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Investigation: Fraud Squad. Keys To Good Faith Fraud Referrals

August 1, 2013

The following article was originally published in CLM’s Claims Management magazine, August 2013.

Unlike robbery, grand theft auto, and other street crimes, insurance fraud is rarely committed in a manner easily detected by law enforcement. While arson-for-profit fires and staged PIP-fraud accidents may attract law enforcement’s attention, the submission of fraudulent written and oral statements to the insurance company occurs out of the public eye.

Without referrals and cooperation from insurers who are in a unique position to detect and obtain evidence of suspected insurance fraud—via examinations under oath, business records, and doctored receipts—law enforcement agencies and fraud bureaus would have much lighter caseloads and be limited in their abilities to obtain critical evidence of fraud. Moreover, countless incidents of insurance fraud would go undiscovered, and the $80 billion each year that the Coalition Against Insurance Fraud estimates insurers and policyholders pay in fraud costs would be even more staggering.

For example, Florida’s Division of Insurance Fraud—one of the most proactive and prolific fraud bureaus in the U.S.—reports that of the 15,148 tips and referrals it received during fiscal year 2011-2012, 3,138 (21 percent) were submitted by insurers, and 8,974 (59 percent) were submitted by the National Insurance Crime Bureau, which many insurers use as a conduit for reporting fraud.

This need for private-public cooperation in the fight against insurance fraud has led to the enactment of state fraud reporting laws that facilitate fraud referrals while affording insurers a measure of insulation from civil liability for defamation, bad faith, malicious prosecution, and other torts. However, these laws—sometimes referred to as “immunity acts”—do not create an impenetrable shield to insurers who provide evidence of suspected fraud to law enforcement. A finding that an insurer acted with malice, bad faith, or fraud during the referral process can completely undercut any qualified or limited immunity and lead to costly litigation for insurers. Here are some examples:

  • The Indiana Supreme Court recently upheld one of the largest defamation jury verdicts in U.S. history against an insurer in an action brought by a restoration company that assisted policyholders in submitting hail damage claims. A key issue in the case was the insurer’s alleged failure to turn over evidence to law enforcement, including reports confirming hail damage, which arguably undermined the fraud allegations against the plaintiff. 
  • In 2010 following a bench trial, a North Carolina court entered judgment against an insurer for malicious prosecution and unfair and deceptive trade practices based on its finding that the insurer wrongfully caused the institution of criminal proceedings against its insured arising out of a fire claim. One of the factors in the court’s decision was the insurer’s alleged delay in providing potentially exculpatory information to criminal investigators.
  • In the early 1990s, a Kansas jury returned a multi-million dollar breach of contract, outrage, and malicious prosecution verdict in favor of a policyholder whose insurer denied her residential fire claim and played a precipitating role in the criminal arson charges brought against her by the state. During the trial, the plaintiff presented persuasive evidence that the insurer withheld exculpatory evidence from public fire officials and prosecutors that supported the conclusion that the fire was not incendiary.

While there are many examples of cases in which insurers prevailed against allegations of bad-faith conduct by insurers that cooperated with law enforcement in fraud investigations, insurers must take steps to protect themselves against such actions as a matter of course. These steps should include:

Know and follow the requirements and limitations of applicable fraud statutes. Is reporting mandatory or permissive? Is immunity afforded for proactive referrals or only responses to requests from law enforcement? Does the law provide qualified immunity for direct referrals to any law enforcement agency, or only to NICB/state fraud bureau? 

Limit company representatives involved in referrals. Fraud referrals and responses to requests for information from law enforcement should only be handled by designated special investigations units or claims personnel who are thoroughly familiar with good-faith fraud referral practices.

Document, document, document. The importance of documenting everything sent to or received from law enforcement or prosecutors and maintaining that documentation cannot be overstated. Outgoing communications to law enforcement should be accompanied by a cover letter specifically citing to the applicable fraud reporting statute or indicating it is in response to a request in order to invoke the protection of the statute.

Provide the good, the bad and the ugly. In the 1963 landmark decision Brady v. Maryland, the U.S. Supreme Court pronounced that withholding exculpatory evidence violates due process “where the evidence is material either to guilt or to punishment.” As a result of that decision, federal and state prosecutors are required to disclose statements of witnesses or physical evidence that conflicts with the prosecution’s case or may impeach a prosecution witness’ credibility to criminal defendants. If the prosecution withholds any “Brady evidence” from the defense in a criminal case, it may cause an otherwise valid conviction to be overturned. There also are very real and serious consequences if an insurer withholds exculpatory evidence from law enforcement during the fraud referral process.

An insurer must turn over Brady-type evidence to law enforcement, such as expert reports that refute an expert’s conclusions, “alibi witnesses” for an insured, physical and testimonial evidence that undercuts evidence of fraud, along with the inculpatory evidence  even if law enforcement or the prosecutor does not request it. Doing so will greatly assist law enforcement and prosecutors in evaluating the sufficiency of the evidence of fraud and the likelihood of conviction before bringing charges. This practice also will safeguard the insurer against allegations of bad faith, malicious prosecution, and defamation. Most importantly, it is the ethical and right thing to do.

Gina G. Smith, a former prosecutor, is currently a partner in the Tallahassee, Fla., office of Butler Weihmuller Katz Craig LLP. She also is a member of CLM’s insurance fraud committee and has been a CLM member since 2009. She can be reached at 850-894-4111;

SIDEBAR – Tips & Tidbits

“When claims adjusters are listening to a story, they must ask the questions on their script if their companies have been provided one. But they can and should go beyond this, particularly if the story doesn’t quite sound right. Trust your instincts and keep asking questions. The devil is in the details and a script cannot anticipate all of the factual scenarios out there. Listen carefully and attentively, and ask away.” – Cathy Gicker, CLM Insurance Fraud Committee Co-Chair