How to Defeat Insurance Fraud

A Video Explaining the Efforts Needed to Deter or Defeat Insurance Fraud

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Insurance fraud is a crime in most states of the United States. The victims of the crime of insurance fraud are insurers – no one else. The crime is committed by every race, gender, national origin, religion, or sexual orientation.

The crime of insurance fraud takes from the insurance industry and, as a result, the insurance buying public, anywhere from $80 to $300 billion dollars every year. No one knows the real amount because most insurance fraud attempts succeed.

I have been involved in insurer’s attempts to defeat insurance fraud for almost 54 years. I have seen frauds succeed. I have had clients compel settlement of a fraudulent claim with voluminous evidence sufficient to prove the fraud beyond a preponderance of the evidence, to avoid the possibility of a bad faith. The only way, in my experience, to defeat insurance fraud is to take the profit out of the crime. Criminal prosecutions don’t take the profit out of the crime since there are few arrests, fewer convictions and most sentences, even after a conviction, are mild and often do not require full restitution.

As a result, many insurers refuse to rely upon police agencies. Even state Insurance Fraud Divisions or Insurance Fraud Bureaus, because of a lack of success of those agencies to reduce insurance fraud. Courageous insurers have decided to refuse to be victims of fraud. They refuse to pay. They take fraud cases to trial and appeal all adverse judgments. Some are beginning to take advantage of whistle blower provisions in state Insurance Fraud Prevention Acts (IFPA).

California’s Code of Regulations describe a thorough investigation at Section 2698.36. “Investigating Suspected Insurance Fraud” explains what is required to complete a thorough investigation.

It requires that the SIU shall establish, maintain, distribute and adhere to written procedures for the investigation of possible suspected insurance fraud. An investigation of possible suspected insurance fraud shall include:

  • A thorough analysis of a claim file, application, or insurance transaction.
  • Identification and interviews of potential witnesses who may provide information on the accuracy of the claim or application.
  • Utilizing industry-recognized databases.
  • Preservation of documents and other evidence.
  • Writing a concise and complete summary of the investigation, including the investigator’s findings regarding the suspected insurance fraud and the basis for their findings.

In addition, to complete a thorough investigation of a suspected fraudulent claim should include:

  • Detailed recorded statements of the insured and all independent witnesses.
  • A demand for production of all documentation available to the insured relating to the loss such as:
    • Title documents.
    • Purchase documents such as receipts, purchase orders, purchase contracts, invoices, warranties, credit car statements, and the like.
    • Telephone records.
    • Tax returns.
    • Employment records.
    • Repair invoices.
    • Repair estimates.
    • Replacement estimates.
  • An examination under oath of the insured(s)
  • An examination under oath of any partners, employees or officers of a suspected corporation or partnership.
  • Reports of any relevant experts like a fire cause and origin expert.
  • Advice and counsel of an independent insurance coverage lawyer.

The Qui Tam Solution to Insurance Fraud

In a case of amazing and surprising perspicacity, the California Legislature recognized the problem and added to The California Insurance Frauds Prevention Act (“CIFPA”) a qui tam provision that made it possible for insurers to file whistleblower suits against fraud perpetrators.

This is a real weapon available to insurers who wish to defeat insurance fraud. The insurer who has collected sufficient evidence to establish beyond a preponderance of the available evidence, was the victim of a single or multiple acts of insurance fraud may file suit under the statute in the name of the state of California. The punishment, if successful, will be enormous and the state and the insurer will share in the funds obtained.

This powerful tool should be emulated by every state as well as every federal court under the false claims act. Take the money from the fraudsters, take the profit out of the crime, and they will move on to other less prosecuted crimes like taking benefits from the U.S. Government’s efforts to ease the public’s cost of the Covid-19 pandemic.

What to do if There is No Available Qui Tam Statute

Every first party property policy of insurance contains the following language mandated by the statutory New York Standard Fire Policy.

This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto. [California Insurance Code Section 2071]

If, after a thorough investigation of a claim the insurer determines a fraud has been attempted and the insurer has obtained a preponderance of all available evidence that can establish a fraud was attempted, the insurer must advise the insured it will not pay and will declare the policy void in accordance with the policy language quoted above.

A Proposal that Every Insurer Should Establish a Corporate Position to Refuse to Pay a Fraud

Since it is often difficult to convince a state department of insurance, a state Attorney General or local prosecutors to prosecute insurance fraud perpetrators insurers must proactively act to defeat insurance fraud. If there is no opportunity to file a qui tam action the insurer must, as a corporate requirement, refuse to pay any insurance fraud perpetrator.

The insurer who truly desires to defeat insurance fraud must:

  1. Require that the entire staff of claims handlers be trained to recognize attempts at insurance fraud.
  2. Require that the entire staff of claims handlers be trained to recognize the “red flags of fraud.”
  3. Create, maintain and effectively fund an SIU staffed with insurance and fraud trained investigators.
  4. Require a thorough investigation of every claim.
  5. Require the claims staff to refer suspected insurance fraud attempts to the SIU when a claims investigation establishes no less than three red flags of fraud.
  6. Require the SIU to conduct a thorough suspected fraud investigation.
  7. When the SIU collects what it believes to be an attempt at insurance fraud it should refer, for advice and counsel, the claim to an experienced insurance coverage lawyer in the state where the claim was presented.
  8. If, after review of the claims investigation, coverage counsel opines that there is a preponderance of evidence establishing a fraud was attempted and claims management is convinced the advice is proper the claim must be rejected as a fraud.

If the insured sues the insurer for breach of contract or bad faith the insurer must:

  1. Publish to the insurance buying public that it is the insurer’s incorruptible opinion that it will never pay what it believes to be a fraudulent claim.
  2. Retain counsel to defend the insurer.
  3. Instruct defense counsel that the insurer expects counsel to take the matter to trial.
  4. Instruct defense counsel to aggressively defend the lawsuit.
  5. Instruct defense counsel to conduct every needed discovery immediately without courtesy.
  6. Instruct defense counsel to depose every insured, every witness and every expert consulted by the insured, as soon as possible after the filing of the law suit.
  7. Instruct defense counsel to move the trial court for orders limiting the actions of the plaintiff including, but not limited to, motions for summary judgment, motions to compel discovery responses, motions in limine and any other motion available to limit the case.
  8. Instruct defense counsel that he or she has no authority to settle or even consider negotiating a settlement.
  9. Instruct defense counsel to advise the policyholder’s counsel that the case must go to trial and there will be no settlement discussions.
  10. Instruct defense counsel to advise the court that because the insurer believes it was defrauded it is against the insurer’s corporate policy to pay anything to a fraud perpetrator.
  11. Instruct defense counsel to provide no “courtesy” to policyholder’s counsel.
  12. If, after trial, there is an adverse judgment against the insurer instruct counsel to immediately file an appeal.

By so doing a proactive insurer will establish proactively spend millions to defend against fraud and refuse to pay tribute to anyone, especially a fraud perpetrator.

Setting up such company policy will go a long way to reduce insurance fraud attempts against the insurer. Fraud perpetrators will move from that insurer to another. Those insurers who do not have such a corporate policy will find more attempts at insurance fraud and will be encouraged to take on the aggressive anti-fraud position taken by the insurer following the anti-fraud position proposed

© 2022 – Barry Zalma

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 also serves as an arbitrator or mediator for insurance related disputes. 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.

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You can contact Mr. Zalma at, https://www,, and . Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

You may find interesting the podcast “Zalma On Insurance” at;  you can follow Mr. Zalma on Twitter at; you should  see Barry Zalma’s videos on YouTube-; or videos on Go to the Insurance Claims Library – The last two issues of ZIFL are available at 

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