Using the Insurance Code to Fight Fraud

I am the public and I’m here to help the government!” How can you make money and reduce insurance fraud at the same time? Consider filing an action under California Insurance Code Section 1871.7.

In April of 2001, Allstate Insurance Company made history by garnering an $8.2 million dollar verdict against a group who had defrauded it. (California ex rel. Allstate Insurance Co. v. Muhyeldin et al. (Super. Ct. Los Angeles County, 2001, No. BC207709).) This was remarkable because Allstate brought this suit under Insurance Code section 1871.7, on behalf of the people of the State of California. This statute was passed in 1993 and was modeled after the Federal False Claims Act. As initially enacted, it was limited solely to workers’ compensation.

It made it illegal to “knowingly employ runners, cappers, steerers, or other persons to procure clients or patients to perform or obtain services of benefits” pursuant to the Workers’ Compensation provisions in the Labor Code. (Insurance Code § 1871.7(a).) It was subsequently amended to include all lines of insurance. Now, civil liability is also imposed for “procuring clients or patients to perform or obtain services or benefits under a contract of insurance or that will be the basis of a claim against an insured individual or his or her insurer.” (Insurance Code § 1871.7(a).)

What impact can this statute have on your business?

Well, returning to the example of Allstate mentioned above, of that $8.2 million, Allstate’s approximate take was 50 percent, even though Allstate brought the action on behalf of the State of California. This is a rare instance of an individual or entity enforcing the law on behalf of the State, and being entitled to receive a share of the proceeds. Thus, you can directly benefit under this statute by collecting money. Moreover, since the result of fraud impacts your clients by way of increased premiums and costs, you can help to lower those expenses and prevent future fraud.

The conduct covered by Insurance Code section 1871.7 is quite broad, as is the class of people who can sue under this statute. “Any interested persons, including an insurer” can sue. (Insurance Code §1871.7(e)(1).) While the statute does not define “interested persons” there are a few key provisions that prevent anyone from just reading the newspaper headlines or the pleadings and suing. The main prohibition reads “No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations . . . in a legislative or administrative report, hearing, audit, or investigation, or from the news media.” (Insurance Code §1871.7(h)(2)(A).)

This provision provides protection from arbitrary lawsuits. But what about someone who learns of fraud by way of the news media, for example, by reading the Fraud Roundup section of the Insurance Journal? Fortunately, this provision also contains an exception to prevent this. But if an interested person has knowledge of fraud by way of the news media or any of the other sources mentioned above, and is also “an original source of the information,” then the person may properly bring a lawsuit.

So, what constitutes an original source? An original source is a person or entity who “has direct and independent knowledge of the information on which the allegations are based…” (Insurance Code §1871.7(h)(2)(B).) Thus, if a person or entity works diligently on its own behalf and uncovers fraud being perpetuated on it, then it can bring a lawsuit.

This concept of “original source” was tested recently in a case before the California Court of Appeal in Los Angeles. The case was The People ex rel. Allstate v. Weitzman, (Mar. 31, 2003, B151252) ____ Cal.4th____[2003 DJDAR 3451]. In this pivotal case, a likely scenario played out. An adjuster at Fidelity Insurance Company was suspicious that an auto accident claim filed by an insured was fraudulent—that the accident had been staged. Upon further investigation by Fidelity, the accident was found to be fraudulent and part of a fraud ring’s activities. Fidelity filed a lawsuit under section 1871.7.

About one month after an article about the suit was published in the Los Angeles Daily Journal, an analyst at Allstate, as part of his job duties, was investigating insurance claims for fraud. He found a pattern of repetitive accidents, medical reports and claims submitted by three of the defendants in the Fidelity case. Allstate then brought a suit under section 1871.7 based upon its investigation. Allstate sued nine of the same defendants sued by Fidelity, and over 30 defendants who were not part of the Fidelity action.

The trial court dismissed the Allstate case, finding that the Fidelity case had alleged a conspiracy among the same group and it had been publicly disclosed such that Allstate was not the original source of the information. Allstate was therefore barred from bringing its case. But couldn’t Allstate be considered an original source, even though it found out about the fraud ring operating on Fidelity from the news media, because it conducted its own investigation and discovered fraud being perpetrated on it?

The Court of Appeal reversed the trial court. It conducted a thorough analysis of section 1871.7 and found that the Fidelity claim alerted the public generally to the existence of the fraud ring and may have caused Allstate to investigate. However it was only through Allstate’s own “considerable efforts that the facts specific to frauds perpetrated on it came to light.” It was through Allstate’s own efforts that it was able to identify multiple defendants who were not parties to the Fidelity lawsuit. Further, there was no evidence that any employee of Fidelity had discovered any claim that was the basis of Allstate’s lawsuit.

The court also looked to the underlying purpose of section 1871.7, which is to encourage interested parties to participate in battling against insurance fraud by allowing them to bring an action on behalf of the State. Allstate was not an opportunist. It did not simply take information that was publicly available and use it as the basis for its lawsuit. Instead, Allstate used its own resources, and conducted a thorough investigation. While some of the defendants were the same as those named in the Fidelity lawsuit, the majority were not. Therefore, the Court of Appeal found that Allstate, through its own efforts, was an original source within the meaning of 1871(h)(2)(B).

So, how can you bring an action?

First, in accord with Allstate make sure that you have done a sufficient independent investigation such that you can be considered an original source. Next, the complaint must be filed in camera, and under seal for at least 60 days.

What this means is that no one will have any knowledge of the complaint. During this time, you must serve a copy of the complaint on both the local District Attorney and the Insurance Commissioner, who will use these 60 days to decide whether or not to intervene in the case. The complaint is not served on the defendants until the court orders it.

There are two important things to note.

First, regardless of whether or not the District Attorney or the Insurance Commissioner elects to intervene, you are still entitled to receive money if the suit is successful. Second, under the statute, no other person can intervene or bring a related action based on the same facts unless authorized by law. (Insurance Code §1871.7(e)(5).) This is yet another safeguard, different from the original source rule, to guarantee that no one is able to bring a claim based on your efforts.

If the District Attorney or the Insurance Commissioner elects to keep the action, then the case will continue. Your role as the person having brought the case may be limited, but you will remain in the case. The District Attorney or the Insurance Commissioner will have primary responsibility for prosecuting the case and will not be bound by any of your actions. Also, you may be limited as to the number of witnesses that you may call, the length of the testimony of those witnesses, cross-examination and other limitations, upon court approval.

It is important to note that a suit under this section can occur concurrently with any criminal prosecution for the same conduct. You are not barred from bringing a suit because a criminal action is also pending. However, upon the application of the prosecutor, the civil case may be stayed until the criminal action has been completed at the trial level.

Now, let’s return to the other option.

If the District Attorney and the Insurance Commissioner elect not to intervene in the case, then you retain full control and can proceed normally. The Insurance Commissioner or the District Attorney can ask for copies of the pleadings and depositions in the case, but they will have to pay for them. Also, the District Attorney and the Insurance Commissioner retain the right to intervene later on in the case, but they must go before the court and make a showing of good cause.

Overall, filing a suit under this section is a relatively simple process. There are just the special filing requirements mentioned above. Most people in the business of insurance are on the lookout for fraud. This statute allows these interested persons to have more power in fighting fraud.

In addition, some of the money lost due to fraud can be recaptured. Further, if you are an agent or broker, you can differentiate yourself and add value to your services.

This gets us to the bottom line. What’s really in it for you?

To start, the penalties for those who are found to have committed fraud under this section range between $5,000 and $10,000. In addition, there is also a mandatory assessment of three times the amount of each claim for compensation as defined by section 3207 of the Labor Code or pursuant to an insurance policy. The court also has the power to grant other equitable relief. In lay terms this means that the court can prohibit a defendant from doing certain things.

If the District Attorney or the Insurance Commissioner elects to proceed with the lawsuit, you can still receive some of the proceeds if the lawsuit is successful. You can receive between 30 percent and 40 percent of the proceeds, if the court determines that you substantially contributed to the prosecution of the action. (Insurance Code §1871.7(g)(1)(A).) You will also receive an award for reasonable expenses, costs and attorney’s fees.

Alternately, if the District Attorney or Insurance Commissioner does not proceed with the action, then you will receive between 40 percent and 50 percent of the proceeds as well as reasonable attorney’s fees, expenses and costs.

Also, if you paid money to the defendant in the underlying claim, then you will get up to double the amount paid, if that amount is greater than 50 percent of the proceeds.

Another interesting feature of this law is that if the local District Attorney proceeds with the suit, then one-half of the money that is not awarded to you will go to the Treasurer of the appropriate county. The money is specifically ear-marked for the investigation and prosecution of fraud. The other one-half that is not awarded to you goes to the state, and is also earmarked to enhance fraud investigation and prevention.

The next time that you are confronted with fraud or have a suspicion of fraud, you should do your homework and then consider filing a suit under this section.

Not only will it benefit your clients in the long run by lowering the overall amount of premiums that are paid for insurance, but also
in the short run you will be able to recoup some of your costs of finding and fighting this fraud.

You will also have the satisfaction of knowing that in the process you have done a service to the people of the state of California—a rare combination.

Michelle Dicks is an associate at Shea, McNitt & Carter. For more information on the company, call (619) 232-4261.