Wave of Civil Claims Being Asserted by Insurers Against Alleged Fraud

Insurance fraud is not just a New York problem, it is a national problem. While this column generally focuses on trends in New York, it can be helpful on occasion to review conduct from across the country. Such a national review reveals that insurance carriers are taking an aggressive stance against insurance fraud and are filing actions seeking to recover compensatory, punitive, or treble damages; insurance payments they previously paid; and even their attorney’s fees and court costs. Defendants assert a wide range of defenses in response. For the most part, however, insurance companies that are able to prove fraud by policyholders, healthcare providers, personal injury plaintiffs, or others who have improperly received funds have successfully obtained judgments for the amounts that had been fraudulently disbursed.

Indeed, in State Farm Mut. Automobile Ins. Co. v. Lincow,[1] the plaintiff insurance carriers were awarded more than $4 million by a Pennsylvania jury in a case in which they asserted fraud claims and claims under RICO against certain health care providers; their damages were trebled for a total award of $12,1 million in their favor. Another example is State Farm Mut. Automobile Ins. Co. v. Physicians Injury Care Center, Inc.,[2] in which the U.S. Court of Appeals for the Eleventh Circuit recently affirmed a jury verdict in excess of $4 million against a medical provider for a sham course of treatment designed to exhaust the patients’ insurance benefits.

The New Jersey appellate court decision last year in Liberty Mutual Ins. Co. v. Land[3] illustrates this trend. The case arose when Liberty Mutual Insurance Company filed what it styled as a “Declaratory Judgment Complaint” against Rose and Frank Land pursuant to the New Jersey Insurance Fraud Prevention Act (“IFPA”).[4] The litigation arose after a neighbor’s tree toppled onto the roof of the Lands’ cabin in Highland Lakes and the Lands filed a property damage claim with Liberty Mutual, their homeowners’ insurance carrier. The Lands employed their nephew, a public adjuster, to assist in the preparation and filing of the insurance claim by assessing the damage and securing the structure. In exchange for this assistance, their nephew was to be paid ten percent of the insurance proceeds.

During its investigation of the claim, Liberty Mutual uncovered a videotape that showed several men on the cabin’s roof shortly after the tree had fallen apparently attempting to increase the physical damage that had occurred. The Lands submitted a “Sworn Statement In Proof of Loss” on their nephew’s letterhead claiming a total loss of $69,338. The Lands also appeared for an oral examination several months later, at which they testified under oath about the circumstances of the tree-falling incident without disclosing the apparent damage-enhancement activities.

After its loss investigation was completed, Liberty Mutual determined that the Lands’ claims of loss had been inflated. It accordingly denied coverage, withheld payment of insurance benefits, and brought suit under the IFPA. A jury returned a verdict in Liberty Mutual’s favor, finding that the Lands had engaged in conduct that amounted to insurance fraud and thus had violated the IFPA. Among other things, the jury’s verdict sheet indicated that Liberty Mutual had proven that “Rose and/or Frank Land knowingly misrepresented, concealed or failed to disclose any material fact concerning the property loss of Dec. 12, 2000.”

As a result, the trial court awarded Liberty Mutual $5,157 in investigative costs, plus $52,576 in counsel fees. The court then trebled those amounts under the IFPA, yielding a total of $173,202. Thereafter, the court further specified that the Lands were responsible for reimbursing Liberty Mutual for an additional $2,100 in witness expenses. The total monetary judgment amounted to $175,302.88, and the Lands appealed.

The Appellate Division explained that the IFPA is “a comprehensive statute designed to help remedy high insurance premiums which the Legislature deemed to be a significant problem.” To meet that goal, the court continued, the IFPA forbids a broad range of fraudulent conduct, and it permits insurance companies that have been damaged as a result of statutory violations to bring civil actions to recover compensatory damages, including reasonable investigation costs and attorney’s fees. The Appellate Division then pointed out that the statutory framework provides that it is left to the court to measure the damages. Concluding that sufficient evidence supported the trial court’s findings, the Appellate Division affirmed judgment in favor of Liberty Mutual.[5]
Preemption Defense

When insurance carriers bring fraud actions involving health insurance, one of the common defenses that is raised is ERISA preemption. As illustrated in Aetna Health Inc. v. Health Goals Chiropractic Center, Inc.,[6] however, courts are not inclined to bar these kinds of insurance fraud claims under Employment Retirement Income Security Act.

This case was filed in a New Jersey state court by Aetna Heath Inc. and Aetna Life Insurance Co., health care benefits and health insurance providers. The defendant Kathleen Baumgardner, a licensed chiropractor, was an officer of the defendant Health Goals Chiropractic Center, Inc. As an in-network health care provider with Aetna, Dr. Baumgardner was obligated to accept discounted rates when she provided professional chiropractic services to individuals covered by Aetna’s insurance plans. Under the terms of the in-network contract, Aetna was required to pay Dr. Baumgardner for all services deemed medically necessary or otherwise covered by the plans.

Aetna alleged that beginning in approximately 2001, the defendants “entered into a scheme to defraud” Aetna and submitted insurance claims and statements for services that “contained knowingly false and misleading statements, misrepresented the services performed and failed to disclose information which affected their right to payment.” According to Aetna, the defendants expressly represented “that they had performed the services billed; that they were licensed to perform the services rendered; that the information and statements contained in the insurance claims submitted were true, correct and complete; and that the amounts billed were actually incurred by the patient.” However, Aetna contended, the defendants submitted claims for excessive, phantom, and duplicate charges that violated regulations governing chiropractic practice. As a result of this alleged fraud, Aetna contended that it had paid the defendants $1,078 million through January 2007.

The defendants removed the action to federal district court, and Aetna moved to remand. As the district court explained, causes of action that are within the scope of Section 502(a) of ERISA[7] are completely preempted and therefore removable to federal court. That section permits certain civil actions to be brought “by a participant, beneficiary, or fiduciary” and the defendants contended that Aetna was acting as a fiduciary and its state law claims therefore were preempted. The court disagreed.

The court found that Aetna’s state claims were based on allegations of fraud, and that Aetna specifically contended that the defendants submitted claims that were knowingly false, misleading and mis-representative of the services they performed. Aetna’s claims “were not brought on behalf” of the defendants’ patients, the beneficiaries of the plan. Aetna did “not seek to deny or control benefits as a fiduciary,” nor were any of its claims predicated on the defendants’ failure to provide proper benefits to a plan beneficiary.

Instead, the claims arose from the defendants’ alleged scheme to defraud Aetna, the court continued. It was Aetna, not the plan beneficiaries, that were the victims of the defendants’ alleged fraudulent misdeeds. Consequently, the court ruled, Aetna’s state claims did not seek either the recovery of benefits under the terms of the plan or the enforcement of the plan. The court therefore concluded that Aetna was entitled to remand because it could not have originally brought the claims under ERISA Section 502.[8]
Conclusion

With insurance fraud still plaguing insurers, policyholders, the economy, and the country, and given the continuing successes that insurance carriers have obtained in the civil litigation context, it seems inevitable that insurers will file significantly more civil fraud actions in the future. When combined with criminal prosecutions and statutory and regulatory changes making insurance fraud more difficult – and costly – to engage in, one can hope that instances of insurance fraud may at some point begin to decline.

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[1] 715 F. Supp. 2d 617 (E.D. Pa. 2010).

[2] 2011 U.S. App. Lexis 10447 (11th Cir. May 23, 2011).

[3] 2010 N.J. Super. Unpub. Lexis 89 (App. Div. Jan. 14, 2010).

[4] N.J.S.A. 17:33A-1 to -30.

[5] See, also, Blue Hill Chiropractic Group Inc. v. Encompass Insurance Co., Nos. 05-02075, 05-02076, 05-02077, 06-5269, Mass. Super., Suffolk Co. Apr. 22, 2011) ($5.7 million judgment in favor of insurance carriers who claimed that healthcare providers had engaged in “coordinated practice of unreasonable and fraudulent billing”); see State Farm Mut. Automobile Ins. Co. v. Cohan , No. 10-1361-cv (2d Cir. Feb. 8, 2011) (court refuses to vacate judgment in an amount in excess of $3 million against medical provider for RICO and common law fraud violations arising out of scheme to bill for unnecessary medical services) (the author and his firm represented the insurance carrier in this case).

[6] 2011 U.S. Dist. Lexis 38059 (D.N.J. Apr. 7, 2011).

[7] 29 U.S.C. § 1132(a).

[8] See, also, Aetna Health Inc. v. Srinivasan, 2010 U.S. Dist. Lexis 135451 (D.N.J. Dec. 22, 2010) (same); cf. Allstate Ins. Co. v. Global Medical Billing, Inc., 2011 U.S. Dist. Lexis 17448 (E.D. Mich. Feb. 23, 2011) (automobile insurance carrier had no standing to assert fraud claims under Michigan no-fault insurance law where it had been reimbursed by Assigned Claims Facility for amounts it had paid).

This article is reprinted with permission from the July 1, 2011 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.