Insurance Frauds Prevention Act Applies Broadly to Claims “Characterized in Any Way by Deceit”

In People ex rel. Allstate v. Suh (No. B280293; filed 6/17/19), a California appeals court upheld a jury’s award of over $6 million in civil penalties for insurance fraud under Insurance Code section 1871.7.

In Suh, Allstate and other insurers brought an action under Insurance Code section 1871.7, on behalf of the People of the State of California, against Suh and others for insurance fraud in violation of Penal Code section 550, which makes it unlawful to submit false or fraudulent claims to an insurance company. Allstate alleged that Suh set up sham law firms, then procured auto insurance policyholders of Allstate as clients of the sham law firms, submitted insurance claims on behalf of the insureds, and absconded with settlement proceeds. The jurors found in favor of Allstate and imposed over $6 million in civil penalties.

On appeal, Suh argued that the trial court had improperly denied her ex parte application for a stay of the civil action pending any criminal proceeding, which forced her to waive her Fifth Amendment privilege against self-incrimination in order to defend herself against the imposition of monetary penalties. She also argued that she did not violate Penal Code section 550, which makes it “unlawful . . . to aid, abet, solicit, or conspire with any person” to “[k]nowingly present or cause to be presented any false or fraudulent [insurance] claim.” The code section also prohibits knowingly assisting or conspiring to present any false or misleading information or concealing the occurrence of an event that affects any person’s initial or continued right or entitlement to any insurance benefits.

The appeals court disposed of the first argument stating that the trial court was within its discretion to deny the ex parte application, finding it procedurally defective and distinguishing several cases because, among other things, there was no evidence of an actual criminal proceeding against Suh.

With regard to Suh’s second argument, the appeals court found that she had committed insurance fraud in violation of Penal Code section 550. The court noted that the Insurance Frauds Prevention Act (Ins. Code, §§ 1871 et seq.), addresses the problem of insurance fraud by creating civil liability for violating the insurance fraud provisions of the Penal Code. Section 1871.7(b) provides: “Every person who violates any provision of … Section … 550 … of the Penal Code shall be subject, in addition to any other penalties that may be prescribed by law, to a civil penalty of not less than five thousand dollars ($5,000) nor more than ten thousand dollars ($10,000), plus an assessment of not more than three times the amount of each claim for compensation…. The penalty prescribed in this paragraph shall be assessed for each fraudulent claim presented to an insurance company by a defendant and not for each violation.”

Suh argued that the insurance claims were not fraudulent, but legitimate claims by legitimate policyholders, for legitimate injuries or damage. She argued that Allstate’s only claim was that she was not a lawyer and the law firms she set up were a sham, but the claims were otherwise genuine and therefore, not in violation of Penal Code section 550.

The court rejected the argument, saying that Suh “read[s] the insurance fraud statutes too narrowly. Unlawful conduct under section 550 does not require a misstatement of fact in the insurance claim. Section 550 requires only that a person knowingly (1) present a claim that is false or fraudulent in some respect, (2) present, prepare, or make a statement containing false or misleading information about a material fact, or (3) conceal an event that affects a person’s right or entitlement to insurance benefits.” The court said that an insurance claim is fraudulent under section 550 and section 1871.7 when it is “characterized in any way by deceit.” Further, “California law uses the words ‘fraud’ and ‘deceit’ interchangeably,” and a “claim is ‘fraudulent’ … if it is … perpetrated to gain some unfair or dishonest advantage.”

According to the court, “Suh and Chang perpetrated a deceitful insurance scheme designed to acquire insurance proceeds illegally for personal gain. Suh and Chang deceived Allstate into believing the attorneys whose names they were using actually and lawfully represented its insureds. (See Cal. Code Regs., tit. 10, § 2695.2(c) [only attorneys, family members, adjusters, or other persons authorized by law may represent insureds].) In their communications with Allstate, Suh and Chang misrepresented that attorneys represented the insureds. They concealed the fact they were masquerading as attorneys when they filed the insurance claims. And the misrepresentations were material: Allstate would not have released settlement proceeds to Suh or Chang or their sham law firms had Allstate known the truth.” Thus, “The conduct of Suh and Chang constituted insurance fraud under section 550 and section 1871.7.”

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July 10, 2019