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Low-Risk Options to Combat Small-Scale Fraudsters

Affirmative actions insurers can take to stop wrongdoers in their tracks.

October 30, 2014 Photo

Insurance fraud, unfortunately, is a commonplace occurrence. While states and the federal government often focus on big sting operations or sprawling Racketeer Influenced and Corrupt Organizations Act (RICO) actions, smaller fraud, such as false or inflated homeowners’ and personal property claims, often is left solely for the insurer to handle. Once an insurer determines that fraud has occurred and issues a denial based on that fraud, small-time fraudsters often disappear. However, while uncommon, it is not unheard of for a wily fraudster to proceed with an action against his insurer for breach of contract or bad faith.

So what options do insurers have? Affirmative actions, such as civil RICOs, work on larger-scale repeat offenders and organized criminals. A good example of this includes lawsuits based on New York’s Mallela decision regarding the violation of the corporate practice of medicine statutes. However, these large-scale operations, which often require hundreds of hours of investigation, are of little use against single-instance or small-scale fraudsters. Although they may recover or prevent the payout of millions, they are expensive to prepare and prosecute.

Some states, such as New Jersey, have addressed this disparity by establishing civil insurance fraud prevention acts that create civil penalties for insurance fraud to be determined and administered by an appointed commissioner. New Jersey’s act further allows an insurer to sue a fraud perpetrator to recover compensatory damages that include investigational expenses, attorney’s fees, and triple damages in the event that a pattern of fraud can be established.

In the absence of such acts, insurers are on their own when prosecuting fraudsters. Such affirmative civil actions create risk for the insurance company and, in the event that fraud is not established, could expose the insurer to further and otherwise needless litigation.

However, the affirmative route is not the only path. An insurer that wants to dissuade small-scale fraudsters without initiating its own affirmative actions instead may target actions brought against it by fraudsters and utilize counterclaims for conversion or, where available, civil theft to obtain not only recovery of payments made but also punitive damages, attorney’s fees, and in some instances, even treble damages—all with little additional risk.

Of course, when fraud has been detected early enough to prevent any payout, an insurer faced with an action for breach of contract or bad faith may do nothing more than defend the action or file a counterclaim for a declaration that the policy is void. But when an insurer has made payments and then denied coverage based on a determination of fraud, the insurer may pursue some simple, cost-effective avenues to recoup those payments.

Some states, such as Florida and Colorado, have statutes that allow recovery for civil theft. These statutes often contemplate treble damages and the award of attorney’s fees. To succeed on such a counterclaim, an insurer must present persuasive evidence of the fraud. However, civil theft statutes often require that the party seeking recovery makes an affirmative act demanding the return of the property (insurance proceeds or payouts) prior to filing the action. While these requirements could make the timing of a civil theft counterclaim tricky, with some planning, an insurer can utilize these statutes for cheap, low-risk counters to a fraudster’s own legal action, with the potential for recovery of three times the insurance payout in penalty.

In states without specific civil theft statutes, such as New York, a similar option is the common law claim of conversion. Conversion generally requires proof of one party’s unauthorized control of the personal property of another. Money is generally considered personal property. In instances where the control of the property was initially “legal,” as may be the case when the proceeds were initially paid out prior to a fraud determination, the party seeking recovery would need to make similar demands for the return of the property as it would make in civil theft cases. Conversion generally allows the recovery of both compensatory and punitive damages, though punitive damages may be limited to provable instances of malice, willful disregard of rights, and matters of public policy. Seeking conversion claims when the insurer’s evidence of fraud is strong might dissuade fraudsters from attempting to continue their illegal schemes by establishing a real monetary risk.

While there are several strong but potentially risky affirmative actions that an insurer can take to combat fraud, there also are a few less risky defensive actions that could ultimately achieve the same goal: stopping fraudsters before they commit the fraud for fear of risk to their own wallets.  

About The Authors
Daniel W. Morrison

Daniel W. Morrison, Esq., is a partner with Jones Morrison LLP. He is a member of CLM’s Insurance Fraud Committee and has been a CLM Member since 2011. He can be reached at (914) 472-2300,  dmorrison@jonesmorrisonlaw.com

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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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