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Knocking Down the Door of Fraud

How to pursue affirmative litigation, and knowing when to change course

October 07, 2019 Photo

Investigating and litigating singular fraud cases for first- and third-party claims used to be the mainstay of special investigation units. While these tactics can be relatively successful, there is still a whole world of abuse and misrepresentation stemming from medical providers, durable medical equipment suppliers, diagnostics entities, premium fraudsters, auto body shops, copy service providers, and more. A newer, cost-effective way to deal with fraud is affirmative litigation.

Think of fighting fraud from both a defensive and offensive posture. This is an exciting avenue and requires, first and foremost, agreement and support from leadership to undertake this process. It often has a long investigative tail and has associated legal costs, but the benefits are far-reaching and can prove to be extremely beneficial to the carrier, resulting in deterrence, punishment of the wrongdoers, and financial recovery. A successful affirmative litigation case can result in a combination of any of the above, depending on the goals of each carrier.

Starting Off on the Right Foot

Developing an affirmative litigation case is a multi-layered process. First, the investigator has to determine a potential subject and then develop the evidence by obtaining statements from insureds, claimants, and former business employees. Then she must perform other similar investigation steps, such as license checks, disciplinary action searches, and predictive analytic searches on TIN numbers and payouts. Additionally, partnering with the National Insurance Crime Bureau will grant access to other carriers’ submissions through their alert and forewarn systems.

It is crucial that the investigation develops evidence and intent of the wrongdoing. Once the investigation begins, it must be consistent, timely, and factual. While it is always the carrier’s decision on when to involve counsel, it can be a good idea to include them early on in order to guide the investigation to the specific carrier’s goals and desired outcomes.

What if a carrier either does not have enough evidence of “intent” to file an affirmative litigation case, or wants to explore other options? If this is the case, then there are a number of alternative paths available. Options range from filing a declaratory relief action, lien consolidation (if dealing with workers compensation claims), or something as simple as a “door knock.” All of these are valuable resources if used timely and effectively.

Litigation Strategies

A declaratory relief action allows a carrier to sue for declaration of rights and duties under a contract where controversy exists. In the insurance context, a carrier is basically asking a court to declare that there is no duty to defend or indemnify because of either fraud or a failure to cooperate.

Bringing a declaratory relief action can prove to be both a prudent means to explore SIU issues via discovery, and a successful avenue to develop intent for an affirmative litigation case. While not completely eliminating the risk, bringing a declaratory relief action substantially reduces the risk of a bad-faith action, as well. Lastly, when faced with a declaratory relief filing, wrongdoers are likely to drop their claims instead of risking the consequences of a judge declaring their action fraudulent.

A lien consolidation is a tool that eradicates the need to fight each and every lien on an individual basis, thereby providing a streamlined way to fight fraud and eliminating the chances of inconsistent results. It can be brought in any situation where there are common issues of fact and law.

A lien consolidation can be used as a standalone tool to fight fraud, as a tool used to develop evidence of intent for a potential affirmative litigation case, or in conjunction with a parallel affirmative litigation case. A major benefit of a lien consolidation is that all liens are stayed during the pendency of the action, thereby avoiding the need to pay on fraudulent claims. Downsides to consider are that these actions can be extremely costly due to the fact that they require service of all known lien claimants in all underlying workers compensation actions being consolidated. Notwithstanding, in many situations, this downside is almost always superseded by the benefits of uniting the lien-fighting process and staying the liens in the interim.

Another option, known as the “door knock,” can prove to be an extremely worthwhile option. This extremely cost-effective option consists of taking the available theories and evidence to those suspected of wrongdoing and attempting a pre-litigation settlement. The “door knock” can be attempted with or without a mediator. A pre-litigation settlement can vary from obtaining money back, obtaining a lien waiver, and sorting out a “no-bill agreement,” where the wrongdoer agrees to discontinue any billing of the carrier in question. This can be a very attractive package that saves the carrier from paying significant amounts of money to fraudsters at a relatively low expense.

The success of the “door knock” comes with a very important caveat: The “door knock” should not be attempted unless there is enough evidence. If settlement does not occur, then it is crucial for the carrier to have developed enough evidence to pursue the fraud through alternative means. Otherwise, there is a substantial risk of developing a reputation of making demands while lacking the requisite evidence to back up the claims made. This could obviously have devastating effects on future efforts to fight fraud

Lastly, if the carrier had evidence of wrongdoing, but not necessarily enough evidence to prove intent for an affirmative litigation case, the “door knock” just proved to be an important tool in the arsenal for building a case. It will be impossible for the wrongdoer to deny intent once they have been put on notice of their bad acts.

Insurance fraud continues to proliferate. Conservative estimates by the Coalition Against Insurance Fraud show that fraud costs over $80 billion a year across all lines of insurance. In recent years, fraudsters have upped their ante when it comes to uncovering new avenues and schemes to defraud insurance companies. To keep up and properly combat the newly emerging fraud trends, it is crucial for carriers to have a wide array of tools in their arsenal, and to know when to use each one.

About The Authors
Multiple Contributors
Laura McAdams

Laura McAdams is a partner in the Los Angeles office of Manning & Kass. lbm@manningllp.com

Cathy Gicker

Cathy Gicker is a senior claims consultant with Allstate Insurance.  cathy.gicker@allstate.com

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