Falling Prey to Online Charms

TINA HANCOCK

Rick Alley had been out of work too long. Money was running low, and he wasn't comfortable accepting help from his wife's family. One day, while at home surfing the Internet, he saw an advertisement about making a living working online. The ad described how he could learn how to sell insurance from the comfort of his home, and it sounded ideal. All he had to do was pay $39 for the e-book sold on the website and he would be able to run his own agency. Rick paid the $39 with his credit card and downloaded the insurance manual onto his computer. He flipped through the pages, excited at the prospect of getting back to work again.

After finishing the manual, though, Rick didn't feel so confident. Running his own agency sounded a lot more difficult than he imagined. About that time, Denny Morfine, the book's author, called Rick to follow up on his purchase. Denny said he was sure that Rick could pass his state licensing exam. Although Denny was in a southwestern state and Rick was living up north, Denny assured him he would be there every step of the way to help him with the insurance agency. Rick thought, “What do I have to lose?” He eked through the licensing exam and started his insurance business online, right out of his home.

Denny built a website for Rick's agency, which he named Insurance Alley, to help market the business online. Ads were targeted to small-business owners looking for commercial liability insurance. Denny also helped Rick manage the agency's bookkeeping, taxes and bank accounts. Denny was like a business partner and assisted with day-to-day operations, so Rick didn't mind that he took a percentage of the business returns. After Rick expanded his agency to several states, Denny hired Doon Ritter to help Rick answer the phones and return emails. Denny assured Rick that Doon didn't need an insurance license because he was just performing customer service.

Denny's help with the agency was so invaluable that Rick had time to work an outside part-time job at a grocery store to support his family. Somehow that wasn't part of his plan, but the money from the agency didn't seem to go far enough after Denny paid the expenses. As Denny said, “Running an insurance agency is expensive.”

Denny was an aspiring actor who promoted himself and his training business in comical videos. Denny was the wacky professor of his online agency's course, and he danced and sang about how “insurance is fun!” He also linked his talent agency's website and his acting credits to his insurance ads, blogs and incredible success stories.

Rick was a nice guy who was just looking for a way to take care of his family. He had been unemployed and knew how hard it was to make a living. He tried to keep up with the demands of Insurance Alley, but holding down an outside job made it difficult. He trusted that Denny could make the business work for everybody. He knew that Denny had lost his insurance license, but the way Denny explained it, he had been misunderstood. And it didn't matter because Rick had his license, and he was the owner of the company.

Rockwell Construction was a small company with 40 employees. Sue and John Rockwell had built it from the ground up, with a lot of hard work and their own funding. With two young children under the age of six, the couple had their hands full running the company and caring for their family. Most days there were not enough hours to do everything necessary for the business and the family.

Rockwell built small office buildings and strip malls and won several municipal government contracts for projects in the local community. The business had done well, and the company expanded from its original ten employees to several work crews supervised by experienced foremen. Rockwell Construction enjoyed a reputation for quality work and completing projects on time. The workers enjoyed regular pay at competitive rates, and the business was like a close-knit family.

A Good Deal Gone Bad

Sue Rockwell oversaw the office management for the company, while John managed project schedules and supervised the foremen. Sue took care of the paperwork, and, of course, tried to save time wherever possible. One Thursday night in the first week of November, after putting the children to bed, she decided to work on an unfinished task from earlier in the day. She had been shopping for quotes on commercial liability insurance for a project bid. She went online and saw an ad for purchasing a business policy through Insurance Alley. Sue input the required information in the Web form to obtain a quote and was pleasantly surprised when it was lower than all the others she had gathered.

The next day Sue received a call from Doon at Insurance Alley. Doon instructed Sue to return her signed application by fax, and he took her bank information over the phone for the quoted down payment of $789. Doon said the policy would be bound that day, and he would fax to her a certificate of insurance. The monthly payments of $350 were within budget, and Sue was relieved it had been so easy to obtain the required coverage online.

Sue received the insurance certificate by fax that afternoon from Doon, but she noticed that the project was not recorded with an insured interest. She called him back, and he said that to add an insured interest would cost an additional $150. Disappointed, Sue authorized the additional charge. Doon said he would have the certificate reissued, but it would take a few days.

The following Tuesday, Sue called Insurance Alley, but there was no answer. Feeling uneasy, she called her bank and learned that the withdrawal for the down payment had cleared the day she signed the application. She called the agency several times that week and left voice messages. The following Wednesday, Doon returned her call to say the certificate was not ready and it would be another week. Over the next three weeks, Sue called and followed up with emails but still did not receive the certificate. She was getting panicky — without proof of insurance, Rockwell could lose the contract. Toward the end of December, Sue's project coordinator called and requested the certificate. Sue called Doon and explained the urgency of the situation. Doon said he would have his supervisor, Rick, look into the matter.

The next week, Sue called again and asked for Rick, who apologized and said it was an oversight by the insurance company. Sue had received her December bank statement, and realized another deduction by the agency had been processed, far more than the additional $150 due for the insured interest — $489. She called Rick again, who explained that the revised certificate had caused the premium to increase, and the certificate would be provided within a week. Several weeks went by, and Sue's project coordinator issued a final deadline for receipt of the certificate. During this time John got involved, and he was not as patient with Doon or Rick as his wife had been. John told them both that if a policy did not materialize before the deadline, he would file a complaint with the state insurance commissioner. Rick hung up on John.

Call for Help

After three months, the Rockwells still had not received the certificate of coverage. Rockwell Construction could not fulfill the terms of its contract and lost the project. Sue also had not been able to obtain two other certificates for additional projects she had ordered from Insurance Alley during the first weeks, and the company lost those projects as well. With the interrupted work flow and loss of income, the company had to lay off workers, who went to work for competitors. The stress that resulted from the insurance transactions gone awry had taken a terrible toll on the young family and their business.

Sue filed a complaint with her state's insurance department that Insurance Alley had taken her company's funds and provided an invalid commercial certificate of coverage without an in-force insurance policy. Sue said the agency failed to provide documents substantiating the additional deduction from her company's bank account. She alleged that the agency's mishandling of the transactions had cost Rockwell Construction lost contracts, income of approximately $1 million and two-thirds of its permanent workforce.

As an investigator with the insurance department in Sue's state, I have investigated many consumer complaints involving misappropriation and diversion of fiduciary funds — insurance-speak for theft of premiums — both permanent and temporary. Jurisdiction over the agents and their agencies often resulted in administrative discipline consisting of probation, suspension, fines or license revocation (termination). Many of these frauds involved forgery or submission of insurance documents with altered or false information. Other times the agent collected and retained the premium but never issued a policy.

Misappropriation and insurance application misrepresentation are felony criminal violations that are often referred to the fraud division for criminal investigation. Unfortunately, in Sue's case, Rick was in a different state, and my jurisdiction was limited to an administrative case. I knew that if the Rockwells' money disappeared without a valid policy, I would need to refer the subjects to regulatory agencies in multiple states, increasing the complexity of the investigation.

Seeing the Big Picture and the Red Flags

My first investigative action always involves looking at the big picture to determine the components: who was involved, what was done, when it occurred, where it happened and why — the five Ws. In this case, Insurance Alley took Sue Rockwell's money on three separate occasions, twice in November and once in December. I discovered that Rick Alley was the only licensed individual at the agency. Doon Ritter did not have a license, but he initiated and completed Sue's transaction. In our state, an insurance agency license was required to transact commercial lines, and Doon was not authorized to conduct the transactions.

Sue's payments occurred online and by phone, fax and email, which constituted wire fraud because Doon and Rick failed to provide contracts after taking Sue's money. Premium charges were not detailed with written documentation as required by law. The “why” was a little harder to document; but when money disappears, it's usually because someone intended to take it and use it for their own benefit. Sometimes agents divert the money and try to pay it back before anyone notices, but that wasn't the case here — Sue never received valid certificates that she had paid for.

After assessing the big picture, I began to look for individual red flags — the attention grabbers, visible markers, even my gut feeling about the case. In this case, the flags were that Rick worked out of his home selling commercial insurance (which was prohibited in our state) and that Sue Rockwell never received the insurance policy and certificates she purchased. Since Rick had been unemployed prior to opening the agency, it meant he was probably using the funds just to survive and support his family. When I saw that Denny was doing a song and dance on the Internet about his acting and insurance agency success, it was apparent he wanted attention and easy money. After all, how many insurance agents were actors and made comedy videos? Having his promotional websites linked to Rick's website illuminated their business relationship, which I explored more fully.

Another flag was that Sue called Rick's phone number in one state but reached Doon in another — an indicator that their business was not operating as a typical insurance agency. It was going to be hard to track and reconcile its activities. The lack of response to Sue's calls and emails was another sign that Rick either couldn't manage the business or didn't intend to do so. The damage to Rockwell Construction and the level of frustration after repeated efforts to resolve the matter were strong indicators that the subjects mishandled the transactions.

Knowing that I was dealing with three subjects in two other states who were operating online meant it was going to take a considerable amount of documentation to prove their activities and intent. After gathering the Rockwells' statements and documents, I requested policy documentation and correspondence from the insurance company and subpoenaed bank records for the subjects and the agency. It was important to establish the timeline of payments and when documents were due to be provided, both to the insurer and to the customer.

I checked the state database for additional filings against Rick Alley and found several other customers who lodged similar complaints. I also checked the national database and enforcement action publications of other states but found no other complaints about Rick. However, Denny's license was revoked in his home state and in 30 other states where he operated for misappropriation of funds and insurance application fraud for providing false certificates to small-business owners. As I processed Rick's case as a nonresident licensee, I referred Denny's case to his home state's department of insurance; I sent information about Doon's unlicensed activity to his home state's agency as well.

As I reviewed the third-party insurers' documents and the subpoenaed bank accounts, it was evident that Rick had treated other customers the same way he had the Rockwells — taken their money without providing policies or certificates of coverage and then ignored their requests for help. I contacted a sampling of the customers and obtained statements from four in my state and two in the states where Doon and Denny lived.

Revealing Records

I discovered documents from a finance company that had Sue Rockwell's signature authorizing a finance agreement for her policy premium, although she never mentioned it. I called her and she stated she had never even seen the document. I had her come into my office and verify that the signature was not hers.

I then ordered additional documents from Rick for the other customers I had identified. As some of them had policies canceled from several third-party insurers, I ordered documents from those companies as well.

The subpoenaed bank records revealed that Rick added Denny as an authorized signor on his agency's account one month after opening it. Denny had been using a debit card drawn on the agency's account for everyday purchases. Rick withdrew $300 per week from the account and transferred it to his personal account, while Denny spent most of the agency's income on personal expenses. The account had been overdrawn every month for more than a year with insufficient funds charges totaling hundreds of dollars. There were very few withdrawals by insurance companies for premiums.

In misappropriation cases, it's advantageous to talk with the individual to obtain additional information. I called Rick and asked him some general questions in a friendly tone and then asked him to explain the customers' transactions. I knew that I might only have one opportunity to get information from him, so I asked my supervisor to be in the room while I was on the call, as a witness to the conversation. Of course I disclosed it to Rick and said she was there to help me take notes for my report. As my tone was relaxed and friendly, Rick was not intimidated and cooperated.

In most cases in our investigative bureau, it was necessary to notify the subject of the investigation if the evidence substantiated the allegations. It was at this point, at the end of the call, that I asked Rick to put his response in writing to include in my investigative report. I already had all the evidence I needed regarding the customers' transactions, but I wanted to give him the opportunity to document his false statements in his own writing, signed and dated.

After I received Rick's written response, I called him again with the goal of getting information on the other subjects. Instead, Doon answered the phone and I verified his location. On another attempt to reach Rick, Denny answered the phone. He said that Rick's line was forwarded, and he verified his and Rick's locations. Denny even provided additional contact information for Rick. I had met my goal of verifying the existence and location of these other agents and their relationship with Rick.

Satisfied Customers

As I reviewed the documents received from the different insurance companies for the customers, it became evident that Rick misappropriated the premiums on every case I reviewed. Of the four customers in my state, all gave sworn statements that they had not received policies or valid certificates of coverage. Two were unaware they had been operating their businesses with no commercial liability coverage for at least two consecutive years, as the insurers had no record of receiving payments and canceled the policy applications. The two customers in Rick's and Denny's states were also unaware they had no coverage. Rick had used his agency address on the policy applications as the customer contact information to intercept all correspondence from the third-party insurance companies.

Of the six customers I reviewed, the average loss was the down payment premiums for two years, or approximately $1,500 each. All business customers suffered lost business income, ranging from a few thousand dollars to $1 million. Each successive policy that was sold by Rick resulted in increased premium rates, due to poor payment history.

Insurance companies began terminating Rick's contracts due to substandard business retention — too many canceled policies and late premium payments. Accounting records provided by the brokers revealed convoluted transactions of numerous policy applications, lost down payments, canceled policies for nonpayment of premiums and invalid certificates with false information on customers. Departmental budget restraints did not permit me to investigate each set of suspicious transactions, but of the ones I calculated, Rick misappropriated an average of 20 percent from each customer. In the two years of the investigation, he wrote contracts with the three insurers worth a total premium amount of $300,000, of which he took about $60,000 and repaid about $10,000. But he also transacted insurance with more than 20 companies in eight states that were not part of the investigation.

Rick had already given me a statement on the phone, and he also emailed statements regarding each customer's transaction, with copies of his credit card and bank statements showing customers' down payments. Rick had an excuse for every problem on each customer's account, and said it was unfortunate he had such a bad group of customers who couldn't keep their payments current and were too hard to please. Rick denied any business affiliation with Denny, stating he had bought the agency from Denny and they were just friends. Rick said Doon was an elderly employee who had Alzheimer's, made a lot of the mistakes at the agency and couldn't remember the customers' transactions.

I sent my written report with an evidence packet to our legal processing unit. The case coordinator analyzed it against statutory law and contacted Rick in an attempt to settle his case. Rick was apologetic at first and said he did not want an agency license in our state and had no intention of conducting business here in the future. He offered to provide refunds to his victims. After the coordinator explained the possible repercussions in detail, including felony arrest, Rick changed his position. He said he knew that once an agent was disciplined in one state, all the other states can take reciprocal action, and he didn't want to lose his entire business. Rick decided to retain an attorney and proceed to an administrative hearing to dispute the facts. He also applied for an agency license in our state. Rick continued to write policy applications despite being notified in writing several times to cease and desist transacting insurance in our state.

After a year of considerable effort, we obtained refunds for all of the customers contacted in the investigation — $10,890 in premium refunds from Rick — a paltry percentage of his overall fraud. We also revoked his nonresident license in our state, and he is currently in the process of losing his license in the eight other states in which he operated.

We referred the evidence of Denny's involvement to the department of insurance in his state, and agents there opened an investigation. Updated contact information for Doon was forwarded to that division as well.

The total time spent on the investigation in our state was 18 months, from the initial customer complaint until the case was transferred to our legal department. Additional information continued to stream in from customers as they sought to obtain refunds from the subject.

About the Author

Tina Hancock, CFE, M.A., M.B.A., is an analyst, auditor and former insur ance examiner. Ms. Hancock's loss reserves analysis led to fraud litigation on her state's largest property and casualty insurer insolvency case. As an insurance investigator, her caseload of agent and agency fraud involved data analysis, interviewing, forensic accounting and risk assessment. She shares her experience in webinars and public speaking.