Attempt to Take the Profit Out of Insurance Fraud Fails
Insurance fraud is rampant in California and the rest of the United States. Insurers, finding no help from prosecutors, have become proactive in the fight against insurance fraud and have sued doctors, lawyers, cappers, runners, chiropractors and others they believed were involved in insurance fraud rings or involved in pursuing multiple fraudulent claims against the insurer. Some have been successful. However, before filing such an action, an insurer must be confident that it has sufficient evidence to establish the crime. Failure to do so can be both embarrassing and expensive.
Allstate Sues Lawyer
In People ex rel. Allstate Insurance Company v. Berg, California Court of Appeal, 2016 WL 661736, (2/18/2016) Allstate Insurance Company (Allstate) sued several members of an alleged insurance fraud ring, claiming they caused Allstate and other insurance companies to pay out more than they should under insurance policies for personal injuries. Defendants Berg Injury Lawyers and its named partner, William Berg (collectively referred to as “Berg”), were key players in this scheme. Berg allegedly referred clients to certain medical providers who, in turn, would recommend unnecessary surgical procedures, which allowed Berg to make inflated demands for payment under the insurance policies.
Berg filed a special motion to strike pursuant to Code of Civil Procedure section 425.16, arguing that its demands to Allstate were protected petitioning activity, and that Allstate had no probability of prevailing on its insurance fraud claim because Berg’s conduct was protected by the litigation privilege. The trial court denied the motion, concluding that although Berg engaged in a protected activity, its conduct was not privileged.
Allstate commenced this lawsuit as a qui tam action, naming as defendants various medical providers, medical centers, and diagnostic facilities. Allstate alleges that the defendants violated Insurance Code section 1871.7, subdivision (b). That subdivision incorporates violations of Penal Code section 550, which makes criminal a broad array of conduct relating to the false submission of insurance claims.
As relevant to this appeal, Allstate alleges that certain defendants solicited unnamed personal injury attorneys to refer their clients into a network of medical providers. From there, providers within the network would form medical opinions that the clients were candidates for surgical procedures when, in fact, they were not. The treatment recommended by the network providers was “governed, at least in part, by available insurance proceeds and not by medical necessity or reasonable patient care.” After the network providers recommended such procedures, they would prepare “false and fraudulent reports” and provide them to the attorneys, who would present the reports to Allstate as part of a demand for payment of a loss or injury under an insurance policy.
Berg was not named as a defendant in the amended complaint. In April 2013, Allstate amended its complaint by substituting Berg in place of unnamed Doe defendants.
The Special Motion to Strike
Berg filed a special motion to strike Allstate’s complaint under the anti-SLAPP statute. Berg argued that Allstate’s complaint arose from Berg’s “lawful and protected petitioning activity in personal injury settlement negotiations and litigation on behalf of injured clients with claims against Allstate and its insureds.” Berg further argued that Allstate could not establish a probability of prevailing on the merits because Berg’s alleged conduct was protected by the litigation privilege.
Berg’s special motion to strike included a declaration from William Berg, in which he stated that him and his firm “have been litigation adversaries of [Allstate] for decades in hundreds of cases[.]” He stated “[i]t is the policy of Berg Injury Lawyers to make settlement demands in good faith and with the lawful intent of compromising either potential future litigation or existing litigation fairly for its clients. If a pre-litigation matter can be reasonably settled through good-faith negotiations, then Berg Injury Lawyers will pursue a negotiated resolution in order to avoid filing a complaint for a client. However, to the extent that the matter cannot be reasonably compromised, then Berg Injury Lawyers will pursue litigation on behalf of its clients as appropriate.” Mr. Berg also denied that he or anyone at his firm dictated medical treatment for clients.
Allstate opposed the motion. Allstate argued that the submission of insurance claims was not protected activity because it was not related to litigation but was instead done in the ordinary course of business. It also argued that Berg’s conduct of submitting insurance claims to Allstate was not protected activity because it was criminal in nature. Allstate argued that even if Berg demonstrated that its activity was protected under the anti-SLAPP statute, it had demonstrated a probability of prevailing on the merits because
Claim that Bergs’ acts were not protected by the litigation privilege
Allstate’s opposition included a “representative sampling” of three demand letters submitted by Berg to Allstate. One letter related to a “first-party” claim in which Berg made a demand for $70,000 on behalf of its client to Allstate pursuant to an underinsured motorist provision in the client’s automobile insurance policy. The other two letters related to “third-party” claims. In them, Berg claimed that Allstate’s insured was liable for personal injuries sustained by Berg’s clients and detailed the medical treatment its clients received. One of the letters made a $100,000 settlement demand. The other requested that Allstate disclose the amount of its insured’s policy limits and stated that if Allstate refused to disclose the policy limits, Berg and its client “will have no alternative but to proceed with litigation.”
In a declaration filed with Berg’s reply brief, Mr. Berg stated that the three representative letters selected by Allstate involved matters that were eventually litigated after Berg sent its demand letters to Allstate.
The Trial Court’s Ruling
The trial court denied Berg’s special motion to strike. Under the first step of the analysis, it found that Berg’s demand letters “are fairly construed as pre-litigation demand letters” and therefore constituted protected petitioning activity. However, under the second step of the anti-SLAPP analysis, the trial court concluded that Allstate demonstrated a probability of prevailing on the merits because Berg did not establish that the demand letters were protected by the litigation privilege. The trial court reasoned that “[a] ruling that the litigation privilege immunizes false claims in pre-litigation communications would frustrate the important public polices underling the anti-fraud statute by protecting the very conduct the statute makes actionable (and Penal Code section 550 makes criminal).”
Applicable Law and Standard of Review
A SLAPP suit—a strategic lawsuit against public participation—seeks to chill or punish a party’s exercise of constitutional rights to free speech and to petition the government for redress of grievances. The statute provides: “A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff [or cross-complainant] has established that there is a probability that the plaintiff [or cross-complainant] will prevail on the claim.” (§ 425.16, subd. (b)(1).) The Legislature has directed that the language of the statute be “construed broadly.” (§ 425.16, subd. (a).)
The court of appeal reviews a SLAPP motion as if it was first presented to the Court of Appeal. In doing so it considers the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.
Berg argues that the demand letters it sent to Allstate were “classic petitioning activity” that the anti-SLAPP statute protects. Allstate disagrees, and argues that Berg was not engaging in protected petitioning activity because it merely sought performance under insurance policies but did not have reason to believe that its demands would be rejected and litigation would follow. It further argues that Berg was not engaging in protected activity because its alleged conduct was criminal. Allstate contends that the trial court erred in ruling that Berg was engaging in protected petitioning activity, and asks us to affirm the trial court’s denial of Berg’s motion on this ground.
Berg Engaged in Protected Pre-litigation Activity
Communications preparatory to or in anticipation of litigation are protected petitioning activity under subdivisions (e)(1) and (e)(2) if they relate to litigation that is contemplated in good faith and under serious consideration. The good faith and serious consideration of litigation test is addressed to the requirement the statements have some connection or logical relation to the action. If the statement is made with a good faith belief in a legally viable claim and in serious contemplation of litigation, then the statement is sufficiently connected to litigation.
Berg’s demand letters were made in good faith and under serious consideration of litigation, and therefore constitute protected petitioning activity. Berg’s practice was to pursue a settlement of its clients’ cases whenever feasible, but also pursue litigation on behalf of its clients in the event a matter could not be settled. Even more telling than the content of the three demand letters is the fact that Berg initiated litigation against Allstate in those three matters after Allstate rejected Berg’s demands. This strongly indicates that Berg was contemplating litigation in good faith when it made settlement demands to Allstate, and was not merely making empty threats. Taken together, these circumstances indicate that Berg’s demand letters to Allstate were sent with a good faith belief in a legally viable claim and in serious contemplation of litigation.
Berg did more than submit insurance claims that simply sought settlement. It submitted detailed demand letters claiming that Allstate was required to pay Berg’s clients under insurance policies, and it threatened Allstate with litigation in the event a settlement could not be reached. Berg’s demand letters, which related to both first- and third-party claims, do not appear to have been a necessary prerequisite to receiving payment under the insurance policies. The content of the letters makes clear that they were not a simple claim for payment, but were instead settlement demands that were a precursor to litigation.
The other cases Allstate relies on to support its argument that Berg was not engaging in a protected activity are also distinguishable on their facts. In People ex rel. 20th Century Ins. Co. v. Building Permit Consultants, Inc. (2000) 86 Cal.App.4th 280, the court held that a construction company’s preparation of allegedly fraudulent damage reports that were eventually submitted with insurance claims was not a protected activity, even though some of the reports were later used in bad faith cases brought against the insurance company. Here, Berg did more than prepare reports that were submitted at a later time with an insurance claim. It sent demand letters directly to Allstate in which it detailed the basis for its settlement demand and threatened litigation in the event a settlement could not be reached.
Berg’s Conduct Was Not Criminal as a Matter of Law
Separately, Allstate argues that because Berg’s conduct allegedly violated a criminal statue––Penal Code section 550––it is not protected by the anti-SLAPP statute. The court of appeal disagreed. Although petitioning activity that is illegal “as a matter of law” is not protected by the anti-SLAPP statute, this exception only applies in narrow circumstances in which the the defendant concedes, or the evidence conclusively establishes, that the assertedly protected speech or petition activity was illegal, as a matter of law. Mr. Berg’s declaration states that Berg “unequivocally” denies engaging in the fraudulent conduct alleged by Berg. As such, Berg has not conceded it acted illegally. Mr. Berg’s declaration also precludes a finding that Berg’s conduct violated Penal Code section 550 as a matter of law, since such a violation cannot be established as a matter of law without conclusive evidence that Berg acted with the specific intent to defraud.
To summarize, Berg’s alleged wrongful conduct arose from protected petitioning activity that was not illegal as a matter of law. Accordingly, Berg has made a prima facie showing that Allstate’s complaint is subject to an anti-SLAPP motion
Probability of Prevailing on the Merits
Having determined that Berg’s alleged conduct is protected by the anti-SLAPP statute, we turn to the issue of whether Allstate has demonstrated a probability of prevailing on the merits of its complaint.
Berg argues that Allstate cannot demonstrate a probability of prevailing on the merits because Berg allegedly fraudulent conduct is absolutely privileged under the litigation privilege. Allstate counters that the litigation privilege does not apply for two separate reasons. First, relying on Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54 (Shafer ), Allstate argues that the litigation privilege should not apply because “application of the litigation privilege in this case would be inconsistent with the purpose of Insurance Code section 1871.7. Second, Allstate argues that Berg’s alleged fraudulent conduct was not “communicative” in nature, which it must be in order for the litigation privilege to apply.
The litigation privilege precludes civil liability, except for malicious prosecution, for ‘any communication (1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that have some connection or logical relation to the action. The litigation privilege is intended to encourage parties to feel free to exercise their fundamental right of resort to the courts for assistance in the resolution of their disputes, without being chilled from exercising this right by the fear that they may subsequently be sued in a derivative tort action arising out of something said or done in the context of the litigation.
The Demand Letters Were Communicative
Allstate also argues that the litigation privilege is inapplicable because the conduct alleged against Berg is not communicative in nature. The key in determining whether the privilege applies is whether the injury allegedly resulted from an act that was communicative in its essential nature. Here, the gravamen of Allstate’s case against Berg is that Berg committed insurance fraud through the sending of prelitigation demand letters. Attorney demand letters such as these are a “classic example” of communicative conduct to which the litigation privilege applies.
Having concluded that Berg’s conduct was communicative, the court also concluded that Berg satisfied the other elements of the litigation privilege, which Allstate does not dispute have been met. Since the litigation privilege applies, Allstate cannot show a probability of prevailing on the merits in this case. Berg’s anti-SLAPP motion should have been granted.
The order denying Berg’s special motion to strike the complaint is reversed, and the trial court is directed to enter a new order granting the motion. Berg is entitled to its costs on appeal.
I am now and have always been a supporter of insurers who act proactively to defeat insurance fraud and have preached for years that when a fraudulent insurance claim is presented it should be taken to trial and nothing should be offered to pay the claim until a court orders payment. When there is evidence sufficient to establish that someone is involved in an act of fraud they should be punished by effective litigation. However, if the evidence is inadequate, as it was with regard to attorney Berg, the suit should never be filed. Simply making a pre-litigation demand is not enough to prove fraud. There must be a material misrepresentation or concealment of fact presented with an intent to deceive that actually deceived the insurer to its detriment. That did not happen and the case against Berg was properly dismissed.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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