How Does a Post Facto Insurance Audit Work?

Ex post facto audits can uncover fraud by claimants or adjusters.

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When an insurance company settles a claim, it may carry out a review of the process after the claim is paid. This is known as an “ex post facto” audit; the phrase means “after the fact” in Latin and is a common legal term. The purpose is to ensure that the adjuster handled the claim correctly and the insured claimant committed no fraud.

Settlements and Audits

Insurance settlements are legal contracts. The insurance company pays a fixed amount to a claimant or to his providers -- medical or otherwise -- according to the coverages set down in the insurance policy. The settlement releases the insurance company from any further responsibility and prevents the claimant from pursuing the claim any further in court. After the settlement, the insurance company may order a review, which will have no effect on the settlement unless the review uncovers fraudulent conduct.

Audit Activities

With an ex post facto audit, an insurance company can investigate a claim further to ensure the process resulted in a fair settlement. The carrier may interview individuals involved in a car accident, for example, to make sure that the insured claimant did not stage the accident. It may audit a life insurance claim by the family of a deceased individual to make sure the insured was not hiding serious medical problems. For a workers’ compensation claim, it may investigate a worksite to make sure a company was not negligent in providing for the safety of its workers. For various reasons, these actions are not always available to the insurance company before a settlement is worked out, because a quick settlement may also be in the company's interest.

High Tech Auditing

Ex post facto audits were once the exclusive preserve of insurance investigators. Modern insurance companies also have data analysis software available to review their claims. An audit program may compare the settlement payout to similar claims paid in the past and send up a flag for “buildup,” the term for exaggerated claim amounts, or “loss padding." “Anomaly detection” is searching out a fraudulent scheme that has no precedent. Using a national database, the software can also turn up individuals who have been involved in previous settlements and may be career insurance con artists. In addition, an audit can spot company employees who may be involved in repeated high settlement amounts, indicating insider collusion with the claimants.

Post Facto Alternatives

If an insurance company detects a fraudulent claim with an ex post facto audit, it can sue in civil court for compensation or bring criminal charges. If a police investigation confirms the fraud, a court judgment can void the settlement and require repayment of the settlement amount -- in part or in full -- by the claimant. The criminal charges of insurance fraud can also result in jail time and fines.