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By Robert W. Gottlieb
The ultimate objective of the insurer in the adjustment of a claim is to achieve a fair result free of fraud. In accomplishing that goal, the insurer must have policies which are based upon a balance between the prevention of fraudulent claims and the cost involved in the deterrence of fraudulent claims. Part of the conflict is the contractual rights of the insured versus the obligation of the company to its shareholders. The insurer should not focus on the punishment of those committing the fraud. That should be left to the criminal justice system. The focus should be on the evidence as proof that the claim is fraudulent at its inception or an exaggeration within an otherwise legitimate claim. The establishment of fraud must be made by clear evidence.
There is a decisive role for the defense attorney at the claim stage in defeating the fraudulent claim prior to a first party demand for UM Arbitration and prior to the filing of a third party lawsuit. Active participation by defense counsel can help meet the insurer’s goals of cost effectiveness and deterrence, thereby acting in the best interests of the insured and the shareholders. These goals and the methods used to achieve them vary in the handling of first party and third party suspected fraudulent claims.
In a first party suspected fraudulent claim situation, the most effective and the first line of defense is the Examination Under Oath (EUO). Defense counsel will evaluate information provided by the claims office, then make a determination what, if any, further investigation needs to be undertaken prior to the insured’s EUO. Defense counsel is not limited to one EUO as is the deposition rule in third party litigation. Information obtained at the first EUO can be investigated and a subsequent EUO of the insured taken to further verify the merits of the claim. Timeliness is of critical importance. Delay and the perception of delay must be avoided.
The perception of a timely investigation is a matter of definition by each person who views the events and includes the obligations of the insured and insurer established by statutes and case law.
Claimant counsel’s perception of unreasonable delay, whether accurate or not, can easily result in a first party bad faith lawsuit and additional costs. It is recommended that each step of the investigation and the EUOs be accomplished in an expedient manner. If solid proof of fraud cannot be established, the claim must be accepted. However, further investigation can still proceed and corrective measures can be taken at a later time if fraud or exaggeration is ultimately proved.
If the claim later proceeds to a UM demand for arbitration, the defense counsel’s services are nearly complete. Additional services might include an IME, arbitration brief and attendance at the arbitration hearing. The claim, now as a UM demand for arbitration, can still be questioned and objections raised based on fraud, exaggeration and/or value. Defense counsel can proceed to an early binding arbitration based on a thorough investigation. An accurate estimate of defense costs can be provided at each step of the claims process. By this method, the insurer meets its obligations to its stockholders and insureds as well as lessens threats of second generation litigation from the insured’s counsel.
In the third party pre-litigated claim of suspected fraud, defense counsel’s services are a cost effective fraud deterrent. Counsel can be requested to evaluate the current state of the investigation and determine the need for further investigation including informal discussions with witnesses and gathering of additional documentation relative to verification of the claim. If appropriate, deposition-style statements (or EUOs) from witnesses with valuable information relative to the claim can be obtained.
A pre-litigation, deposition-style statement secures and preserves the testimony and can lead to other investigative sources that either verify the merits of the claim or prove fraud. This type of statement is more comprehensive and detailed than the telephonic recorded statement. It takes place under oath in a face-to-face setting with all the seriousness and solemnity of a deposition without the presence or interference of plaintiff’s counsel. If favorable testimony given through this process establishes a fraudulent claim, or exaggeration within an otherwise legitimate claim, the claim representative can correctly evaluate the claim and proceed to deny the claim or negotiate to settlement on an equal basis with opposing counsel and without being misled by incorrect information.
The above takes into consideration that the provider of the testimony will cooperate and remain available. Defense counsel has had success in the past with witnesses in this situation once the circumstances are explained to the witness. An advantage of this tool in an effort to uncover suspected fraud is that the information need not be exchanged with the opposing attorney prior to litigation. It limits or neutralizes any strategy or tactics used by opposing counsel to mislead or confuse the claims representative or defense counsel. The decision to communicate favorable witness and documentary information taken under oath often times diffuses opposing counsel’s arguments. This limited litigation service has the potential to reduce or eliminate expensive future third party litigation costs.
In the event of litigation, the defense will not be required to schedule witness or other information gathering depositions as they have already been taken in a less costly and time consuming manner. When defense counsel reveals that the testimony has already been secured and preserved through a formal deposition-style statement, it should be clear to plaintiff’s counsel (in a suspected fraud claim) that it is not to his benefit to engage in a counter-productive effort to document adverse testimony. Ideally, this will result in plaintiff’s withdrawal or abandonment of a fraudulent claim, or the acceptance of the offer of damages by the claims office which is free of any fraud or exaggeration. It becomes an easier task for the claims office to disallow fraud and evaluate plaintiff’s/claimant’s recovery on the legitimate portion of the claim for losses if this pre-litigation investigation is handled by defense counsel in the above-described manner.
Robert Gottlieb is a partner in the San Diego law firm of Gottlieb & Chelsea.
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