State Legislature Needs to Step Up and Fight Insurance Fraud

Monday, March 17, 2008 | 2

By Barry Zalma

Insurance fraud is not a local problem. It depletes the wealth of the entire country. Insurance fraud costs $100 billion annually, and it is a crime in which the victims are insurers, who are less than loved by the public. If properly prepared, the insurer victim can avoid liability to those who attempt to profit from an insurance policy by fraudulent conduct.

The majority of fraudulent insurance claims are made by people with legitimate claims covered by an insurance policy who attempt to add to the legitimate portion of the claim. Insurance regulators often describe these by the incongruous and inaccurate description of "soft fraud," which they differentiate from "hard fraud." Of course, insurance fraud, whether soft or hard, is fraud. Insurance fraud, regardless of the name given to it, is a crime and a tort that should deprive an insured of the benefits
of the policy.

California requires that all "integral anti-fraud personnel" be trained to recognize insurance fraud and how to report it to the state. This includes any person employed by an insurer who the insurer has not identified as being directly assigned to its special fraud investigation unit but whose duties may include the receipt, processing, investigating or litigation pertaining to payment or denial of a claim or application. These personnel include claims handlers, underwriters, agents, policy handlers, call center staff, legal staff and other insurer employee classifications that perform similar duties.

Insurers in states where the tort of bad faith exists, like California, deny fraudulent insurance claims with fear and trembling. The specter of punitive damages has worked to make multimillionaires of many insurance criminals who convince insurers to settle rather than take a chance on trial. Insurers pay claims they believe they do not owe because they are fearful - regardless of the merits of their position - of being assessed punitive damages in a bad faith action. That fear will continue as long as there is not an effective means of defeating fraud and putting perpetrators in prison.

California collects many millions every year from the insurance industry to support the state's fraud division and the prosecution of insurance criminals. It doles some of those funds out to local district attorneys to be used to prosecute fraud.

The effectiveness of this system is less than exciting. The lawyer for the department of insurance of each state, including California, is the state attorney general. A special unit should be established in the office of California's attorney general, funded with the money taken from the insurance industry, to support the state's effort against insurance fraud, rather than splitting the funds among local prosecutors who are not interested in prosecuting the crime. This unit should be given a simple mandate: File and prosecute every insurance fraud brought to the unit by the fraud division that has better than a 50% chance of success.

The unit established by the attorney general should concentrate on prosecuting everyday insurance fraud, the frauds of opportunity that take 90% of the money paid to fraud perpetrators, in the range of $5,000 to $50,000, as well as the major fraud rings. Single counts should be prosecuted. Multiple counts and multiple defendants simply make the cases complex and cause the courts to impose settlements on the parties. Teeth must be put in the posters that say: Commit insurance fraud, go to jail.

The California Department of Insurance receives thousands of reports from insurers of potential fraudulent claims every month. The state does not have the staff, the ability or the desire to investigate and prosecute every case brought to them. If there was a dedicated unit of prosecutors working directly with the investigative staff at the Department of Insurance that prosecuted only 5 % of the suspected fraudulent claims reported to the state, the deterrent effect would be enormous.

The Department of Insurance and the attorney general should issue press releases concerning every arrest and conviction. Newspapers should report daily that insurance criminals have been arrested and are going to trial or were convicted and are going to jail. Jail sentences should be made mandatory and the Legislature should remove from local judges the right to grant convicted felons probation or short jail sentences for what is, by statute, a major felony.

It is not enough for the state to say that the insurance companies must investigate and work to fight fraud. The state must also aggressively and vigorously fight insurance fraud.

Today, a person perpetrating an insurance fraud need only be concerned that an aggressive fraud investigation might delay, or
reduce, the amount he might recover from his crime. Criminal prosecution for the crime of insurance fraud is so minuscule in
relation to the amount of fraud that it's virtually nonexistent. It certainly does not act as a deterrent.

In conjunction with the formation of a special insurance fraud prosecution unit in the office of the attorney general, the Legislature should enact the following statute to protect insurers from frivolous bad faith lawsuits: "Any insurer that, without malice, reports to the Fraud Division that it suspects it is the victim of the crime of fraud or has denied a claim on the ground of fraud may not be sued in any court of this state, for any tort cause of action. This section is not intended to eliminate the right of any insured to sue its insurer for breach of the insurance contract."

If the Legislature really wants insurers to fight insurance fraud, as it stated when it enacted the Insurance Frauds Prevention Act; if the Legislature wishes to keep strong and viable this important industry; if the Legislature wants to reduce the insurance premiums paid by their constituents, they must make practical the effort of insurers to avoid insurance fraud. As long as the tort of bad faith and the exposure of punitive damages hangs over insurance companies that accuse their insureds of fraud, the effort to stop insurance fraud will be one of attrition where no one will win except the criminals.

Insurance fraud is taking money out of the pockets of innocent and honest people who buy insurance. For every dollar taken by a fraud, an insurer must collect two dollars in premiums. Every person in the United States who does not commit fraud is paying to support those who do. A minimum of $20 for every $100 paid in premiums goes into the pockets of insurance criminals.

Every person in the state of California should be angry enough to write to his or her local district attorney, attorney general or U.S. attorney and let them know of their anger. If enough people complain, perhaps the prosecution levels will increase. If not, the fraud will continue, and the citizens of California will keep paying too much for insurance, and insurers will be forced to waste the funds they pay to support prosecution of insurance fraud.

<i>Barry Zalma is a Culver City lawyer whose practice emphasizes insurance coverage and claims handling matters. He can
be reached at zalma@zalma.com.</i>