JustHealth

Insurance Fraud Reduction Act of 2007

FINDINGS

In 1992 the Legislature enacted measures [Penal Code §§ 549 and 550 and Insurance Code § 1871] designed to reduce the incidence of abuse and illegal activities in the many transactions related to the business of insurance. Particular attention was paid to automobile, health and workman's compensation insurance, but the legislation was intended to reach all forms of abuse and illegal activities affecting the business of insurance committed by any "person". Criminal penalties were provided for any "person" found guilty of abuse and illegal activities connected to insurance and "person" was given the broad meaning common to both the Penal and Insurance codes.

Since that time there has been ample evidence produced, both in California and elsewhere, that insurance companies, as well as other "persons", engage in fraudulent activities with respect to the business of insurance that negatively affect policyholders, prospective policyholders, investors, competitors,  regulators, the general public, in short, virtually everyone in California. These activities by rogue insurers include bid rigging, undisclosed kickbacks, systematic refusals to pay legitimate claims, making false or misleading promises when policies are marketed and sold, falsification of records, etc. The list is only limited by the creativity of those who choose to engage in the illegal conduct.

The California Insurance Commissioner, now Lieutenant Governor, John Garamendi was quoted in the Los Angeles Times on August 21, 2005: "In the last 12 months alone, we've seen the largest insurance brokers in America, the largest property and casualty companies in America, the largest title insurance companies, the largest financial service firms and the largest disability insurers all engaged in flagrant violations of their most basic obligations to their customers, ... This is not just a UnumProvident problem; it's an insurance industry one."  The Commissioner's statements came after Elliott Spitzer, then Attorney General, now Governor, of the State of New York, was quoted in the New York Times on January 8, 2005, as saying:  "Fraud In Insurance Is Vast" and that he had "uncovered evidence of wrongdoing among insurance brokers and insurance companies on a far larger scale than he had anticipated when he began investigating the industry nearly a year ago."

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In 2006, The California Supreme Court denied review of an opinion of the Second District Court of Appeal in the case of State of California ex rel. Linda Nee and John Metz, Civil Appeal No. B183487. The Appellate opinion had dramatically narrowed the scope of Penal Code §§ 549 and 550, and Insurance Code § 1871 by construing them to exempt insurance companies from their reach. To come to this conclusion, the Court found that an insurance company is not a "person", as that is currently defined in both the Penal Code and the Insurance Code. (California Penal Code § 7.  "'[T]he word "person" includes a corporation as well as a natural person." California Insurance Code § 19.  "'Person' means any person, association, organization, partnership, business trust, limited liability company, or corporation.") In his amicus curiae brief submitted to, but not accepted by, the Nee Court, the Insurance Commissioner argued that the "restrictive interpretation" adoped by the Court could have a broad affect on the utitility of the [statutory] procedure to the Commissioner and is both unnecessary and insupportable."

We find that the word "person", as used in Penal Code §§ 549 and 550, includes a corporation as well as a natural person, and in Insurance Code § 1871, includes a corporation, association, organization, partnership, business trust, limited liability company or any person. We find that an insurer is a "person", within the meaning of Penal Code §§ 549 and 550.

To eliminate any confusion, the phrase "including an insurer" is deleted from section 1871.1, subd. (e)(1). 

The Court of Appeals also found that insurance companies only "accept" or "deny" claims, but do not make statements "in support of" or "opposition to", or, apparently, "in connection with" or "as part of" insurance claims, within the meaning of Penal Code §§ 549 and 550.

We find that an insurer is required to seek out evidence that might support insurance claims ("Indeed, in Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, the Supreme Court emphasized that, in order to protect the interests of its insured, it was "essential that an insurer fully inquire into possible bases that might support the insured's claim." (Id., at p. 819; italics added.)" Mary Ann Jordan v. Allstate Insurance Company - B187706 - March 22, 2007) and to make statements in support of claims for payment or other benefit pursuant to an insurance policy, within the meaning of Penal Code §§ 549 and 550. Moreover, when a first party insurer supports the claim made by its policyholder, who has been harmed by a third party, against that other person's insurance, or when an insurer makes a claim to its own reinsurer,or to an insurance exchange in which it is a member, the insurer makes statements in support of claims for payment or other benefit pursuant to an insurance policy, within the meaning of Penal Code §§ 549 and 550.

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We also find that the incidence of litigation by claimants against insurers, the experiences of claims being resisted by insurers that are frequently described in the media and on the Internet, and the fact that the California Insurance Commissioner requires insurers to file with their Annual Statements a listing of information on claims they have "Resisted", i.e. "Opposed" (Schedule F) - as sufficient evidence that insurers "oppose" claims and make statements in opposition to claims for payment or other benefit pursuant to an insurance policy, within the meaning of Penal Code §§ 549 and 550.

We further find that insurance companies can and do make statements "in connection with" and "as part of" insurance claims within the meaning of Penal Code §§ 549 and 550. Indeed, it is hard to imagine how they could conduct their business without doing so.

The following amendment is declaratory of existing law.

In order to clarify the meanings of Insurance Code § 1871 and Penal Code §§ 549 and 550(b), the first sentence of Insurance Code § 1871 (e)(1) is amended as follows (deletion stricken):

(e) (1) Any interested persons, including an insurer, may bring a civil action for a violation of this section for the person and for the State of California.  //