APPENDIX 3 INSURANCE FRAUD STATUTES

• Jurisdiction: United States

Below I have presented two Model Insurance Fraud Acts and the insurance fraud statutes of a few states for comparison. As can be seen from the review none cover all of the issues raised by the model act and some are much less comprehensive than others. The fraud investigator should be familiar with the law in the state where he or she practices.

Model Fraud Bureau Act

The Coalition Against Insurance Fraud has published a Model Fraud Bureau Act, a summary of which is reproduced below. It is recommended to review the complete Model Act.

Background

The effort to combat insurance fraud must be a partnership among consumers, the insurance industry and government. The economic impact is substantial and an effective partnership will help alleviate fraud's effect on rates charged consumers and on claims paid by insurance companies.

In the past several years, 28 states have created insurance fraud bureaus by statute to investigate suspected fraudulent activity and to bring to justice violators of existing insurance fraud laws. In some cases, these bureaus have jurisdiction over all lines of insurance; in other cases, the bureaus have jurisdiction over specific areas only, such as workers compensation or health insurance fraud.

Of the 24 states that have bureaus looking at all lines of insurance, most are placed within the state's department of insurance; however, several states decided to house the bureau elsewhere. Fraud units in South Carolina, Nevada and Pennsylvania are within the attorney general's office; Massachusetts' unit is independent of any government agency or department. Staff size usually varies with the problem in the state; in New Jersey and Florida, where insurance fraud is seen as high, bureaus have staff to meet those needs with more than 100 investigators. States where insurance fraud is not considered as much of a problem have smaller bureaus. Staff size should be commensurate to the level of insurance fraud in each state.

Purpose

This model legislation establishes an insurance fraud bureau and defines its duties. It also suggests ways to fund the operations of the bureau and prosecution efforts. While the Coalition recognizes the need for fraud bureaus in those states that clearly have an insurance fraud problem, the Coalition encourages states to have a framework of insurance fraud laws in place prior to establishing a fraud bureau.

Section 1. Purpose of Act

It is the intent of the act to aggressively confront all forms of insurance fraud within the state by establishing a Division of Insurance Fraud within the Department of Insurance.

A fraud bureau facilitates the detection of insurance fraud and reduces both the occurrence of fraud and the amount of premium dollars used to pay fraudulent claims. The Coalition recommends, given the background and the responsibility of insurance regulators, that the department of insurance is the most logical place to house a fraud bureau. However, it should be noted that several states have placed its bureau in the attorney general's office. Placement decision should be based on where it would have the greatest impact on reducing fraud.

Section 2. Definitions

The section defines relevant terms such as "insurance policy" and "insurance transaction" in a way that covers all forms of fraud. The legislation offers two definitions of insurance fraud. One recommended alternative defines insurance fraud broadly to include claims and application fraud, as well as fraud committed by persons who are, or are purported to be, in the insurance industry. This definition tracks the insurance fraud definition of the Coalition's Model Insurance Fraud Act. The second alternative is the existing definition of insurance fraud in a state's insurance code.

There is evidence to indicate that a fraud bureau may not function effectively when the definition of insurance fraud is too narrow. In addition, the Coalition's broadly defined alternative protects both consumers and insurers. Therefore, it is offered for states to consider adopting even though a definition may already exist.

Section 3. Division of Insurance Fraud: Duties and Powers

This section defines the authority of the "division of insurance fraud." The division or bureau would initiate and conduct investigations; respond to complaints from law enforcement, governments and the public; review fraud reports from authorized insurers; and report incidents of alleged fraud to the appropriate prosecutorial office. Information supplied to the bureau remains confidential and not subject to public inspection or any state's freedom of information law.

State laws applicable to law enforcement officers are applied to the bureau's investigators. The bureau has the authority to administer oaths, subpoena witnesses and compel attendance at any hearing. Investigators also have the authority to make arrests.

Fraud bureau investigators should have powers and protection similar to police and other law enforcement officials if they are to be effective crime fighters. Having police status will give investigators greater access to vital information from other law enforcement agencies. Information about investigations must remain confidential in order to protect the privacy of both the person investigated and the person furnishing the material.

Section 4. Funding

The Coalition's white paper discussing alternative funding mechanisms for fraud bureaus is attached to the model.

Section 5. Notice to and Cooperation with the Division of Insurance Fraud

This section requires anyone who has knowledge of fraudulent activity to notify the fraud bureau and, in cases of potential claims fraud, gives the bureau a reasonable time to investigate and respond. The bill allows the establishment of a voluntary fund to reward persons not connected with the insurance industry who provide information or evidence that leads to the arrest and conviction of any person responsible for insurance fraud.

This section prevents insurers from simply paying fraudulent claims and then passing the costs on in the form of higher premiums. Under this provision, suspected cases must be reported and insurers must cooperate with any subsequent investigation. As a further incentive, insurers are given limited protection from actions by impatient claimants because this is one established indicator of a potentially fraudulent claim. A time limit allows insurers and the fraud bureau to investigate claims adequately. Monetary incentives encourage cooperation by private citizens who suspect fraud.

Section 6. Privileges and Immunity

The bill grants broad immunity to any person cooperating with, or employed by, the fraud bureau in supplying information about suspected fraudulent activity if the information is provided without malice. This protection ensures individuals, especially those employed by insurers for the purpose of investigated suspected fraud, can collect, share, and present information to the fraud bureau and under the proper circumstances be protected from civil liability.

The Coalition believes it is essential to have broad civil immunity to ensure that information concerning suspected insurance fraud is given to the bureau, and to ensure the fullest cooperation from the insurance industry. Civil immunity will alleviate fear of lawsuits for proper transferring of information on suspected insurance fraud, which has had a chilling effect in many cases. Also, many frauds, especially organized rings, are uncovered only when insurers discover the same claims are filed with multiple insurers, or the same names or addresses appear in many claims. This provision allows insurers to share information among themselves as long as the information is used solely for the detection, prevention and prosecution of fraud.

Section 7. Refusal to Cooperate with an Investigation

This section would make it unlawful for anyone to resist an arrest authorized by this law or interfere with any investigation of this law.

Section 8. Other Law Enforcement Authority

The law would not pre-empt any other law enforcement authority of the state to investigate and prosecute alleged violations of the law.

The Coalition doesn't wish to discourage any other agency from investigating fraud.

Model Insurance Fraud Act

The Coalition Against Insurance Fraud has published a model here. Its purpose is stated as:

This legislation establishes insurance fraud as a specific crime and as a felony in felony cases. It attacks insurance fraud at the source and can be used as a framework for additional laws, such as creating an insurance fraud bureau. The model will help reduce fraudulent claims paid by insurers. Since the model also covers fraud committed by insurers and those who purport to be insurers, it would curtail fraud committed against consumers and lessen financial disruption of the insurance industry.

Specifically, the model includes a cohesive attack on fraud with both civil and criminal penalties for committing what's defined as either a fraudulent insurance act or an unlawful insurance act. The model addresses all forms of insurance fraud, including claims fraud, underwriting fraud, deceptive sales practices and scams by insurance operators.

The fraudulent act is an act based on an intent to defraud someone, whether an insurance company or a consumer. The unlawful insurance act requires a lower standard of proof and is designed to attack scams such as medical mills and fraud rings in which the leaders often are able to shield themselves from prosecution under current laws.

The model significantly expands the definition of insurance fraud that currently exists in state laws and other models, as well as the remedies available to both the consumer and insurer when defrauded. The bill affords the consumer an additional level of protection particularly when it comes to shutting down the bogus insurance companies. The bill also sets strict penalties for licensed practitioners who are found in violation of the...