Copyright held by The John Cooke Fraud Report. Reprint rights are granted with attribution to The John Cooke Fraud Report with a link to this website.
© 2007 Barry Zalma, Esq., CFE
Before insurance fraud can be discussed it is essential to understand that, as the Restatement of Contracts, Section 291, insurance is:
A fortuitous event . . . is an event which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a past event, such as the loss of a vessel, provided that the fact is unknown to the parties.
A loss intentionally caused by an insured is uninsurable since, by definition, it is not fortuitous.
Insurers, their employees and governments are told daily that insurance fraud is a serious problem in the Americas. In the United States, statutes are on the books compelling insurers to fight fraud. There is unanimity in government and insurance circles that insurance fraud is a problem that needs to be solved.
There is not unanimity, however, on what insurance fraud is or the sufficiency of the evidence needed for an insurer to report a suspected fraud to the appropriate agency.
Insurance Fraud
In any country in the world where insurance is written insurers are faced with three major categories of insurance fraud:
· FRAUD IN THE INCEPTION: The insured misrepresents or conceals facts material to the decision of the insurer to insure or not insure the prospective insured. If the insured lies in the application about a matter that would have, had the truth been known, affected the decision of the insurer, the insurer may have the right to rescind the policy, determine it never existed, return the premium, and deny the claim presented by the insured;
· FRAUD (BY THE INSURED) IN THE PRESENTATION OF THE CLAIM: The insured lies about a fact material to the decision of the insurer to pay or not pay a claim. The insurer faced with a fraudulently presented claim can deny the claim in accordance with the policy provisions or declare the policy void and deny the claim; and
· FRAUD IN THE PRESENTATION OF THE CLAIM BY A CLAIMANT AGAINST THE INSURED: In these cases, the third party claimant makes a false and fraudulent claim against the insured.
In Black’s Law Dictionary, 6th Edition fraud is defined as:
An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.
In simple language, insurance fraud can be defined as a lie told an insurer for the purpose of obtaining money from an insurer who believes the lie to be true. An insurer can be confident it is the intended victim of insurance fraud if the insured:
· Makes a representation to the insurer that the insured knows is false;
· Conceals from the insurer a fact he or she knows is material to the insurer
· Makes a promise he or she does not intend to keep;
· Makes a misrepresentation on which the insurer relies in issuing the policy or paying a claim; and
· The insurer is damaged.
Insurance fraud comes in as many varieties as there are people to perpetrate the scheme. The ways to defraud an insurer are innumerable. Insurance fraud is limited only by the imagination of the person willing to commit the crime.
The U.S. Supreme Court found that insurance fraud exists when:
A false answer as to any matter of fact material to the inquiry, knowingly and willfully made, with an intent to deceive the insurer, would be fraudulent. If it accomplished its result, it would be a fraud effected; if failed, it would be a fraud attempted. No one can be permitted to say, in respect to his own statements upon a material matter, that he did not expect to be believed;their materiality, in the eye of the law, consists in their tendency to influence the conduct of the party who has an interest in them and to whom they are addressed. [Claflin v. Commonwealth Insurance Co., 110 U.S. 81, 3 S. Ct. 507, 28 L. Ed. 76 (1884)]. (emphasis added)
Insurance fraud is, in most of the United States, a crime. For example the California Penal Code defines the crime as:
(a) It is unlawful to do any of the following, or to aid, abet, solicit, or conspire with any person to do any of the following:
(1) Knowingly present or cause to be presented any false or fraudulent claim for the payment of a loss or injury, including payment of a loss or injury under a contract of insurance.
(2) Knowingly present multiple claims for the same loss or injury, including presentation of multiple claims to more than one insurer, with an intent to defraud.
(3) Knowingly cause or participate in a vehicular collision, or any other vehicular accident, for the purpose of presenting any false or fraudulent claim.
(4) Knowingly present a false or fraudulent claim for the payments of a loss for theft, destruction, damage, or conversion of a motor vehicle, a motor vehicle part, or contents of a motor vehicle.
(5) Knowingly prepare, make, or subscribe any writing, with the intent to present or use it, or to allow it to be presented in support of any false or fraudulent claim.
(6) Knowingly make or cause to be made any false or fraudulent claim for payment of a health care benefit.
(7) Knowingly submit a claim for a health care benefit which was not used by, or on behalf of, the claimant.
(8) Knowingly present multiple claims for payment of the same health care benefit with an intent to defraud.
(9) Knowingly present for payment any undercharges for health care benefits on behalf of a specific claimant unless any known overcharges for health care benefits for that claimant are presented for reconciliation at that same time. [California Penal Code § 550]
Insurers faced with facts that raise sufficient suspicion that fraud, as defined in common law or by the Penal Code section, must report its suspicion to the appropriate entity.
Intentional Acts
Not all intentional acts are fraudulent. All intentional acts, since they do not fit within the definition of insurance, should not be insurable.
In 1923 New York Judge Cardozo stated a simple and obvious rule of law concerning fraud that has become an international axiom of the law: “no one shall be permitted to take advantage of his own wrong.” [Messersmith v. American Fidelity Co., 232 N.Y. 161, 133 N.E. 432 (1921)]. Almost every insurance policy issued around the world either specifically excludes the intentional acts of the insured or use the definition of insurance to avoid insurance of intentional acts because they are not fortuitous. Fraud, directly against insurers or against individuals harmed by an insured, would be encouraged if insurance against intentional acts was allowed. If an insurer insured wrongful acts it would encourage people to act wrongfully with no adverse effect to the criminal, fraud perpetrator or other wrongful intentional actor, since their victims would be compensated by insurance.
California, where I practice, enacted Insurance Code Section 533 to set the public policy of the state that no insurer may ever pay for the intentional acts of its insured. In 2006 the California Court of Appeal, in Combs v. State Farm Fire & Casualty Company, 143 Cal.App.4th 1338, 49 Cal.Rptr.3d 917 (Cal.App. 2006) clarified and reiterated the public policy created by the enactment of California Insurance Code Section 533. It noted that Section 533 is incorporated into all policies issued in California and creates a prohibition against indemnity for intentional acts. In so doing the court agreed that an insurer was not only relieved of its obligation to pay indemnity for intentional acts but was also relieved of an obligation to pay court ordered attorneys fees to the victim of the intentional acts.
The court concluded that a judgment that requires a defendant to pay the attorney fees of the opposing party only becomes payable if and when the insured has been found liable. In this case the attorneys fees were ordered paid only as a statutory consequence of the liability of the defendant. If the wrongdoer was permitted to insure against the consequence of his actions would, just as allowing the wrongdoer to be indemnified for the damages he or she must pay as a result of willful misconduct, undercut the public policy behind section 533 and permit the wrongdoer to avoid what may be a significant consequence of the wrongdoing.
State Farm provided Combs with a defense, under a reservation of rights, to a complaint filed in federal district court by Fair Housing of Marin (FHOM) charging Combs with racial discrimination in the management of a San Rafael apartment complex in violation of federal and state law.
In March 1999, the district court entered an order striking Combs’ answer and entering his default, based on findings that his “failure to produce documents was not only the ‘fault’ of the defendant, but was a willful and bad faith attempt to obfuscate the discovery process and mislead FHOM and the court,” that he had “not only failed to produce documents as ordered, but that he misrepresented to both counsel and to the court the very existence of such documents,” that his “gamesmanship” had caused prejudice.
Following an evidentiary hearing, the trial court found “direct evidence of racial animus . . . amply present on this record” and “the record on liability” to be “damning,” and awarded plaintiff compensatory and punitive damages. Thereafter, following the receipt of a report and recommendation from a magistrate judge, the district court awarded FHOM some $508,000 in attorney fees as the prevailing party pursuant to the provisions of both the underlying federal and state statutes.
The Ninth Circuit Court of Appeals affirmed the judgment in all respects. [Fair Housing of Marin v. Combs (9th Cir. 2002) 285 F.3d 900] Thereafter, the judgment was augmented by attorney fees of an additional $131,000 incurred on appeal and in opposing a petition for a writ of certiorari.
Combs was insured by a State Farm “Apartment Policy” that provided comprehensive business liability coverage for bodily injury, property damage, personal injury and advertising injury as defined in the policy.
The court concluded:
There is no doubt that intentional discrimination, such as the district court found Combs to have committed, is willful conduct for which section 533 precludes indemnification. (Melugin v. Zurich Canada (1996) 50 Cal.App.4th 658, 664-665; Coit Drapery Cleaners, Inc. v. Sequoia Ins. Co. (1993) 14 Cal.App.4th 1595, 1603-1604.) Combs does not pursue a claim to be indemnified for the compensatory and punitive damages for which he was held liable, implicitly acknowledging that coverage for such liability is barred by section 533.
Liability for the adversary’s costs and attorney fees in this case is a loss caused by and incurred as a result of the insured’s intentional racial discrimination. Since attorney fee awards may not normally be considered “damages” in that they do not compensate claimants for the injury for which they brought suit it was not an insured loss. The insured was required to pay the judgment and the insurer was prohibited from paying indemnity.
A similar public policy was found to be the policy of the state of Nebraska in Volquardson v. Hartford Insurance Company of the Midwest, 264 Neb. 337, 647 N.W.2d 599 (Neb. 07/12/2002) and in Virginia, “Public policy will not permit an insured to benefit from his or her own intentional wrongdoing.” [St. Paul Fire & Marine Ins. Co. v. Jacobson, 826 F. Supp. 155, 162 (E.D. Va. 1993)].
Not all states of the United States agree with Judge Cardozo. Some have different statements of their public policy. In Texas, for example, insurance for punitive damages is not against public policy [Westchester Fire Insurance Co. v. Admiral Insurance Co., 152 S.W.3d 172 (Tex.App. Dist.2 12/02/2004)]
Regardless of the place where the insurance is written or to be performed, whether in the United States, any of the countries of North or South America, Europe, Asia, or Australia, insurance should never be asked to pay indemnity for the intentional or wrongful acts of an insured. The governmental entity that allows insurance against intentional acts runs afoul of the definition of insurance. It should reconsider the position and modify or change its law.
Insurance should, by definition, only insure against fortuitous acts. To do otherwise would be to encourage fraud or other criminal acts.
Barry Zalma is an insurance coverage lawyer and insurance consultant who practices in Culver City, California. He is the author of many insurance books and articles and computer based training programs available at http://www.claimschool.com. He can be contacted at http://www.zalma.com or http://www.zic.bz or by e-mail at zalma@zalma.com. His books are available from Specialty Technical Publishers, http://www.stpub.com and Carolina Academic Press at http://www.cap-press.com.