Zalma’s Insurance Fraud Letter – November 15, 2019

 Zalma’s Insurance Fraud Letter 

Ethics & the Insurance Fraud Investigation

Uberrimae Fidei – Utmost Good Faith

Adapted from Barry Zalma’s book, in two volumes, “Insurance Fraud” now available from  with Volume One available as a Kindle book and a paperback and Volume Two Available as a Kindle book and a paperback. Other insurance books by Barry Zalma are available at

Insurance adjusters and fraud investigators, like everyone else, can become frustrated. Every adjuster and fraud investigator has had “gut feelings” about a case that are not supported by the evidence. Frustration faced by an adjuster was responsible for allowing the California Supreme Court the foundation for creating the tort of bad faith in first party insurance claims.
In 1973 an insurance adjuster, without sufficient evidence, caused his employer’s insured to be arrested for arson and fraud. The adjuster was frustrated by his failure to prove that a bar owner had destroyed his bar by arson a few years before and was convinced he had done so again. The adjuster told a police officer of his suspicions, past experience with the insured and his gut feeling that the insured caused the fire.
The insurer demanded that the insured appear for examination under oath in accordance with conditions of the policy. The insured refused to appear because of the arrest citing his First Amendment Right against self-incrimination, but offered to appear as soon as the criminal charges were resolved.
The California Supreme Court, in Gruenberg v Aetna Insurance Co., 9 Cal 3d 566, 108 Cal Rptr 480 (1973), concluded that unfounded actions by an investigator which caused an insured to be arrested for arson required the application of the new tort of bad faith to first-party insurance cases.
Coface North America Insurance Co. Settles Lawsuit with Alleged Fraudster Lawyer
An insurance company that sued an attorney over allegations he conspired with online fraudsters to steal more than half a million dollars meant for a policyholder has settled its claims with Villa Rica solo James “Jay” Davis III.
Coface North America Insurance Co. sued Davis in federal court in Atlanta in January, claiming unknown “John Doe” confederates used a bogus email account to hijack a $3.1 million settlement. The insurer discovered the ruse in time to recover most of the money from Davis’ trust account, but it said $552,766 was never accounted for.

In back-and-forth filings, Davis’ lawyers argued that Coface itself allowed the scam by ignoring clear signals of fraud, including grammatically garbled messages sent from a phony email account similar to the policyholder’s, except that its domain name ended in “.cf” rather than “.com.” The “.cf” internet domain is used for websites in the Central African Republic.Read the full article here.

 What Happens When an Insurance Lawyer act Unethically

Violation of the Rules of Professional Conduct

The practice of law demands more than knowledge of statutory and case law. It requires more than technical proficiency in the nuts and bolts of legal practice. A lawyer is an officer of the legal system whose conduct should conform to the requirements of the law, both in professional service to clients and in the lawyer’s business and personal affairs.
When a lawyer violates the Rules of Professional Conduct, whether committing or dealing with insurance fraud or some other misconduct, he or she can be disciplined by the local bar association and/or the state’s supreme court. Each state has its own disciplinary system managed by a group of investigators, lawyers and administrative law judges.
A lawyer who settled a case without client authorization, charged interest on money that he loaned to a client, converted client funds, failed to cooperate with state in an investigation, and provided false statements to the state is misconduct that amounts to a violation of the Rules of Professional Conduct in Louisiana. [Louisiana State Bar Ass’n v. Reis, 513 So. 2d 1173 (La. 1987).” In re Bell (La., 2019)]
In Georgia multiple, previous disciplinary cases addressing violations of various Rules of Professional Conduct have resulted in a reprimand. [In the Matter of Jordan, 305 Ga. 35 (823 SE2d 257) (2019); In the Matter of Smart, 303 Ga. 156 (810 SE2d 475) (2018).]
The violation of Rules of Professional Conduct is limited to the state Bar or the state Supreme Court. In Indiana, for example, there is no independent civil cause of action for a violation of the Indiana Rules of Professional Conduct, a breach of fiduciary duty claim against a lawyer is not viable. [Liggett v. Young, 877 N.E.2d 178, 183 (Ind. 2007)]
In Ohio, evidence established that a lawyer chose to ignore, rationalize, or act ignorant of the unambiguous limitations placed on him as a suspended attorney and because he has proven, time and time again that he cannot act as an ethical attorney, he must be permanently disbarred to protect the public. [Disciplinary Counsel v. Dougherty, 2019 OHIO 4418 (Ohio, 2019)]

Bad Faith Causes Bad Behavior 

In the 1950s, the California Supreme Court created a tort new to U.S. jurisprudence: the tort of bad faith.
A tort is a civil wrong from which one person can receive damages from another for multiple injuries. The tort of bad faith was created because an insurer failed to treat an insured fairly, and the court felt that the traditional contract damages were insufficient to properly compensate the insured. The court allowed the insured to receive, in addition to the contract damages that the insured was entitled to receive under the contract had the insurer treated the insured fairly, damages for emotional distress and punitive damages to punish the insurer for its wrongful acts.
Insureds, lawyers for insureds, regulators, and courts across the United States cheered the action of the California Supreme Court, for providing a fair remedy to abused insureds. Most of the states adopted the tort created by the California Supreme Court. Some enacted statutes allowing for litigation of the tort of bad faith. Many did so, like California, by judicial fiat.
After the creation of the tort of bad faith, if an insurer and insured disagreed on the application of the policy to the factual situation, damages were no longer limited to contract damages as in other commercial relationships. If the court found that the insurer was wrong, it could be required to pay the contract amount and damages for emotional distress, pain, suffering, punishment damages, attorney fees, and any other damages the insured and the court could conceive in order to deter other insurers from treating their insureds badly.
The courts and legislators adopting the tort of bad faith hoped that the tort of bad faith would have a salutary effect on the insurance industry and force insurers to treat their insureds fairly. However, even after claims for $40 wrongfully denied resulted in $5 million verdicts, the intended purpose of the bad faith cases and statutes were skewed. Juries, unaware of the reason for and operation of insurance, decided that insurers that did not pay claims were evil and that they wrote contracts so they never had to pay claims. The jurors were convinced it was appropriate to punish insurers severely even when the insurer’s conduct was correct and proper under the terms of its contract since no insurance policy can cover every possible eventuality.
The massive judgments were publicized, and many insurers decided fighting their insureds in court was too expensive regardless of how correct their position was on the contract. They found it less expensive to pay than to fight just as shop owners threatened by the Mafia decided it was better to pay protection to the Mob rather than fight.
Most of the massive verdicts were reversed or reduced on appeal. The bad actors raised their premiums and lost little business. Other insurers, faced with the massive verdicts, allowed fear to control reason, and paid claims that were improper or fraudulent.
The extra cost was passed on to all insurance consumers. The insurers who acted improperly were punished less than then honest insurers who were threatened with punitive damages. The insurers who treated their insureds badly, in fact, profited since they continued their wrongful acts and only were required to pay the few insureds that sued. Those insureds that did not sue added to the wrongdoers’ profit margins.
Honest insurers, fearful of being painted with the bad faith brush, paid frauds and claims they did not owe. As a result the insurers that paid claims they did not owe found they needed to raise premium charges to cover the extra expense. The increased premium paid by insureds to cover the extra expense was a clear example of the effect of the law of unintended consequences. The insurers and their insureds who paid rather than fight for fear of assessments of punitive damages, lost business and profits because they could not actuarially predict the cost of paying tribute to insureds and lawyers claiming the tort of bad faith.

Other Insurance Fraud Convictions

New Jersey Man Sentenced in Slip and Fall Insurance Scam 
Alexander Goldinsky, a New Jersey man is not going to prison for orchestrating a slip and fall insurance scam.
Under terms of a plea agreement, a judge on Monday instead sentenced 58-year-old Alexander Goldinsky to probation, community service and ordered him to pay $563.48 in restitution to an insurance company. Goldinsky had pleaded guilty to insurance fraud.
Middlesex County prosecutors say Goldinsky was an independent contractor working at a company in Woodbridge in 2018 when he threw ice on the floor in the cafeteria and laid down until he was discovered. He sought medical treatment claiming he had a head injury.

His prosecution was part of the state attorney general’s statewide insurance fraud crackdown.Defendants Make Admissions and Agree to Pay a Total of $5.99 Million

LIFE SPINE INC. (“LIFE SPINE”), MICHAEL BUTLER (“BUTLER”), the founder, president, and chief executive officer of LIFE SPINE, and RICHARD GREIBER (“GREIBER”), the vice president of business development of LIFE SPINE, have settled a civil healthcare fraud lawsuit with the United States that alleged that LIFE SPINE paid kickbacks in the form of millions of dollars of consulting fees, royalties, and intellectual property acquisition fees to surgeons to induce them to use LIFE SPINE’s spinal implants, devices, and equipment.
The surgeons who received these kickbacks accounted for approximately half of Life Spine’s domestic sales of spinal products from 2012 through 2018.  In the settlement, LIFE SPINE agreed to pay $5.5 million, BUTLER agreed to pay $375,000, and GREIBER agreed to pay $115,000.  Each defendant also made admissions and acknowledged and accepted responsibility for conduct alleged in the Government’s complaint as described further below.  The amounts paid by LIFE SPINE and GREIBER under the settlement are based on the Office’s assessment of their ability to pay based on the financial information they provided.

The Current Issue Contains the Following:

The Zalma on Insurance blog has posted over 2850 digests of insurance appellate decisions and other important insurance materials and articles published five days or more a week and are available at


Zalma’s Insurance 101

Zalma’s Insurance 101 that consists of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.
If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.
The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library

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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