The Insurance Fraud Prevention Act protects and cannot be used to punish insurers

Gilbert Ellinger sued as one who tam plaintiff on behalf of the people of the State of California against Zurich American Insurance Company (Zurich), ESIS, Inc. (ESIS) and Stephanie Ann Magill under Insurance Code section 1871.7, a provision of the Insurance Frauds Prevention Act (IFPA). The district court upheld the defendants’ dismissals without permission to change.

IN Folket ex rel. Gilbert Ellinger v. Stephanie Ann Magill et al.E076378, California Court of Appeals, Fourth District, Second Division (March 18, 2022), the Court resolved the issue of the limitation of who tam lawsuits under the purpose of the California Insurance Frauds Prevention Act.

BACKGROUND

Ellinger injured his back while working. The following month, Ellinger reported to his employer’s HR manager that he had sustained a work-related injury and had told his supervisor about it. The human resources manager created a “timeline memorandum” that summarizes the conversations she had with Ellinger about the injury. She included the memorandum in Ellinger’s personnel file.

Ellinger filed a claim for damages based on the damage. Zurich was an insurance company for occupational injury insurance for Ellinger’s employer and ESIS was Zurich’s claims administrator. Magill worked as a senior claims investigator for ESIS and was the adjuster who was commissioned to investigate Ellinger’s claims. ESIS denied Ellinger’s claim. Magill later testified that she denied the claim due to a written statement from Ellinger’s supervisor from April 2016 where the supervisor claimed that Ellinger had not reported the injury to him.

When the chief of staff was fired, she produced the timeline memorandum, and almost eight months after that revelation, in July 2017, ESIS revoked its refusal of the claim and ordered that Ellinger be injured while working, as he had claimed.

Contrary to Magill’s testimony, her emails showed that the HR manager had emailed Magill’s timeline memorandum in March and April 2016, and Magill thanked the manager for sending it.

Ellinger argued that Magill’s concealment of or failure to disclose the timeline memorandum violated section 550 of the Penal Code, subsections (b) (1) to (3). On the basis of these alleged infringements, Ellinger claimed that the defendants were liable under section 1871.7. Against each defendant, Ellington requested a civil penalty and an assessment of no more than three times the amount of his workers’ compensation claim.

The defendants submitted letters of credit. They argued that insurers and their agents, such as a claims management company and a claims adjuster, could not be held liable in a who tam action under section 1871.7. The district court upheld the defendants’ dismissals without permission to change. It concluded that defendants could not be held liable under section 1871.7 for any failures by Magill in the handling of claims or the review process. The court concluded that insurance companies are not liable under IFPA for claims management methods.

DISCUSSION

When the court deals with a sham, the court must proceed from the truth of the correctly invoked factual allegations, facts that can reasonably be deduced from the explicitly invoked and questions that have been raised in court. Ellinger claimed that the trial court erred in concluding that insurers and their agents could not be held liable under IFPA for claims handling practices. He argued that strong political considerations support holding insurers liable under the IFPA and that he has correctly stated a cause of action under the IFPA. We are not convinced.

Legal background

Legislative results and declarations on IFPA begin as follows:

The insurance business includes many transactions that have the potential for abuse and illegal activities. . . . This chapter is intended to allow full use of the expertise of the Commissioner and the Department so that they can more effectively investigate and detect insurance fraud, stop fraudulent activities and assist and obtain assistance from federal, state, local and administrative law enforcement agencies. authorities in the prosecution of persons who are parties to insurance fraud. (1871 §, subd. A).)

The results and declarations go on to describe different types of insurance fraud, including fraud with car insurance, fraud with work injury compensation and health insurance fraud. With regard to workers’ compensation, the legislator stated:

Fraud with compensation to employees harms employers by contributing to the ever-increasing costs of occupational injury insurance and self-insurance and harms employees by undermining the perceived legitimacy of all claims for workers’ compensation. (1871 §, subd. (D).)

The clear purpose of the legislation is to reduce fraud against insurers in order to benefit policyholders. The Legislative Assembly adopted the IFPA to combat insurance fraud committed against insurers by individuals, organizations and companies. It is noteworthy that IFPA’s legislative results do not mention any problem with the handling of insurance claims.

Section 1871.7 of the IFPA stipulates that all interested persons may bring one who tam measures to recover penalties, damages and other relief for certain misleading acts directed at insurers not by insurers directed at the public. The penalties are assessed for each fraudulent claim made on an insurance company by a defendant and not for each violation.

Section 550 of the Penal Code criminalizes a wide range of misleading acts in connection with making, supporting or opposing claims for payment, including but not limited to insurance claims. Some, but not all, violations of section 550 of the Penal Code may form the basis of an action under section 1871.7, since section 1871.7 only applies to claims made to insurance companies.

Liability under section 1871.7 does not cover insurers and their agents based on claims handling practices. This conclusion is in line with IFPA’s purpose of preventing and punishing fraudulent claims on insurance companies. The charter is not aimed at the insurance companies’ actions, but is aimed at fraud committed against insurance companies.

Ellinger claimed that he correctly invoked a violation of the Penal Code section 550, subsections (b) (1) to (3), based on Magill’s alleged conduct in the handling of his claim. The argument fails for two reasons. Ellinger’s claim that he has correctly invoked a violation of section 550 of the Penal Code is based on an incorrect characterization of the record. Ellinger does not explain how Magill’s alleged lie at her deposit in September 2018 could have affected the handling of his claim, given that the rejection of his claim had already been revoked in July 2017.

First, Ellinger has not sufficiently alleged a breach of section 550 of the Penal Code and has thus not correctly alleged that the defendant committed any form of fraud.

Second, to exclude insurers and their agents from liability under section 1871.7 “does not implicitly approve insurance company fraud” or otherwise cause insurers and their agents to commit fraud with impunity. This only means that insurers and their representatives can not be sued according to IFPA. This holding is not surprising, since IFPA explicitly only addresses misleading behavior towards insurers, not inappropriate behavior from insurers.

The verdict was upheld.

There is no doubt that an insurance company can commit insurance fraud even if the facts relied on by Ellinger were not sufficient to establish a basis for an action for fraud. If there was fraud from the insurance company, rather than just an incompetent claims decision, still no one can file a who tam action against an insurer under section 1871.7. This action was creative but incorrect. I support insurance companies that use section 1871.7 against fraudsters but condemn the use of 1871.7 to punish insurers because it uses a charter designed to help insurance companies and the state fight insurance fraud and not a weapon against insurance companies.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry. He is available at http://www.zalma.com and zalma@zalma.com.

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