Insurance investigations are important to make sure real claims are paid quickly while stopping fraud. Insurance fraud costs billions worldwide. For example, in the U.S., the FBI estimates non-health insurance fraud alone costs about $40 billion every year. This raises premiums for honest customers.
Investigations must be fair and honest. Insurers have a legal duty of good faith and fair dealing—they must act honestly, investigate properly, and consider the policyholder’s interests, not just their own.
This guide explains simple best practices for insurance investigations, ethical rules, and examples from real cases.
Duty of Good Faith in Insurance
Insurance companies must handle claims fairly. They must:
- Investigate claims carefully
- Communicate with the insured promptly
- Avoid unnecessary delays or unfair denial
If they fail, they can be sued for bad faith and pay extra damages.
Important Cases:
- Comunale v. Traders & General Ins. Co. (California, 1958): Insurance companies must settle claims fairly when it’s clear they are liable, even if it might cost more than the policy limit. Not doing so is bad faith.
- Gruenberg v. Aetna Ins. Co. (California, 1973): Bad faith applies to first-party claims too. Ignoring evidence or denying claims unreasonably is a breach of good faith.
These cases show insurers cannot put profits over fair treatment.
Indian Case Laws
Recent Indian court rulings have strengthened policyholder protections against unfair insurance claim rejections. The Kerala High Court (2025) held that arbitrary denial of medical claims, particularly after treatment has been undertaken, violates the right to life under Article 21, and insurers cannot repudiate claims based on unrelated pre-existing conditions or beyond statutory time limits under Section 45 of the Insurance Act.
The Jharkhand High Court (2025) ruled that third-party motor accident claims cannot be denied solely due to incorrect policy details provided by claimants, as insurers must verify and honour valid policies using available information.
Additionally, courts continue to emphasize good faith obligations, quashing unjustified repudiations where alleged non-disclosures lack material nexus to the claimed illness, reinforcing that insurers must act fairly and not exploit technicalities to avoid legitimate payouts. These decisions highlight a judicial trend toward preventing wrongful denials and upholding the core purpose of insurance.
Best Practices in Insurance Investigation
- Start Quickly and Keep Records: Begin investigating as soon as the claim is reported. Take photos, videos, and notes. Collect statements from witnesses.
- Gather Evidence Carefully: Inspect the site, review medical, police, or financial records. Use experts when needed (e.g., fire investigators in arson cases).
- Interview Claimants and Witnesses: Ask open-ended questions. Use recorded statements or Examinations Under Oath (EUO) to clarify facts.
- Watch for Fraud Signs: Look for unusual patterns like sudden financial problems, staged accidents, or exaggerated injuries. Use social media or surveillance legally.
- Use Special Investigation Units (SIUs): SIUs are separate teams trained to investigate fraud objectively. They often work with law enforcement.
- Use Technology: AI, predictive analytics, and blockchain can help detect suspicious patterns and protect data integrity.
- Resolve Claims Fairly and Quickly: Explain decisions clearly. If denying a claim, mention the exact policy rules and facts.
Ethical Considerations
- Be Fair and Impartial: Avoid assumptions; check multiple sources.
- Respect Privacy: Follow laws when collecting data or doing surveillance.
- Be Transparent: Tell the insured what steps are taken when required.
- Avoid Conflicts of Interest: SIUs should remain independent to avoid pressure to deny claims.
Following ethics prevents legal problems and builds trust.
Real-Life Examples
- Bad Practice: Not interviewing witnesses or ignoring expert reports → Courts can find insurer acted in bad faith.
- Good Practice: Detecting life insurance fraud through careful SIU investigation → Fraud stopped and restitution ordered.
- Staged Accidents: Surveillance proved claimants were active despite claiming injuries.
- Property Fraud: Arson investigations used fire pattern analysis and financial checks.
- Positive Example: Theft claim investigated quickly with neighbour interviews → Fair payment, no exaggeration.
Special Focus
- Workers’ Compensation: Check that the injury happened at work using employer statements and medical reports. Surveillance must not trespass.
- Auto Claims: Reconstruct accidents using witness statements, diagrams, and vehicle inspection. Late injury reports are a red flag.
Conclusion
Following good practices helps insurers fight fraud while being fair to honest policyholders. Using thorough investigations, technology, and ethical standards—supported by cases like Gruenberg and Comunale—builds trust, reduces losses, and ensures fair results.
Ethical investigations benefit everyone: honest customers pay lower premiums, and genuine claimants get what they deserve.
