Closing the Loopholes on Insurance Fraud

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by John Kennedy

OIFP’s 2007 Recommendation for Legislative and RegulatoryReform - Reinstating the Intended Reach of the InsuranceFraud Statute in the Wake of the New Jersey Supreme Court’sRestrictive Interpretation of the Crime of Insurance Fraud

Closing theLoopholes onInsurance Fraud:

IntroductionThe crime of Insurance Fraud is

committed when one makes a falsestatement of material fact in, or omits amaterial fact from, a document inconnection with an insurance transaction.New Jersey’s Criminal Code expresslyprovides that multiple acts of insurancefraud – which by definition includesmultiple false statements of material fact– contained in a single document are eachseparate and distinct offenses.

By defining Insurance Fraud so thateach false statement is a separate offense,the Legislature continued its efforts tocombat insurance fraud by increasing thepenalties for it, by facilitating the prosecu-tion of it, and by making the falsestatement, and not the false claim, theunit of prosecution. The statute isintended to encompass all types ofinsurance fraud: claims fraud, applicationfraud, premium financing fraud, and anyother insurance related fraud.

In its first opinion construing thestatute, the Supreme Court of New Jerseyreached the conclusion that multiple falsefacts contained in one document do noteach constitute a separate, distinct offense.Rather, the Court concluded, the word“statement” encompasses all the falsefactual assertions a person makes in onedocument. Therefore, the Courtconcluded, a person generally commitsonly one offense regardless of thenumber of false factual assertions hemakes in a single document.

The Office of the Insurance FraudProsecutor (OIFP) respectfully disagreeswith the Court’s legislative construction.First, the language of the statute plainlystates the opposite. Second, the Court’sreasoning is troublesome. Third, theimplications of the Court’s ruling arecontrary to the Legislature’s intent to deterfraud through stiff penalties. Because theCourt was attempting to divine andimplement the Legislature’s will, it isfitting and proper for the Legislature toamend the statute to return it to itsoriginally intended meaning. For thereasons explained in this article, OIFPrespectfully recommends that theLegislature do so.

The Plain Language of the ActThe crime of Insurance Fraud1 is

defined in N.J.S.A. 2C:21-4.6a, whichprovides:

A person is guilty of the crime ofinsurance fraud if that personknowingly makes ... a false, fictitious,fraudulent, or misleading statementof material fact in, or omits a materialfact from, ... any record, bill, claim orother document, in writing, electroni-cally, orally or in any other form, that aperson ... submits ... in connectionwith: (1) a claim for payment ... ; (2)

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1. In the interest of clarity, Insurance Fraud iscapitalized when it refers to the specific crimedefined by N.J.S.A. 2C:21-4.6, rather thaninsurance fraud more generally, unless it appearsin lower case in a quotation.

John Kennedy is an Assistant AttorneyGeneral serving as Senior Counsel incharge of OIFP’s Case Screening,Litigation, and Analytical SupportSection. He also supervises civilenforcement matters. Previously, hewas Section Chief in OIFP’s criminaldivision for three years, overseeing allcriminal prosecutions except Medicaidcases. He has been with the Divisionof Criminal Justice since 1987.

Closing the Loopholes on Insurance Fraud

an application to obtain or renew aninsurance policy; (3) any paymentmade or to be made in accordancewith the terms of an insurance policyor premium finance transaction; or (4)an affidavit, certification, record orother document used in any insuranceor premium finance transaction.[Emphasis added.]

In sum, a person commits an “act ofinsurance fraud” when that personknowingly makes a single false ormisleading statement of material fact in(or omits a single material fact from) anydocument the person submits inconnection with a claim for payment, anapplication, a payment, an insurancetransaction, or a premium financetransaction.

N.J.S.A. 2C:21-4.6b establishes thedegree of the crime. That paragraph reads:

Insurance fraud constitutes a crime ofthe second degree if the personknowingly commits five or more actsof insurance fraud, including acts ofhealth care claims fraud pursuant to[N.J.S.A. 2C:21-4.2] and if theaggregate value of property, servicesor other benefit wrongfully obtainedor sought to be obtained is at least$1,000. Otherwise, insurance fraud isa crime of the third degree. Each actof insurance fraud shall constitute anadditional, separate and distinctoffense, except that five or moreseparate acts may be aggregated for thepurpose of establishing liabilitypursuant to this subsection. Multipleacts of insurance fraud which arecontained in a single record, bill, claim,application, payment, affidavit,certification or other document shalleach constitute an additional, separateand distinct offense for purposes ofthis subsection. [Emphasis added.]

This statute unambiguously contem-plates that there can be multiple acts ofinsurance fraud, and thus, by defini-tion, multiple false statements ofmaterial fact, in a single document, orapplication or affidavit. Just as plainly,

each act of insurance fraud is a separateoffense, even when the multipleoffenses occur in a single record, bill,claim, or other document.

Legislative History and IntentThe Legislature enacted the crime of

Insurance Fraud as a continuation of itsefforts to rein in high insurance costs,particularly for health and auto coverage,through reform of insurance related laws.An unmistakable component of thateffort has been a steady ratcheting up ofthe penalties for insurance fraud.

The Supreme Court of New Jerseyhas recognized that “[i]nsurance fraud is aproblem of massive proportions thatcurrently results in substantial andunnecessary costs to the general public inthe form of increased rates. In fact,approximately ten to fifteen percent of allinsurance claims involve fraud.”2 Unfor-tunately, the problem remains as pressingtoday, if not more so, as it was when theCourt wrote those words. In 2000, thetotal national outlay for health carereached $1.3 trillion. Of that amount, theNational Health Care Anti-FraudAssociation (NHCAA) estimates that atleast 3%, or $39 billion, is lost to outrightfraud.3 Fraud undeniably contributessignificantly to rising health insurancecosts. Rising costs have caused a nation-wide decline in the number of employersoffering health benefits to their employ-ees, from 69% in 2000 to 60% in 2005.4

With respect to automobile insurance,the problem of cost, driven in part byfraud, is near legendary in New Jersey. In2000, the Insurance Research Council and

ISO, a leading source of insuranceinformation, surveyed 753 carriers whotogether accounted for 73% of property-casualty insurance in the country. Thesurvey found that so-called “soft fraud” -exaggerating the value of a loss in anotherwise legitimate claim - costs insurersmore money than “hard fraud,” such asautomobile accidents staged by organizedrings or fabricated auto thefts. More thanhalf the carriers estimated that “soft fraud”occurs in more than 15% of all claims.5

The Legislature has responded to theproblems of insurance availability andhigh costs through a series of enactments.Because fraud - including one singleincident of “soft fraud” - undeniablycauses a significant percentage of that cost,this series of enactments has included aconsistent progression of increasingpenalties for insurance fraud, therebyfacilitating its criminal prosecution.

In 1983, the Legislature enacted theInsurance Fraud Prevention Act(IFPA),6 based on the model actpromulgated by the National Associa-tion of Insurance Commissioners. TheIFPA codified the public policy of thisState to “confront aggressively theproblem of insurance fraud[.]”7 Toaccomplish this goal, the act authorizesthe State to impose civil monetarypenalties for violations of the IFPA.8

In 1997, the Legislature created thecrime of Health Care Claims Fraud.9

The Senate Health Committee State-ment to the bill which was passedprovided in part:

This bill ... reform[s] the criminal lawsto address health care claims fraud ...

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2. Merin v. Maglaki, 126 N.J. 430, 436 (1992).3. NHCAA, Health Care Fraud, A Serious andCostly Reality for All Americans, at 1, 2 (Apr.2005), at www.nhcaa.org/content/files/HealthCareFraudArticle2005.pdf4. The Kaiser Family Foundation and the HealthResearch and Education Trust, Employer HealthBenefits 2005 Summary of Findings, at 4 (2005),at www.KFF.org/insurance/7315/sections/upload/7316.pdf

5. See Coalition Against Insurance Fraud, Fraudis Rising, Insurers Say, and it’s Uncle Bernie’sFault: Soft-Core Scams a Major Source of BadClaims and Money Loss (Jan. 1, 2002), atwww.insurancefraud.org/rc_research_set.html6. N.J.S.A. 17:33A-1 et seq.7. N.J.S.A. 17:33A-2.8. N.J.S.A. 17:33A-5.9. N.J.S.A. 2C:21-4.2 to -4.3.

particularly in the treatment ofpatients involved in automobileaccidents[.] New Jersey’s Code ofCriminal Justice does not addresshealth care claims fraud in a mannerthat permits efficient prosecution andeffective punishment. Under currentstatutes, a person commits a crime ofthe second-degree if the amount ofthe theft is $75,000 or more. How-ever, in the context of health careclaims fraud where the individualfraud claims may be relatively small, aprosecutor may be required to provehundreds of separate claims asfraudulent to arrive at the $75,000amount[.] This bill would cover notonly those instances of claims fortreatments that were not provided,but also false and misleading state-ments concerning the necessity oftreatment and the nature and scope oftreatment.10

Thus, as it had in the IFPA, the Legisla-ture chose to penalize individual falsestatements, not false claims.11

In 1998, the Legislature enacted theAutomobile Insurance Cost ReductionAct (AICRA).12 “AICRA is, as its nameimplies, a cost-containment initiativeenacted as a refinement to the no-faultautomobile insurance system ... Thelegislative findings and declarationsunderlying AICRA are unequivocal; costcontainment, fraud avoidance and a fairrate of return to insurers.”13 Amongother things, AICRA requires a plaintiff,who is covered by a policy containing the“limitation on lawsuit option” and whowishes to sue for non-economic losses, tofile a certification from a physician

attesting that the plaintiff has sufferedcertain injuries as spelled out in thestatute. The Legislature included a toughcriminal provision punishing anyone whomakes a false physician certification. Inlanguage similar to that later used in thecriminal Insurance Fraud statute, AICRAprovides: “A person is guilty of a crimeof the fourth degree if that personpurposefully or knowingly makes, orcauses to be made, a false, fictitious,fraudulent, or misleading statement ofmaterial fact in, or omits a material factfrom, or causes a material fact to beomitted from, any certification filedpursuant to this subsection.”14 Asanother example of the Legislature’sdesire to deter insurance fraud throughstiff penalties, the Legislature included apresumption of incarceration for thisfourth-degree crime.15

By 2003, the Legislature perceived aneed for additional action, and passedP.L.2003, c.89, as “a comprehensive set ofsolutions to the automobile insuranceavailability and affordability challengesfacing insurers, consumers and regulatorsin New Jersey.”16 The Act amendednumerous provisions of law regulatingautomobile insurance. Of particularrelevance here, and in a continuation of itsefforts to increase penalties for insurancefraud and facilitate prosecution, theLegislature created the crime of InsuranceFraud.17 The findings and declarationsthat accompanied the Act clearly articulatethe Legislature’s intent to establishsubstantial criminal penalties in order topunish wrongdoers and deter others:

a. Insurance fraud is inimical to publicsafety, welfare and order within the

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State of New Jersey. Insurance fraudis pervasive and expensive, costingconsumers and businesses millionsof dollars in direct and indirectlosses each year.

* * *c. To enable more efficient prosecutionof criminally culpable persons whoknowingly commit ... fraud againstinsurance companies, it is necessary toestablish a crime of “insurance fraud”to directly and comprehensivelycriminalize this type of harmfulconduct, with substantial criminalpenalties to punish wrongdoers andto appropriately deter others fromsuch illicit activity.18

In keeping with its intent to establish“substantial criminal penalties,” theLegislature graded Insurance Fraud as asecond-degree crime if the violatorcommits five or more acts of InsuranceFraud and the aggregate value of theproperty or services sought to beobtained is at least $1,000. Otherwise, itis a crime of the third degree.19 At thesame time it created the crime of Insur-ance Fraud, the Legislature amended theHealth Care Claims Fraud Act, clarifyingthat each act of Health Care Claims Fraudoccurring in one document constitutes aseparate and distinct offense.20

The Supreme Court’s InterpretationIn State v. Fleischman, 189 N.J. 539

(2007), the Supreme Court of New Jerseyconstrued the crime of Insurance Fraud,N.J.S.A. 2C:21-4.6, for the first time. Theissue was whether there can be multiplefalse statements of material fact in one

10. Sen. Health Comm. Statement to S. 2270(Dec. 11, 1997) (emphasis added).11. N.J.S.A. 2C:21-4.2; compare Merin v.Maglaki, 126 N.J. at 435-36 (each knowing, falsematerial statement is a violation under the IFPA).12. P.L.1998, c.21, §§1 to 74.13. Casinelli v. Manglapus, 181 N.J. 354, 360(2004) (internal citations omitted); see N.J.S.A.39:6A-1.1b (legislative findings and declarations).

14. N.J.S.A. 39:6A-8a (emphasis added).15. Ibid.; see Casinelli, 181 N.J. at 366(“AICRA’s intention was ... to cull out those non-meritorious matters in which the new thresholdcannot be met and to counter fraud.”).16. Assembly Banking and Insurance Comm.Statement to S. 63 (May 5, 2003).17. P.L.2003, c.89, §§71 to 73 (codified atN.J.S.A. 2C:21-4.4 to -4.6).

18. N.J.S.A. 2C:21-4.4.19. N.J.S.A. 2C:21-4.6b.20. P.L.2003, c.89, §75 (codified at N.J.S.A.2C:21-4.3).

Closing the Loopholes on Insurance Fraud

document. The Court focused on thesingle word “statement” rather than onthe sentence in which it appears: “Aperson is guilty of the crime of insurancefraud if that person knowingly makes orcauses to be made, a false, fictitious,fraudulent, or misleading statement ofmaterial fact in, or omits a material factfrom, or causes a material fact to beomitted from, any record, bill, claim orother document, in writing, electronically,orally or in any other form[.]”21 TheCourt held,

[W]hen a defendant provides toofficials in connection with a fraudu-lent claim a document or oral narrativethat contains a material fact or factsrelating to the claim, each suchdocument or narration is a ‘statement’equating to an ‘act’ of insurance fraud.Although we recognize that there canbe multiple ‘statements’ in a singledocument or narration, for examplewhen a document’s or narration’scontents relate to a separate claim ofloss (the fur coat example), we rejectthe assertion that the Legislatureintended every discrete fact within anarrative assertion about a single claimwould amount to an ‘act’ of insurancefraud.22

OIFP respectfully disagrees with theCourt’s construction of the statute. OIFPsubmits that each stage of the Court’sreasoning is troublesome. The Courtbegan its analysis by finding that the word“statement” is inherently ambiguous,because it can be defined both as a singledeclaration or remark and as a report ornarrative. In consulting dictionarydefinitions, the Court focused solely onthe word “statement” and did not

consider the rest of the sentence in whichthe word is used.23 Thus, the Court didnot discuss the fact that the Legislaturewas plainly speaking of a single fact whenit made it an act of insurance fraud to“omit a material fact” from a document.Because it did not address that context,the Court did not explain why it con-cluded that the Legislature would definean “act of insurance fraud” in such a waythat a separate offense is committed byeach material fact which is omitted from adocument, but a separate offense is notcommitted by each affirmative misstate-ment in a document.24

Having determined that the word“statement” is inherently ambiguous, theCourt turned to legislative history todetermine the Legislature’s intent. TheCourt recited the findings and declarationswhich accompanied the Insurance FraudAct, at N.J.S.A. 2C:21-4.4. The Courtacknowledged “the Legislature’s stronglyexpressed desire to curb the rampant andexpensive problem of insurance fraud byincreasing the penalties for such behav-ior.”25 The Court reasoned “the State’sarguments [as to why ‘statement ofmaterial fact’ refers to each item ofmaterial information] do not address thefact that the Legislature created twodistinct offenses: third-degree insurancefraud and second-degree insurance fraud.Were ‘statement’ to be interpreted as theState suggests, it would be difficult toenvision a setting in which a violatorcould be charged with third-degreeinsurance fraud and not the second-degreeoffense.”26

Contrary to the Court’s opinion, it isnot difficult at all to envision crimeswhich would be third-degree but not

second-degree Insurance Fraud. First,Insurance Fraud only constitutes asecond-degree crime when, among otherthings, the value obtained or sought to beobtained is at least $1,000. Thus, every actof insurance fraud which obtains orattempts to obtain less than $1,000 is acrime of the third degree but not thesecond degree.27 Second, insurance fraudcan only constitute a crime of the seconddegree if the person knowingly makes fiveor more fraudulent misstatements ofmaterial fact or omits five or morematerial facts.28

Application fraud, also known asunderwriting fraud, is an entire categoryof fraud which is often committed bytelling fewer than five lies. For example,auto insurance applications typically askone or two questions seeking to identifyall licensed drivers in a household.Unfortunately, it is not at all uncommonfor an applicant to lie on that question,either by failing to disclose a teenager orother high risk driver (thereby omitting amaterial fact), or by falsely checking “no”to a question asking whether there are anyother drivers in the household (therebymisstating a material fact). During 2007,OIFP received 969 referrals of autoinsurance application fraud. At leasthalf of those referrals related to undis-closed drivers.

Similarly, disability insurance applica-tions often include a list of healthconditions. Typically, a disability applica-tion specifically asks as to each healthcondition whether the applicant has everhad that particular condition. It is not atall uncommon for applicants to lie abouta specific condition or two. Such applica-tions include one or two misstatements

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21. Ibid. (emphasis added).22. Fleischman, 189 N.J. at 553-54 (emphasis inoriginal). The “fur coat example” refers to anexample the Court had given earlier in its opinion.The Court had said that a defendant who falselyclaimed that her car had been stolen and alsofalsely claimed that a fur coat had been in the trunkwould commit two acts of insurance fraud. TheCourt did not explain its reasoning in creating this

judicial exception to its own construction of an“act” of insurance fraud. Consequently, the exactcontours of this judicially-created exception areunknown at this time.23. Id. at 546-48.24. Ibid.25. Fleischman, 189 N.J. at 548-49.

26. Id. at 550 (internal citation omitted).27. N.J.S.A. 2C:21-4.6b.28. Ibid.29. Fleischman, 189 N.J. at 550.30. Ibid.31. Fleischman, 189 N.J. at 551.

of material fact, and therefore wouldconstitute third-degree, but not second-degree Insurance Fraud. During 2007,OIFP received 173 referrals of disabilityfraud. Many of these referrals relate tomisstatements on the application such asthose just discussed.

Therefore, the Court’s premise that itwould be difficult to envision a setting inwhich a violator could be charged with thethird-degree offense but not the second-degree offense is factually incorrect. OIFPreceives hundreds and hundreds ofreferrals alleging just such conduct everyyear. From that incorrect premise, theCourt concluded, “[a]lthough it is evidentthat the Legislature intended to curbinsurance fraud, we cannot ignore that theLegislature created two separate offensesof different degrees. It would beinappropriate to interpret the Act in amanner that leads to the absurd result ofpractically eliminating the third-degreeoffense.”29 Because the Court’s factualpremise is incorrect, its conclusion iserroneous. The Court, nevertheless,turned “to the established principle ofstatutory interpretation that the Legisla-ture is presumed to act with knowledgeof the judicial construction given topredecessor or related enactments.”30

The Court looked to its priorconstruction of the Insurance FraudPrevention Act, N.J.S.A. 17:33A-1 et seq.,in Merin v. Maglaki, 126 N.J. 430 (1992).The Fleischman Court reiterated theholding in Merin that the IFPA creates aviolation for false statements, not falseclaims.31 The Fleischman Court statedthat in Merin, the Court had concludedthat each document constituted astatement under the IFPA.32 The

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Fleischman Court stated that the languagein the IFPA and the crime of InsuranceFraud is “essentially identical”33 and“strikingly similar.”34 The Court therefore“conclude[d] that the Legislature wouldhave presumed, consistent with our Merinholding, that each document or narrativestatement containing materially false factswould be held to be a separate ‘act’ ofinsurance fraud.”35

Therefore, it is worth comparing thelanguage of the Insurance Fraud Preven-tion Act to the language of the InsuranceFraud crime. Merin involved twoprovisions of the IFPA: N.J.S.A. 17:33A-4a(1) and N.J.S.A. 17:33A-4a(2). The firstof those provides, “A person ... violatesthis act if he [p]resents ... any written ororal statement as part of, or in support ofor opposition to, a claim for payment ...pursuant to an insurance policy ...knowing that the statement contains anyfalse or misleading information concern-ing any fact or thing material to theclaim[.]”36 The IFPA includes a statutorydefinition of the word “statement.”N.J.S.A. 17:33A-3 provides, “[a]s used inthis act ... ‘statement’ includes, but is notlimited to, any application, writing, notice,expression, statement, proof of loss, billof lading, receipt, invoice, account,estimate of property damage, bill forservices, diagnosis, prescription, hospitalor physician record, X-ray, test result orother evidence of loss, injury or expense.”This definition, for purposes of theIFPA, defines statement so that it isequivalent to a writing or a document.

The crime of Insurance Fraud pro-vides, “[a] person is guilty of the crime ofinsurance fraud if that person knowinglymakes or causes to be made, a false,

fictitious, fraudulent, or misleadingstatement of material fact in, or omits amaterial fact from ... any record, bill, claimor other document ... that a person ...submits ... as part of, in support of oropposition to or in connection with” aclaim, an application, a payment or “anaffidavit, certification, record or otherdocument used in any insurance [transac-tion] or premium finance transaction.”37

In addition, the Insurance Fraud crimeprovides, “[e]ach act of insurance fraudshall constitute an additional, separate anddistinct offense .... Multiple acts ofinsurance fraud which are contained in asingle ... document shall each constitute anadditional, separate and distinct offense forpurposes of this subsection.”38

Far from being essentially identical,the two provisions are conceptual inversesof each other. Under the IFPA, the unitof prosecution is the statement [i.e.,document] which contains false ormisleading material information; underthe Insurance Fraud crime, the unit ofprosecution is the false material statementof fact or the omission of a material fact,and each false statement of fact oromission of a fact is a separate violation,even if they occur within one document.Under the IFPA, each document whichcontains material false information is aviolation regardless of how many discreteitems of material fact are misstated in it;under the Insurance Fraud crime, eachitem of material false information is aviolation, and there can be multipleviolations in a single document. TheCourt’s premise that the language in thetwo acts is essentially identical is incorrect.

As the Court wrote, it is a longestablished principle of statutory

32. Ibid.33. Id. at 550.34. Id. at 552.35. Ibid.36. N.J.S.A. 17:33A-4a(1). The violation createdin paragraph 4a(2) is similar. Neither Merin norFleischman discussed the violations set forth in

paragraphs 4a(3) to 4a(5), b, c, d, or e. In thoseparagraphs, the IFPA addresses particular types ofinsurance fraud separately. In contrast, theInsurance Fraud criminal statute creates a single,unified offense which is intended “to comprehen-sively criminalize this type of harmful conduct[.]”N.J.S.A. 2C:21-4.4c.

37. N.J.S.A. 2C:21-4.6a.38. N.J.S.A. 2C:21-4.6b.

Closing the Loopholes on Insurance Fraud

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construction that the Legislature ispresumed to act with knowledge of priorjudicial rulings on its statutes. Therefore,presumptively aware of the Court’s rulingin Merin that each document would be asingle violation under the IFPA regardlessof the number of misstatements itcontains, the Legislature includedlanguage in the Insurance Fraud crimewhich explicitly states that under thisstatute (unlike under the IFPA), multiplefalse statements of material fact, ormultiple omissions of material facts,“which are contained in a single ...document shall each constitute anadditional, separate and distinct of-fense[.]”39 The Supreme Court inFleischman did not discuss this languageor how it is different from the languageof the IFPA. Instead, it concluded itsanalysis by construing the InsuranceFraud crime to be consistent with itsconstruction of the IFPA in Merin. “[W]econclude that the Legislature would havepresumed, consistent with our Merinholding, that each document or narrativestatement containing materially false factswould be held to be a separate ‘act’ ofinsurance fraud.”40

The Court’s opinion creates anunfortunate dichotomy between casesbased on an affirmative misstatement andcases based on the omission of a materialfact. The Court’s reasoning in Fleischmanwas based on a perceived ambiguity in theword “statement” which is part of thephrase “statement of material fact” usedto define an “act of insurance fraud”when it is committed by an affirmativemisstatement. However, an “act ofinsurance fraud” can also be committedby omitting a material fact from a

document. Since the underlying fraudu-lent conduct in Fleischman involveddefendant’s acts of commission ratherthan omission, the Fleischman opiniondid not address an act of insurance fraudpredicated upon the omission of amaterial fact.

The Insurance Fraud statute plainlyspeaks in the singular when stating that aperson commits an “act of insurancefraud” if that person “knowingly ... omitsa material fact from” any document.41

Since the word “statement” is not used indefining this type of Insurance Fraud, theambiguity which the Court perceived inthe word “statement” does not existwhen an “act of insurance fraud” iscommitted by omitting “a material fact.”The definition of “act of insurance fraud”is unambiguous when it is committed byomitting a material fact.42 Thus, “a court’srole is to apply the statute consistent withthe plain meaning of the legislative choiceof expression.”43 Each knowingomission of “a material fact” from adocument constitutes an act of insurancefraud, and for this type of case, “multipleacts of insurance fraud which are con-tained in a single ... document shall eachconstitute an additional, separate anddistinct offense.”44 The Fleischman Courtdid not explain why the Legislature wouldhave treated acts of omission moreharshly than acts of commission. Thisunexplained, judicially-created dichotomyis another reason why the Court’sconstruction is problematic.

Implications of the Court’s InterpretationThe Court’s holding that each

document or oral narrative containing amaterial fact or facts is a “statement,”

which when knowingly false equates toone act of insurance fraud, has dramaticimplications on the State’s efforts tocontain insurance costs when applied tofact patterns other than the allegedly fakeautomobile theft the Court had before itin Fleischman. It may also affectprosecutions under the Health CareClaims Fraud statute, because that crimeis also defined using the phrase “state-ment of material fact.”45

Health care practitioners who know-ingly commit a single act of Health CareClaims Fraud in the course of providingservices commit a second-degree crime.46

Whereas, prior to Fleischman, a practitio-ner could be prosecuted for each misstate-ment of material fact, even if they were allbundled into one document, now apractitioner’s criminal exposure under theHealth Care Claims Fraud Act is limitedto one count if the multiple misstate-ments are contained in one “record, bill,claim or other document[.]”47 The terms“record” and “claim” are amorphous.Thus, the Court’s ruling presentsdishonest practitioners with a tremen-dous opportunity to urge a constructionof the statute which would insulate themfrom being held to account for the fullscope of their misconduct.

Under both the Health Care ClaimsFraud statute and the Insurance Fraudstatute, the terms “record, bill, claim orother document” include those submittedelectronically.48 The Court has introduceduncertainty into these statutes: how doesone decide when electronic data transmis-sions constitute one bill or several? Thatuncertainty does not exist under theLegislature’s definition of the crimes,focusing as it does on false statements

39. N.J.S.A. 2C:21-4.6b.40. Fleischman,189 N.J. at 552.41. N.J.S.A. 2C:21-4.6a.42. See State v. Tarlowe, 370 N.J. Super. 224,232 (App. Div. 2004) (definition of health careclaims fraud is unambiguous).43. Fleischman, 189 N.J. at 545.

44. N.J.S.A. 2C:21-4.6b.45. N.J.S.A. 2C:21-4.2.46. N.J.S.A. 2C:21-4.3a.47. N.J.S.A. 2C:21-4.2.48. Ibid.; N.J.S.A. 2C:21-4.6a.49. Malcolm K. Sparrow, License to Steal: Why

Fraud Plagues America’s Health Care System, at182 (Westview Press 1996). Professor Sparrow isChair of the Masters in Public Policy Program at theKennedy School of Government, HarvardUniversity. See also id. at 129-33 (discussing othervariations of electronic payment fraud schemeswhich have been detected in the Medicaid program,but only after millions of dollars had been stolen).

regardless of whether they are containedin one electronic “document” or several.While that judicially-created ambiguitymight eventually be sorted out by futureappellate opinions, consider the implica-tion if a single electronic data interchangeis ruled to constitute one “record, bill,claim or other document”: such asubmission can contain thousands ofindividual statements seeking payment, allof them false, as chillingly described byProfessor Malcolm K. Sparrow:

[B]ust-out schemes [are] the majornew threat under electronic claimsprocessing. Under such schemes,fraud perpetrators test claims toestablish which ones the system willpay automatically (auto-adjudicate).Then they generate thousands or tensof thousands of similar claims andsubmit them electronically, safe in theknowledge that the system will treateach of them exactly the same way.The utter predictability of thepayment system works to the fraudperpetrator’s advantage.49

Since, under the Court’s holding, eachof these thousands of false statementscontained in one electronic submissionmay not constitute separate acts ofinsurance fraud (or, defendants willundoubtedly argue, health care claimsfraud), the State would be required toprove the falsity of hundreds or thou-sands of individually low-dollar claims,one by one, to aggregate the thefts to$75,000 before achieving the “substantialcriminal penalties,”50 the Legislatureintended to apply whenever the Statecould prove five acts and $1,000. TheCourt’s statutory construction goes a longway toward reverting the law to the time

when “New Jersey’s Code of CriminalJustice [did] not address health care claimsfraud [or insurance fraud] in a mannerthat permit[ted] efficient prosecution andeffective punishment,”51 the situation theLegislature intended to correct when itpassed the Health Care Claims FraudAct in 1997 and the Insurance Fraudstatute in 2003.

RecommendationOIFP respectfully disagrees with the

Court’s construction of N.J.S.A. 2C:21-4.6a. OIFP believes the Legislatureintended each statement of a material factto constitute an act of insurance fraud,just as it unambiguously said it intendedeach omission of a material fact toconstitute an act of insurance fraud.Since, as the Court itself noted, theCourt’s “function is to effectuate legisla-tive intent[,]”52 it is proper and appropri-ate for the Legislature to amend thestatute to make its intent clearer. Accord-ingly, OIFP proposes that the Legisla-ture amend the Insurance Fraud statuteand the Health Care Claims Fraudstatute to return them to their originallyintended meaning.

First, the phrase “statement ofmaterial fact” should be amended to read“statement of a material fact.” In thisway, it would precisely mirror the phrase“omission of a material fact,” which isalready in the statute, and which unam-biguously penalizes each knowingomission of a material fact.

Second, both the Insurance Fraudstatute and the Health Care Claims Fraudstatute should be amended to include adefinition of the phrase “statement of amaterial fact.” That phrase is not used or

defined elsewhere in the Criminal Code,but the word “statement” is. There areseveral provisions in Chapter 28 (“Perjuryand Other Falsification”) of the CriminalCode which are violated by individualfalse statements, provided the otheressential elements of those crimes arepresent.53 For purposes of the Chapter28 offenses, “statement” is defined as“any representation[.]”54 While the Codeof Criminal Justice does not make thisdefinition applicable to the crime ofInsurance Fraud, it is a useful startingpoint. The commentaries to the Codeexplain that “statement” or “representa-tion” means each “item of information”:

The offense of perjury might beregarded either as the making of afalse oath, from which it would followthat there would be only a singleoffense regardless of how many falsestatements were made under thatoath, or, as in prevailing law and theCode, the offense can be regarded ascommitted by each false statementmade under oath. An intermediatecourse would be possible if, as wewould recommend, “statement” isnot construed so rigorously as toapply to individual sentences, butrather to connote any single item ofinformation communicated in onesequence of declarations or responsesto questioning.55

In the Chapter 28 offenses, a “state-ment” is a representation of any singleitem of information. In the crimes ofInsurance Fraud and Health Care ClaimsFraud, a “statement of a material fact” is arepresentation of any single item ofinformation which is material. Therefore,OIFP recommends that the definitional

50. N.J.S.A. 2C:21-4.4c.51. Sen. Health Comm. Statement to S. 2270(Dec. 11, 1997).52. Fleischman,189 N.J. at 545.53. See N.J.S.A. 2C:28-1 (“A person is guilty ofperjury ... if in any official proceeding he makes a falsestatement under oath ... when the statement is material

and he does not believe it to be true.”); N.J.S.A.2C:28-2 (“A person who makes a false statementunder oath ... when he does not believe the statementto be true” is guilty of false swearing); N.J.S.A. 2C:28-3a (A person commits unsworn falsification “if hemakes a written false statement which he does notbelieve to be true, on ... a form bearing notice ... thatfalse statements made therein are punishable.”).

54. N.J.S.A. 2C:27-1i.55. II The New Jersey Penal Code: Final Reportof the New Jersey Criminal Law RevisionCommission at 272-73 (1971) (emphasis added;citing Comments, Model Penal Code TentativeDraft 6 at 115-16 (1957)).

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Closing the Loopholes on Insurance Fraud

sections of Insurance Fraud56 and ofHealth Care Claims Fraud57 be amendedto include the following definition:

“Statement of a material fact” means arepresentation of any single item ofinformation which is material. Eachrepresentation of a separate item ofmaterial information is a separatestatement of a material fact, even ifthey occur within the same record, bill,claim or other document.Third, since the Insurance Fraud

statute and the Health Care Claims Fraudstatute do not define the term “material,”this is an opportunity to do so, andthereby bring greater certainty to the law.Existing case law does define the conceptof materiality in the contexts of claimsand underwriting. As noted, the Insur-ance Fraud statute is intended to applymore broadly than that, applying to alltypes of insurance fraud, whetherstemming from claims, applications,premium financing, or any other insur-ance transaction. Therefore, while the caselaw is a starting point, the statutorydefinition should be worded so that itapplies to every type of insurance fraud towhich the statute applies.

In the context of a claim, a statementis material if, at the time the statementwas made, a reasonable insurer wouldhave considered the misrepresented factrelevant to its concerns and important indetermining its course of action.58 In thecontext of an application, the SupremeCourt has adopted a broad materiality testunder which a statement is material if itwould naturally and reasonably influencethe judgment of the underwriter inmaking the contract, or in estimating thedegree or character of the risk, or in fixingthe rate of premium.59 Materiality is

56. N.J.S.A. 2C:21-4.5.57. N.J.S.A. 2C:21-4.2.58. Longobardi v. Chubb Insurance, 121 N.J.530, 542 (1990).59. Paul Revere Life Insurance Co. v. Haas, 137N.J. 190, 209 (1994).

judged as of the time the misstatement ismade. It does not matter if the misstate-ment later turns out to have greater orless significance than appeared at thattime.60 Therefore, materiality is judgedaccording to the statement’s “prospectivereasonable relevancy.”61

As noted, the Insurance Fraud statuteis intended to apply to all types ofinsurance related fraud. For example, thestatute specifically applies to premiumfinance fraud. In premium financing, afinancing company lends money toinsureds who cannot afford to pay theirpremiums when due. Typically, these arecommercial entities, such as truckingcompanies, with significant premiums.The insured then repays the loan overtime. Unfortunately, sometimes agentsof a premium financing company will lieto its lender to obtain more money thanit needs to make loans, and the extra cashis embezzled. Thus, in premium financefraud, the defrauded party is not aninsurer, but a bank or other source ofcapital. The statutory definition mustbe broad enough to apply nonetheless.Accordingly, OIFP recommends thatthe definitional sections of InsuranceFraud and of Health Care ClaimsFraud be amended to include thefollowing definition:

“Material.” A fact is material if areasonable person involved in theclaim, application, payment, insurancetransaction or premium financetransaction would have considered thefact relevant to his concerns andimportant in determining his courseof action. Materiality is judged as ofthe time the statement is made or thefact omitted, according to the fact’sprospective reasonable relevancy.

60. Longobardi, 121 N.J. at 541-42 (“The rightrule of law, we believe, is one that providesinsureds with an incentive to tell the truth. It woulddilute that incentive to allow an insured to gamblethat a lie will turn out to be unimportant. The focus,therefore, should be on the time when the insuredis about to let loose the lie.”).61. Id. at 542.

Proof that an insurance company hasrequested the information in process-ing the claim, application, payment ortransaction may give rise to aninference that the fact is material.

ConclusionIn 1997, the Legislature enacted the

crime of Health Care Claims Fraud tocorrect the then-existing ineffectivenessof the Criminal Code in confrontinghealth care fraud. The Legislaturecriminalized individual false factualassertions, and mandated toughpenalties for licensed professionals whocommitted fraud in the course ofproviding professional services. With its2003 enactment, the Legislature appliedthat same approach to all types ofinsurance fraud. In doing so, theLegislature continued its efforts tocombat insurance fraud by increasing thepenalties for it, by facilitating theprosecution of it, and by making thefalse statement, and not the false claim,the unit of prosecution. In theFleischman opinion, the Supreme Courtconstrued the Insurance Fraud statute ina manner which reverses the progressmade by the Legislature and undercutsthe Legislature’s efforts to confront thisexpensive and intractable social problem.For the reasons explained in this article,OIFP respectfully recommends that theLegislature amend the Health CareClaims Fraud and Insurance Fraudstatutes to return them to their originallyintended meaning.

John KennedyAssistant Attorney General

Senior Counsel, CLASS

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