Phony Claims Pour Through the Cracks

The Northridge earthquake crumpled cars, buckled freeways and flattened buildings, but how could it have damaged baseball cards?

That question was enough to raise suspicions about one of the 114,000 claims State Farm Insurance collected after the quake. And when company officials got an answer, they grew even more suspicious.

The San Fernando Valley man who submitted the claim said the cards--22,000 of them valued at $1.9 million--had been ruined by water damage.

The quake, he explained, had sloshed three feet of water out of his swimming pool. This miniature tsunami then rolled under his home and into his garage, where the cards were stored on the floor.

“The claims representative just about choked,” said Gerri Brown, claims superintendent at State Farm in Westlake Village.

The man, who said he had thrown the cards away, withdrew the claim when State Farm officials pressed him for receipts. But Brown said the card caper is just one example of the lengths people have gone to since the Northridge quake to soak their insurance companies. “I have cases open right now that are even more ridiculous,” she said.

Insurance companies aren’t the only targets of such schemes. Officials say thousands of people have turned to cheating or outright fraud to snatch some of the $20 billion in federal disaster aid and insurance money distributed to quake victims.

Small armies of investigators have been scouring the Southland to catch these would-be thieves. But investigators are so outnumbered that their task has been a bit like trying to keep the ground dry in a storm by catching raindrops in a bucket.

The federal Small Business Administration, for example, has approved $4.7 billion in low-interest loans for quake victims. Officials figure that 1% of the 250,000 disaster loan applications received probably contain some fraud. But 18 months after the quake, just 11 people have been caught and convicted, according to the U.S. attorney’s office.

Similarly, the Federal Emergency Management Agency has allocated $9.7 billion for emergency grants to quake victims. A few high-profile prosecutions helped prompt the voluntary return of about $16 million. But even though the agency has received 681,694 applications, just 33 people have been convicted of submitting false claims.

Numerous state agencies, including the Department of Insurance and Contractors State License Board, along with private insurance companies, have been similarly overwhelmed. Even the Internal Revenue Service has yet to complete a preliminary review of what could be a torrent of phony tax deductions from quake damage claims.

Officials admit that catching most quake-related fraud is an impossible task, but say that it’s the effort that counts. “With every type of crime, there will always be people who evade detection,” said Nathan Hochman, the assistant U.S. attorney in charge of disaster-fraud prosecutions. “But they will always be looking over their shoulders, wondering if they’re next in line to go to jail.”

Or at least wondering whether they’ll get a $1,500 citation. That’s the most common penalty faced by the hundreds of unlicensed contractors who have flooded the region to take advantage of the quake repair construction boom.

As a supervising deputy with the Contractors State License Board, Ralph Hollier’s job is to catch those scofflaws. He and a small band of investigators patrol the Valley each week, stopping at construction sites and doling out citations to unlicensed contractors.

Each week, Hollier targets a different city. On a recent Thursday morning, he and three investigators congregated at a Northridge park, and fanned out into the surrounding neighborhoods.

By day’s end, the team had visited 48 construction sites and passed out 18 citations, with fines totaling $27,150. One of the first caught was James Masters, a contractor based in Thousand Oaks.

Though computer records showed Masters’ contractors license had been revoked in 1989, he and his small crew were busy pouring a cement driveway at a house in Chatsworth.

Asked why he decided to run the risk of operating without a license, Masters offered a logical explanation: The $1,500 fine would erase his profit margin on the $7,500 driveway job, he said. “But if you do a lot of jobs, it’s worth it.”

Hollier said that half the construction sites he visits are quake-related and that half the contractors he encounters are unlicensed, which means they are not bonded with the state, tend not to pay payroll taxes and are difficult to track down when they jilt a customer.

Citations prompt some to get their licenses. But Hollier acknowledges that he sees many of the same offenders again and again. “They’ll do 300 jobs and we’ll catch them once,” he said.

The license board also responds to complaints from homeowners. At an office in Van Nuys, Supervising Deputy Steve Skogebo presides over eight investigators who handle quake-related complaints, mostly about contractors who perform shoddy work or disappear after taking hefty cash deposits.

Since January, the office has received 776 complaints. Trouble is, about 150 new complaints arrive each month, and the office is so backlogged that it can be months before complaints reach investigators.

One complaint under investigation lists 132 structural problems, Skogebo said. It was filed by a family that, after paying nearly $250,000 to have their quake-crumpled home rebuilt, found inch-wide gaps around doors and windows and missing plumbing in the bathrooms. “None of the doors in the house have doorknobs, so they’ve slipped towels through the holes,” Skogebo said.

The office is often successful at cajoling contractors into correcting problems. But those who refuse typically face meager penalties, including fines of up to $2,000 and suspension of their licenses. “Doesn’t help homeowners very much, does it?” Skogebo said. “That’s a reason the public is disillusioned with this agency.”

For their part, agents and investigators say they are increasingly disillusioned with the public, citing widespread belief that stealing from the government is not only forgivable but a justified blow against bureaucracy.

Insurers face similar hostilities, said Diane Sheldon, fraud manager at the Allstate Insurance office in Woodland Hills. But an unusual phone call she got two months ago offered a refreshing change.

An attorney called to say he represented an Allstate policyholder who had cheated the company out of $15,000 on a quake claim. Overwhelmed by guilt, the policyholder wished to return the money, anonymously.

That policyholder “wanted to clear his conscience, which was nice,” Sheldon said. But so far, she added, “that’s the only one.”

Roughly 10% of all insurance claims filed each year contain some magnitude of fraud, insurance industry experts say. For the quake, that would translate into about 43,000 fraudulent claims.

Quake fraud “is mostly opportunistic fraud, where people have suffered a loss and they’re just trying to exaggerate,” Sheldon said. Hoping to meet high deductibles, policyholders ratchet up the brand names and dimensions of their damaged possessions. Konica cameras become Hasselblads, Sanyo camcorders become Sonys, and televisions swell from 20 to 32 inches.

Sheldon says her investigators have caught most of the exaggerated claims, thanks partly to tips from neighbors, relatives and jilted lovers. But many cheaters will succeed, she concedes, and few will ever face criminal prosecution.

Insurance companies are required to refer all suspicious claims to the State Department of Insurance for criminal investigation. But the department has investigated fewer than 100 claims so far, and only one conviction has been recorded, said Gil Rosas, supervisor of the department’s fraud division in Los Angeles. Rosas supervises four investigators. “I’d like to have at least 20,” he said. “There would be enough work.”

When government investigators take a case, sometimes one clue is all they need.

Elsa Aguirre Gomez applied for a $200,000 SBA disaster loan last year, contending her restaurant near Downtown had burned in a fire caused by the quake, officials said. For some reason, however, the Fire Department report she submitted indicated that the fire had started at 2:12 a.m. on Jan. 17, 1994, more than two hours before the quake hit.

When SBA loan officials asked her about this, she said it was a mistake. She then provided a new report that listed a time of 4:42 a.m., 11 minutes after the quake. But now officials wondered why the time was printed in type different from the rest of the report.

Last August, Gomez confessed after SBA investigators confronted her with a copy of the real Fire Department report--which showed the fire caused $20,000 in damage and happened two weeks after the quake. She has since pleaded guilty to filing a false claim with the government, officials said, and awaits sentencing.

But Gomez is one of only a handful who have been nabbed by SBA investigators for quake-related schemes. Even though officials estimate that 2,500 of the quake applications received contain fraud, just 65 applications have been investigated so far, said Debbie Jones, supervisor of a Glendale-based team of SBA special agents.

“We’re not equipped to conduct that number of investigations,” said Jones, whose five agents are swamped with cases stemming from disasters going back to the riots of 1992. “I have to use my resources on what I consider the most egregious fraud.”

In fact, Elsa Gomez probably wouldn’t have attracted so much attention if her ruse hadn’t been so inept. As it was, the SBA went after Gomez largely because her scheme was deemed “insulting to the SBA’s intelligence,” Jones said.

* HOMEOWNER’S HEADACHE: Debris becomes homeowner’s responsibility. B1