An unholy alliance: perceptions of influence in insurance fraud prosecutions and the need for real safeguards.

• Author: Abramovsky, Aviva

1. INTRODUCTION

   For the past three decades, most state legislatures (1) have enacted (2) criminal statutes specifically targeted at deterring insurance fraud. (3) Unlike most criminal statutes, these insurance fraud laws not only delineate the unlawful conduct sought to be deterred, but also generally restrict the scope of potential victims to insurance carriers. (4) The expressed intent of the new legislation was to provide a specific vehicle for the prosecution of those who attempted to or actually filed false, fraudulent, or exaggerated claims with their insurance companies. (5) In addition to deterring future offenders, legislators hoped that these statutes would result in a public benefit of smaller insurance premiums. (6)

   Financial fraud prosecutions are complex and frequently expensive, with all jurisdictions dedicating substantial resources to combating white collar crime. Unlike most other criminal prosecutions, insurance fraud prosecutions are increasingly being brought by prosecutors funded separately from the state's general revenues. These prosecutors' salaries are either entirely or in large part paid by monies obtained by direct assessments on the insurance industry. (7) The adoption of this prosecution funding method allows insurance fraud prosecution programs to exhibit the most comprehensive presence of any private industry in the enforcement of relevant criminal laws. (8)

   The enforcement of the criminal laws is a public trust. (9) It is generally accepted that criminal defendants are entitled to a certain amount of neutrality and disinterestedness on the part of the prosecutor, particularly as a part of defendant's right to a fair trial. (10) The prosecutor's office is seen as representing the people, and the office seeks justice within the confines of governmental impartiality. (11) As such, it is important to examine these new institutionalized structures and their entwinement with private interests as potential sources of risk to that notion of impartial justice. (12)

   Moreover, the consequences of even a perception of improper influence on fraud prosecutions implicate other relevant policy considerations. The existence of statutory schemes which offer even the reasonable inference of injustice, such as perceptions of conflicts of interests, may themselves have undesirable consequences. (13) Attorneys have been criminally prosecuted under these systems for actions undertaken during civil cases adverse to insurance industry financial interests. (14) Such prosecutions, without sufficient prophylactic safeguards, may result in chilling the representation available to claimants and implicate issues of zealous advocacy. (15)

   It is well understood that the threat of criminal prosecution is an effective restriction on the bounds of zealousness. As Professor John C. Coffee has recognized, between the alternatives of engaged advocacy or self-preservation from criminal prosecution, the rational lawyer would not likely risk his liberty in favor of his aspirational duty of zealousness. (16) Fear of a non-neutral or otherwise influenced prosecutor implicates issues beyond the prosecution of any specific criminal defendant. (17) Even the mere appearance of influence and the concomitant perceived increased risk of triggering an unjust prosecution have the capacity to affect the availability and efficacy of legitimate advocacy adversely. (18)

   Those familiar with the relationship between tort law and insurance (19) have long understood the insurance industry's financial interest in the cost of tort recoveries (20) and the relationship of those costs to claimants' legal representation. Plaintiffs' lawyer advocacy is strongly correlated with an adverse effect on insurance industry financial interests. (21) If lawyers are deterred from representing clients against the insurance industry, the implications for the tort system and clients are extensive. Moreover, as some members of the trial bar have recognized, the actual motivation of a prosecution is irrelevant to that prosecution's ability to chill advocacy. (22) To a very great extent, so long as the plaintiffs' bar perceives such prosecution as arising from the improper influence of private interests on the actions of a prosecutor, fear of biased prosecution could reasonably be predicted to restrict and inhibit the trial bar's activities. (23) In this context it might truly be said that even the appearance of impropriety is likely sufficient to inhibit advocacy.

   This Article will explore the structure of the insurance industry-prosecution alliance ("The Alliance") as it is expressed in various states. Part II will give careful attention to how these institutionalized arrangements increase the risk of improper private influence on public law enforcement decision-making. Part III will explore how the Alliance system may chill legitimate claims and particularly affect the functioning of tort plaintiffs' lawyers in an inappropriate manner. Part IV will explore the Alliance in terms of both a prosecutor's ethical duty of independence as well as a potential due process threat. The final section of the Article will suggest certain prophylactic reforms to attorney prosecutions for professional conduct, since it is unlikely that the Alliance will be dismantled in the near future. The Article concludes with one such suggested procedure.

2. THE ALLIANCE IN ACTION

   The prosecution of criminal offenses requires substantial public funding, and municipalities are often reluctant to provide sufficient tax-funded revenues. (24) Historically, police departments and prosecutorial agencies have not received adequate tax funding to combat the volume of crime that exists in their areas of jurisdiction. (25) Despite a general understanding that insurance fraud is pervasive and costly, (26) insurance fraud cases would likely be an under-prosecuted crime without alternative funding programs. (27)

   Insurance fraud is inarguably extremely costly. The losses to insurance companies from insurance fraud have been estimated at $120 billion per year. (28) The industry estimates that these fraud losses cost the average American family $300 annually in higher insurance premiums. (29) Hence, industry financing of insurance fraud bureaus is seen as a mutually beneficial investment. For example, the "Mission Statement" of the New Mexico Insurance Fraud Bureau remarks on the willingness of the insurance industry to fund their program, finding the industry "very willing to finance the bureaus, because of the potential return on investment: for every dollar an insurance company spends in support of a bureau, it retains ten dollars that would otherwise be lost to insurance fraud." (30)

   1. THE ALLIANCE'S FORMS AND FUNDING

      Currently, there are three basic models by which the insurance industry and government coordinate and integrate the investigation and prosecution of insurance fraud. The first model, unique to Massachusetts, creates a quasi-governmental agency, (31) a majority of whose directors are appointed by insurance industry associations. (32) Massachusetts's model is also unique in that the two trade industry groups assessed have only a voluntary membership which may choose to contribute additional monies beyond the minimum legislatively assessed upon them. (33) The second model, followed by a majority of states, creates a specialized insurance fraud bureau within the state's Department of Insurance, the Attorney General's Office, or some other governmental agency. (34) The final model, which exists in eight states, consists of a less formalized interaction of the parties due to the nonexistence of a formal insurance fraud bureau. In these jurisdictions, insurance companies or trade organizations provide private investigators to work in tandem with public officials.

      1. The Massachusetts Model

         The Massachusetts legislature statutorily created an entity called the Insurance Fraud Bureau of Massachusetts ("IFB"). (35) The IFB is considered by courts to be a "quasi-governmental" agency. (36) It employs approximately thirty full-time investigators. (37)

         The IFB is not a pure governmental agency, in the sense that the majority of its Board of Directors are not public officials (38) and it is funded by a special assessment rather than general revenues. (39) IFB funds derive from the assessment on two insurance company trade associations in which membership is voluntary. These two associations each provide five of the IFB Board's directors, for a total often of the fifteen members of the Board, with the remaining five being public officials. The IFB's purpose is to investigate allegations of insurance fraud referred to it and, when appropriate, refer these allegations to various prosecutorial offices for further action.

         The method through which the IFB receives its cases is also noteworthy. The vast majority of its cases are acquired by direct referral from insurance companies who are statutorily obligated to advise the IFB of their suspicions whenever they "have reason to believe" that an insurance transaction may be fraudulent. (40) Once the IFB receives a referral from either an insurance company or from a call placed to its public "hotline," it proceeds to investigate the cases under its statutory authority. Case files are created and reviewed, and when the IFB's executive director "is satisfied that a material fraud, deceit, or intentional misrepresentation has been committed in an insurance transaction, he must refer the matter to the attorney general, the appropriate district attorney or the United States attorney." (41) The Massachusetts IFB is unquestionably busy. In 2005, for example, it oversaw 3829 cases of suspected insurance fraud, (42) approximately 85% of which emanated directly from insurance companies. (43) Of the cases referred, prosecuting authorities subsequently were given 146 cases of suspected insurance fraud. (44)

         In Massachusetts, like other states, the funds...