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Photo Inspection: First line, of defense against vehicle insurance
HISTORICAL OVERVIEW OF
VEHICLE PRE-INSURANCE INSPECTION
How It Started, What It Is, What It Does
The significance of vehicle pre-insurance inspection is best
understood through the perspective of history and performance,
and an appreciation of the myriad issues related both to the
need for vigorous inspection programs, and the benefits provided.
Vehicle inspection, in the most fundamental terms, is a system designed to
verify and document the existence of a motor vehicle, as well as its condition
and existing options and accessories. The primary goal of the inspection process
is to help lower the cost of insurance coverage for physical damage by significantly
reducing opportunities for fraudulent claims.
New York State Led The Way
In 1977, as auto insurance rates had risen to unparalleled levels, there was
strong sentiment and increasing public protests over the continuing spiral
in the cost of insurance, New York State passed the Insurance Reform Act of
1977, also known as “Regulation 79" or the “Photo Inspection
Law.” This forward-looking legislation, which has served as the model
for other states and has been responsible for saving hundreds of millions of
dollars, was designed to help stabilize or reduce auto insurance costs. This
has been accomplished to a large degree by preventing non-existing or “phantom” vehicles
from being insured, and suppressing both exaggerated damage claims and claims
for pre-existing damage from being made by policy owners looking to defraud
an insurance carrier.
Regulation 79 required that vehicles with physical damage insurance coverage
including fire, theft, collision or comprehensive coverage be inspected by
a representative of the insurance carrier prior to issuing a policy, a ground-breaking
idea in the ‘70s. The inspection, which involved verification by an inspector
that the all-important Vehicle Identification Number, or VIN, matched the vehicle,
also established that various options and accessories claimed by the policy
owner were correct. The inspection law required and that pre-existing damage
to the vehicle be clearly identified and photographed, along with the Federal
Motor Vehicle Safety Certification Standard label, frequently referred to as
the EPA label. This type of inspection was arguably the first effective deterrent
to vehicle-related insurance fraud.
In late 1977, CARCO Group, Inc., a privately-held corporation, was founded
to provide physical damage pre-insurance inspection services to the insurance
industry. As a convenience to the motoring public the company established a
network of more than 1,000 inspection stations throughout New York, with sites
accessible to all residents of the state. An integral part of the inspection
service was the leading-edge computer processing and communication capabilities
developed by the company, which would ultimately prove to be a powerful investigative
and law enforcement tool.
Based on the success of New York’s Photo Inspection Law in quickly reducing
the number of fraudulent claims, the Commonwealth of Massachusetts and New
York’s neighboring state, New Jersey, implemented similar programs. As
in New York, a comprehensive physical damage inspection site network and vehicle
inspection program comparable to New York was established.
Following Massachusetts and New Jersey the next state to introduce an inspection
program, although limited in scope, was Florida. Physical inspection services
to meet the needs of insurance carriers in Florida, based on the successful
programs in New York, Massachusetts and New Jersey, were established by private
inspection service contractors. In 1994 the state of Rhode Island also implemented
a vehicle pre-insurance inspection program.
Based in large part on the success of pre-insurance inspection programs in
the U.S., the Canadian Province of Ontario passed the “Insurance Act”,
which mandated physical damage inspection of vehicles throughout the Province.
Within a few months after passage of the “Act” the site network
of nearly 750 inspection facilities in Ontario, was fully operational.
VEHICLE INSURANCE FRAUD IS A NATIONAL PROBLEM
Crime involving motor vehicles is a costly national problem, which unfortunately
represents substantial profits. Because of this “profitability” and
potential for sizeable fraudulent claims, the insurance industry has come under
attack by its critics for not being aggressive in investigating and prosecuting
the perpetrators of fraudulent claims. The reasons given have included the
high cost of investigation and litigation, and the consequences of losing cases
in court and being sued for non-performance on insurance policies. The safe
alternative for the insurance companies has traditionally been to raise rates
and pass the cost along to policy holders.
Vehicle crimes and insurance frauds that encompass real theft and legitimate
accident damage claims, petty frauds involving inflated claims, and exotic
scams executed by skilled individuals and organized crime rings, force honest
premium payers to subsidize the enterprises of dishonest citizens and clever
criminals. Although vehicle-related crimes represent about a tenth of all reported
property crimes, they have accounted for more than half of all property crime
losses [in dollars] for a number of years.
Billions lost each year
In 1987 annual losses for property crimes involving vehicles were in excess
of six billion dollars, compared to the combined losses attributed to all other
major categories of property crime, which totaled $6.4 billion. In 1990, vehicle
crime losses totaled more than $8 billion out of the total property crime losses
of $15 billion. In statistics published in the 1992 FBI Crime Reports, the
figures were virtually unchanged, even though the percentage of year-to-year
increase in auto crime decreased: over $7.6 billion for motor vehicle crimes
out of the total of $15 billion. The conclusion is that vehicle crime, including
the sizeable fraud component, continues to be big business. As you can see
by the figures shown for two reporting years, albeit a decade apart, the financial
significance of vehicle-related crime remains relatively unchanged.
Major Property Crime Losses
Larceny-Theft & Burglary
the estimated percentage of fraudulent claims varies from year-to-year
depending on the source, it is substantial. Figures from the
insurance industry, however, tend to disguise the problem.
The industry's estimates have generally been within the 10–15
percent range of claims submitted. By contrast, law enforcement,
fraud bureaus and insurance claims investigators feel that
fraudulent claims represent far higher percentages, generally
between 20 to 30 percent of all claims submitted. In some states,
Whichever range is correct, or perhaps somewhere in between, the results are
measured in billions of dollars. Each year, huge profits are made by criminals
who successfully commit insurance frauds on a regular basis and by policy owners
attempting to recover part of their premiums from the insurance company. These
losses place a significant financial burden on honest consumers who ultimately
pay the bill in the form of higher insurance premium rates. A resource problem
is also created for law enforcement agencies who are required to investigate
fraudulent claims. In the case of theft fraud, for example, law enforcement agencies
spend valuable time investigating accidents that never took place, and searching
for “phantom” vehicles that do not exist.
In 1987, according to the FBI Crime Reports, a motor vehicle was reported stolen
every 24 seconds. The FBIs 1993 statistics showed that vehicles were reported
stolen on an average of every 20 seconds, while in 2000, the frequency was reduced
to every 35 seconds – only a slight improvement over a 13 year period.
If you factor in the fraudulent theft reports for phantom vehicles that would
have been filed if pre-insurance inspection programs didn't exist in a number
of states, the total number of offenses would have been significantly higher.
And while many of the vehicles included in these statistics were in fact stolen,
a large percentage, however, were phantom vehicles.
THE PHYSICAL INSPECTION SOLUTION
It is unlikely that there will ever be a satisfactory solution to all vehicle
property crimes, or absolute deterrents to real theft, vandalism and other
criminal activities. In the case of insurance fraud, however, mandatory inspection
programs have proven their worth in deterring a spectrum of schemes in every
state with a strong pre-insurance inspection law and active anti-fraud programs.
As a requisite for obtaining an insurance policy, inspection can produce
dramatic results. It makes the insured prove that a vehicle actually exists,
thereby preventing a host of otherwise easy to execute schemes.
Vehicle insurance fraud, like other insurance crimes, is often referred to
as a hidden or invisible crime. Regrettably, it is also widely perceived as
acceptable because “everyone does it.” Because of the very nature
of fraud and the intent of the perpetrator to deceive, the evidence of the
crime isn't usually visible and is therefore difficult to detect.
John Reiersen, formerly Chief Examiner in the New York Insurance Department's
Property and Casualty Bureau and an important force in making New York’s
mandatory inspection law a reality, agrees with the prevailing perception that
insurance fraud isn't considered a crime by those who reap the benefits. According
to Reiersen, "Many policy owners feel that filing an inflated or fraudulent
claim isn't a crime. It's simply getting back at the company that's been ripping
you off." In Reiersen's opinion, a significant percentage of all vehicles
reported stolen in states with serious crime problems, are attempts to defraud
In reality, insurance fraud is a crime of major economic significance. In the
long term its consequences do not affect insurance carriers, but the public
who will ultimately pay billions of dollars each year in increased premiums
and law enforcement costs. Policy owners pay the price for fraud, whether it's
day-to-day abuses such as inflated damage claims or sophisticated schemes engineered
by organized crime rings. Although a large portion of vehicle-related insurance
fraud is the result of organized crime such as high volume chop shops, a substantial
portion is also attributable to fraudulent claims made by “average” citizens.
Many routine theft claims, for example, include accessories or personal items
that didn't exist such as an expensive CD player, car phone or expensive radio.
Claimants regularly inflate the value of lost or damaged property, attempt
to collect for damage that existed when the vehicle was purchased, or try to
obtain inflated estimates for damage repair.
Insurance frauds can be implemented in many ways and classified
under a number of categories. The intent, however, is
generally the same – to make a profit through deception.
A definition given by the Coalition Against Insurance
Fraud accurately describes the nature of insurance fraud: “Any
deliberate deception perpetrated against or by an insurance
company or agent for the purpose of unwarranted financial
gain. It occurs during the process of buying, using,
selling and underwriting insurance.”
Experienced insurance claims specialists in the property and casualty industry
generally agree that fraud accounts for a significant percentage of all claims,
perhaps ten to fifteen percent of all claims, or more. The major problems occur
with vehicle casualty and property losses associated with theft and arson where,
according to the National Insurance Crime Bureau [NICB], between ten to 30 percent
of all property/casualty insurance claims are fraudulent.
The key to fighting fraud in general and vehicle insurance fraud in particular
is to understand its nature, scope, mechanics and economic implications. Only
then will the solutions be clear. In states with strong legal deterrents such
as mandatory inspection programs, insurance fraud bureaus, and the commitment
and resources to vigorously pursue offenders, progress is being made. A result
of this progress can be seen in the various states that now have fraud bureaus
within state insurance departments that cooperate with law enforcement agencies
and the insurance industry.
While completely eliminating vehicle insurance fraud may not be a realizable
goal, making it more difficult for individuals or organized crime rings to profit
is. Through effective anti-fraud laws and regulations the situation will change.
Laws that make it difficult for dishonest people to dupe insurance companies,
that encourage investigation of suspicious claims, that require physical inspection
before an insurance policy is written, and enforce laws that punish people who
commit fraud, will make the difference.
MANDATORY INSPECTION IS WORKING IN NUMBER
Mandatory vehicle inspection, with visual documentation [photographs or digital
images], as a requisite for obtaining an insurance policy is the only proven
deterrent to vehicle insurance crime. Inspection laws now in effect in various
states require a new policy applicant or policy holder adding a newly acquired
used vehicle to have it inspected and photographed at one of the many designated
inspection sites located within the respective states. Inspection programs prevent
a variety of costly insurance frauds from being successful and often save countless
hours of police work to investigate fraudulent claims.
New York’s pioneering legislation, which is still the model used as a baseline
by other states considering comparable programs, established rigid standards
for physical inspection and photo documentation of newly acquired used vehicles
including autos, trucks, vans, and motorcycles. Since the insurance carrier is
given the option to inspect any vehicle, in many cases even high-priced new vehicles
are candidates for inspection.
The inspection process virtually eliminates future claims for the theft or repair
of phantom cars, or the repair of damage that existed before the vehicle was
insured. It requires that inspectors see the vehicle and acknowledge in writing
that they performed the inspection. The resulting paper trail linking the inspector
to the vehicle is also an effective deterrent to collusion between inspectors
and dishonest policy holders.
The success story about the war on fraud began to unfold with New York's Photo
Inspection Program in the late 1970's. In 1979, for example, about ten percent
of all reported vehicle thefts in the U.S. occurred in New York City. In fact,
New York led the country in the number of vehicles reported stolen with a 14.8
percent increase over 1975. It also had the smallest percentage of recovered
vehicles, only 38 percent. As evidence of the law's dynamics, there were more
than 7000 fewer reported vehicle thefts in New York in 1987 than 1977, ten years
after pre-insurance inspection went into effect. During this period the problem
of vehicle crime was mushrooming in different parts of the country.
The success of New York's legislation had an almost immediate effect on surrounding
states. While reported vehicle thefts declined by about seven percent in New
York in the two years following its enactment, neighboring states such as Pennsylvania,
Connecticut and New Jersey experienced sharp increases: 16 percent, 19 percent
and 36 percent, respectively. The New York law was amended and strengthened in
1988. Since its enactment the consensus is that New York's inspection law has
accounted for more than $100 million in loss payout savings annually, which is
translated into a stabilization of insurance rates. Paradoxically, despite New
York's success, it took more than ten years for any state to follow its lead
in enacting a comparable mandatory vehicle inspection law.
THE PHYSICAL INSPECTION SOLUTION
Mandatory inspection programs provide the opportunity for an authorized inspector
to carefully examine the vehicle's documentation and identification numbers,
its condition and optional equipment, and record the findings on an inspection
report form. The addition of color photographic or digital images provides
a permanent record of what actually exists, not necessarily what the policy
The inspection process, as now performed in states with inspection laws, involves
a thorough inspection of the vehicle and, in states with photographic requirements,
pictures of the vehicles. This includes newly purchased used vehicles and if
required by the insurance company, high value new vehicles. The general consensus
within the claims investigation community is that physical inspection and photographic
documentation is arguably the only successful deterrent to vehicle-related insurance
The Inspection Process
Vehicle inspection generally starts with the inspector copying the Vehicle Identification
Numbers [VIN] from the VIN plate seen through the windshield. The uniqueness
of the VIN is its specially encoded 17-digit alphanumeric sequence that identifies
the vehicle and establishes its origin. It is the equivalent of the vehicle’s
birth certificate. The make, model, year and odometer reading are also recorded
on the inspection report, along with a description of any expensive accessories
found in the vehicle, optional equipment and comments about the vehicle's physical
Standardized VIN Diagram
states where digital or photographic images are required,
at least three color images are produced: two oblique views
which show the rear and passenger side
and front and driver's side of the vehicle. The third photo, a vital component
in the inspection report, shows the Federal Motor Vehicle Safety Certification
Standard Label, including the VIN. The self-adhesive sticker, often referred
to as the EPA label, is located on the driver's side door post or door jamb.
Additional photos are taken of physical damage or special features that the
inspector deems to be important.
The completed report and photos are promptly sent to a central data processing
facility such as the CARCO computer center located in New York [CARCO is one
of the major vehicle inspection services in the country, with operations in all
states with inspection programs]. Here, the inspection information is entered
into a powerful computer database that automatically checks the authenticity
of the VIN to ensure that the vehicle and VIN match. Irregularities can be detected
in seconds. If there is any disparity the insurance company is alerted that further
investigation may be needed.
The photo inspection process results in permanent, tamper-proof, high quality
images that are attached to the inspection report and kept on file by the inspection
service or the insurance carrier. When the insurance company or law enforcement
agency needs inspection information, a copy of the report can be quickly provided,
Inspection requirements are essentially the same in all states with mandatory
programs regarding the number of photos and the contents of each image. Some
aspects, however, differ from state-to-state such as: the documentation format
and information required, the need for photos, grace period after notification,
exemptions and waivers [in years], renewals, age of vehicles to be inspected,
and new/used car inspection guidelines. When an insurance company receives a
request for coverage involving a newly acquired used vehicle, or a change in
carriers, the insured is notified in writing that the vehicle must be inspected
within a specified period of time and provided with a list of convenient authorized
INSPECTION DETERS VARIETY OF FRAUDULENT SCHEMES
Inspection programs are now playing an active role in a number of states in preventing
certain types of insurance fraud. An intriguing variety of fraudulent schemes
can be discouraged or detected by physical inspection. These include claims for
non-existent phantom vehicles abandoned by their owners and reported stolen,
claims for pre-existing damage, dumping vehicles into a body of water such as
a lake, river or canal, and later claiming it stolen. Inspection programs provide
strong deterrents to a spectrum of costly schemes including:
Non-existent or phantom vehicles using phoney VINs.
Claims for damage that existed when vehicle was purchased.
"Paper Car" and
counterfeit title frauds using falsified documents.
Salvage schemes involving titles and VIN plates from salvaged vehicles.
Duplicate car frauds using same VIN plate and documentation.
Duplicate title frauds: to collect claims from sale of vehicle, and theft
Increasing claim value by adding equipment and accessories not in vehicle.
Import/Export frauds using authentic documentation for vehicles residing
in another country.
Staging accidents or claiming accidents that never occurred.
Multiple policy frauds to collect on multiple claims.
Supported By Law Enforcement
Law enforcement officials favor mandatory vehicle inspection as a strong deterrent
to crime and as a tool for obtaining convictions in insurance fraud court cases.
This opinion is prevalent throughout law enforcement communities in states with
inspection laws, and in states with high vehicle crime problems that are considering
similar legislation. The speed and versatility of the inspection process provides
insurance company Special Investigation Units [SIUs], law enforcement agencies
and insurance fraud bureaus with effective tools.
Although insurance rates have historically moved upward because of increased
vehicle crimes such as theft, vandalism and property damage resulting from accidents,
the percentage of overall rate increases related to insurance fraud is lower
in states with inspection programs. Even in states with vehicle inspection regulations,
however, rates may continue to stay high, or even increase, because of the surge
in legitimate personal injury claims as well as fraudulent personal injury claims.
Despite the increase in personal injury claims, the net result of inspection
programs and other anti-fraud activities is a containment of costs by insurance
carriers, stabilization of rates for the consumer and improved productivity for
law enforcement agencies.
THE NATIONAL AGENDA
Although the increased problems in property crimes have grown to nationwide proportions
in a number of areas, representing more than 15 billion dollars each year, vehicle-related
property crimes seem to be the fastest growing, and without strong measures to
counter the escalation in insurance fraud, it is likely to continue. The results
are higher premiums, which tend to heighten fraudulent activities in a never-ending
spiral. Organized crime rings that specialize in insurance fraud, whether it
be health care or vehicle-related, flourish in states lacking effective deterrents.
Unfortunately, no strong federal standards exist other than the Standardized
Requirements Regulations For Vehicle Identification Numbers [VIN], which went
into effect in 1981 and the Federal Motor Vehicle Theft Law Enforcement Act of
1984, which commenced with the 1987 model year. The lack of nationwide reporting,
a unified national database and uniform laws makes it difficult or impossible
to track fraudulent activities on a national basis.
The 1984 Act requires standardized marking of the VIN on targeted new vehicles
and replacement parts. The Motor Vehicle Theft Law Enforcement Act, which requires
that standardized National Highway Traffic Safety Administration [NHTSA] identification
labels be used on specified new vehicles and replacement parts, is divided into
Covers manufacturer's requirements for permanent ID numbers to be placed on up
to 14 major parts of certain vehicle models.
Makes it a felony to alter or remove ID numbers from a vehicle.
Makes it illegal to import or export stolen vehicles.
Mandatory inspection as a requisite for obtaining vehicle insurance is the only
proven deterrent to vehicle insurance fraud. To date, it is the only strategy
that has proven successful in significantly reducing fraudulent claims and stabilizing
insurance rates. Since 1977, when the first inspection law was passed In New
York, billions of dollars have been saved through this unique anti-fraud measure.
The benefits of the photo inspection process extend far beyond the inspection
report itself. Because the policy-holder must prove the existence and condition
of a vehicle, the possibility of future claims for the theft of non-existent
vehicles or the repair of vehicles with prior damage is greatly reduced. In addition
to its deterrent value, photographic evidence also provides an excellent investigative
The major benefit of pre-insurance vehicle inspection lies in its pro-active
rather than reactive attributes. It allows the insurance carrier to take action
to prevent an insurance fraud from occurring, rather than passively allowing
criminals and dishonest citizens to create economic havoc for the motoring public.
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