THE LINE IN THE SAND FRAUD AWARENESS, PREVENTION, AND ... · specifics. If it is out of place, then...

©2011

THE LINE IN THE SAND

FRAUD AWARENESS, PREVENTION, AND DETERRENCE

“SOMETHING WICKED THIS WAY COMES”

Insurance fraud is rarely self-evident. The issues at play evolve and allow their

participants to receive profitable returns. Most times the payout is worth the risk as the

wrongdoing can be easily concealed or skewed. Identification of new patterns and trends in

insurance fraud and how to combat them is essential. In this session, you will discuss these

developments, as well as learn the various legal updates. Also, you will discover the art of

being proactive from a cost-conscious perspective.

JEFFREY RAPPATTONI, ESQ.

Shareholder

Marshall Dennehey

Cherry Hill, New Jersey

Jeffrey G. Rapattoni joined MDWC&G in 2008 and is a Shareholder with the firm’s SIU

Department. Jeffrey focuses his practice on insurance fraud, bad faith, and SIU-related

matters.

Jeffrey litigates insurance fraud and fraud-related matters throughout the state of New

Jersey and has coordinated complex litigation strategy and fraud related investigations in

various other states. He has extensive training and a background in provider-based

investigations, underwriting fraud, policy voidance, and staged accidents. Other practice

areas include large loss property claims, coverage, general civil litigation, and appellate

practice. He also has significant experience in large settlement negotiation, mediation, and

arbitration. As part of his practice, Jeffrey has worked with experts in the fields of cause and

origin and bad faith as well as with local and Federal authorities.

Jeffrey is frequently asked to lecture on a variety of insurance topics including insurance

fraud and bad faith. He is a regular presenter for and on behalf of several local and national

insurance organizations. He also provides legal education seminars for various clients and

organizations across the country.

After graduating with a BA degree from Villanova University in 1997, Jeffrey served as a

Legislative Correspondent for United States Senator Arlen Specter in Philadelphia and

Washington, D.C., where he assisted in drafting legislation and conducted legal

investigations. While attending Rutgers Law School, he served as a judicial extern to the

Honorable Judge John A. Almeida, J.S.C. Burlington County-Civil Division, where he

drafted various tentative dispositions of the Court and assisted in court-ordered mediation

sessions.

©2011

JAMES COLE, J.D.

Shareholder/Director of SIU

Marshall Dennehey

Cherry Hill, New Jersey

James focuses his practice on both the investigation and litigation of Special Investigative

Unit claims and property damage claims, including arson claims, mold claims, and

automobile thefts. Within his areas of practice, James is experienced in the bad faith and

coverage issues inherent in first party/SIU investigations and litigation. Throughout his

career, James has assisted with hundreds of SIU investigations related to reported vehicle

thefts, burglaries, and incendiary fires. He is frequently asked by clients and industry

organizations to lecture on a variety of topics concerning property damage, insurance fraud,

and bad faith matters.

James is a 1990 graduate of the Indiana University of Pennsylvania. Immediately

following graduation, he accepted a position as a claims representative with a large insurance

carrier where for eight years he was involved in the investigation and resolution of property

and casualty claims. In 1995, he entered Temple University School of Law while continuing

to work full time. James graduated from Temple University in 1999 with a degree of Juris

Doctor. Thereafter, he joined the firm of Marshall Dennehey and is Chair of the firm's SIU

Litigation and Property Damage Litigation Practice Groups.

―Association of Certified Fraud Examiners,‖ ―Certified Fraud Examiner,‖ ―CFE,‖ ―ACFE,‖ and the

ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc.


22nd

Annual ACFE Fraud Conference and Exhibition ©2011 1

NOTES Introduction

Generally, ―medical payment coverage‖ is a first party

coverage without respect to fault.

Because this is a first party situation, a failure to pay

can give rise to a breach of contract claim while an

―unreasonable‖ failure to pay can give rise to a bad

faith claim.

Thus, know the difference from the start and identify

your facts.

A genuine dispute will not sound in bad faith.

Common Fraudulent Scenarios

Under New Jersey law, medical providers are ineligible to

receive benefits when either:

(i) the patient’s treatment was in violation of the law

(perhaps not medically necessary), or

(ii) the licensing, ownership, or operation of the

medical practice was in violation of the law.

The Courts Have Spoken

Ignorance is no excuse – ―It is well settled that

individuals that practice in highly regulated

industries, such as physicians, are charged with the

knowledge of the laws that govern their practice.‖

Allstate v. Greenberg, 376 N.J. Super. 623 (N.J.

Super. Ct. 2004).

―An insurer may properly deny payment based upon

a healthcare provider’s failure to comply with the

administrative regulations governing the practice of

healthcare in New Jersey.‖ Allstate v. Schick, 328

N.J. Super 611 (N.J. Super. Ct. 1999).

Upcoding Issues

Most of your common medical fraud scenarios will

be broadly defined as ―upcoding.‖


22nd


NOTES Upcoding is charging for a more expensive service

than was performed.

This can occur in first or third party claims, PIP,

workers compensation, and routine medical claims.

For example:

1. Billing for services never rendered

a. Common configuration of blatantly

billing for a service that never took

place.

b. This is the most extreme scenario of

upcoding.

c. Example: Billed for 10 treatments, 0

occurred.

2. Services rendered in part

a. Provider sees the patient and performs

limited treatment but bills for services

that were not part of the visit.

b. The key here is that they must bill for

services that were not part of the visit.

c. Example: Therapeutic exercises billed

for every visit and seldom take place.

3. Billing for services not medically necessary

a. Over-utilization of codes and treatments

that were not medically necessary.

b. Subjecting the patient to procedures that

will not provide them with any relief or

medical benefit.

c. Example: (Look for a pattern of repeat

procedures) Four MRIs of the same area,

or multiple injection therapies with no

objective or subjective benefit.

4. CPT code abuse

a. Current Procedural Terminology (CPT)

abuse occurs when the code is selected

for a more serious condition than a

patient has.


22nd


NOTES b. The single most abused code is 99204.

c. 99204 is a 45 minute, new patient

examination.

d. Generally, this code is wrong for auto

cases.

e. Use common sense. After speaking with

insureds, the exam is never 45 minutes

and they are never actually seen for over

an hour. It is important to ask them what

took place during this ―exam‖ and get

specifics. If it is out of place, then the

provider is abusing the code for

payment.

5. Code stuffing

a. Code stuffing is the insertion of a

fabricated diagnosis to receive higher

payments.

b. These are pre-fabricated diagnostic

codes.

c. Diagnosis will change care paths.

d. Example: You will pay more for a

herniation treatment and care path than a

disc bulge.

e. Look for patterns within medical

practices. Do the same people read and

interpret the films? Do they go to the

same MRI facilities? Is transportation

provided?

6. Billing for services not provided by a physician

a. Billing for services performed by a

doctor when they are performed by

office staff.

b. Example: Unlicensed office staff giving

―therapeutic‖ massage and using CPT

code 97124.


22nd


NOTES c. Code inheritably provides that the

greater the degree of the person

rendering service, the higher the bill.

d. A very common configuration across the

board. It’s easier for the doctor to

delegate these tasks than actually

perform them. Note: Billing the code is a

representation by the provider that he

actually performed the treatment, thus

this is a misrepresentation every time it

is billed.

e. This can actually cause a physical harm

to the patient depending on the

underlying injury.

7. Medical supplies (DME)

a. Billing for unnecessary medical supplies

to increase bills.

b. More common with chiropractic

practices.

c. Example: All patients get cervical collar,

pillow, or home exercise equipment.

8. Unbundling

a. Charging separately for services or parts

of a procedure that should be billed as a

group.

b. Example: Needles, drugs, surgical

equipment instead of the actual

procedure. Seen commonly with

injections and RF treatments.

c. CPT 97010 (application of hot/cold

packs) is bundled into the payment of

services and shall not be reimbursed

separately.

9. Fragmentation


22nd


NOTES a. Services usually billed together at a set

price that are billed separately at a

higher price.

b. Example: Examination by a chiropractor

and physician whereby each submits an

individual bill. Seen in practices with

mixed disciplines.

Specific Provider Issues

Self-referrals – It is illegal for a physician to refer

you to another physician practice that he has a

monetary interest in without disclosing the interest

to the patient.

Kickbacks – Providers providing monetary

incentive for referrals.

Fee-splitting – Physicians split a patient’s fee with

an unlicensed person or company or a physician

refers a patient to another physician and collects a

portion of the fee.

Pre Suit Investigation

Initially

Determine your exposure for possible recovery

Match CPT codes to the written notes (SOAP) of

the provider

Run an index on the doctor, claimant, and attorney

(if available)

Establish patterns and look for links

Investigate the Claim

Compliance letters – Correspondence to the facility

or practitioner asking for more information

concerning his practice.

In particular, names of all personnel (licensed or

not) copies of licenses, incorporation documents,

etc.


22nd


NOTES Why? It is objective proof of good faith.

Facility inspections – Difficult to get but a wealth of

information.

Look for the obvious. If they bill for exercises,

where is the equipment? Where is the room?

What type of tables do they have? (i.e., roller vs.

aquatic)

Massage and traction devices – All things billed for

should be present and obvious.

Parkway v. New Jersey Neck & Back, 330 N.J. Super.

172 (1998)

Non-cooperation by claimants and medical

providers under an auto insurance policy, which

deprives an insurer of the ability to investigate the

reasonableness of the claims and necessity of the

treatment, will result in the insurer’s ability to void

a policy ab initio and deny coverage for failure to

comply with the terms of the policy (pg. 178-179).

Your strongest weapon is to secure testimony from

the patients as to exactly what was and was not

performed.

Need a mix of claimants to interview.

Most have lawyers. This will make it easier to

secure the examination.

If counsel wants to get paid they will encourage the

statement.

Litigation Options

The Insurance Fraud Prevention Act (NJ)

The Insurance Fraud Prevention Act can be found at

NJSA 17:33A-1 et seq.

The purpose of the act is to ―aggressively confront

the problem…by facilitating the

detection…eliminating the occurrence… [and]


22nd


NOTES requiring the restitution of fraudulently obtained

insurance benefits.‖

This is a carrier’s best offense and defense.

VIOLATIONS UNDER THE ACT

Summarized generally, it includes acts by

anyone making a claim who:

Takes action against an insurance policy

knowingly that a statement contains false

information that is material to the claim.

Knowingly fails to disclose information

pertinent to his or her entitlement to an

insurance benefit.

As an applicant for motor vehicle insurance,

gives a false statement concerning

residency.

Assists another person to participate in a

fraudulent scheme and

Knowingly benefits from proceeds of a

fraudulent scheme.

Can be used in a number of different ways.

Affirmatively bring suit under it (treble,

punitive and attorney fees and costs).

Effective as a counterclaim.

New Jersey Supreme Court recently lowered the

standard from ―clear and convincing‖ to

―preponderance of the evidence.‖

LIBERTY MUTUAL V. LAND,

186 N.J. 163, 892 A.2D 1240 (NEW JERSEY SUPREME

COURT, 2006)

Landmark decision decided 3/14/06 by the

Supreme Court of New Jersey.

Facts: A tree falls on the insured’s cabin.

Insureds contact their nephew, a public adjuster,

who files a claim for 70k.

Investigation reveals that the insured’s neighbor

sees the insured and public adjuster creating


22nd


NOTES more damage to the home than originally caused

by the tree.

Prior claim several months earlier concerning

prior tree fall evidences similar damages and

claim valued at 10k.

Jury awards 82k to Liberty Mutual. Insured

appeals.

Appellate Court reverses but upholds ―clear and

convincing‖ standard as carrier’s burden of

proof under the Insurance Fraud Prevention Act.

Certification was granted by the Supreme Court

on the sole issue of the ―appropriate standard of

proof.‖

The Supreme Court held the appropriate

standard is ―preponderance of evidence‖ and not

―clear and convincing‖ for purposes of litigating

under the IFPA.

Thus the Court held that the insurer must prove

―that the desired inference is more probable than

not.‖

Legislative intent in enacting IFPA was to

―aggressively‖ combat fraud.

Fraudulent behavior must encompass a ―broad

range‖ of conduct.

Court says that this is not a common law fraud

action, but a statutory remedy with lowering

burdens to protect the welfare of the general

public.

Finally, the preponderance standard is better

antiquated with civil actions and civil remedies.

POINT: This ultimately empowers carriers to be

proactive and adds viability into SIU

investigations as we are finally on an equal plain

(i.e., bad faith litigation).


22nd


NOTES Order to Show Cause – Rule 4:67-2.

Beneficial when seeking a quick judicial resolution

of a particular legal issue

Compelling compliance with policy

Ultimately gets you before a judge and brings about

a quicker resolution

Property: Arson Investigations and Insurance Claims

Red Flags for Law Enforcement and Carriers

Red flags at the scene and during the initial

investigation:

The insured is deeply in debt or in bankruptcy

The insured is unusually calm

The insured is willing to accept a small settlement

rather than document all claim losses

The insured’s demeanor changes radically during

the claims process

Additional red flags:

No one at home at the time of loss, including the

family pet

Neighbors report movement of items out of the

home/building prior to loss being reported

Property is part of divorce settlement, argument, or

disagreement

Property in disrepair, condemned, vacant, or to be

demolished

Property, normally close to premises, is moved just

prior to loss

Information Exchange and Immunity

Insurance Fraud Reporting Immunity Statutes

Does not necessarily make your job easier

NJ – Easy

PA – Difficult and confusing

Nothing is privileged


22nd


NOTES In NJ, wide protection is afforded

NJSA17:36-16. BELIEF BY INSURER FIRE LOSS DUE

TO OTHER THAN ACCIDENTAL CAUSE; NOTICE

AND PROVISION OF MATERIAL TO COUNTY

PROSECUTOR; DISPOSITION

The carrier must notify law enforcement and the

county prosecutor shall furnish the information

requested to the authorized agency responsible

for the investigation of the fire.

When an insurer has reason to believe that a fire

loss in which it has an interest may be of other

than accidental cause, the insurer shall, for the

purpose of notification and for having such fire

loss investigated, notify the county prosecutor

of the county wherein the fire occurred and

provide the county prosecutor with any or all

material developed from the company's inquiry

into the fire loss.

NJSA 17:36-17 IMMUNITY FROM LIABILITY

OF INSURER

An insurer, or a person acting on its behalf, shall

not be held liable in any civil proceeding for any

statement made or action required by this act

where actual malice on the part of the insurer or

its representative is not present.

NJSA17:36-18 DISCLOSURE OF ACQUIRED

INFORMATION BY AUTHORIZED AGENCY

Any authorized agency which has obtained

information from any insurer pursuant to this act

may disclose such information to any authorized

agency of this or another state, or of the United

States to the extent that such disclosure or use is

relevant to a loss by fire of real or personal


22nd


NOTES property which is under investigation by the

agency.

The information obtained may otherwise be

disclosed only for use in a civil or criminal

proceeding as ordered by the court.

NJSA 17:36-19 RIGHT OF INSURER TO RECEIVE

INFORMATION FROM AUTHORIZED AGENCY

WITH RESPECT TO CIVIL ACTION

Any insurance company providing information

to an authorized agency or agencies pursuant to

this act shall, with respect to a civil action, have

the right to request relevant information and

receive, within a reasonable time, not to exceed

30 days, the information requested, provided

that the information is not otherwise privileged

by law.

NJSA 17:36-20 TESTIMONY IN LITIGATION BY

AUTHORIZED AGENCY OR ITS PERSONNEL

Any authorized agency or its personnel may be

required to testify in any litigation in which the

insurer at interest is named as a party.

NJSA 17:36-21 VIOLATIONS; PENALTY;

COLLECTION

A person who knowingly:

Refuses to release information,

Fails to notify the county prosecutor of a fire

loss of which there is reason to believe that

it was caused by other than accidental

means, or

Fails to hold information in confidence, as

required by this act,

is liable to a penalty of not more than

$250.00, which may be collected or

enforced in a summary manner under "the


22nd


NOTES penalty enforcement law" (N.J.S. 2A:58-1 et

seq.). The proceedings may be brought by

authorized agency which has not received

information or has not been notified

regarding a fire loss, or an insurer or person

which has been injured by a failure to keep

information confidential, or the State. If a

money judgment is rendered against the

defendant, it shall be paid to the plaintiff. A

reasonable and good faith effort to comply

with the provisions of this act shall be a

defense to an alleged violation of this act.

What to Turn Over

Statements

Transcripts

Proofs of loss

Inventories

C&O reports

Applications

Underwriting information

Must provide all information gathered, both positive

to your case and negative

What Not to Turn Over

Activity logs

Evaluation reports

Correspondence to counsel

ASSUME EVERYTHING TURNED OVER WILL

GET INTO INSURED’S HANDS

Insurance Considerations and Coverage

Insurance Considerations

Common triggers.

Contents list includes serial numbers that owners do

not typically record.


22nd


NOTES Value of items is not consistent with claimant’s

income.

Claimant refuses replacement items.

Handwriting or typeface is the same on receipts

from different stores.

Receipts are in whole dollars. Receipts are generic

with no store logo.

Public adjuster considerations.

Insurance Investigation and SIU

Statements of insureds

Witness and neighbor interviews

C&O reports

Contact with law enforcement

Documentation recovery

Fire and police reporting

EUO

Documentation, proof, and policy compliance

SIU Involvement

Material misrepresentation – An insurance policy is

void for misrepresentation ―if the insurer establishes

the representation was false, that the insured knew

that the misrepresentation was false when made or

made it in bad faith, and the representation was

material to the risk being insured; [and that the]

insured made the misrepresentations with a

deliberate intent to deceive.‖

The Insurance Dilemma is Rooted In

Bad Faith

Punitive damages

Single digit multipliers

Attorney’s fees factored into multiplier

Treble damages

Elevates to home office


22nd


NOTES A jury cannot be counted on

Keep Opinions to Yourself

In log

To neighbors

To origin and cause experts

To everyone

Bad faith v. libel/slander

Carrier Posturing: Arson Defense

The insurer must gather proof that the insured either

set or arranged the fire and is, therefore barred from

collecting insurance proceeds.

An insurance company that asserts an arson defense

must provide, by fair preponderance of credible

evidence, that (1) there was an incendiary fire; and

(2) evidence linking the insured to the fire.

Good Faith Investigation

Fully document your file

Follow up on all leads

Goal is to rule out insured

Only include facts

Draft all entries assuming jury will see

No gaps in log

Reasoned analysis based on facts why an action

taken

Intentional Act

More difficult

Must prove intentionally damage property

Difficulty in proof led to arson defense

Motive

Not necessary (unless relying on arson defense), but

important


22nd


NOTES Divorce

Revenge

Money

Obtain financial documents

Credit reports

Bank records

Business records

Insurer Required Reporting

To law enforcement

To insured

Public adjuster

Before Denial Make Sure:

Everyone interviewed

All alibis checked

Motive documented

Can explain all actions or lack thereof

Denial letter clearly cites reasons for denial and

references appropriate policy language

Joint Efforts with Law Enforcement

Communication with Law Enforcement

Job necessitates communication

Must never give impression of collusion or

railroading insured

If suspicion of fraud and you do not communicate,

you are not doing your job

Goals

Law enforcement goals

Obtain conviction

Manage caseload

Insurance company goals

Pay covered losses

Rule out insured


22nd


NOTES Who is Law Enforcement

Investigating officer/detective

District attorney

Attorney general

ATF

State police

State Fire Marshall

County Fire Marshall

Local Fire Marshall

Different Goals, Different Standards

Civil: Preponderance of the evidence

New Jersey Insurance Fraud Prevention Act

Criminal: Beyond a reasonable doubt

Done correctly cooperative investigations can be

mutually beneficial

Done incorrectly—no conviction

Bad faith

Property – Auto

Investigating the Claim

Statistics

In 2009, 1,627,346 motor vehicles stolen

Recovery rates around 56%

In 2006, 1,235,226 motor vehicles stolen

Recovery rates around 62%

POINT: The economic downturn is evident

Starting Point

The goal should be to eliminate the insured as a

suspect, rather than implicate.

Why? Because the threat of bad faith is real.

Be impartial.

Keep an open mind.

Documentation and policy compliance is key.


22nd


NOTES Red Flags and Scenarios

Misrepresentation during the investigation

(recorded statement vs. EUO)

Misrepresentation in the application

Straw purchase

DUI

Financial difficulty

Mechanical issues

High mileage on leased vehicle

General Motive

Finances

Greed

Drugs

Divorce

Mechanical problems

Easy cash

Avoid prosecution

Key Accountability

Number of keys

Copies of keys

Lost keys

Keys in vehicle

Transponder

Access to keys

Lost or ―dropped‖ keys

Valid Reasons for Denial Include:

1. Intentional act

2. Lack of cooperation

3. Material misrepresentation

4. Failure to adhere to policy terms

5. Rate evasion


22nd


NOTES Information Gathering

Recorded Statements

You’re right to speak with the insured, so do so

Listen

Follow up

Open-ended questions—do not answer for them

Upon the first call, set the tone

Get DETAILED information

Document critical information through a

comprehensive statement

Other Questions

Cell phone records

GPS

Anti-theft systems

What was left in vehicle

What was in the car

The trunk

The glove compartment

The center console

Parts missing? (Get pictures—aftermarket v. OEM)

What’s not missing?

Things to Avoid in an Investigation

Delay

Indecision

Emotion

Partiality

Prejudgment

Disparagement

These are the things that plaintiffs look for

Tips

Let the claim file be a record of your good faith

The claim file should be your evidence that you

handled the claim appropriately


22nd


NOTES Always assume a jury will read what you have

written

Seek advice of counsel when appropriate

Main Sources of Information

The insured

The vehicle

Dealership or prior owner

Tax returns, credit reports

Cell phone records

Law enforcement

ISO

Documents that either confirm or incriminate the

testimony of the insured

Do You Need More Information?

Contact the insured

OTSC

Summary proceedings

EUO

Request proofs (cooperation clause)

Use the policy

Rule 4:11-1 (cell phone records, etc.)

Rule 4:11-1 Motion for Pre-Litigation Discovery

Rule 4:11-1 Motions are particularly helpful when in

need of:

A particular document that may not exist in the

future;

medical records;

police report;

State held applications or documentation;

pre-litigation testimony of witnesses

BENEFITS TO 4:11-1…

Courts generally grant this liberally;


22nd


NOTES Generally brings about a result within 30 to 45

days

At the end of the hearing, you are provided with

a formal Order

Avoiding Bad Faith

Bad faith is generally defined as ―an insurer’s breach of its

implied fiduciary duty, resulting from its wrongful failure

to fulfill its good faith obligation to the insured, resulting in

an unjustified financial risk to the insured.‖

Managing Your File

(1) PRE-LITIGATION TACTICS

Paper your file

Request documents or proofs

Stay in contact with the insured

Request an EUO

File first

Provide the policy

Secure a recorded statement

E-MAIL – A WOLF IN SHEEP’S CLOTHING

Demands immediate responses

Has all of the characteristics of a written letter

Avoid the tendency to type and send

Be sure to proofread for typos and content

before sending

Metadata and electronic discovery

Do You Write Like This?

HEADACHE?

Attorney Farris called. He wanted the PIP and

future med in a lump.

Told him the only lump I was going to give him

would be the one on his head.


22nd


NOTES PARLEZ VOUS ENGLAIS?

Attempted to contact the insured. I do not speak

Spanish. I will close the file until the insured can

get a translator for me to communicate with.

PARLEZ VOUS ENGLAIS? (PART II)

The insured is stupid and does not speak English

very well. I mailed him a denial letter in hopes that

he can read better than he speaks.

BECAUSE I SAID SO

I denied coverage for the extensive damage to the

floor as the cause of loss is unknown. The insured

requested an expert identify the source of the water.

I told him that I am the expert and the damage is not

covered.

BECAUSE I SAID SO (PART II)

My inspection of the roof indicated extensive

damage. I do not know what caused the damage, so

I won’t cover this loss.

LIAR, LIAR, PANTS ON FIRE

After reviewing the insured’s inventory form, it is

obvious she is lying. No one living in a house like

hers could afford contents she is claiming. The

insured says she inherited most of her belongings. I

don’t believe this and am going to deny the claim.

HE’S FAKING, I JUST KNOW IT!

There is no smoking gun in the SSA files - sigh -

the VA records are our last hope.

COMING TO GETCHA!

We were able to get the arbitration postponed. It

looks like we have more time to nail this guy.


22nd


NOTES Coming to a Conclusion

In most cases, it is the difference between what the

insured tells you and/or provides

What the vehicle tells you that makes the case

Catastrophe Fraud

Types:

Hurricane

Flood

Fire

Earthquake

Mudslides/landslides

Explosions

Civil disorders/riots

Tornado/wind/hail

Terrorist attack

What is a Cat Loss?

ISO’s Property Claim Service (PCS) now defines

catastrophes as events that cause $25 million or

more in direct insured losses to property and that

affect a significant number of policyholders and

insurers.

For an individual state to be named in a catastrophe

declaration, there must be $5 million or more in

direct insured losses.

Different carriers have different standards.

Catastrophe Losses

These losses cause emotional and financial hardship

to our policyholders.

Most of our policyholders are honest people who

suffered a loss.

Most claims submitted are legitimate and should be

settled.


22nd


NOTES Those claims with indicators of suspicion are

referred to SIU.

The Environment

After the Disaster

Massive volume of claims

Extreme hardships

Quick settlements

Media coverage

Public adjusters and contractors

Working Conditions

Lack of telecommunications

No office or temporary office space

Neighborhoods destroyed

No utilities

No accommodations in the affected areas

Opportunity

Some policyholders see the situation as the

insurance industry’s open checkbook

Unscrupulous predators may swoop in and prey

upon the area in the form of professional claimants,

would-be contractors, debris removal services, and

illegitimate public adjusters

Cat Fraud Indicator and Scams

Medical claims show up later for friends visiting

during the disaster

Renters making claims as owners

Owners claim renters’ contents

Business property claimed under HO policy

Back to back disasters where un-repaired damage

from the first disaster is claimed again


22nd


NOTES Cat Fraud Indicators and Scams

Fraudulent claims for theft due to non-disaster

coverage

Items claimed are not available for inspection

Claim items would not fit into available floor space

There are no carpet indentations from claimed items

Life insurance fraud

Role of NICB (Major Event Status)

Establish on-site NICB field office

Establish liaison with local law enforcement, state

fraud bureau, and Federal authorities (FEMA)

Coordinate loss data

Disseminate information via Forewarn system

Role of FEMA

Reduce loss of life and property

Protect the national infrastructure

Development of risk preparedness plans

Response and recovery

Functions of FEMA

DISASTER RESPONSE

Emergency site deployment

Disaster plan implementation

Individual assistance

Public assistance

Hazard mitigation

Public FEMA Assistance

Debris removal

Emergency protective measures (PD, FD)

Infrastructure repair and replacement (roads, water

systems, utilities)

Administration of National Flood Insurance

Program


22nd


NOTES Emergency food and shelter

Individual FEMA Assistance

Funds for emergency home repair

Disaster unemployment

Small business loans

Mortgage and rental assistance

(Grants of up to $13,900)

FEMA Claims Workflow

Individual applies for assistance

FEMA inspector visits site of applicant

Inspector makes claim payment recommendation

FEMA acts upon inspector’s recommendations

Office of the Inspector General

Mission: To promote economy and effectiveness and to

prevent and detect fraud within FEMA and its programs.

Serves as the investigative arm of FEMA

Federal police powers

OIG Caseload

False claims involving Federal Disaster Assistance

Grants

Procurement fraud

Theft

Bribery

Embezzlement

Internal agency investigations

Most Common Scams Faced By FEMA

Pre-existing damage

Applicant didn’t live in the disaster area

Submission of multiple claims

Damage caused by claimant

Flood insurance limitations


22nd


NOTES FEMA OIG Offices

Headquarters in Washington D.C.

Eastern region: Atlanta, Georgia

Western region: Oakland, California

Contractor and Provider Indicators

Do not maintain local office or have a local phone

number

Are not able to provide references

Want cash or payment up front

Offer below market prices that are ―too good to be true‖

Estimate is very general—lump sum

Are not bonded or licensed in state

The FBI Says…

Home repair crooks swoop in after hurricanes (not to

mention other natural disasters) and prey on

homeowners desperate to get their lives back to normal.

These criminals know that many legitimate companies

are booked for months after major disasters and that

some frustrated homeowners won’t do their homework

before signing on the dotted line.

What’s the M.O. of these con artists? Just two

examples:

Let’s say your roof is damaged by a hurricane. A

―contractor‖ knocks on your door and offers to fix it

for a drastically discounted price. He says he’s got

some materials left over from other work he did in

the neighborhood. He’ll give you the low-ball

price—if you sign the papers today.

People claiming to be local utility company workers

or building or health inspectors appear at your door

unannounced and point out ―problems‖ such as

shoddy roofing, a cracked driveway, or dangerous

electrical wiring. They say you’re in violation of

some regulation and give you the name of someone


22nd


NOTES who can fix the problem fast. Then that person

overcharges, performs poor work, starts the job and

then says it’ll cost thousands more, or skips town

with your money before finishing.

The Unscrupulous Public Adjuster

1. ―Don't worry, you have insurance…‖

2. ―The loss is only the beginning…‖

3. ―The reason people are in this business is to

make money…‖

So You Want to be a Public Adjuster?

Work from home

Be your own boss

Eat what you kill (high incentive)

No formal educational requirement (no degree

required)

Solicitors v. Public Adjusters

Did not take/pass the Public Adjuster examination

Passed only a ―solicitor examination‖

Usually less complex examination and less stringent

requirements

Limitations

Salesman for Public Adjuster

Not permitted to adjust claims

Very cutthroat

General Solicitation Tactics

Referral fees to contractors, former customers,

whoever

Flyers promising cash and large settlements

Advertising

Door to door – They will find the damage for you


22nd


NOTES Scanners (fire truck chasing)

Twenty-four hour rule

The hard sell – Aggressively marketed to insureds

Limitations

First party property claims only

Cannot assist with auto claims or third-party claims

and cannot practice or advise on areas of law

Types of Fraud

1. Date of loss

a. Creation of false date of loss

b. Backdating claims

c. Loss occurring before policy inception

d. Combining claims

2. Causes of loss

a. Pipe break vs. subsurface water/flood

b. Wear and tear

c. Deterioration

d. Dry rot (hidden damage)

e. Storm damage

f. Mold

3. Scope of loss

a. Pre-existing damage

b. No damage

c. Matching

d. Continuous damage

4. Pricing

a. Fraud or ―puffing‖?

b. Estimate is preliminary and subject to

Errors – SF instead of SY

c. Age and condition

5. Remediation

i. Tear-out

ii. Destructive tear-out

iii. Face nailed siding


22nd


NOTES iv. Excessive patching

v. Excessive equipment

vi. Questionable reports

6. Forgery

a. Improperly endorsing checks

b. Improperly endorsing contracts

c. Changing contingency fees

7. Personal property (contents)

a. Age

b. Ownership

c. Condition

d. Price

e. Reparability/cleaning

8. Intentional damage

i. Creation of water damage

ii. Shingles and siding

iii. Hail hits

iv. Collapse

v. Matching

Because It’s Insurance Fraud…

Potential Pitfalls

Intimidation/strong-arming

Letter writing

Bad faith set up

Delay

What Not To Do

React

Try to play same game

Low ball

Procrastinate

The Threat of Bad Faith

Magnified in disaster settings

Emotions run high


22nd


NOTES Recourses may be stretched thin

Use of independent adjusters

Vulnerable insureds

Who Will be Deciding Your Fate?

Disaster Claim Red Flags

1. Roofing/siding losses

a. Shingles blown off every slope

b. White patches on a black roof, but next

door…

2. Black patches on a white roof

a. Face nailed siding

b. Excessive remediation

3. Water losses

a. Water where there should not be water

b. Still wet two weeks later

c. Internal pipe break but muddy water

d. Sump pump

e. Surface water

4. Personal property

a. Receipts

i. Web sites creating receipts

ii. Lack of receipts

iii. Doctored receipts

b. Age/style popular with Brady Bunch

c. Quantity

d. Contents items not consistent with

income or lifestyle

5. Other red flags

a. Pushing for quick settlement

b. Insured never available

c. Late reporting

d. Use of property

e. Emergency service contractor referred

by Public Adjuster

f. Refusal to cooperate


22nd


NOTES 6. Adjuster tools

a. Recorded statements

b. Consistency – Handling claims the same

way

c. Skepticism

d. ISO

e. Prior claim files

f. Document everything in writing

Civil Litigation Strategies for Combating Fraudulent

Hail Claims

Current Trends

RED FLAGS

Pushing for quick settlement

Insured never available

Late reporting

Use of property

Emergency service contractor referred by Public

Adjuster

Refusal to cooperate

CONTRACTOR VS. PUBLIC ADJUSTER

Current referrals suggest a ―turf war‖ between

general contractors and Public Adjusters

Important to understand the legal difference

between the two, as each have separate legal

consequences

Civil Remedies

The New Jersey Insurance Fraud Prevention Act

The Insurance Fraud Prevention Act can be found at

NJSA 17:33A-1 et seq.

The purpose of the act is to ―aggressively confront

the problem…by facilitating the

detection…eliminating the occurrence…[and]


22nd


NOTES requiring the restitution of fraudulently obtained

insurance benefits…‖

This is a carrier’s best offense and defense.

VIOLATIONS UNDER THE ACT

Summarized generally, it includes acts by

anyone making a claim who:

Takes action against an insurance policy

knowingly that a statement contains false

information that is material to the claim.

Knowingly fails to disclose information

pertinent to his or her entitlement to an

insurance benefit.

For motor vehicle insurance, gives a false

statement concerning residency.

Assists another person to participate in a

fraudulent scheme and

Knowingly benefits from proceeds of a

fraudulent scheme.

Can be used in a number of different ways

Affirmatively bring suit under it (treble,

punitive and attorney fees and costs)

Effective as a counterclaim

New Jersey Supreme Court recently lowered the

standard from ―clear and convincing‖ to

―preponderance of the evidence‖

Plenary Hearings

Order to Show Cause - Rule 4:67-2.


of a particular legal issue. For example, compelling

compliance with policy

Ultimately gets you before a judge and brings about

a quicker resolution


22nd


NOTES Strategies

Preferred SIU Tactics

How you choose to litigate is just as important as

what you choose to litigate

Your mistake may skew the judiciary and cause a

negative impact for other carriers

Demand more from your counsel

Seek out new ways to solve problems

Be informed

Direct counsel accordingly

Declaratory Judgment vs. Order to Show Cause vs.

Rule 4:11-1

Simply stated, use the right tool for the job.

Declaratory Judgment NJSA 2A:16-50

The Uniform Declaratory Judgment Act has been

expressly declared to be remedial. It is to be

liberally construed and administered. Civil Service

Com. v. Senate of New Jersey, 165 N.J. Super. 144

(App. Div.).

However, it cannot be used to decide or declare

rights or status of parties upon a state of facts which

are future, contingent and uncertain.

The filing Plaintiff must have an interest in the

subject matter in order to maintain the action.

The act is a remedial device designed to settle and

afford relief from uncertainty and insecurity with

respect to rights, status and other legal relations.

Worrick v. Katz 178 N.J. Super. 269 (App. Div.).

It is designed to ―forestall the emergence of costly

and cumbersome proceedings.‖ Moss Estate, Inc v.

Metal & Thermit Corp., 73 N.J. Super. 56.

Two common configurations exist (DJ for discovery

purposes and DJ for coverage adjudication).


22nd


NOTES A declaratory judgment action should be used to

adjudicate coverage where a dispute of law may

occur, i.e., homeowner coverage, policy

reformation, or other contractually driven

controversies.

Improper usage includes protracted discovery

initiatives or other fact finding investigations.

DISCOVERY ACTIONS VIA DECLARATORY

JUDGMENT

Will go on for years

Will cost money

Will skew the original intended purpose

May subject you to bad faith

Must be litigated with great specificity

Should be used only as a last resort after

exhausting all other pre-litigation tactics and

investigations

Note: Courts strongly disfavor this form

DECLARATORY ACTIONS FOR COVERAGE

ADJUDICATION

A true coverage issue should be brought to court

via declaratory action.

Creates the appearance of good faith.

Format should not be abused.

These are true disputes involving coverage

issues where a carrier is seeking adjudication on

the merits, not discovery!

Note: Other alternatives exist.

Order to Show Cause – Pursuant to Rule 4:67-2.


of a particular legal issue.

Perfect in a pre-litigation context.


22nd


NOTES Allows the controversy to proceed to the bench on

an expedited path.

Ultimately gets you before a judge and resolves the

issue inexpensively.

APPLICATIONS AND USAGE

Compelling compliance with policy

Failure to attend or produce (EUO)

Disposing of a coverage issue

Adjudicating issues of law

Facility inspections

Adjudication of an insured’s failure to cooperate

Enforce settlement agreements, contract

provisions, appraisal, arbitration, and other legal

processes

BENEFITS

Cost effective

Fast

Court order

Bench determination

Often times misused by adversaries

Good faith implications

Rule 4:11-1 Motion for Pre-Litigation Discovery

Situations ultimately arise whereby subpoena power is

needed to secure documents in advance of litigation.

Rule 4:11-1 allows pre litigation discovery of items

via motion.

Elements:

1. that the petitioner expects to be a party to an

action;

2. the subject matter of such an action and the

petitioners interest;

3. the facts the petitioner relies upon;


22nd


NOTES 4. the names or description of persons the

petitioner expect will be opposing the

application;

5. the names and addresses of the persons or things

to be examined;

6. names and addresses of persons having control

or custody of the documents in need of

inspection.

WHEN TO USE RULE 4:11-1

Rule 4:11-1 Motions are particularly helpful when

in need of:

A particular document that may not exist in the

future;

medical records;

police report;

State held applications or documentation;

pre-litigation testimony of witnesses

BENEFITS TO 4:11-1

Courts generally grant this liberally;

Generally brings about a result within 30 to 45

days

At the end of the hearing, you are provided with

a formal Order

The Importance of the EUO

DO NOT UNDERESTIMATE THE POWER OF AN

EUO.

Speak to your insured, it is your right to do so.

Great tool for fact discovery in a

pre-litigation arena.

Utilized too infrequently across the board.

Every policy has standard language subjecting the

insured to an EUO.


22nd


NOTES This policy language as well as the right to an EUO has

been upheld time and again by New Jersey Courts. See,

N.J. Automobile Insurance v. Jallah, 256 N.J. Super.

134 (App. Div. 1992).

Failure to comply with an EUO request CAN result in

an order against the insured via a subsequent filing.

For example…

Avoiding Bad Faith

Bad faith is generally defined as ―an insurer’s breach of its

implied fiduciary duty, resulting from its wrongful failure

to fulfill its good faith obligation to the insured, resulting in

an unjustified financial risk to the insured.‖

Pickett v. Lloyds, 621 A.2d 445 (NJ 1992)

(1) bad faith is established by showing that no

debatable reason existed for denial of benefits;

AND

(2) bad faith is established by showing that no valid

reason existed to delay processing the claim and the

insurance company knew or recklessly disregarded

the fact that no valid reason supported the delay.

Id. at 481.

Who will be deciding your fate?

Managing Your File

(1) PRE-LITIGATION TACTICS

Paper your file

Request documents or proofs

Stay in contact with the insured

Request an EUO

File an Order to Show Cause

Provide the policy

Secure a recorded statement


22nd


NOTES (2) LITIGATION TACTICS – USE VENUE WHERE

APPLICABLE

Oftentimes Federal District Court is a better

venue to litigate a true bad faith issue

In order to remove you must have

complete diversity and an amount in

controversy over $75,000.00

Better case management but

slower pace

(3) USE COUNTERCLAIMS

With Liberty v. Land, it is easier to file an

affirmative suit or counterclaim under the

Insurance Fraud Prevention Act

Preponderance of the evidence NOT clear and

convincing

Creates a moment of pause as both parties are

finally on equal ground

Electronic Discovery

What Is Electronic Discovery?

Electronic Discovery is the discovery of electronic

documents

Examples: E-mail, Excel spreadsheets, word

processing documents, presentations, etc.

There are three dimensions to an electronic

document:

Front of document (the image)

The ―face‖ of the document

Middle of document (the text)

What the document says

Document content fully searchable

Back of document (meta data)

Meta data – Data about the document, i.e.,

date created or modified, bcc, original

author, links to attachments


22nd


NOTES Why Is E-Discovery Important?

Growing recognition that e-documents are different

from paper documents

Volume of documents that must be reviewed

has grown tremendously, causing new

challenges in discovery management.

E-docs are richer – Meta data divulges much

more information about the document. Certain

file types do not contain all information on

paper (i.e., Excel).

More efficient review: Searchability features,

duplicate document management.

Deleted data may be discoverable.

Why Are E-Documents Treated Differently?

Volume

Volume of electronic data is increasing

92% of new information is stored electronically

By the end of 2011, 35 billion e-mail messages

(non-spam) will be sent each day

E-mail correspondence

Often contains comments previously reserved

for oral communications and less frequently

found in hard copy documents

Deletion may not actually occur

Backup tapes

Servers

Forensic recovery

What is Discoverable?

Rule 26(a): Initial Disclosures

Must discuss issues relating to the disclosure and

discovery of documents and ―electronically stored

information.‖

Rule 33, 34, and Rule 45:

Interrogatories and request for documents


22nd


NOTES Documents and ―electronically stored information‖

are discoverable

Discoverability of Electronic Information –

“Not Reasonably Accessible”

Rule 26(b)(2)(B) and Rule 45(d)(1)(C):

Responding party need not provide discovery of

electronic information that is not reasonably

accessible due to undue burden or cost.

However, upon the requesting party’s motion, the

responding party must show that the information is

not reasonably accessible.

Even if that showing is made, the court may still

order its production if the requesting party

demonstrates good cause.

The court may specify conditions for the discovery

(cost-shifting).

Form of Production

Rule 34(b) and Rule 45

If document request or subpoena does specify the

form for producing ―electronically stored

information‖

Responding party may object or agree with request

If object, responding party must state the form or

forms it intends to use

Expert Consultation

OBVIOUS BUT OFTENTIMES OVERLOOKED

It provides you with a ―good faith‖ basis

moving forward.

You will ultimately need to retain an expert for

the purposes of an affirmative recovery action.

You will learn something (good or bad).

Validation of independent findings.


22nd


NOTES Qualification. Is this someone you would want

to put on the stand to testify, does he appear

credible and likeable?

Meet your expert one on one and in person,

learn about his practice—information outside of

the CV is more critical.

Applications and Usage

For example:

Arson or fire, get a C/O

Contents dispute, hire a vendor

Medical provider fraud, retain a medical expert

qualified in the regulations or seek a coding

expert

Coverage issue, seek coverage counsel

Bad faith suit, seek a bad faith expert

Summary

Use the right tool for the right job.

Improper use can cause a backlash from the bench.

Know your case.

Know your limits.

Use pre-litigation tactics.

Do not litigate in a vacuum.

Do not give your opponent time.

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