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.
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.
Case law 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.
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.
1 Aviva Abramovsky, "An Unholy Alliance: Perceptions of Influence in Insurance Fraud Prosecutions and the Need for Real Safeguards," Journal of Criminal Law and Criminology 98, no. 2: 383.
2 See the discussion in Abramofsky, Ibid. The government took the position that the NICB investigator was not a government employee.
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