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By Dennis B. Kass
The endless hours of charting, linking and performing computer searches have finally paid off. After months of investigation, the claims staff has uncovered a prolific fraud ring. Thirty files involving the same group of doctors and attorneys have been identified, each with the same fact pattern.
The sole capper has recruited various individuals to pose as the insured. The capper provides the insured with a false driver’s license and an old car and sets up a convenient post office box to use as the garaging address. The capper then brings the insured to a local insurance agent and obtains an insurance policy. The insured, the capper and the future claimants meet at a local park. They agree that the insured will follow behind them, and once given the signal, will crash into the back of their vehicle.
With script in hand, the insured immediately calls to report the accident to the claims office, gladly accepting responsibility for this most unfortunate accident. The claimants are signed up with one of the attorneys of choice and sent to one of the doctors involved in this highly profitable scam.
The company is now faced with 30 accidents involving 100 claimants. The law suits are certainly forthcoming. Thousands of dollars will undoubtedly have to be paid in investigation costs and attorney fees to defend these fraudulent suits. The claims manager wants to know the available tools to fight these fraudulent claims and whether methods exist to recoup the funds expended.
Insurance companies, long the victim of insurance fraud, now have tools at their disposal to fight back against crooked doctors, attorneys, claimants, and yes, even insureds. Many insurance carriers are not aware of the offensive weapons available to them when they suspect or discover that they are faced with a fraudulent claim. In addition to traditional defensive techniques for disposing of fraudulent claims, insurance companies can also go on the offensive to defend their own interests, in addition to the interests of their insureds, and in the appropriate setting, can recoup funds expended in the defense of fraudulent or collusive claims.
FIGHTING THE CLAIMS
Before action is taken to recoup funds expended in defending the fraudulent claims, the focus must first be put on successfully disposing of each of the 30 claims.
In our hypothetical case, many of the attorneys are now filing lawsuits and serving the insureds. Of course, the remaining lawsuits loom in the not too distant future. Normally, the suit might be turned over to an attorney to defend the interests of the insured. But it is clear that this is a collusive claim. An independent defense counsel, representing the insured’s interests in the defense of the lawsuit, may be able to dispose of the matter by his own actions. However, counsel cannot legally or ethically implicate the insured. If he does not succeed in the defense of the case, the insurer may be forced to pay an adverse judgment, in addition to unnecessarily incurring defense costs where no defense is owed.
How can the insurer fight these collusive claims without writing a policy limits check to the plaintiff’s attorney? Here are a few of the offensive weapons available to fight these claims.
Intervention
While defense attorneys traditionally pursue motions in limine and resort to any means possible to prevent the jury from learning that the defendant is insured, intervention accomplishes just the opposite. Intervention thrusts the issue of insurance before the jury by allowing the insurance company to become a party to the litigation and defend its own interests. In fact, the insurer now becomes an adversary to the insured in the pending litigation.
It has long been recognized that in the insurance context, defense counsel has two clients: the insured and the insurer. Some cases have gone so far as to find that in this tripartite relationship between the insured, the insurer and the claimant, the “defendant’s insurer is in effect, if not in law, the real party in interest.” (Don v. Cruz (1982) 131 Cal.App.3d 695.) Intervention addresses the situation where a conflict of interest arises and defense counsel can no longer adequately represent the interests of both the insured and the insurer.
Where there is evidence of fraud and collusion, an insurance company can generally intervene to protect its own interests. Since an insurer may be required to satisfy a judgment obtained by the plaintiffs, the insurer has a direct and immediate interest warranting intervention.
After successfully intervening, as a party to the litigation the insurer can take depositions and propound written discovery. At trial, not only can the insurer participate, but the RFS word can be used, implicating the plaintiffs and the insured in a FRAUDULENT scheme.
While intervention is a very powerful tool in an insurance company’s arsenal when used to thwart nefarious schemes involving its insureds, there are certain risks and costs inherent in this offensive weapon.
The chief detractor is the cost itself. An insurance company must retain two separate attorneys: one to represent the insured’s interests and another to represent the insurance company’s interests. Depending upon what stage of the litigation the intervenor becomes involved, this may become a costly venture. Of course, this must be weighed against not having an intervenor and, therefore, never raising the specter of fraud. Absent an intervenor in a collusive case, the insurance company’s interests are not represented and the plaintiff and defendant will likely profit from a successful conspiracy to defraud the insurance carrier.
The risk of drawing a bad faith suit cannot be ignored; although, with proper case handling, the risk can be minimized Q as long as the claims handler keeps in mind the duty to defend the insured. Even after intervention, the insured must be given a full and fair defense. This means that the same adjuster should not handle both the defense of the lawsuit and the intervention part of the suit. There should be one claims adjuster whose job it is to make sure that the insured’s interests are fully represented and a strong defense raised. A second adjuster will work with intervention counsel, working to expose the fraudulent scheme and implicate the insured. The files should be kept completely separate. If computer files are used, different file numbers should be used so that the two adjusters do not type into the same diary. The two attorneys should deal at arm’s length. After all, though they both win if the case is dismissed or a defense award is rendered, they are adversaries in the litigation. One wants to show the insured’s involvement in the fraudulent scheme, the other wants to show that the insured was not involved in any alleged fraud. As long as the files are completely separated and the defense attorney truly defends the insured’s rights, the risk of drawing a bad faith claim, or at least of losing such a claim, are minimal.
In our hypothetical case, after the summons and complaint are served, defense counsel is retained to represent the insured. Defense counsel cannot use the insurer’s data and charts showing how the insured improperly obtained his policy or how the insured staged this accident with the plaintiffs, just as in the other 29 accidents that have been identified. The insurer is left hoping that the plaintiffs do not answer discovery and that the case is dismissed for discovery abuses; or that the plaintiffs’ attorney forgets how to properly introduce medical evidence at trial, resulting in exclusion of most of the damages.
Instead of relying on chance and good fortune, the insurer can intervene, raising the issues of fraud and collusion. The charts the insurer has compiled showing the same scheme being perpetrated over and over, using the same attorneys and same doctors, can now be brought out. Most plaintiffs’ attorneys dismiss the case or substitute out of the case shortly after the insurance company intervenes. It is the rare case that proceeds through the litigation process.
Rescission or Declaratory Relief
In each of the 30 cases in our hypothetical situation, research demonstrates that the insured has misrepresented his identification, the garaging address of the vehicle and his home address, not to mention that the policy was obtained to perpetrate a fraud.
Further offensive weapons available to successfully dispose of the cases include pursuing rescission or declaratory relief actions. Procuring an insurance policy under false pretenses may allow an insurance company to decline performance under the insurance contract. Where material misrepresentations exist in the insurance application, an insurance company may choose not to perform it duties to defend and indemnify under the contract via either rescission or declaratory relief.
Rescission is an action taken to void an insurance contract from its inception, usually because an insured misrepresents or conceals material facts in an insurance application. Not only would you not owe a defense or indemnification for the staged accident in question, but the rescission would also cover any other claims arising during the policy period.
Rescission reflects the policy allowing the insurance company to determine what risks it will accept. An insurance company has a right to select the risks that it will insure and rely upon the insured to accurately provide information in an application, allowing the insurance company to determine if it wishes to underwrite the risk.
Whereas rescission voids the entire insurance contract from its inception, a declaratory relief action is a lawsuit requesting a judicial determination of rights or duties under a contract, with its focus on a particular claim. The declaration has the same force and effect of a final judgment. Such a suit is particularly appropriate in the insurance context when a question exists as to whether the insurer has a duty to defend and indemnify. The prayer for relief would request a judicial determination that there is no duty to defend or indemnify due to material misrepresentations. So, in each declaratory relief action pursued in response to the fraudulent claims, the insurer would ask for a judicial declaration that it has no duty to defend or indemnify the insured in the underlying fraudulent claim.
With a successful declaratory relief or rescission action, a judicial declaration is obtained that a policy was obtained under false pretenses and that no defense or indemnification is necessary. In a rescission action, since the policy is found void from the inception, all premiums paid during the policy period must be returned to the insured. While not guaranteeing that no bad faith suit will be filed, a successful declaratory relief action severely undermines the credibility and viability of any potential bad faith actions. In some states, by obtaining a judicial declaration of rescission, the insured is barred from pursuing a bad faith claim. Once a policy is rescinded, all rights of the insured under the policy, including the right to sue for bad faith, are extinguished.
GETTING YOUR MONEY BACK
Once the 30 fraudulent lawsuits have been successfully defended, the insurer could close his files, pat himself on the back and accept the accolades for a job well done. After all, he exposed a fraudulent scheme and then successfully closed each file without paying a dime of indemnification. Or, he could look for a means to recoup the thousands of dollars that have been spent on attorney fees, investigator fees, court costs and claims adjuster time funds expended.
Finally, recognized as victims, many avenues have opened up to insurance companies allowing them to recoup funds expended in fighting fraudulent claims.
Whistle-Blower Suits.
An exciting remedy has recently been enacted in California – “Whistle – Blower” lawsuits. (California Insurance Code T1871.7) Patterned after the Federal False Claims Act and California’s False Claims Act, this new enactment recognizes that private industry can play a significant role in the civil prosecution of insurance fraud. Now, private individuals, including insurance companies can bring their own civil actions in cooperation with the State Attorney General, the County District Attorney or the State Department of Insurance.
As originally enacted, the statute’s reach was limited to those who unlawfully employed cappers to procure clients or patients to obtain worker’s compensation benefits. Cappers refer essentially to individuals who illegally bring cases to attorneys or doctors for money. The statute’s scope was expanded to the civil context in 1994, adding liability if the clients or patients are procured in order to violate California Penal Code section 549 (referring or accepting cases with knowledge or reckless disregard as to whether the case involves insurance fraud), Penal code section 550 (Insurance fraud), or Penal Code section 551 (Compensation by automobile repair dealers for the referral of cases from an insurance company.)
Beginning in January, 1996, the legislature gave the statute far reaching effect, by requiring capping or violation of the above noted penal code provisions. Now, the statute can be used by the insurance industry if an individual submits a fraudulent claim to an insurance company.
While the statute is quite lengthy, a brief synopsis demonstrates the strength of this weapon when used against attorneys, doctors, clinics, cappers, claimants or insureds, who are caught submitting fraudulent insurance claims.
The lawsuit is filed under seal and is not served on the defendants. For the first 60 days, the matter is confidential and none of the target defendants know about its existence. During that time, the lawsuit is reviewed by the District Attorney’s office, the State Attorney General and the State Department of Insurance. Any one of the three may decide to join the suit. During that time, before the crooked attorneys or doctors know about the suit, the District Attorney’s office, Attorney General’s office or the Department of Insurance may decide to issue search warrants on the unsuspecting perpetrators. If they do not join in the lawsuit, the insurer may still prosecute the lawsuit as a relator on behalf of the People of the State of California.
The most enticing element of the new law is the penalties. Each violation of the law subjects the violator to a fine from $5,000.00 to $10,000.00, plus damages in the sum of three times the amount of the claim. If you have paid any money to the whistle-blower defendant, then you are entitled to up to double the amount paid. Attorney fees are also provided above and beyond these damages. The state Attorney General, District Attorney or Department of Insurance do receive a percentage of the proceeds, with the specific amount based upon whether or not they join in the suit.
In our hypothetical case, if we assume that our 30 lawsuits contain 100 claimants, a successful lawsuit would result in fines totaling $500,000.00 – $1,000,000.00. Assuming at least a $10,000 demand per claimant, damages of three times the amount of the claim total $3,000,000.00.
In total, by uncovering this fraudulent ring and striking back at the perpetrators, they could be subject to a judgment of $4,000,000 plus attorney fees expended in prosecuting the claim. A well-timed and well-presented lawsuit of this nature could essentially put a criminal organization out of business. Hitting these fraudulent clinics and law firms in their pocketbook may be the most effective way to eradicate the problem of insurance fraud.
Malicious Prosecution Action or Motion for Attorney fees.
Many states have enacted statutes patterned after Federal Rules of Civil Procedure, Rule 11, holding attorneys and their clients responsible for submitting lawsuits which lack merit. Participation in the fraudulent scheme could result in the claimants and their attorney being held responsible for attorneys fees and costs. This is essentially a more expedient and simple form of a malicious prosecution action. In the not too distant past, sanctions were minimal and nothing more than a slap on the wrist. More recently, the penalties have been substantial, including some reaching into the 6 figures.
Applied to our hypothetical case, after the insurance carrier has intervened and demonstrated how the fraud was perpetrated, the case is ultimately dismissed. The judge generally retains jurisdiction to hear a motion for attorneys fees, costs and sanctions. Since the carrier is able to demonstrate how this case was staged, just as all of the other cases that have been identified, the judge may require that the claimants and/or their attorney reimburse the carrier for all costs and fees expended in the defense of this one particular lawsuit. The carrier would need to pursue the same type of motion after successfully defending each of the 30 lawsuits. This is a particularly easy and cost effective means to recoup the funds that were expended defending these fraudulent lawsuits. Unfortunately, the cappers, doctors and clinics cannot be reached with this remedy, since the judge only has jurisdiction over those who are parties to the lawsuit or their attorneys.
As an alternative, should the carrier want to obtain further damages, including the possibility for punitive damages, as well as suing other individuals not directly involved in the underlying suit, a suit can be brought for malicious prosecution. The malicious commencement of a civil proceeding is an actionable tort.
To succeed in an action for malicious prosecution, the carrier must demonstrate (1) a favorable termination for the prior proceeding (2) lack of probable cause and (3) malice. Certainly, by successfully demonstrating that the collisions were staged, resulting in dismissals of the underlying actions, the carrier can successfully demonstrate each of these elements.
CONCLUSION
Ingenuity and creativity of the criminal mind create new and more sophisticated scams each day. The fight against insurance fraud demands equal inventiveness in coming up with effective remedies to stem the tide and put the criminal enterprises out of business. In addition to the methods highlighted in this article, other well documented options include RICO actions or suing for fraud. If criminal action against the players is imminent, criminal action can be started, asking the judge to order that the criminal defendants pay restitution for all monies expended in fighting the fraudulent claims.
If a state has not enacted aggressive statutes designed to fight insurance fraud, such as California’s whistle-blower statute, consider lobbying the legislature to pursue such legislation. Keep in mind that California’s statute is patterned after and nearly identical to the Federal False Claims Act. Only with a full arsenal of weapons to fight insurance fraud, can anyone expect to put even a small dent in this costly problem.
Dennis B. Kass is a charter partner at the law firm Manning Marder & Wolfe. Along with John A. Marder and Anthony J. Ellrod, Dennis helps lead a team of attorneys who specialize in defending against insurance fraud.
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