Statute and Common Law Provide Immunity for Insurers Reporting Fraud

After a fire damaged a house in Wilson, North Carolina, that was owned by Cully’s Motorcross Park, Inc., its president and sole stockholder, Laurie Volpe, submitted a claim to North Carolina Farm Bureau Mutual Insurance Company, the insurer for Cully’s. Farm Bureau began an investigation and ultimately denied the claim, citing its suspicion that the fire had been intentionally set, among other factors. The insurance company’s investigator subsequently met with a local police sergeant, who concluded that Volpe had committed a crime. She was arrested, but the district attorney dismissed the charge. Volpe then asserted a malicious prosecution claim against Farm Bureau.

A trial court found Farm Bureau liable for malicious prosecution, the Court of Appeals affirmed, and the case reached the North Carolina Supreme Court.

In a decision in June, the North Carolina Supreme Court reversed,[1] finding that the conclusion that Farm Bureau had maliciously instigated a criminal prosecution against Volpe did “not account adequately for the roles played by police and prosecutorial discretion.” Relying on the analysis in Comment (g) to Section 653 of the Restatement (Second) of Torts,[2] the court found that the police sergeant, after receiving information from Farm Bureau’s investigator, had independently exercised his discretion to make the prosecution his own. Consequently, the court ruled, Farm Bureau had not instituted a malicious prosecution.

Fighting Fraud

Insurance companies across the country are becoming more and more aggressive in fighting insurance fraud – and in reporting their suspicions to prosecutors and regulators. As a result, malicious prosecution and defamation claims against insurance carriers are likely to proliferate.

Many states have enacted statutes that provide immunity for insurance companies (and others) in these situations.[3] New York has its own set of rules that both encourage the reporting of suspected fraud as well as protect insurance carriers that do so.

The New York Law

Section 405 of the Financial Services Law, entitled “Immunity,” provides that, in the absence of fraud or bad faith, no insurer shall be subject to civil liability, and no civil cause of action “of any nature” shall arise against an insurer, for any information relating to suspected insurance law violations that the insurer furnishes to law enforcement officials, the financial frauds and consumer protection unit of the Department of Financial Services (“DFS”), or any state agency investigating fraud or misconduct relating to financial fraud.[4]

Although enacted in 2011, when the state’s banking and insurance departments were reorganized into the DFS, Section 405 has a long history. It originally was passed as Insurance Law Section 38-e by Chapter 720 of the Laws of 1981 as part of the law that established the Insurance Department’s frauds bureau. Several years later, it became Insurance Law Section 406, which was repealed when Section 405 of the Financial Services Law – substantially the same as Section 406 – was adopted as part of the creation of the DFS.

In the few cases that have interpreted Section 406,[5] New York courts have broadly applied its immunity provisions to protect insurance carriers.

Zellermaier

In 2002, in Zellermaier v. Travelers Indemnity Co. of Illinois,[6] Section 406 served as the basis for the Supreme Court, New York County, to dismiss a claim against an insurance company seeking damages for a report the insurance company had filed with the New York State Insurance Department’s frauds bureau.

The plaintiff, Irwin Zellermaier, was the chief executive officer of General Credit Corporation.  General Credit had obtained an insurance policy from Travelers Indemnity Company of Illinois in which Travelers agreed to insure 13 refrigerated tractor trailers in which General Credit had a security interest and that were owned by a customer.  After General Credit reported the trailers as stolen and submitted a claim under the policy, Travelers investigated and filed a report with the Insurance Department’s frauds bureau.

The plaintiff sued Travelers, seeking $10 million in compensatory damages and punitive damages for what he said were the “false statements by Travelers in filing the report to the Frauds Bureau of the Insurance Department.” The insurance company moved to dismiss under Section 406.

In its decision, the court explained that the legislative history of the predecessor to Section 406 indicated that its purpose was to permit insurance fraud to be more effectively discovered and investigated and to assist law enforcement in the prosecution of fraudulent insurance claims.  The court added that the governor’s message on signing the bill noted that “insurance-related fraudulent activities result in higher premiums for most types of insurance [and the bill would permit the agency to] more effectively investigate and discover insurance frauds.”[7]

The court then ruled that a “broad reading of the immunity provided by the statute” accorded with the legislative intent because immunity for reports to the frauds bureau would “have the effect of encouraging parties who know or suspect fraudulent activity to report this to the Insurance Department,” and that a “narrow reading would tend to make individuals more cautious in reporting insurance fraud and thus discourage these reports.” Thus, the court found, the “fraud or bad faith” qualification in Section 406 (which continues in Section 405) meant “intentionally knowing wrongful conduct in the filing of a report to the Frauds Bureau of the Insurance Department.”

With that said, the court explained that the plaintiff had “not presented evidentiary proof of fraud or bad faith” in either the allegations of the complaint or in papers opposing Travelers’ cross motion. Therefore, it granted Travelers’ cross motion for summary judgment dismissing the complaint. It also denied the plaintiff’s motion to amend his complaint to add an additional cause of action for negligent misrepresentation, finding that that would be barred by the immunity provided by Insurance Law § 406 as well.

American Commerce

More recently, in American Commerce Ins. Co. v. Martinez,[8] Justice Anthony L. Parga of the Supreme Court, Nassau County, reached the same result.

Here, an insurance carrier sought a declaration that events giving rise to the defendants’ claims were the product of an intentional incident, namely a staged accident/intentional loss, and were not covered by its insurance policy. One of the defendants asserted in a counterclaim that statements the insurer had made to the Bronx District Attorney were defamatory. Relying in large part on Section 406, the insurer moved to dismiss the defamation counterclaim, asserting that it was entitled to immunity for providing information relating to suspected insurance fraud.

The court granted the carrier’s motion, rejecting the defendant’s contention that it was not entitled to the immunity provided by Section 406 because its conduct was motivated by malice, ill will, and bad faith. The court found that the insurer had sufficiently set forth the basis for its allegations that the accident was staged/intentional and that the defendant had presented “no admissible evidence” that demonstrated that the insurer had engaged in fraud or bad faith in relaying information relating to the suspected staged/intentional accident to the district attorney. Therefore, the court concluded, Section 406 barred the defendant’s counterclaim for defamation against the insurer.

Stein

Finally, the 2009 decision by the Supreme Court, Bronx County, in Stein v. City of New York,[9] reflects a common law approach to these kinds of claims against insurance carriers.

The case arose from an investigation being conducted by the Bronx District Attorney of various medical providers as part of an undercover sting operation involving medical insurance fraud and staged vehicle accidents. As part of the investigation, undercover police officers presented to various medical providers with falsified symptoms designed to invoke the providers to perform certain tests. In connection with the operation, the district attorney’s office instructed New York Central Mutual Fire Insurance Company to pay certain claims based upon “pretext policies,” i.e., policies issued to undercover agents who were not actually involved in accidents.

As part of its investigation, several undercover agents made visits to the office of a practicing physiologist, claiming to be involved in motor vehicle accidents. The physiologist allegedly examined the agents and allegedly submitted bills to New York Central for nerve conduction (“NCV”) studies performed on the undercover agents; New York Central paid the bills, as instructed by the district attorney’s office, without any independent investigation or verification.

The district attorney’s office said that it learned from a New York Central representative that needles were required to conduct NCV tests, but its undercover agents indicated that the physiologist did not use needles when he examined them. Therefore, it arrested him and charged him with eight felony counts of insurance fraud in the third degree, attempted grand larceny in the third degree, and falsifying business records in the first degree.

After the physiologist’s arrest and indictment, his attorney advised the district attorney’s office that the NCV test could properly be conducted with electrodes rather than with needles. Following independent research to confirm this, the district attorney moved for dismissal of all charges. The charges were dropped, based on a lack of evidence of “discernible fraud,” and the physiologist sued New York Central, among others, for malicious prosecution and defamation.

The court found that New York Central was entitled to summary judgment dismissing the cause of action for malicious prosecution. It explained that to support a cause of action for malicious prosecution under New York law, a plaintiff must establish the initiation of a proceeding, its termination favorably to the plaintiff, lack of probable cause, and malice. The court then observed that “one who does no more than disclose to a prosecutor all the material information within his or her knowledge is not deemed to be the initiator of the proceeding.” Because New York Central’s “only role” was to provide information requested by the district attorney, to process and pay claims at the district attorney’s request, and to testify to its knowledge of insurance coverage for certain procedures before the grand jury, the court found that it could not be said that New York Central had initiated proceedings against the physiologist. Therefore, the court dismissed his malicious prosecution claim against the insurer.

The court also found that the false arrest claim against New York Central should be dismissed. It explained that to support a cause of action for false arrest under New York law, a plaintiff must establish that the defendant intended to confine the plaintiff, the plaintiff was conscious of the confinement, the plaintiff did not consent to the confinement, and the confinement was not otherwise privileged. The court then found that, with respect to the first element, a civilian complainant, merely by furnishing information to law enforcement authorities who were free “to exercise their own judgment as to whether an arrest should be made,” would not be held liable for false arrest. The court ruled that dismissal of the cause of action for false arrest was warranted where the physiologist had failed to rebut New York Central’s showing that it did not instigate his arrest but merely provided information to law enforcement authorities who determined arrest was appropriate.[10]

Conclusion

            Insurance fraud is costly and damaging to policyholders and insurance companies alike. Insurance carriers that report their suspicions to the authorities can help them uncover, investigate, and, ultimately, perhaps even to eliminate this societal burden. Courts recognize this, and have come to afford broad immunity to carriers that act in good faith when providing information about potential insurance fraud to the government.