Employing Affirmative Civil Fraud Litigation

P&C insurers and state fraud bureaus are turning to civil actions to help right the wrongs of fraud perpetrators.

December 17, 2013 Photo

In a perfect world, all fraudsters would have their day in court and face the full weight of America’s criminal justice system. But the reality is that scarce prosecutorial resources and overburdened criminal courts means it’s rarely the case. So fraud fighters often must go elsewhere to hit fraudsters where it hurts most—their wallets.

P&C insurers and even state fraud bureaus are turning to civil actions to help right the wrongs of insurance fraud perpetrators. Aside from the monetary recoveries, these deterrent actions help convince would-be fraudsters that insurance fraud is not worth the high risk of financial ruin.

One recent civil case provides a good example. Medical providers in Minnesota were suspected of bilking the auto no-fault system for years, yet few providers faced criminal prosecution. Nonetheless, Farmers Insurance filed a $1.9-million federal RICO lawsuit against a lab and 46 chiropractors in October 2013, alleging that the defendants carried out an elaborate kickback scheme that cheated the no-fault system out of millions of dollars while also causing increased auto insurance premiums. The lawsuit is the largest civil action since no-fault was created 40 years ago.

Another prime example of the value of affirmative civil action occurred in Oregon, which has virtually no anti-insurance fraud laws, no dedicated insurance fraud prosecutors, and no state fraud bureau. That means insurers are left to combat fraud on their own. Accordingly, civil actions are the effective weapon of choice and necessity.

In the case, Farmers alleged that medical providers convinced auto-crash victims to seek treatment, even if they had no symptoms or pain. They directed these “patients” to show up for all medical appointments or risk permanent pain and injury. Real accident victims also were told to continue getting treatments long after they had recovered. Civil actions like this have put crooked medical providers in Oregon on notice that they may face highly disruptive lawsuits and expensive civil penalties, and therefore can no longer bilk the system with impunity.

Affirmative litigation also works well in states that actively prosecute fraudsters. Civil remedies and criminal prosecution can work effectively in tandem. Allstate aggressively uses civil suits in New York, New Jersey, and California, which also are states that are leaders in prosecuting insurance fraud criminally.

 A Los Angeles County court awarded Allstate a healthy $7.7 million against several unlicensed medical and chiropractic personnel in September 2013, in that insurer’s first lawsuit in California under the state’s False Claims Act. The court ruled that the defendants submitted more than 390 false medical claims and, thus, ordered them to pay Allstate $3.9 million in penalties, plus $3.8 million in assessments and fees.

Private litigants, including insurers, can team up with state officials in California, Illinois and Florida, which have severe civil penalties, to file suit against fraudsters. Still, only a handful of carriers seem to go the civil route, even though it has been available for years. This is understandable, as it takes a good deal of courage and skill to toss away the risk-averse nature that most insurers embrace. Civil actions certainly are not for the faint-hearted. While success can be monetarily and morally rewarding, a single error can quickly turn the tables and transform an insurer from a plaintiff to a defendant faster than you can say, “bad faith.”

The high cost of litigation is another obstacle. It often is a major challenge to convince senior management to spend hundreds of thousands of dollars on litigation without knowing for certain that they will achieve a successful verdict, settlement, or even recover a dime from the defendant providers or fraud perpetrators.

Still, more and more insurers think civil actions are a worthy gamble in part because of the deterrent effect of successful litigation. Word travels quickly on the streets when a given state or insurer is a high-risk target that should be avoided. And going after insurance thieves is simply the right thing to do because it protects customers who entrust insurers with their premium dollars.

The risks insurers face taking civil actions largely don’t exist for state fraud bureaus. For that reason, several states have used administrative penalties for many years, directly imposing fines without the need for court action. These cases usually involve minor fraud violations, such as inflated homeowners’ claims or fraudulent insurance applications, perpetrated by otherwise ordinary people who made poor decisions. New Jersey is a leader in this area, issuing thousands of civil penalties each year, primarily in smaller cases that prosecutors have little time or desire to pursue.

Civil actions and administrative fining authority will never replace criminal prosecutions. Rather, this triad of antifraud weapons can work effectively if insurers, fraud bureaus, legislators, and the courts view and utilize them as effective and efficient tools. These actions bring justice to fraudsters and are powerful deterrents to those who make the mistake of walking the risky path of insurance crime.   

About The Authors
Dennis Jay

Dennis Jay is executive director of Coalition Against Insurance Fraud (CAIF). He has been a CLM Fellow since 2012 and can be reached at www.insurancefraud.org. 

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CLM’s Insurance Fraud Committee identifies, analyzes, and offers education on emerging fraud schemes and tactics; monitors and reports on developments in case law, state fraud statutes and applicable regulations; collaborates with other anti-fraud industry organizations and associations; and seeks to provide amicus support in matters of importance in the fight against insurance fraud.

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