The War on Fraud: Pitfalls in Public-Private Partnerships
August 2009
I begin this commentary with a caveat. In
writing the series about fraud, it is not my intention to downplay the
importance of investigating and prosecuting insurance fraud.
by Tim Ryles,
Ph.D.
Tim Ryles Consulting
I have directed investigations of fraudulent practices; developed
databases on "the usual suspects"; raided offices of medical providers;
subpoenaed thousands of documents; seized office equipment, including
computers; ordered undercover investigations; and worked with federal,
state, and local agencies to bring a collective effort in attacking certain
types of fraud. While heading Georgia's Consumer Protection Agency, our
investigative staff was doing "link analysis" long before we knew that is
what we should call it.
My concerns about insurance fraud statutes has more to do with
implementation, a fear that government resources are too often applied to
serve private interests, a concern that rights of suspects are compromised,
and a growing belief that insurance fraud is too narrowly defined as
policyholder fraud. I am also troubled by what I believe is a growing
tendency to criminalize contract disputes.
One threat posed by certain events in the fight against fraud is that we
may ultimately undermine the legitimacy of government's efforts to combat
fraudulent practices. Accordingly, in addition to concerns expressed in
previous commentaries, this article addresses three matters: (1) the funding
mechanism for state government insurance fraud units; (2) the
industry-government partnership in the battle against fraud; and (3) the
methods used by some special investigative units (SIUs) in fraud
investigations.
The Funding Mechanism for Anti-Fraud
Twenty-four states fund their fraud units by assessments against
insurance companies either in part or completely. Fifteen states rely only
on public tax money, and 14 rely exclusively on assessments, according to
the National Association of Insurance Commissioners (NAIC). Perhaps the most
symbiotic industry-government relationship stemming directly from the
assessment form of financing is the Insurance Fraud Bureau of Massachusetts
(IFB) and prosecutor positions in the state attorney generals' offices.
IFB's Web page
acknowledges, "The bureau is wholly funded by the insurance industry in
Massachusetts" and declares its mission to be "the systematic elimination of
fraudulent insurance transactions." Review of its newsletter and its "court
activity" reveals that IFB focuses singularly on claimant fraud, primarily
in auto and workers compensation. In fact, the IFB does not report a single
example of having conducted a fraud investigation of an insurance company or
other regulated entity. Further, while the IFB Web page cites several
successful prosecutions of business owners who cheat workers compensation
insurers by misclassifying their workforce to qualify for lower insurance
premiums, IFB reports no corresponding prosecutions (or even investigations)
of insurers that misclassify a policyholder's employees to earn a higher
premium.
In a detailed description of the IFB and the Attorney General's
prosecutorial staff, Professor Aviva Abramofsky found that the Attorney
General's prosecutorial staff refused to prosecute insurer fraud (as opposed
to policyholder fraud) "on the ground of perceived conflict of interest."1
For critics who believe that government is essentially "for sale," the
MFIB-industry relationship may validate the belief.
Indeed, insurer
funding of anti-fraud activities, no matter how well intentioned, raises
questions of undue influence over the what, where, why, when, and how of
investigative and prosecutorial efforts.
The Government—Industry
Partnership Issue
MFIB is a hybrid, one of those strange
combinations of public and private functions that led courts to characterize
it as "quasi-public." A major player in anti-fraud efforts, the National
Insurance Crime Bureau (NICB), on the other hand, is "a not-for-profit
organization that receives support from approximately 1,000
property/casualty companies" according to its
Web page.
Joseph H. Wehrle Jr., president and chief executive officer of
NICB, recently told attendees (the writer included) at the 14th Annual
America's Claims Experience (ACE) that he is responsible for 300 employees.
According to Mr. Wehrle, investigators at NICB are either former law
enforcement officers, criminal justice majors, or both. He indicated that 46
state insurance departments accept reporting of insurance fraud through
NICB. What this means is that an insurer reports fraud suspects to NICB
which, in turn, forwards the report to the appropriate state regulatory
agency.
The NICB says it "partners with insurance and law enforcement
agencies to facilitate the identification, detection, and prosecution of
insurance criminals." Its investigators carry the title of "Special Agent,"
and the organization aggressively pursues its mission through public
information campaigns, training programs, legislative lobbying,
publications, and what it terms "data analytics."
The partnering role
involves not only contact with but also the training of law enforcement
officers on the subject of insurance fraud. NICB investigators receive case
assignments, investigate allegations of fraud, and often work jointly with
law enforcement authorities. The organization's database on stolen vehicles
is available to law enforcement authorities, and its staff of investigators
are available presumably at no cost to government prosecutors to testify on
methods of identifying and tracing stolen vehicles.
On its own initiative
or in conjunction with insurers, NICB brings cases of insurance fraud to
local, state, or federal prosecutors. Attempts to cultivate close working
relationships with law enforcement authorities have succeeded quite well, as
indicated in several ways. Prosecutors have shared grand jury information
with NICB investigators; in one case, the NICB investigator sat at the table
with the prosecutors. When the accused defendants were found not guilty,
they sued several parties, including NICB's investigator, for malicious
prosecution. NICB argued that its investigator, although its full-time
employee, was working for the U.S. government on the case.2
NICB, in pursuing immunity under federal law, sued unsuccessfully in federal
court on the immunity issue. In fact, after the loss in federal court, NICB
sought relief in state court in Indiana. On April 24, 2009, the Indiana
court agreed with the federal courts in holding that the investigator was
acting as a volunteer or independent contractor, not as a federal employee.
(Jaskolski v. Daniels, Ind. App. No. 45A04-0810-CV- 588.)
NICB also will substitute for insurers in securing prosecutorial attention.
In Hampton v. State Farm Mut. Auto. Ins. Co., et al. (Mo. App.
W.D. Jan. 8, 2008, No. WD66791), State Farm alleged that the policyholders
had arranged to have their vehicle burned to collect insurance and denied
their claim. Consequently, the insured filed a civil action against State
Farm for breach of contract based on failure to pay the claim. While the
civil action was pending, State Farm's adjuster contacted NICB's local
representative and persuaded him to take the file to the local district
attorney (DA) and seek criminal prosecution of the insureds for insurance
fraud. The local district attorney filed charges against the Hamptons the
day before the statute of limitations ran—the same day NICB's representative
met with the DA. At the criminal trial, the jury rendered a "not guilty"
verdict, leading to a subsequent lawsuit by the defendant insureds for
malicious prosecution.
The malicious prosecution trial ended with judgment
against State Farm. The proceedings disclosed that the local prosecutor said
that if State Farm had brought the case to him directly instead of through
NICB, "he would have been suspicious." Thus, this case illustrates a point
made by Mr. Wehrle to the ACE conference: Sometimes NICB can do things that
insurers cannot do.
However, the case also shed light on NICB personnel's
lack of due diligence in confirming information provided by the insurer. In
upholding the judgment against State Farm, the appellate court noted, "State
Farm did not give NICB the entire file. For instance, the file given to NICB
did not reference the potential exculpatory evidence … found by Carter, the
mechanical expert witness hired by State Farm to inspect the burned
4Runner." Further, "Plaintiffs also presented evidence from which the jury
could have inferred that State Farm knew by going through [the NICB
investigator], a former Kansas Bureau of Investigation employee, that the
Johnson County District Attorney was more likely to file charges, as the
prosecutor himself admitted."
The Role of SIUs
I have witnessed SIU investigators step into the shoes of adjusters and
provide incomplete case files to prosecutorial officials. Also, when
exculpatory evidence came to them after a referral to a law enforcement
official, I have experienced examples in which the SIU official did not
forward the new information to the prosecutor.
Caselaw also confirms that SIU personnel are not reluctant
to engage in the types of investigative techniques commonly employed among
government law enforcement officials, like lying to alleged suspects, for
example. In Newland v. Progressive Corp., an August 30, 2006,
decision from the U.S. District Court, Eastern District of California, the
insurance adjuster believed that the Newlands vandalized their own vehicle,
a Volvo S80, so he sent the file to the company's SIU. During the
investigation, the SIU investigator discovered that there were two keys to
the car, and guilt or innocence possibly could be determined by showing
which key last started the car. "All the fingers are pointing to you and
your husband," the investigator asserted to the policyholders. He then
falsely told them that a black box in the car would reveal which key was
used last.
Without detailing the rest of the story (the company did not
fare well), what caught my attention was the SIU investigator's use of
deception. Government investigators may lie to gain investigative advantage;
however, an insurance contract is a contract of utmost good faith, governed
by a body of statutes, regulations, and common law. When the state
legislatures passed the anti-fraud statutes, they did not repeal the Unfair
Claims Practices Act or any of the many rules governing claims handling. In
short, SIU personnel must play by the same rules as any other person
involved in claims. Somewhere along the line, however, some SIU staff (many
of whom are former police officers) still want to play government policeman.
Conclusion
In some instances, I perceive a blurring of distinction
between public and private persons in enforcing anti-fraud laws. When
private citizens play cops and robbers by assuming the role of cop, they not
only increase their personal liability when things go awry but also provoke
questions about the neutrality of government agencies. As private
organizations continue their role of partnering with government, perhaps
insurance regulators should pay closer attention. Setting standards of
conduct, including continuous oversight of and evaluation of private
entities engaged in investigative work, is worth consideration. Government
must avoid turning over criminal law enforcement to private interests, no
matter how noble the cause.
With respect to funding, my solution may
appear rather draconian, but if a public purpose is unable to attract
sufficient public budgetary appropriations to do its work, maybe the program
should be abandoned. Also, is it really necessary to add criminal laws to
the mix of authority insurers have under their contracts of adhesion if the
insurers have to pay for the effort? I do not believe so.
Further, private
funding of government activities invites conflicts of interest. Indeed, one
might conclude that the absence of arrests of insurance company personnel,
compared with policyholder arrests for fraud, already confirms a systematic
bias in anti-fraud efforts. Any contention that insurance company personnel
are disciplined by a system of civil regulatory laws and ought not be
subject to criminal statutes fails to address the essential issue: Why are
similar infractions treated as civil matters for corporate offenders but as
criminal offenses by policyholders and other claimants?
For SIU personnel
within insurance companies, regulators typically expect the insurance
company to have an anti-fraud program and some means of fighting fraud. That
is about all there is. As a developing record suggests, however,
policyholder protection deserves closer attention to make certain that
company internal referrals to SIUs are reasonable courses of conduct and
that SIU activity complies with established principles of fair claims
handling.
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