A Civil Alternative to Fraud Deterrence

When faced with organized fraud rings, insurance companies have two choices – turn the matter over to the police and courts for criminal prosecution or pursue civil recovery of losses. While some groups like the Insurance Bureau of Canada (IBC) are lobbying for stricter criminal sentencing on auto theft and educating the judicial system about the pernicious effects of fraud, the alternative of civil litigation is increasingly standing out as a fruitful method of recovery and deterrence for insurance companies.

Civil recovery actions are not new, but recent judgments in some provinces across Canada have buoyed insurers’ chances of success and underlined the importance of establishing a clear process for pursuing these kinds of lawsuits. In particular, the Insurance Corporation of British Columbia (ICBC) is seeing the rewards from a civil recovery protocol established about a decade ago, according to Frank Potts, a founding partner with the law firm Lindsay Kenney, who handles most of the insurer’s civil fraud litigation.

“ICBC took a more sophisticated approach to dealing with fraud in the mid-’90s,” Potts says. “It got a lot more organized and focused on what we call ‘cluster’ frauds.”

While the insurer already had a special investigations unit (SIU), typically staffed with ex-police officers, it merged the SIU with civil side adjusters, who had more knowledge of and expertise in civil recovery. ICBC also established a three-step protocol that ensured the corporation would minimize the chance of bad faith claims or “acting unreasonably” in a civil recovery action. The protocol involved the first step of proper investigation and documentation from front-line investigators for cluster frauds. The second step involved in the solicitation of advice from independent counsel on the merits of a case. The final step required the sign-off of a “fraud assessment” committee, composed of ICBC senior claims staff and management.

“As a result of this process, ICBC has collected a lot more in civil restitution in recent years than they thought they would,” Potts says. “It is a very small percentage of people who participate in these fraud clusters. Even if they can’t pay, they are sent a strong message of deterrence and they often take off to other provinces.”

There are several recent examples in British Columbia of large punitive damages awarded to the ICBC against fraudulent individuals and service suppliers. In July, a B.C. Supreme Court jury awarded ICBC more than $2.3 million in a civil lawsuit against several defendants operating a fraudulent driver-licensing scheme. Last May, a B.C. Supreme Court jury also awarded ICBC almost $2.93 million in damages as a result of 12 fraudulent insurance claims that occurred in the Lower Mainland in the late 90s. That judgment included a punitive damages award of just over $2.5 million. In addition, in December 2003, a B.C. Supreme Court jury awarded ICBC $4.5 million in a civil lawsuit against two brothers who operated a “chop shop” in Mission, B.C.

Other provinces and private sector insurers are taking notice of these concrete results. But the widespread adoption of civil recovery has not been as quick as some would like. The lack of activity on the civil litigation front is a challenge that many insurers openly acknowledge.

“I think insurance companies got off to a slow start on civil actions against insurance fraud,” Wendy Hillier, vice president, claims, Aviva Canada, says. “However, I think we are moving in the right direction. Insurance companies have to step up to the plate and take responsibility to pursue fraudulent claims. It is our obligation to pursue anything that breaks the contractual responsibility of good faith.”

TAKING FEAR OUT OF FRAUD

One of the main reasons for insurers’ traditional reluctance to pursue civil recovery is simple – costs. Companies have been apprehensive about the legal costs surrounding civil actions and many have held back from aggressively trying to recover funds. Potts also notes that insurance companies, in general, have been concerned about taking a “hard-line” stance on insurance fraud for fear of alienating customers. In addition, in many cases, insurers have been concerned about going before a jury, he adds.

Insurance criminals and their legal representatives have noted this lack of effort and many see no significant deterrent in operating organized fraud schemes, according to the IBC.

In fact, the IBC has recently developed a streamlined process to coordinate civil actions and help individual member companies recover funds in a cooperative, cost effective manner. Rick Dubin, IBC’s vice president of investigative services, says this new approach should send a clearer signal to fraudsters.

“This is a change in mindset in terms of how insurers fight fraud,” Dubin says. “In the past, insurers have been reluctant to proceed on civil recovery because of the legal costs incurred. What we are suggesting is to hire one counsel to represent multiple insurers as plaintiffs and take this consolidated action against the individuals or service suppliers that committed the fraud.”

With this new process now in place in Ontario, IBC’s investigative services unit will conduct background investigation and gather documentation on organized fraud schemes.

A fraud assessment committee, similar to the model of ICBC, will then examine the merits of a case. External counsel with expertise in civil litigation and insurance will also give constructive advice.

If there is agreement that a particular case has a high likelihood of success in civil litigation, the claims vice presidents of affected insurers will be contacted and requested to attend a presentation by both external counsel and the lead IBC investigator. Individual insurers can then decide if they want to participate in a consolidated action led by expert counsel selected by IBC.

Dubin emphasizes that it will be up to individual insurers to decide if they want to move forward on a consolidated action, with costs and recovery shared on a pro-rated basis. In addition to identifying legal firms that would conduct the litigation, IBC’s main role will be in handling the investigation and the coordination of a chronological process for civil recovery. Where insurers decide to proceed with a civil action, appropriate steps must be taken to freeze key identified assets of alleged fraud participants prior to serving a Statement of Claim so that funds are not transferred or hidden.

“We want to get the word out on all successful civil recovery actions,” Dubin says. “If a fraudulent service provider on either the rehabilitation or auto physical damage side has assets, we will be going after them. In addition, if they settle the lawsuit, there will be no publication bans. We want these actions to send a powerful message of deterrence.”

The deterrence effect is something that ICBC prizes just as much, if not more, than the restitution of funds, according to Potts. “The actual recovery is gravy; what they are really tracking is the drop in the number of fraudulent claims,” he says. “Someone who commits fraud is not worried about a conditional sentence; he or she is worried about losing a car or a home.”

CASHING IN ON FRAUD PREVENTION

Last year, ICBC’s anti-fraud program netted more than $70 million in savings for the corporation and its policyholders from denied fraudulent claims, money recovered and savings generated through fraud prevention. Civil lawsuits represent a significant contribution to this figure.

“It is not acceptable to ICBC to sit back and simply pass the cost of fraud onto our customers,” Mark Withenshaw, ICBC’s vice president of loss management, says. “We invest in fraud prevention because less fraud helps keep rates low and stable for our customers.”

“There is no reason that we should not get the same results here (in Ontario),” Dubin says, adding that Ontario will be used as a test to develop best practices in civil recovery before the process expands to other provinces. “The problem is that there has not been a very aggressive or coordinated approach by the industry, and that is what we need to happen.”

Hillier agrees that “there have been challenges when it comes to multiple companies and organized fraud rings. I think there is a need for coordination and certainly the IBC is playing a strong role in properly investigating ring activity and providing the background for any potential actions.”

Dubin says the fruits of these investigations need to come out during a civil trial, especially before a jury. “In particular, we need to show a jury the outrageous behaviour of a fraudulent party and its societal and economic impacts,” he notes. “Juries have shown a willingness to award punitive damages in these cases.”

“Punitive damages should go both ways,” Randy Bundus, vice president and general counsel, IBC, adds. “Both sides in the insurance relationship have a duty of utmost good faith.”

LANDING THE RIGHT LAWYER

To achieve success in civil litigation and recovery actions, Potts says there are important issues to consider. One is the selection of appropriate counsel. “This is very different from doing insurance defence work – it really requires a different approach and knowledge of the field,” he says. “You need a plaintiff’s counsel that understands insurance work. I do plaintiff work for insurance companies. That is a big difference from defence lawyers, who tend to be more cautious and conservative.”

Potts notes that groups like ICBC have turned on its head the traditional approach of insurance companies towards civil litigation. “We almost always take a jury on civil actions,” he observes. “We go in front of the jury and demonstrate what the individual or group of individuals has done and state that they may have received a six-month conditional sentence. We tell the jury if they agree with that, then go ahead, but increasingly juries are showing that they don’t think that is fine.”

Armed with knowledge of civil litigation, lawyers for insurance companies can use various techniques such as a ‘Mareva injunction’ to freeze assets before they disappear, or an ‘Anton Piller order’ to search and seize evidence of fraud. “We can do virtually everything the police can do, but on the civil side,” Potts says. “There is a lot of misunderstanding and ignorance of civil litigation. Many people, including some lawyers, seem to take their knowledge of civil law from U.S. television shows.”

IBC’s fraud assessment committee has already identified two solid cases to test out the new process of civil recovery for its member companies. Dubin says there are plans to move forward with litigation in Ontario this fall. There are hopes that these cases will translate into successful civil recovery actions or settlements. Potts notes that ICBC spent a great deal of time and effort to ensure its first civil recovery action set the stage for future lawsuits.

One of the enduring challenges facing private insurance companies affected by complex fraud schemes is the need for coordination among multiple insurers and one consolidated action. This is an important point, but one that Potts argues has been overplayed. For multiple insurance companies, the issue comes down more to logistics and selection of counsel. With the resources they have, I don’t really see why more insurance companies don’t take a more active stand on civil litigation,” he says. “The real question is — do they have the will to do it?”