in October to seven felony counts of embezzlement and money laundering in federal court in Indiana after being accused of stealing about $3 million from at least 7,000 TRG customers. Zanfei is facing trial on similar charges next week. Both already are serving prison time in Florida after pleading guilty to racketeering.
William H. Dazey, an attorney representing Zanfei, declined to comment other than to note that his client has pleaded not guilty. But he added, “These are the kinds of cases where people, honest to God, don’t think they did anything wrong.”
Kansas fined Strand, the agent who sold Davis the policy, $1,000 for failing to “research the program adequately” and relying too much on TRG’s representations that it was a “safe and affordable source of health insurance.”
But it wasn’t until The Star made state regulators aware of Strand’s felony conviction that they revoked his license. While Kansas performs criminal background checks on new applicants for agent licenses, it requires agents to self-report any subsequent convictions.
“Mr. Strand’s conviction was not something we were aware of,” Kansas insurance spokeswoman Charlene Bailey said. “We find this very disturbing and we will act on it immediately.”
Missouri, where Strand holds a nonresident license, also is investigating.
Strand said he began selling the health plan after seeing an ad in an insurance magazine. “I figured an outfit that big had already done all their due diligence,” he said.
Strand also said he remembers writing a letter to Kansas insurance regulators from his prison cell, notifying them about his felony. However, he said he never received a response. Kansas authorities said they had no record of any such letter.
For his part, Davis said he never would have purchased the health plan if he had known about the conviction 11 years ago that landed Strand on the state’s sex offender registry.
“I don’t want anybody like that around my family,” Davis said. “He had the kids insured. I had two daughters.”
With extraordinary access to intimate personal and financial information, bad agents can spend years nurturing confidence and homing in on an elderly client’s assets. And they can do it all under the radar of the state agencies supposedly regulating them.
That’s what happened to 94-year-old Lina Dickerson, a proper but petite figure at only 4 feet 11 inches tall. She’d taught in St. Louis public schools for nearly 50 years and was treasurer of the Sunday school at All Saints Episcopal Church for 70 years.
“Every time she came in she was a perfect lady, with a hat and gloves on,” recalled William McDowell, a Clayton, Mo., lawyer who handled her estate.
But Dickerson had a blind spot for insurance agent Todd McGrath, who’d done her taxes for years.
“He really won her over,” said Dickerson’s longtime friend, Patricia Heeter. “He would call and see how she was and come by. He was good.”
In December 1995, McGrath persuaded the then 87-year-old Dickerson to pull $338,000 from a money market account and purchase a long-term investment that often is considered risky for the elderly.
When Dickerson was 93, McGrath asked her to loan him $306,000 at zero percent interest for 20 years. Moreover, the promissory note included this provision: “This note shall be deemed fully paid upon the death of the holder.”
FBI agents and senior citizen advocates later explained to Dickerson how McGrath had taken her money.
Dickerson wanted to testify against McGrath. But she died just a month before he pleaded guilty in October 2003. McGrath at his sentencing agreed to pay $306,000 in restitution to the beneficiaries of Dickerson’s estate.
But the Missouri Department of Insurance only learned of McGrath’s crimes from an FBI agent after he was sentenced, The Star found. McGrath already was at a federal prison camp in Yankton, S.D., when he received his insurance license revocation. Missouri regulators depend on insurance agents to notify them of any pending criminal case against them. But McGrath never called.
Even when the system works, and a bad agent is successfully bounced by regulators, trusting consumers can lose money if they fail to check an agent’s background. That oversight cost Joyce Tavernaro of Tecumseh, Kan., $53,000.
Disabled in a roll-over accident, Tavernaro was looking for a cheaper supplemental health policy in September 2003 when she met Wilbert House.
House was a smooth talker who flashed what he said was his insurance license when he promised to help her get coverage.
Tavernaro should have taken a closer look — that license had been revoked the previous March because of a string of theft convictions.
She wrote House $3,000 in premium checks. Soon he called with the good news that she was covered. Then he asked her for a loan to bail out his struggling home repair business, and she gave him $50,000.
“He tried to help me out, so I felt a little obligated,” she explained.
This March, House was sentenced to 11 months in prison for felony theft for the insurance policy that never arrived. Tavernaro obtained a civil judgment against him for the $50,000 loan.
On Aug. 25, Shawnee County authorities charged House in an unrelated case with six misdemeanor counts of theft and using deceptive commercial practices.
Tavernaro was devastated to learn that a quick call to the state insurance department would have revealed that House no longer carried a valid license. If she had made that call, she admits she never would have given him her money.
“Check out people’s credentials,” Tavernaro said.
The Star found that the most common way agents go bad is by collecting premiums from a customer and not forwarding them to the insurance company. It’s called “pocketing.”
Insurance regulators’ files are brimming with customers from across the United States who paid their premiums in good faith, then found out during a crisis that they were uninsured.
That’s what happened to Donalda Martinez of Garden City, Kan.
Nine days after an agent accepted her premium, Martinez, a struggling single mother of four, slid through a stop sign on a snowy day. She crashed into another vehicle and totaled her 1994 Ford Aerostar, which still sits in her driveway as a grim reminder.
But when she called what she thought was her insurance company, she learned she wasn’t covered.
Months before, the company had severed its relationship with the agent.
“The agent kept telling me it was going to be taken care of, but nothing ever happened,” Martinez said.
By the time Martinez complained, Kansas insurance regulators already were investigating seven reports that the agent either had misrepresented coverage or had failed to forward premium payments to insurance companies.
After the owner of the other vehicle sued Martinez, she had to pay $4,000 in damages. Today, she’ll only buy insurance directly from insurance companies, not an agent.
Kansas regulators revoked the license of Martinez’s auto insurance agent in 2003, after ruling that he had “misappropriated” her premiums.
Martinez said her experience can serve as a warning to consumers everywhere. She had worked with her agent for a couple of years before he took her money and delivered nothing in return.
“You’re driving around and you believe you have insurance,” Martinez said. “You have a card, but you don’t have crap.”
The story so far
On Sunday, The Star’s database analysis of nearly 35 million insurance records revealed how 2,400 of the largest companies rated in consumer complaints for auto, home and health coverage.
@ Go to KansasCity.com for Sunday’s installment and a searchable database rating the insurance companies.