State Legislatures Tackle Insurance Fraud

November 7, 2014 | Appeals | Insurance Coverage

In an effort to combat insurance fraud, state legislatures across the country have passed a wide variety of bills this year that their governors have signed into law. While many other bills failed to make it to a governor’s desk for one reason or another, some that have been introduced may yet become law.

Despite these efforts, insurance fraud undoubtedly will remain a drain on our economy and on policyholders’ pocketbooks for quite some time to come. Nevertheless, the new laws should help insurance regulators and insurance carriers reduce insurance fraud to at least some degree.

a. Define the Crime

Defining “insurance fraud” can be an important step in the fight against it. A new law in Colorado1 provides that a person commits insurance fraud if he or she, with an intent to defraud, does any of the following:

(i) Presents or causes to be presented an application for the issuance or renewal of an insurance policy where the application or documentation in support of the application or renewal contains “false material information” or “withholds material information” that the insurance company requested, resulting in the issuance of a policy or insurance coverage for the applicant or another;

(ii) Presents or causes to be presented any claim for a loss or injury, which claim contains false material information or withholds material information;

(iii) Causes or participates, or purports to be involved, in a vehicular collision or any other vehicular accident for the purpose of presenting any false or fraudulent insurance claim;

(iv) Presents or causes to be presented a claim for the payment of a loss where the loss or damage claimed preexisted the execution of the insurance policy unless permitted under the policy; or

(v) Presents or causes to be presented any written, oral, or electronic material or statement as part of, in support of, or in opposition to a claim for payment or other benefit under an insurance policy, knowing that the statement contains false material information or withholds material information.

The first crime noted above is a class 1 misdemeanor; the others are class 5 felonies.

b. Solicitation

A new provision of Maryland’s insurance law2 prohibits a person from paying, allowing, or giving, or offering to pay, allow, or give, directly or indirectly, anything of value to an insured as an inducement to hire a public adjuster. A new law in Georgia3 goes somewhat further in an effort to limit improper insurance claims.

The Georgia law provides that it is unlawful for any person to act as a “capper, runner, or steerer” for any “practitioner,” a term defined to include attorneys, health care professionals, and owners or partial owners of a health care practice or facility. The law defines “capper, runner, or steerer” as a person who receives a pecuniary benefit from a practitioner, whether directly or indirectly, to solicit, procure, or attempt to procure a client, patient, or customer at the direction or request of, or in cooperation with, a practitioner for the purpose of obtaining benefits under an insurance policy or for the purpose of asserting a claim against an insured or an insurer for providing services to the client, patient, or customer.

The law also states that practitioners may not compensate or give anything of value to a capper, runner, or steerer. In addition, under the law, it is unlawful for any capper, runner, or steerer to recommend or secure a practitioner’s employment by a client, patient, or customer if the practitioner obtains or intends to obtain benefits under an insurance policy or asserts a claim against an insured or an insurer for providing services to the client, patient, or customer.

A first violation of this new law is a misdemeanor, subjecting the violator to at least 30 days imprisonment and a fine of up to $1,000. A second or subsequent violation is a felony, subjecting the violator to no more than 10 years in prison and a fine not exceeding $100,000 per violation.

It is worth noting that the law specifically provides that it does not prohibit an attorney from making a referral and receiving compensation as permitted under Georgia’s professional rules of conduct.

c. Applicant Misrepresentations

North Carolina’s approach to insurance fraud this year4 was to enact a law allowing insurance companies to cancel a policy if an applicant misrepresented certain information.

In particular, the law provides that if an applicant for a personal automobile insurance policy “knowingly makes a material misrepresentation of the years of driving experience or the driving record of any named insured or of any other operator who resides in the same household and who customarily operates a motor vehicle to be insured under the policy,” the insurance company may:

(i) Cancel or refuse to renew the policy;

(ii) Surcharge the policy; or

(iii) Recover from the applicant the appropriate amount of premium or surcharge that would have been collected by the insurer had the applicant furnished the correct information.

The law should reduce the incentive for misrepresentations in insurance applications by increasing the risks if a misrepresentation is discovered.

d. Certificates of Insurance

In Delaware,5 a new Chapter 45 in Title 18 of the Delaware Code, titled, “Certificates of Insurance Act,” prohibits a person from requesting the issuance of a certificate of insurance that does not accurately reflect the underlying policy. It also prohibits a person from issuing a false or misleading certificate or one that purports to alter, amend, or extend the coverage provided by the insurance policy. In addition, the bill prohibits the use of a certificate to warrant that a policy of insurance complies with the insurance or indemnification requirements of a contract, and confirms that a certificate of insurance is not a policy and does not independently confer rights to its recipient.

A violator of the law can be fined up to $1,000 per violation.

e. Other State Changes

Among other state law changes targeting insurance fraud, Utah6 has decided to strengthen the powers of the Utah Insurance Department’s insurance fraud investigators by designating them as law enforcement officers, with the full powers of those officers. And Louisiana7 extended the term of the insurance fraud investigation unit within the state’s Department of Public Safety and Corrections from its previous expiration date of July 1, 2014, to July 1, 2016.

f. Pending Bills

Pending bills around the nation cover a variety of matters. Locally, an anti-insurance fraud bill was introduced in the New Jersey Legislature8 that would make “reverse rate evasion”—essentially, a New Jersey resident who garages a motor vehicle in New Jersey but who insures it elsewhere in an effort to pay lower insurance premiums—a form of insurance fraud.

Michigan9 would create an automobile insurance fraud authority. Among other things, it would have the power to provide financial support to state or local enforcement agencies for programs designed to reduce the incidence of automobile insurance fraud and to provide financial support to state or local prosecutors for programs designed to reduce the incidence of automobile insurance fraud.

Legislation was introduced in Massachusetts10 that would target Workers’ Compensation insurance fraud. A bill provides that any employer required to maintain Workers’ Compensation insurance under Massachusetts law who falsely asserts to an employee, customer, or government official that the employer has an active Workers’ Compensation insurance policy or who presents, displays, or shows a certificate of Workers’ Compensation insurance or certificate of self-insurance when such certificate is invalid or has been cancelled, revoked, or otherwise terminated could be punished by a fine of not less than $1,000 or imprisonment for not more than two and one-half years, or both.

Moreover, an employer “shall be personally liable for any loss or damages to anyone who has relied on such false assertion or invalid certificate.”

A second bill in Massachusetts11 would remove the “incontestability” period for life, accident, and health insurance policies. Specifically, the bill provides that there would be no time bar for an insurance company to assert as a defense to a claim under any such policy, or as grounds for rescission, that the statements contained in the policy application, or in any reinstatement application, were fraudulent and were made with the actual intent to deceive and gain coverage for which the applicant or insured would not otherwise have qualified. Such a defense to a claim must be “pertinent” to the policy, and “inadvertent mistakes” made by an insured would not constitute fraud.

Under the bill, an action by an insurance company for rescission must be brought within three years of the time that the insurer discovered or reasonably should have discovered the fraud by the applicant.??

g. Conclusion

The ideas contained in the various bills that have become law, or that have been introduced by state legislators, cover many different aspects of insurance fraud. Other states, including New York, would be well advised to consider their effectiveness, with a view to possibly adopting some or all of them in the future.

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7. See At the same time, Louisiana exempted every “small” insurance company—defined as a domestic life insurer that does business exclusively in Louisiana, with admitted assets not exceeding $10 million and having gross annual premiums not exceeding $2 million—from the requirement of having an insurance anti-fraud plan. See Reengrossed.

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Reprinted with permission from the November 7, 2014 issue of the New York Law Journal.  All rights reserved.

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