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.
By Dennis Kass, Esq.
INTRODUCTION
Imagine a football game where your team never plays offense. For the entire game, you field only a defensive squad. Your opponent passes around you, runs at you and, of course, continually scores. You may intercept a few balls and cause a few fumbles, and you may possibly even run one or two back for a touchdown. You would spend the entire game back on your heels, reacting to your opponent’s moves. Every Monday morning quarterback will tell you that you are destined to lose such a game.
Every successful team needs both an offense and a defense. Yet, when it comes to fighting fraud, insurance companies have historically only fought from a defensive posture. Insurance companies fight fraud on a claim-by-claim basis, investigating and, where appropriate, aggressively fighting each claim through litigation. While such a defensive mode is often effective in fighting the individual claims, does it truly deter future insurance fraud?
Under this defensive game plan, is there a downside for the perpetrators submitting a fraudulent insurance claim? Typically, no. If the claimants lose their case, they may be ordered to pay costs. In the rare case, they may be ordered to pay attorney’s fees under a state equivalent of Federal Rules of Civil Procedure, Rule 11.
These sums are rarely collectible. The majority of the claimants involved in insurance fraud are indigent or transitory, and even if they can be tracked down, most do not have the resources to pay court ordered fines. If you can find and implicate the accident stagers or cappers, you will likely have difficulty enforcing your judgment. Often the most culpable parties, the professionals such as the attorneys or doctors, insulate themselves to a degree that, on an individual case, you will have a difficult time demonstrating to a judge that these professionals are behind the fraudulent case.
Unfortunately, when fighting fraud from a strictly defensive posture, you will achieve incremental victories, but not deter the professional frauders. Ask any claims professional or defense attorney what they consider a victory, and the answer will be uniform: “A dismissal or defense verdict.” This is the nature of a defense attack on insurance fraud. You win that particular case, but what about the hundreds of other cases the crooked professionals have successfully submitted and for which they received payment? Does your aggressive defense really deter these frauders?
The stark reality that a * defense alone does not equal deterrence * has led to a recent upsurge in offensive actions against those professionals repeatedly perpetrating fraud against insurance companies.In 1998, a number of insurance companies, both large and small, brought actions against crooked professionals. These actions have received a great deal of national publicity. From the largest papers in Los Angeles, Chicago and New York, to local and national television pieces, insurance fraud and lawsuits against those perpetrating the fraud have taken on a new fervor.
While this new movement against defrauders has included actions around the United States, nowhere has this change been more prominent than in California. Traditionally, the “hotbed” of insurance fraud, California has now enacted one of the first statutes designed solely to combat insurance fraud.
CALIFORNIA INSURANCE CODE 1871.7
A new and potent weapon against insurance fraud, California’s Insurance Code 1871.7 provides one of the first opportunities for the government and private sector to work together in the continuing battle against insurance fraud. By passing this unusual statute, the California legislature recognized that the private sector can contribute additional resources to help fight fraud. In return, the statute provides a financial incentive for insurance companies to bring actions against those who have defrauded them.
Alternately referred to as whistle-blower, qui tam or ex rel actions, the California statute is patterned after the Federal False Claims Act (31 U.S.C.$$3729-3732, as amended, PUV, L.99-562, 100 Stat. 3153 (1986)), which is a true “whistle-blower” action. Under the Federal model, incentives are provided for individuals to come forward with information with any fraud perpetrated against the government. A lawsuit can then be brought against the perpetrators by the so-called whistle-blower, either alone or in conjunction with the US Attorney’s Office. The whistle-blower receives a bounty in the form of a percentage of any settlement or judgment from the lawsuit.
California has molded these principles in its own fraud fighting statute. While under Section 1871.7, any member of the public may bring a suit where he can demonstrate that individuals have defrauded insurance companies, the statute is best utilized by insurance companies, permitting them to strike back against those who are defrauding them. Insurance Code 1871.7 provides a remedy to sue crooked professionals – such as attorneys, doctors, chiropractors, body shop owners, cappers and claimants.
In 1993, California passed this statute as a means of attacking rampant workers’ compensation fraud. In its original form, the state allowed for lawsuits only where a capper was used in a workers’ compensation matter. The statute was expanded in 1994 to include any civil matter or workers’ compensation matter where a capper was used. In 1995, the statute took its present form. You can now pursue a lawsuit where you can demonstrate that someone used a capper, or violated California Penal Codes 549, 550, and 551. Essentially, you can now sue anyone who knowingly takes part in submitting a false or fraudulent claim.
Note what Section 1871.7 does not require: the payment of the claim or completion of the fraud. These are prerequisites for most other fraud-fighting causes of action.
Two of the most common causes of action used against those who defraud insurance companies, common law fraud and Racketeering Influenced and Corrupt Organizations Act (RICO), require detrimental reliance as an essential element to be proven by the plaintiff. In other words, to sue under either of these theories, the insurance company must actually pay on the fraudulent claim(s), meaning that the fraud must have been completed. For RICO, you must also demonstrate a pattern of racketeering activity (19 USC 1961, et seq.), Effectively precluding its application on a single claim.
Contrast this with California’s statute. Perpetrators are held responsible for “merely” attempting to defraud an insurance company; a completed fraud is not necessary to trigger a lawsuit. By holding individuals responsible for knowingly submitting fraudulent claims, California enacted an extremely potent weapon to deter insurance fraud.
HOW DOES CALIFORNIA INSURANCE CODE 1871.7 WORK?
Since this is an ex rel action, the State of California is considered the real party in interest, thus creating a number of procedural hurdles which must be cleared. Technically, this means that you are suing for yourself on behalf of the State of California. Your lawsuit is filed under seal for 60 days. The public, including the defendants, have no notice that a lawsuit has been filed against them. Simultaneously with filing the complaint, you must file a statement of all of your material evidence in support of your action with the local district attorney, the Attorney General and the Insurance Commissioner. This document is not provided to the court.
When these governmental entities are served, each initiates two separate analyses: one criminal and one civil. For their criminal analysis, the local district attorney, the Insurance Commissioner and the State Attorney General determine whether, based upon the evidence provided and in conjunction with any of their own independent investigations, they wish to execute search warrants on the defendants or any others implicated in the statement of material evidence.Since the case is under seal, the targets are not tipped off that the search warrant(s) will be executed. The governmental entities can also decide whether to arrest any of the perpetrators. If the 60-day time frame is insufficient for the government to take action, the government can extend the seal based upon a showing a good cause.
The three governmental entities must also decide whether they wish to intervene in the case and prosecute the civil action with the “whistle-blower.” If more than one of the governmental entities decides to intervene, the Attorney General takes precedence, followed by the district attorney and the Insurance Commissioner. If the government intervenes, it is entitled to conduct the action and has the “primary responsibility for prosecuting the action.”
This language, while not defined in the statute, appears to be enabling language only. For example, in the case of an overzealous whistle-blower who seeks to hinder the government in its civil or criminal efforts, the statute makes clear that the government has the right to control the litigation. Nowhere does the statute define what “primary responsibility for prosecuting the action” means. However, the statute does not prevent the government from relying on the resources of a private defendant.
Nonetheless, the statute does provide the government with significant authority over the case – if it chooses to intervene and if it decides to exercise that authority. With court approval, the government can dismiss a defendant or settle any part of the case, even over the objections of the whistle-blower. The whistle-blower’s participation in the lawsuit can also be restricted if his actions would interfere with or unduly delay the government’s prosecution of the action or if the whistle-blowers actions are repetitious, irrelevant, or for the purposes of harassment.
If the government elects not to intervene, which has been the case in all actions under Section 1871.7 filed to date, then the whistle-blower has the right to conduct the action on his own.
At the end of the 60-day seal period, the government must either alert the court of its decision concerning intervention or move the court to extend the period for the case to remain under seal.
California Insurance Code 1871.7 does not address the statute of limitations. Being that California’s False Claims Act (Cal. Gov’t Code 12650 et seq.) has provided a three-year statute of limitation, the same as in a common law action for fraud (California Code of Civil Procedure 338(d)), it is likely that the courts will enforce a three-year statute from when you knew or should have known of the fraudulent activity.
When suing professionals such as doctors and attorneys, one should always worry about the possibility of losing the lawsuit and the potential backlash. Insurance Code 1871.7 addresses this issue, providing that the defendant can recover all of his attorney fees and costs only if he can show that the action was “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.” This should be compared to a malicious prosecution standard, which typically requires the plaintiff to prove that the prior action: R(1) was commenced by or at the direction of the defendant and was pursued to a legal termination in his, plaintiffs, favor {citations}: (2) was brought without probable cause {citations}: and (3) was initiated with malice {citations}.S (Crowley v. Katleman (1994) 8 Cal.4th 666.) Insurance Code 1871.7(s) heightened standard recognizes a policy of encouraging parties to “blow the whistle” on fraud without the fear of retribution if the case is ultimately not successful. At the same time, the statute does provide a remedy for those sued wrongfully in a completely meritless case.
DAMAGES
The key distinction between this enactment and any other remedy available in lawsuits alleging insurance fraud is the damages. Not only can you sue for damages, even though you have not paid any money as a result of the fraud, but the statute provides the opportunity for substantial recovery against the defrauders.
But how can you calculate damages if you catch the fraud at the earliest claims stage, even before you retain an investigator or defense attorney? What if the insurance company is not out any indemnity or other costs, except for the claims adjuster’s salary? Insurance Code 1871.7 answers this question by providing a statutory formula for determining damages.
One of the most attractive elements of California Insurance Code 1871.7 is that it has teeth. By statute, damages are set at $5,000 to $10,000 in penalties per claim, plus three times the amount of each claim for compensation, plus all attorney fees and costs.
The following example will demonstrate the deterrent value of the damages portion of this statute.
Assume a staged, rear-end collision, where you have evidence demonstrating the attorney’s involvement in the scam. After the three claimants regimen of treatment for soft-tissue injuries, their attorney submits a demand letter to the insurance company for $15,000 per claimant. This one collision can cause statutory exposure for the crooked attorney of up to $165,000 plus attorney’s fees and costs.
Under the formula provided by the statute, damages are calculated as follows:
A penalty of $10,000 per claim ($30,000); three times the claim for compensation ($45,000), multiplied by three claimants ($135,000). Add to this $165,000 figure all attorney fees and costs expended in prosecuting the lawsuit. As you can see, even one fraudulent accident can give rise to substantial exposure to any involved party.
Before you run off and file scores of lawsuits, however, you must remember that this is an ex rel/qui tam lawsuit. Since you are suing for yourself and on behalf of the State of California, the State will take a cut of any settlement or judgment. If the government intervenes in the action, you can expect it to keep 75 percent to 85 percent of any settlement or judgment. If the government does not intervene, it will still keep 70 percent to 75 percent.
But before you tear up this article and declare this statute a farce, you must consider two factors that affect the amount of the settlement or judgment that you keep. First, if you paid money to the defendant, you keep up to double the amount paid plus attorney fees and costs. This recognizes that, unlike the Federal False Claims Act, where the whistle-blower receives a bounty for exposing the fraud, the insurance company, as the victim, should receive a larger amount based upon the amount of their true damages.
Second, in the cases where you did not pay money to the perpetrators, you will only keep 15 percent to 30 percent of any settlement or judgment (plus attorney fees and costs). While, initially, this might not seem worthwhile or fair, consider the alternatives. Technically, you have not been damaged. Under common law fraud or RICO, you could not sue at all. Since you did not pay any money, you cannot demonstrate that you detrimentally relied on the perpetrator’s fraud.
Under this new statute, you can obtain some recourse against those who tried, albeit unsuccessfully, to defraud you. Though you are not out any indemnity dollars, you will still receive damages nonetheless. Also, keep in mind that the measure of damages, even where you did not pay any money, is three times the demand for compensation (plus a penalty, attorney fees and costs). In actuality, without paying any money to the perpetrators, you will still receive substantial damages.
CONCLUSION
An exciting new era in the fight against insurance fraud is being ushered in. Rather than fighting fraud strictly from a defensive posture, insurers are becoming proactive, utilizing the work performed by their Special Investigation Units to initiate lawsuits against those who defraud them.
Because of the strength of its new law, California is leading the nation in lawsuits against defrauders. The obvious short-term benefit of these lawsuits is recoupment of dollars lost to fraud. The long-term hope is that fraud will no longer consume a substantial amount of indemnity dollars and that fraud will be driven out of insurance premiums.
If your state does not have a statute similar to California’s anti-fraud enactment, consider writing to your state legislators and impressing upon them the need for appropriate fraud-fighting tools.
Dennis Kass is an attorney with the firm of Manning, Marder & Wolfe in Los Angeles, California. He can be reached at 213-624-6900.
© Copyright 1999 Alikim Media