Warning to California from the Coalition Against Insurance Fraud


In the first issue of the Coalition’s government affairs leadership publication for 2019 the Coalition warned against a proposed change in SIU Regulations in California that I warned about in an earlier issue of Zalma’s Insurance Fraud Letter.

A sweeping draft SIU regulation has the stated purpose to improve the quality of insurer fraud referrals to the California insurance department. The goal is worthy. In my opinion and that of the Coalition, the draft goes too far and would make the investigation and prosecution of insurance fraud-reporting far more onerous for those working in SIUs and, in my opinion, reduce the number of reports to the Department of Insurance and prosecutions of insurance fraud.

The Coalition reported that many observers, as do I, believe the draft overreaches. The department is seeking initial comments before the formal public review begins and every insurer and SIU investigator should provide their comments to the CDOI.

Among the initial concerns listed by the Coalitiion are:

  • Claim documents can have no information redacted from claims documents. This could void attorney-client privilege, since, if a prosecution is filed the defendant is entitled to discovery of the files turned over by the insurer, including attorney client privileged documents and protected work product.
    • The Coalition suggested a potential change allowing the insurer or SIU to simply provide the insurance department with a privilege log listing what was redacted.
    • Better, in my opinion, would be to instruct insurers to protect the work product of their attorneys and never divulge attorney client privileged documents.
  • Compliance training also would be required of hired investigative contractors. Yet the rule inadvertently would mandate training of vendors that merely assist the insurer SIU, instead of firms performing “integral” SIU functions.
    • This type of micro-managing does nothing to help the investigations but increases the expenses of the insurer and its vendors.
  • Insurers would have to provide the insurance department staffing and case referral data from around the U.S.
    • The Coalition notes that this proposed requirement is potentially unnecessary and overreaching, and provides the state of California with information that has no relevance to the investigation and reporting of potentially fraudulent claims in California.
    • There are no reasonable basis, in my opinion, for the state to know about insurer staffing in Alaska, New Hampshire, or Vermont, let alone all states.

The insurance department’s updating is, and clearly should be, attracting plenty of discussion inside the anti-insurance-fraud community around the U.S., given California’s size and regulatory stature.

The Coalition took an active role in the insurance department’s standing-room-only meeting in Sacramento in March. The department sought initial comments to help refine the draft before the public hearings begin.

Requiring high-quality case referrals from insurers is a worthy regulatory goal, the Coalition told the insurance department. The insurer “checkbox” approach reduces valuable case leads and allows more fraud to go unchallenged. However, the rule should avoid erecting barriers that inadvertently defeat this goal, the Coalition urged.

Many insurers have little or no staff in California, a state with more than 1400 insurers admitted to do business in the state. As a result those insurers contract with an investigation firm to act as its California SIU. The proposed regulation would define it as follows:

(f) “Contracted entity” means any entity with which an insurer contracts to perform SIU or integral anti-fraud personnel duties or functions on behalf of the insurer. “Contracted entity” also includes subcontractors and sub-subcontractors contracted to perform SIU or integral anti-fraud personnel duties or functions on behalf of the insurer. (emphasis added)

As to contracted entities, the proposed regulation requires specific terms in the contract between the insurer and the contracted entity and its subcontractors. The proposed regulation specifies enough detail and requirements to make it financially impossible for a non-major insurer to find a contractor willing to act as its SIU.

Proposed section 2698.34 requires documents to be submitted to the CDOI without redaction including any “other information which the Fraud Division or an Authorized Governmental Agency may deem relevant and important.” This will put the insurer on the horns of a dilemma: obey the regulations and waive the attorney client privilege or disobey and be punished by the CDOI.

Insurance fraud, from my 51 years of experience, comes in many forms that seldom fit into a tight classification. The proposed regulation requires the SIU to provide written procedures and lists of red flags specific to each line of insurance, a task almost impossible to complete and which might hinder the recognition of a fraudulent scheme that does not fit within the procedures.

The investigation requirements of the proposed regulation quoted in full below is a form of micro-management and adds unnecessary busy-work that may or may not have an effect on the completion of the investigation:

Amend Section 2698.36. Investigating Suspected Insurance Fraud.

(a) The SIU shall establish, maintain, distribute and adhere to written procedures for the investigation of possible suspected insurance fraud. The SIU’s written investigation procedures shall specify all of the following:

(1) How to conduct a thorough analysis of a claim file, application, or insurance transaction, that includes consideration of factors indicating insurance fraud.

(2) How to identify and interview potential witnesses who may provide information on the accuracy of the claim or application.

(3) A list of industry-recognized databases that are to be used in fraud investigations and procedures for using those databases.

(4) How documents and other evidence obtained during an investigation will be preserved.

(5) How to write a concise and complete summary of an entire investigation, that is specific to the investigation at hand, is separate from any other document prepared in connection with the investigation and includes the investigator’s findings regarding the suspected insurance-fraud and the basis for their findings. The summary shall answer the following questions:

(A) When did the reporting party become suspicious?

(B) What facts caused the reporting party to believe insurance fraud occurred or may have occurred?

(C) What are the suspected misrepresentations and who allegedly made them?

(D) How are the alleged misrepresentations material and how do they affect the claim or insurance transaction?

(E) Who are the pertinent witnesses to the alleged misrepresentation, if there are pertinent witnesses?

(F) What documentation is there of the alleged misrepresentation, if documented?

(b) Each investigation of suspected insurance fraud shall include performing at least the procedures specified pursuant to subdivision (a) of this Section 2698.36, to the extent they are applicable.

The SIU will, in my opinion, spend all of its time fulfilling the Regulations and little time performing a thorough fraud investigation.

Proposed Section 2698.40 requires an SIU annual report that requires identification of all of the SIU personnel, a description of the insurer’s methods and copies of written procedures used by the SIU.  This report, and its details, will invariably find itself quoted in civil law suits brought by the fraud perpetrator who will claim he or she was wrongfully accused and failure to comply with every nit-picking and micro managing required by the proposed changes to the SIU Regulations will be trotted before a jury as evidence of bad faith rather than a decision made by the SIU investigation to determine whether a fraud was being attempted or not.


Every insurer doing business in the state of California should prepare comments to the CDOI asking that it reconsider the proposed amendments that will make it more difficult, more expensive, and more difficult to defend suits brought by fraud perpetrators claiming denial of their claim for fraud was an act of bad faith. SIU investigators are insurance fraud professionals and should be allowed to investigate each potential fraudulent claim thoroughly and in accordance with their professional expertise without hindrance from oppressive Regulations that hinder, slow, and add unnecessary expense to the task of investigating and acting upon a potential fraudulent claim.

Read this and more than 2600 posts at http://zalma.com/blog


I have written a book about compliance with the current SIU Regulations that may assist you in understanding the proposed modification and lead you in creating comments to submit to the CDOI as has the Coalition Against Insurance Fraud.

California SIU Regulations

The State of California Imposes Control on the Investigation of Insurance Fraud

California SIU Regulations: The State of California Imposes Control on the Investigation of Insurance FraudCalifornia SIU Regulations is designed to assist California insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, and all integral anti-fraud personnel working with California admitted insurers to comply with the requirements of California SIU Claims Regulations.

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and train all integral anti-fraud personnel to recognize indicators of insurance fraud.

Available as a Kindle Book.

Available as a paperback.



About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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