South Carolina Lawyer
SC Lawyer, November 2009, #3.
Insurance Fraud in South Carolina : Potential Pitfalls for Insurers
South Carolina LawyerNovember 2009Insurance Fraud in South Carolina: Potential Pitfalls for InsurersBy Jeffrey J. Wiseman and Joseph W. RoheFraud is big business in South Carolina and, with the recent economic turmoil, it's going to get even bigger. A recent article published by the Coalition Against Insurance Fraud (www.insurancefraud.org), citing data from the National Insurance Crime Bureau, noted that the number of reportedly stolen vehicles being recovered burned or flooded under suspect circumstances increased steadily with rising gas prices and increasing unemployment figures. According to the S.C. Attorney General's office, at least 10 percent of all auto, home and business insurance claims are either fraudulent or highly inflated. Additionally, the S.C. Insurance News Service (www.scinsnews.com) reported that insurance fraud costs Americans more than $85 billion a year, while the effect of insurance fraud costs the average American household more than $1,000 a year in out-of-pocket expense.
In 2006 (the most recent figures available), the three largest insurance sectors affected by fraud in South Carolina were automobile (45 percent), personal/commercial property (14 percent), and workers' compensation (13 percent). According to the S.C. Attorney General, the seven most common types of insurance fraud in the state are:
* Underreporting the number of miles driven on an automobile policy; * Failing to report an accurate medical history when applying for health insurance; * Employees faking or exaggerating injuries to avoid work and draw workers' compensation payouts; * Auto accident victims who falsify or overstate injuries to achieve large settlements or awards; * Staging automobile accidents that result in inflated injury claims; * Exaggerating or fabricating injuries or illness to draw accident and/or health insurance benefits; and * Exaggerating the amount and value of items stolen from a home or business. S.C. Attorney General's Office (www.scattorneygeneral.org).
South Carolina, however, is at the forefront of the fight to combat insurance fraud. For instance, in 2002, South Carolina was ranked number one in the nation by the Coalition Against Insurance Fraud for convictions per dollar spent fighting insurance fraud. While the pro-activity of the State has greatly increased the ability to combat and deter this fraud, it is the insurance claims professional, their counsel and management that remain best poised to defend against this problem. This is accomplished through careful and calculated claims handling practices, policy language drafting and legal guidance.
Pleading and Proving Fraud
Pleading a cause of action for fraud under the special pleadings rule of the South Carolina Rules of Civil Procedure requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Rule 9, SCRCP. Further, failure to plead and prove any one of the nine elements will be fatal to a cause of action for fraud. Inman v. Ken Hyatt Chrysler Plymouth, Inc., 294 S.C. 240, 242, 363 S.E.2d 691, 692 (1988) ("It is well-settled that a complaint is fatally defective if it fails to allege all nine elements of fraud.").
The requisite burden of proof
In South Carolina, the requisite burden of proof in most civil cases is a "preponderance of the evidence" standard. As judges will typically explain to a jury when charging on this burden, one must only "tip the scales" slightly to meet this standard. In contrast, fraud must be proven by the elevated burden of clear, cogent and convincing evidence. See Brown v. Stewart, 348 S.C. 33, 42, 557 S.E.2d 676, 680 (Ct. App. 2001).
Further confusing the issue, case law suggests that an insurer can "defend" a claim with a fraud defense in cases of arson and need only to prove the claim with a "preponderance" evidentiary standard. SeeCarter v. Am. Mut. Fire Ins. Co., 297 S.C. 218, 220, 375 S.E.2d 356, 358 (Ct. App. 1988) ("An insurance company can prevail in an arson defense based solely on circumstantial evidence if it shows that the fire was of incendiaryorigin and that the plaintiff had both the opportunity and motive to have the fire set."); see also Brown v. Allstate Ins. Co., 344 S.C. 21, 25, 542 S.E.2d 723, 725 (2001) ("To prove arson, an insurer must demonstrate by the preponderance of the evidence the fire was of an incendiary origin, and the insured caused the fire."). As it currently stands, the difference in evidentiary standards between a fraud claim and a fraud defense appears to be limited to cases where an insurer raises arson as a defense to plaintiff's claim. See Kerr v. State Farm Fire & Cas. Co., 731 F.2d 227, 228-29 (4th Cir. 1984) (applying South Carolina law and reversing a jury charge on an insurer's defense of "misrepresentation" that the insurer's burden was "by a preponderance of the evidence"). In the end, this discussion regarding the difference between the preponderance standard and the clear and convincing standard is likely more esoteric than practical. The jury will either believe...