Criminal and Administrative Insurance Fraud Cases in the Courts

May 6, 2011 | Appeals | Insurance Coverage

State and federal courts in New York have recently issued a number of significant decisions in cases involving allegations of insurance fraud in the criminal and administrative arenas. The results were decidedly mixed for the government.[1] However, the fact that there have been so many important cases in the courts, together with at least one new major legislative development relating to criminal insurance fraud, suggests that insurance fraud may finally be gaining the attention it deserves in New York.

Incentive Programs

In February, the Court of Appeals decided People v. Wells Fargo Insurance Services, Inc.[2] Here, the Attorney General brought a civil action against the insurance brokerage firm now known as Wells Fargo Insurance Services, Inc.  The complaint contended that Wells Fargo had engaged in “repeated fraudulent or illegal acts” in violation of Executive Law Section 63(12), which permits the Attorney General to apply to the Supreme Court for an order enjoining the continuance of such actions.

The Attorney General’s complaint asserted that Wells Fargo had been unjustly enriched, had committed common law fraud, and had breached its fiduciary duties. It alleged that Wells Fargo acted as an agent for organizations and individuals seeking to purchase insurance; that Wells Fargo dealt with insurance companies on behalf of those customers, obtained quotes from the insurers, and presented them to the customers; and that it also offered customers recommendations about what coverage would best suit their needs.  Wells Fargo “often has advised its customers in complex insurance placements where all things are rarely equal, and where subjective decisions must be made among competitors with varying coverages, financial stability, and price.”  Customers relied on Wells Fargo “to make its recommendations strictly based on the customer’s best interest.”

The complaint also alleged that Wells Fargo entered into a number of “incentive” arrangements with insurance companies, in which the insurance companies rewarded Wells Fargo for bringing them business.  The complaint focused especially on Wells Fargo’s “Millennium Partners Program,” in which participating insurers agreed to pay cash compensation to Wells Fargo based on the volume of business that the broker brought to them.  It alleged that, as a result of the incentive programs, Wells Fargo “steered” its customers to particular insurance companies and away from others that did not participate in the programs.

The complaint alleged that the incentive payments were not disclosed to Wells Fargo’s customers.  It did not allege, however, that Wells Fargo made any affirmative misrepresentations or that any customer suffered demonstrable harm from the incentive arrangements, and there were no allegations that any customer was persuaded to buy inferior, or overpriced, insurance to help Wells Fargo earn its incentives. 

In a unanimous decision by Judge Robert S. Smith,[3] the Court explained that the complaint essentially amounted to a claim for breach of fiduciary duty and that it rested on the rule that one acting as a fiduciary in a particular transaction may not receive, in connection with that transaction, undisclosed compensation from persons with whom the principal’s interests may be in conflict. The Court conceded that the rule was “a sound one in general,” but it concluded that it did not apply in this case.

As the Court observed, a broker is the agent of the insured, but it customarily looks for compensation to the insurer, not the insured, and it is sometimes the insurer’s agent also – for example, when collecting premiums.  Given a broker’s “dual agency status,” disclosure to its customers of the contractual arrangements it had with insurance companies was “not normally required,” the Court decided. Moreover, it continued, if there were exceptions to this rule, “this case does not present one,” noting that the complaint did not allege that anything Wells Fargo did was contrary to industry custom. The Court therefore held that an insurance broker did not have a common law fiduciary duty to disclose to its customers “incentive” arrangements that the broker entered into with insurance companies.

It should be noted that a recently adopted Insurance Department regulation requires disclosure to a purchaser of insurance if a broker “will receive compensation from the selling insurer … based in whole or in part on the insurance contract” that the broker sells.[4] The regulation, effective January 1, 2011, was not applicable to the Wells Fargo case.

Fraudulent Insurance Act

The Court also decided People v. Boothe[5] in February, and it also rejected the government’s contentions in this case. Here, the chief operating officer and executive vice president of a managed health care provider had been indicted on charges that included two counts of insurance fraud in the first degree.[6]  The indictment charged that the defendant had committed “fraudulent insurance act[s]” when he submitted marketing plans to Medicaid that he knew contained materially false information. The defendant moved to dismiss, asserting that he had not committed a “fraudulent insurance act” as defined by the Penal Law.  The trial court granted the defendant’s motion, the Appellate Division affirmed, and the issue reached the Court of Appeals. 

In a unanimous decision by Judge Eugene F. Pigott,[7] the Court explained that a fraudulent insurance act, as defined by the Penal Law, was limited to certain defined commercial and personal insurance.  The government conceded that the marketing plans allegedly submitted by the defendant did not meet that test but argued that a “fraudulent health care insurance act” was a “species” of “fraudulent insurance act,” and that Penal Law Section 176.05(2) could be read as specifying an expanded set of “fraudulent insurance acts” relating to health care that were punishable under Penal Law Sections 176.10 through 176.30.  The Court rejected that contention.

The Court found that the Legislature had “failed to criminalize” the conduct at issue.  Indeed, the Court pointed out that the Judicial Conference of the State of New York proposed in its 2003 Legislative Agenda Report that the legislature amend the Penal Law so that a fraudulent health care insurance act would be included as a fraudulent insurance act and thereby would constitute the crime of insurance fraud.[8] 

Because that had not been done, the Court concluded, a “fraudulent health care insurance act” was not included within the definition of “fraudulent insurance act” and therefore the defendant had not violated Penal Law Section 176.05(1).  Accordingly, the Court affirmed the Appellate Division’s decision.

Health Care Fraud

The Appellate Division, First Department, recently addressed the nature of proof required for a conviction for health care fraud under Penal Law Article 177, which the Legislature enacted in 2006 to deal specifically with fraud by health care providers. The opinion, People v. Khan,[9] is the first appellate decision under the statute.

The case stemmed from a joint investigation by the New York City Police Department and the Human Resources Administration of a pharmacy in Manhattan based on a tip that drugs were being sold out of that location without prescriptions. The investigation resulted in the prosecution of the defendant for, among other crimes, fourth degree health care fraud on the theory that claims that the pharmacy submitted to Medicaid misidentified the recipient of the medications obtained from the pharmacy.[10]

A divided Appellate Division concluded that the defendant in this case knew that the woman who was named in the bills submitted to Medicaid was not the recipient of the medications, but rather that they were intended for the male who came to the pharmacy, and that he wanted the drugs to sell for a profit.

The defendant argued that, under this theory, a customer who went to a pharmacy to obtain medication for a spouse would be guilty of health care fraud merely because the insurance claim or Medicaid claim was made in the spouse’s name, but the majority opinion of the First Department disagreed. In its view, absent evidence that a spouse was involved in a scheme to defraud a health care plan, there could be no prosecution for health care fraud. Moreover, a pharmacist who dispensed medications to someone other than the one for whom medications were prescribed would not commit fraud in the absence of evidence that the person picking up the medications was involved in an illegal scheme and the pharmacist also was aware of what was going on.

Finally, the appellate court pointed out that the offense of health care fraud in the fourth degree required proof of receipt of payment in an amount exceeding $3,000, whether by the defendant or another. Here, it concluded, that requirement had been met:  The evidence established that Medicaid reimbursed the pharmacy for the fraudulent claims submitted by the defendant, and the total payment exceeded $3,000 in less than one year.


One can expect that the Legislature will remedy the problem found by the Court of Appeals in Boothe, much as the Insurance Department has issued a regulation that now deals with the problem identified by the Court in Wells Fargo.  Indeed, the legislature is already considering a bill to address criminal insurance fraud:  In March, the New York State Senate passed S1685-2011, which creates the crimes of staging a motor vehicle accident in the first, second and third degrees; prohibits acting as a passenger or an operator of a motor vehicle with intent to defraud by means of planning and execution of an accident; and provides that the crime is a class B felony if an uninvolved party is injured. The bill has been sent to the Assembly. Attention to criminal insurance fraud with increased investigations, arrests, and prosecutions[11] and with legislative and court involvement is the only way that this significant problem can be harnessed. 

[1] See, e.g., U.S. v. Truman, No. 5:10-CR-245 (N.D.N.Y. Feb. 1, 2011) (defendant entitled to judgment of acquittal on insurance fraud counts).

[2] No. 6 (Feb. 17, 2011).

[3] Judge Victoria A. Graffeo took no part in this case.

[4] 11 NYCRR § 30.3(a)(2) [effective January 1, 2011].

[5] No. 31 (Feb. 24, 2011).

[6] Penal Law § 176.30.

[7] Judge Jonathan Lippman took no part in this case.

[8] The Judicial Conference of the State of New York, 2003 Legislative Agenda (January 2003). 

[9] 916 N.Y.S.2d 28 (1st Dep’t 2011).

[10] To establish fourth degree health care fraud, the government must prove that the defendant, “with intent to defraud a health care plan … knowingly and willfully provide[d] materially false information … for the purpose of requesting payment from a health plan for a health care item or service and, as a result of such information, the [defendant] or another person receive[d] payment in an amount [to which the defendant or another] [was] not entitled,” and “the payment wrongfully received … from a single health plan in a period of not more than a year exceed[ed] [$3,000] in the aggregate.” Penal Law § 177.05, § 177.10.

[11] See, e.g., The Annual Report to the Governor and the Legislature of the State of New York on the Operations of the Insurance Frauds Prevention Act (March 15, 2011); Sandra Peddie, “Ex-legislator gets 4-12 years in insurance scam,” Newsday at A05 (March 22, 2011).

This article is reprinted with permission from the May 6, 2011 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.

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