Sharing of Information between Insurers To Fight Fraud*

July 2006

Often insurers, even faced with enormous losses, are reluctant to communicate with each other or police agencies. The NAIC and many state legislatures support legislation designed to encourage insurers to share information when the goal is to fight fraud.

by Barry Zalma
Barry Zalma Inc.

Insurers faced with a potentially fraudulent claim involving other insurers are unduly fearful. They fear claims of violation of privacy laws, suits for bad faith, collusion, governmental actions, and claims of violation of antitrust laws. They fear suits for false arrest and acting as agents of the state that caused the National Insurance Crime Bureau (NICB) this year to pay a $1.1 settlement to two accused insurance fraud perpetrators. The fear deprives the insurer, fellow insurers, and the public of information that will reduce the effectiveness of the crime of insurance fraud.

The fear should be put aside and controlled intelligently. The law in the United States is directed at helping insurers work together and with government agencies to defeat fraud. In fact, because insurance fraud has become such a drain on the nation, the law requires insurers to share information about fraud with each other and the proper authorities. The insurers who refuse to cooperate misunderstand, in my opinion, the letter and intent of the statutes. They are, in fact, violating the statutory scheme and contributing to the massive growth rate of insurance fraud.

Insurers in California, where I practice, and other states with similar insurance privacy laws, faced with a request from another insurer about the claims or underwriting history of an insured, imitate the three famous chimps who "See no evil, hear no evil, and speak no evil." They also render themselves blind, deaf, and dumb.

Legislative Initiatives

In 1947 the National Association of Insurance Commissioners (NAIC) first proposed a model Unfair Trade Practices Act. The Unfair Trade Practices Act combined with the Unfair Claims Settlement Practices Act, work to regulate the methods of performing the business of insurance and insurance claims. Since that time, under various revisions, the Unfair Trade Practices Act has been adopted by almost every jurisdiction in the United States.

The more recent NAIC Insurance Information and Privacy Protection Model Act (on which the statutes in California and many states are based) was designed as a shield to protect the innocent insured from unwanted disclosure. It was not designed as a weapon to use against an insurer attempting to defeat a fraudulent claim. The scheme designed in the Model Act, and other statutes, encourages the sharing of information between insurers concerning potential insurance fraud. The states that have adopted the Act are shown in Figure 1.

Statutory Schemes Encourage Insurers To Share Information

The intent of the NAIC, the California Legislature, and the Legislatures of those states that have adopted the Model Act was to encourage the sharing of information concerning fraud between insurers. Under the Act, insurers may safely disclose to other insurers almost all information gathered in an investigation if the reason for the disclosure is to detect or prevent fraudulent or criminal claims activities. Before a disclosure can be safely made, however, it must be determined by the insurer that:

• The disclosure is to be made in good faith.
• The disclosure is based on reasonable investigation.
• The disclosure is made without malice.

Such disclosures are not limited to questions of fraud or criminal activity. Disclosure can also be made in cases of misrepresentation or concealment of material facts, a fraud attempted (rather than a fraud effected), or an innocent misrepresentation or concealment.

The NAIC Acts, with their requirements for sharing information with proper authorities, the establishment of a Special Investigation Unit (SIU) to fight fraud, and the establishment of an information depository where all insurers could benefit from the experience of other insurers is an indication, in my opinion, of a statutory scheme authorizing and encouraging insurers to share information so that insurance fraud will no longer be financially lucrative to its perpetrators. These efforts modify the crime by increasing the number of activities that are considered to be criminal insurance fraud and also by increasing the penalties for those who are convicted of the crime.

The statutory scheme was enacted with the express purpose of providing the insurance industry with a reasonable means of combating insurance fraud. By enacting the Insurance Frauds Prevention Act (IFPA), the California Legislature (and other states such as New Jersey that have enacted similar statutes), clearly understood that fraud was a major problem facing the country and that drastic measures were necessary to reduce insurance fraud. The intent was to provide the industry with immunities from civil liability if the insurer meets minimum requirements for investigation and reporting of suspected fraud.

The IFPA even creates a state operated database designed to allow insurers and the state to share information about potential fraudulent claims without exposure to litigation for providing the information. This is further indication that a statutory scheme and policy authorizing the sharing of information concerning fraud and fraudulent insurance claims exists.

Recommendations

To be effective, statutes relating to the disclosing of insurer information to another insurer need to ensure the following.

• The insurer who is requested to share information with another insurer must have a reasonable belief that fraud, criminal activity, misrepresentation, or concealment of material fact are being attempted before it may disclose that information.

• Before such disclosure is made, the insurer must be satisfied, in accordance with state and federal law, that the disclosure is made in good faith. The insurer must have conducted a good faith investigation to establish that there is good cause for the disclosure.

• The insurer cannot provide information to another insurer merely because another insurer asks for it. On the other hand, if an appropriate police agency demands the information in writing, it not only may, but also must, disclose the information to the proper police agency.

• If an appropriate authorization form is signed by the person whose records are sought to be disclosed, the insurer may always disclose the information. The delivery of the authorization establishes that the consumer whose privacy the statutes attempt to protect has given permission to disclose the information. Further, if the insurers act on the signed authorization of the insured, the authorization is prima facie evidence of the good faith of the insurers. Insurers may also, similarly, obtain like information from other insurers as long as they provide those other insurers with the information necessary for the other insurer to produce the documents to them in good faith. The best means of obtaining the information is to have the insured sign an authorization form that complies with the statute.

• Disclosure of information, in good faith, to other insurers to prevent fraud should not be construed by a trier of fact as a violation of the antitrust, unfair competition, or unfair practices acts. An insurer who is requested to provide information about an insured, or ex-insured, to another insurer can do so safely if it establishes the following before making a disclosure:

1. The insured has signed an appropriate authorization.
2. The insurer seeking the information is doing so in good faith.
3. The insurer seeking the information is doing so without any malice to the insured.
4. The insurer seeking the information has sufficiently investigated to establish that it has sufficient grounds to seek the information.
5. The insurer producing the information is doing so in good faith.
6. The insurer producing the information is doing so without any malice to the insured.
7. The insurer producing the information has sufficiently investigated to establish that it has sufficient grounds to convey the information.

If the seven rules stated above are followed, the insurer will, in my opinion, be in clear compliance with the requirements of the law and will be better equipped to fight fraud. If rules 2. through 6. are followed the insurer will, in my opinion, be in compliance with the requirements and spirit of the law. If an insurer refuses to respond to legitimate requests from other insurers who have followed the rules indicated above, it can be found to be involved in unfair business tactics and be subject to fines and suits for damages.

The key to safely disclosing information about an insured, or past insured, is to apply the rule on which all insurance is based the doctrine of uberrima fides [utmost good faith]. The insurer who discloses information to other insurers in situations involving potential fraud does so with the utmost good faith and will comply with both the spirit and letter of the law.

Police agencies must also remember that the private investigators, the insurers, and their representatives are an essential part of every insurance fraud investigation. Information should, and in some cases must, flow in both directions.

*This article is excerpted from a much longer report on the topic, which delves into the specifics of California statutes and caselaw. For more information on that report, contact Mr. Zalma at (310) 390-4455 or by e-mail at or . Information on the new Zalma's Insurance Fraud Letter may be obtained at http://www.zalma.com.

© Barry Zalma 2006

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