Sentencing and Restitution Awards in Insurance Fraud Cases

November 6, 2015 | Appeals

As this column regularly observes, insurance companies frequently use civil litigation as a tool to fight insurance fraud,1 including fraud involving life insurance policies.2 Insurance fraud, of course, also is a crime,3 and prosecutors often bring criminal actions against those who commit insurance fraud.

Generally speaking, a person convicted of insurance fraud faces a potential prison sentence as well as an order requiring restitution to victims.4 A recent decision by the U.S. District Court for the Western District of New York, in U.S. v. Jafari,5 and a recent decision by the U.S. Court of Appeals for the Fifth Circuit, in U.S. v. Bazemore,6 explore how sentencing and restitution should be calculated in insurance fraud cases.

Health Care Fraud

The defendant in the first case, Nina Jafari, a licensed clinical social worker, was charged with health care fraud in violation of 18 U.S.C. §1347, was convicted on four counts after a jury trial, and was sentenced to a term of incarceration of 30 months. Thereafter, the court considered the government’s restitution request under the Mandatory Victim Restitution Act (MVRA)7 and determined that an appropriate award of restitution to be paid to the victim, BlueCross BlueShield of Western New York (BCBS), was $135,742.

To calculate the award, the court observed that the indictment alleged that the defendant had billed BCBS using a “Current Procedural Terminology” (CPT) code that had resulted in inflated payments and payments for services that had never been rendered. It said that the manager of the special investigations unit at BCBS had reviewed claims submitted by the defendant during the time frame covered by the indictment; presumed that some form of service had been rendered on each date of service billed by the defendant (despite the fact that there was significant evidence presented at trial that the defendant regularly submitted bills for services that had never occurred); and downgraded the reimbursement code to determine the amount it had overpaid the defendant.

The court acknowledged that not all claims had to be downgraded but said that, due to the defendant’s fraud and incomplete record-keeping practices, it could not determine which instances should not be adjusted. The court concluded that the methodology was “reasonable” and supported the restitution award “by a preponderance of the evidence.”

The Bazemore Case

Vincent Bazemore, in his role as an insurance agent, convinced senior citizens of modest means, many of them relatives or family friends, to apply for multimillion dollar life insurance policies meant for high net-worth individuals. Bazemore promised these applicants that they would not have to pay anything out of pocket for the insurance and that after two years—after the lapse of the “contestability period” during which an insurer could challenge the issuance of the policy—he would sell the policy and pay them a lump sum.

After securing a recruit, Bazemore would grossly inflate the person’s net worth and income on the policy application and falsely claim that the applicant did not intend to transfer the policy to a third party. Bazemore did not, however, misrepresent the age or health status of an applicant.

If a policy was issued, Bazemore would take out a loan to pay the premiums for the first two years, at which point he planned to sell the policy to an investor and use part of the proceeds to pay back the loan. As the agent responsible for the sale, he would receive a commission on each issued policy roughly equivalent to the cost of the first year’s premium payment.

Bazemore was charged and convicted of four counts of mail fraud,8 each relating to a so-called stranger-owned (or originated) life insurance (STOLI) policy issued to an unqualified applicant9 for which he received a commission payment. The U.S. District Court for the Northern District of Texas calculated a U.S. Sentencing Guidelines (U.S.S.G.)10 range of 292 to 365 months’ imprisonment based on an offense level of 39 and a criminal history category of II. The offense level was largely the product of a 24-point enhancement for the scheme’s intended loss to the insurers, which the district court calculated to be $81 million, the sum of the death benefits for all of the policies issued to Bazemore’s applicants.

The district court sentenced Bazemore to a 292-month term of imprisonment, 240 months for each count, to run partially concurrently and partially consecutively. The district court also ordered Bazemore to pay $4.01 million in restitution pursuant to MVRA for the commissions paid to him by the insurers and for some of the notes issued by banks to finance the premiums.

Bazemore appealed to the Fifth Circuit.

The Sentencing Ruling

After upholding Bazemore’s conviction,11 the circuit court addressed his challenges to the 24-level enhancement the district court had applied based on an intended loss of $81 million, which was the combined value of the death benefits of the policies the insurers issued to Bazemore’s applicants. The Fifth Circuit ruled that the district court had erred in using the face value of the insurance policies to calculate the intended loss of Bazemore’s scheme.

The circuit court explained that, under U.S.S.G. § 2B1.1, the offense level assigned to a fraud conviction depends on the amount of loss inflicted on the victim or intended by the defendant. The loss figure used to determine the enhancement is “the greater of actual or intended loss,” with “actual loss” meaning the reasonably foreseeable pecuniary harm that resulted from the offense and “intended loss” meaning the pecuniary harm that was intended to result from the offense. The intended loss in this case was larger than the actual loss suffered by the insurance companies.

Here, the Fifth Circuit found, the intended loss of the scheme was not the total amount of the death benefits obtainable under the policies—$81 million. The circuit court reasoned that a life insurance policy lapses in the event of non-payment, in which case the insurer is entitled to retain the premiums paid until that point and has no obligation to pay out death benefits when the insured dies. Thus, it said, the primary risk to an issuer of a fraudulently induced life insurance policy was that an insured would die more quickly than anticipated by the actuarial model, forcing the insurer to pay death benefits before receiving the expected amount of premiums.

The Fifth Circuit then ruled that, to apply the intended loss enhancement, the government had the burden to prove by a preponderance of the evidence that Bazemore intended pecuniary harm to result from his scheme. The circuit court added that this required the government to establish that the STOLI policies imposed a financial risk to the insurers beyond the risk they believed they were receiving in issuing life insurance to Bazemore’s applicants.

Given that Bazemore had not misrepresented the age or health status of his applicants, the circuit court ruled, to prove intended loss, the government had to prove that his misrepresentations as to the applicants’ financial status and third-party financing arrangements posed a risk of financial harm to the insurers that would not have existed if the information provided in the insurance applications had been true.

According to the Fifth Circuit, the government had not attempted to make this showing, or to quantify any purported economic harm. It then vacated Bazemore’s sentence and said that, on remand, an intended loss enhancement could not be applied unless the government proved by a preponderance of the evidence that the STOLI policies posed a risk of financial loss to the insurers that the same policies issued to qualified insureds—the applicants the insurers thought they were getting—did not.

The Restitution Ruling

The Fifth Circuit then turned to Bazemore’s appeal of the district court’s restitution order.

The Mandatory Victim Restitution Act makes restitution mandatory for victims of certain crimes. Section 3663A(a)(1) states that “[n]otwithstanding any other provision of law, when sentencing a defendant convicted of an offense described in subsection (c), the court shall order…that the defendant make restitution to the victim of the offense or, if the victim is deceased, to the victim’s estate.”

The term “victim” is defined as “a person directly and proximately harmed as a result of the commission of the offense for which restitution may be ordered.12 A trial court may award restitution when sentencing a defendant convicted of “an offense against property under Title 18, including any offense committed by fraud or deceit.”13

Under the MVRA, restitution is limited to the actual loss directly and proximately caused by the defendant’s offense of conviction. An award of restitution cannot compensate a victim for losses caused by conduct not charged in the indictment or specified in a guilty plea, or for losses caused by conduct that falls outside the temporal scope of the acts of conviction.14

The Fifth Circuit pointed out that the presentence report (PSR) for Bazemore recommended restitution in the amount of $4.558,416 and that the district court adopted the figure, except for commission payments not induced by the fraud scheme. The Fifth Circuit explained that the PSR calculated the actual losses to the insurers as the commissions paid to Bazemore based on its determination that, “[w]hen the fraud was discovered, the insurance companies revoked the policies and remitted the paid premiums to the lenders.”

Before sentencing, the circuit court noted, prosecutors had informed the district court that they could not support some of the loss amounts specified in the PSR because certain insurers had retained the premiums they had received or had not verified their losses. Although the government agreed with Bazemore that paid premiums should be offset against commissions and argued that the amounts it identified should not be ordered as restitution, the district court apparently ignored both Bazemore’s and the government’s objections to the PSR.

The circuit court ruled that the restitution order could not stand. Instead, it held, the actual loss on a rescinded STOLI policy was “the commission the insurer paid to Bazemore less any premium payments that it retained.”

Accordingly, the circuit court vacated the order of restitution.

Conclusion

An encouraging aspect of Jafari and Bazemore—in addition to the circuit court affirming the defendant’s fraud conviction—is that prosecutors and the courts now should understand how to calculate the impact of insurance fraud for purposes of sentencing and restitution. With other courts, including in New York,15 also ordering restitution in criminal cases involving various forms of insurance fraud, the disincentive to commit insurance fraud continues to grow.

Endnotes:

1. See, e.g., Evan H. Krinick, “Challenging Fraud by Employers in Workers’ Compensation” (NYLJ, March 6, 2015); “ERISA and Insurer Fraud Suits Against Health Care Providers” (NYLJ, Jan. 5, 2015).

2. See, e.g., Evan H. Krinick, “Fraud Claims Over Stranger-Originated Life Insurance Hit the Courts” (NYLJ, Nov. 5, 2010); “Rescission When Fraud Is at the Heart of Life Insurance Policy” (NYLJ, July 17, 2009).

3. See, e.g., Evan H. Krinick, “When Licensed Professionals Commit Insurance Fraud” (NYLJ, May 1, 2015); “State Legislatures Tackle Insurance Fraud” (NYLJ, Nov. 7, 2014).

4. Restitution also can be a remedy in civil litigation. See, e.g., Evan H. Krinick, “Restitution to Insurance Carriers: The New York Rule” (NYLJ, March 7, 2014).

5. No. 1:13–CR–19 EAW (W.D.N.Y. May 14, 2015).

6. No. 14-10381 (5th Cir. April 21, 2015), cert. denied (U.S. Oct. 5, 2015).

7. 18 U.S.C. §3663(A).

8. See, 18 U.S.C. §1341.

9. A STOLI policy is a life insurance policy held by a third party that has no insurable interest in the insured.

10. See, http://www.ussc.gov/guidelines-manual/guidelines-manual.

11. The Fifth Circuit reasoned that the government proved that insurers paid Bazemore commissions for value they were promised but did not receive in the form of qualified insureds, finding that this was “sufficient to satisfy the mail fraud statute.”

12. 18 U.S.C. §3663A(a)(2).

13. 18 U.S.C. §3663A(c)(1)(A)(ii).

14. See, e.g., United States v. Sharma, 703 F.3d 318 (5th Cir. 2012).

15. See, e.g., U.S. v. Binday, Nos. 14–2809–CR, 14–2832–CR, 14–2873–CR (2d Cir. Oct. 26, 2015) (restitution of $37,433,914); U.S. v. Cohan, 988 F.Supp.2d 323 (E.D.N.Y. Dec. 23, 2013) (restitution of $607,186).

Reprinted with permission from the November 6, 2015 issue of the New York Law Journal.  All rights reserved.

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