The Insurance Frauds Prevention Act Protects and Cannot be Used to Punish Insurers

Gilbert Ellinger sued as a qui 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 trial court sustained defendants’ demurrers without leave to amend.

In The People 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 qui tam suits under the purpose for the enactment of the California Insurance Frauds Prevention Act.

BACKGROUND

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

Ellinger filed a workers’ compensation claim based on the injury. Zurich was the workers’ compensation insurance carrier for Ellinger’s employer, and ESIS was Zurich’s claims administrator. Magill worked as a senior claims examiner for ESIS and was the adjuster assigned to investigate Ellinger’s claim. ESIS denied Ellinger’s claim. Magill later testified that she denied the claim because of an April 2016 written statement from Ellinger’s supervisor in which the supervisor claimed that Ellinger had not reported the injury to him.

When the human resources manager was deposed she produced the time line memorandum, and nearly eight months after that disclosure, in July 2017, ESIS reversed its denial of the claim and stipulated that Ellinger was injured while working, as he had alleged.

Contrary to Magill’s testimony, her email messages showed that the human resources manager had emailed Magill the time line memorandum in March and April 2016, and Magill thanked the manager for sending it.

Ellinger alleged that Magill’s concealment of or failure to disclose the time line memorandum violated Penal Code section 550, subdivision (b)(1) to (3). On the basis of those alleged violations, Ellinger alleged that defendants were liable under section 1871.7. Against each defendant, Ellington sought a civil penalty and an assessment of no greater than three times the amount of his workers’ compensation claim.

Defendants filed demurrers. They argued that insurers and their agents, such as a claims administration company and a claims adjuster, could not be held liable in a qui tam action under section 1871.7. The trial court sustained defendants’ demurrers without leave to amend. It concluded that defendants could not be held liable under section 1871.7 for any failures of Magill in the claims handling or review process. The court concluded that insurance carriers are not subject to liability under the IFPA for claims handling practices.

DISCUSSION

When dealing with a demurrer the court must assume the truth of the properly pleaded factual allegations, facts that reasonably can be inferred from those expressly pleaded, and matters of which judicial notice has been taken. Ellinger argued that the trial court erred by concluding that insurers and their agents cannot be liable under the IFPA for claims handling practices. He contended that strong policy considerations support holding insurers liable under the IFPA and that he has properly alleged a cause of action under the IFPA. We are not persuaded.

Legal Background

The legislative findings and declarations concerning the IFPA begin as follows:

The business of insurance involves many transactions that have the potential for abuse and illegal activities. . . . This chapter is intended to permit the full utilization of the expertise of the commissioner and the department so that they may more effectively investigate and discover insurance frauds, halt fraudulent activities, and assist and receive assistance from federal, state, local, and administrative law enforcement agencies in the prosecution of persons who are parties in insurance frauds. (§ 1871, subd. (a).)

The findings and declarations go on to describe various types of insurance fraud, including automobile insurance fraud, workers’ compensation fraud, and health insurance fraud. Concerning workers’ compensation, the Legislature found:

Workers’ compensation fraud harms employers by contributing to the increasingly high cost of workers’ compensation insurance and self-insurance and harms employees by undermining the perceived legitimacy of all workers’ compensation claims. (§ 1871, subd. (d).)

The clear purpose of the legislation is to reduce fraud against insurers in order to benefit policyholders. The Legislature enacted the IFPA to combat insurance fraud committed against insurers by individuals, organizations, and companies. Notably, the IFPA’s legislative findings make no mention of a problem with insurance claims handling practices.

Section 1871.7 of the IFPA provides that any interested person may bring a qui tam action to recover penalties, damages, and other relief for certain deceptive acts directed at insurers not by insurers directed at the public. The penalties are assessed for each fraudulent claim presented to an insurance company by a defendant and not for each violation.

Penal Code section 550 criminalizes a broad range of deceptive acts in connection with making, supporting, or opposing claims for payment, including but not limited to insurance claims. Some, but not all, violations of Penal Code section 550 can serve as the basis for a section 1871.7 action, because section 1871.7 concerns only claims presented to insurance companies.

Liability under section 1871.7 does not extend to insurers and their agents based on claims handling practices. This conclusion is consistent with the IFPA’s purpose of preventing and punishing the making of fraudulent claims to insurance companies. The statute does not target the conduct of insurance companies themselves it targets frauds perpetrated against insurance companies.

Ellinger argued that he properly pleaded violations of Penal Code section 550, subdivision (b)(1) to (3), based on Magill’s alleged conduct in handling his claim. The argument fails for two reasons. Ellinger’s contention that he has properly pleaded a violation of Penal Code section 550 is based on a mischaracterization of the record. Ellinger does not explain how Magill’s alleged lie at her deposition in September 2018 could have affected the handling of his claim, given that the denial of his claim had already been reversed in July 2017.

First: Ellinger has not sufficiently alleged a violation of Penal Code section 550 and thus has not properly alleged that defendants committed any kind of fraud.

Second: excluding insurers and their agents from liability under section 1871.7 does not “tacitly approve of insurance company fraud” or otherwise entail that insurers and their agents can commit fraud with impunity. It means only that insurers and their agents cannot be sued under the IFPA. That holding is not surprising, because the IFPA expressly targets only deceptive conduct directed at insurers, not improper conduct by insurers.

The judgment was affirmed.

There is no question that an insurance company can commit insurance fraud even if the facts pleaded by Ellinger were insufficient to establish a cause of action for fraud. If there was fraud by the insurance company, rather than just an incompetent claims decision, still no one can file a qui tam action against an insurer under section 1871.7. This action was creative but wrong. I support insurers using section 1871.7 against fraud perpetrators but condemn using 1871.7 to punish insurers because it uses a statute designed to help insurers and the state fight insurance fraud and not a weapon against insurers.

Barry Zalma, Esq., CFE, now limits his practice to service as an 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 an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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