California Law: Insurance Fraud

California Law: Insurance Fraud
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Every state makes insurance fraud a crime. In California, the laws about insurance fraud are found in both the California Penal Code and the state's Insurance Code. The Fraud Division of the Department of Insurance is in charge of investigating and prosecuting the crime.

Insurance fraud can be charged as a misdemeanor or a felony under California law, depending on the circumstances of the crime. Those convicted may be sent to jail and/or required to pay fines.

What Is Insurance Fraud?

Insurance fraud can include any act that defrauds an insurance company. Like with all types of fraud, a person can only be convicted of insurance fraud if he acts knowingly and deliberately with the intention to defraud. Generally it is insurance fraud whenever someone lies to an insurance company with the intention of obtaining a benefit or an advantage to which he is not entitled. It is also insurance fraud for a company or agent to deny a benefit to an insured, knowing that the denial is wrongful.

Who Commits Insurance Fraud?

Insurance fraud often happens when an insured makes a false or inflated insurance claim. For example, if someone has vehicle insurance that includes theft coverage and falsely claims that a computer was stolen from her car, she commits insurance fraud. Likewise, if someone's home is insured for fire damage and she burns it down to get the payment, she commits insurance fraud.

However, insureds are not the only ones who can commit insurance fraud. Those providing covered services can also commit insurance fraud by charging inaccurate or improper amounts. For example, an auto shop that bills an insurance company for work on an insured's vehicle, but includes false or inflated bills, commits insurance fraud. Likewise, doctors who bill insurance companies for services they did not render commit insurance fraud.

Another way insurance fraud is committed is when a group of people work together to create an insurance "claim mill" that generates false insurance claims by planning or creating accidents or injuries. Often attorneys or their agents are involved in these schemes. Finally, an insurance company can commit insurance fraud by denying claims that it knows are valid in order to defraud the insured person of her benefits.

Read More: California Insurance Fraud: Overview, Penalties, and Sentences

Who Regulates Insurance Fraud?

In California, insurance fraud is taken very seriously. Investigation and prosecution of insurance fraud in the state is the responsibility of the California Department of Insurance Insurance Fraud Division. This division started up in 1979 with only five investigators and it has grown in staffing and authority. Today, it is the premier insurance fraud investigative agency in the country with a staff of over 275, including over 230 sworn officers working in nine regional offices throughout California.

How Is the Fraud Division Set Up?

The fraud division is composed of four separate insurance fraud programs assigned to investigate and prosecute certain types of insurance fraud:

  • Vehicle insurance fraud.
  • Workers' compensation insurance fraud.
  • Property, life and casualty insurance fraud.
  • Disability and medical insurance fraud.

Fraud Division detectives are all sworn peace officers. They get extensive training in fraud investigations, including surveillance and undercover operations. Much of the division's funding comes from assessments on California insurance policies. As early as 1988, California assessed an amount from every vehicle insurance policy issued in the state that goes toward funding auto insurance fraud investigations.

Is Intent Required for a Criminal Insurance Fraud Case?

Under California law, the crime of insurance fraud is a specific intent crime. This means that a person commits insurance fraud only if he acts intentionally. It also means that to convict someone of insurance fraud, the state must be able to prove beyond a reasonable doubt that the accused person committed the act with a specific intent to defraud. A misrepresentation to an insurer is not enough for fraud.

On the other hand, the fraud need not be successful to be prosecuted. If a person takes an action intending to defraud the insurer, she can be convicted of insurance fraud even if the insurer did not in the end pay out any funds for the fraudulent claim.

What Types of Insurance Fraud Are Common in California?

If there is an insurance policy covering something, there is the potential for insurance fraud. In California, some types of insurance tend to generate more than the average number of fraud cases. The most common types of insurance fraud occur in the areas assigned to specific fraud division investigation units: auto insurance, workers' comp, property/life/casualty insurance and disability/medical insurance.

Each of these categories of insurance fraud happen in different ways. But the Fraud Division has figured out patterns of behavior that they see repeatedly.

Examples of Insurance Fraud Patterns

For example, in auto collision insurance fraud, investigators regularly see schemes ranging from simple to elaborate in which the criminals set up accidents in order to claim insurance money. The fraud plan can be as simple as one person deliberately braking suddenly to cause a rear-end collision to an organized ring of criminal collaborators, including lawyers and doctors, orchestrating collisions and making claims.

Likewise, workers' compensation insurance fraud often appears in patterns that investigators identify and keep an eye out for. Note that the Department of Insurance estimates that workers' compensation fraud in California costs the state between $1 billion to $3 billion per year.

Workers' comp fraud can involve claimants, attorneys or doctors inflating billing or deliberately misrepresenting the facts of a case. But it can also involve employers who defraud the insurance company by giving false information about payroll to get workers' compensation coverage at a lower premium. For example, the employer might inflate wages to make it look like the workers are experienced journeymen with less likelihood of injury.

Criminal Penalties for Insurance Fraud

In California, the penalties for insurance fraud depend on a variety of factors, including:

  • Type of insurance fraud. 
  • Value of fraud involved. 
  • Whether someone got injured in the fraud.
  • Criminal history of the accused.

Many types of insurance fraud are "wobbler" offenses in California. This means that the prosecutor can elect to treat them as misdemeanors (lesser crimes with lower penalties) or felonies (the most serious type of crime with the real possibility of insurance fraud jail time). If prosecuted as a misdemeanor, insurance fraud in California may result in a sentence of up to one year in county jail, a fine of up to $10,000, or both. Felony jail time can extend to five years, and the fines are considerably higher.

Examples of Penalties for Insurance Fraud

Health insurance fraud is a wobbler offense in California. If it is charged as a felony, the person convicted can receive a prison term of two, three or five years and/or a fine of up to $50,000. Many auto insurance fraud convictions carry the same range of punishment.

On the other hand, the potential fines for workers' comp insurance fraud are greater. They range up to $150,000, or double the amount of the fraud, whichever is greater.

Any prior convictions for insurance fraud can count against an accused when it comes to sentencing. In many cases, a previous felony conviction for insurance fraud will result in a sentencing enhancement. Each prior conviction can tack on two additional years of jail to the term of imprisonment.