California Insurance Fraud: Overview, Penalties, and Sentences

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Insurance fraud is an umbrella term covering multiple acts that are illegal in California. The scenarios that may be designated as insurance fraud are many and varied. However, all involve an attempt by one person or a group of people to obtain insurance benefits or advantages to which they are not legally entitled.

In California, insurance fraud is detected and investigated by the Department of Insurance Fraud Division. The penalties vary depending on the type of fraud involved. Many types of insurance fraud are wobbler offenses that can be charged as either misdemeanors or felonies, with penalties including jail time and significant fines.

Overview of Insurance Fraud

Every fraud offense in California involves a person's deliberate and willful attempt to either get something he is not entitled to, or prevent somebody from getting a benefit that he is entitled to. If the benefit or advantage involved in the fraud involves insurance, the act qualifies as insurance fraud.

Insurance fraud can be committed by the holder of an insurance policy. He may file for inflated benefits, or benefits to which he is not entitled, like making a claim against his auto property policy for a theft that never occurred. Or he might create the loss he has insured against, like burning down his house to collect the fire insurance or killing a spouse to collect on life insurance.

Read More: California Law: Insurance Fraud

Insurance Fraud by Providers or Insurers

While people who are insured are responsible for many cases of insurance fraud, there are other players as well who can organize or orchestrate insurance fraud for their own benefit. Anyone who tries to obtain some advantage or benefit from an insurance company to which she isn't entitled can be charged with insurance fraud.

One common example of insurance fraud committed by someone other than the insured is overbilling by service providers. These are companies or individuals who inflate their bills to the insured to get unjust reimbursement. This can be anyone providing services covered by the insurance. For example, automobile repair people might overbill the insured for work done under a vehicle property damage policy, and medical personnel sometimes overbill a health care policy or bill for services that were not actually offered.

Some types of insurance include coverage for the services of attorneys used to bring the claims, like in workers' compensation cases. It can be insurance fraud when an attorney overbills the company for her services or bills for services she did not actually perform. It is also insurance fraud when an insurance company tries to defraud an insured out of benefits to which she is legally entitled.

California Department of Insurance Fraud Division

In California, the Department of Insurance Fraud Division is charged with investigating insurance fraud and arresting those committing this crime. This unit started out as the California State Bureau of Fraudulent Claims with a very small staff, but today, it is the largest law enforcement unit in the Enforcement Branch of the California Department of Insurance and, many believe, the premiere insurance fraud investigative agency in the nation.

The office employs over 230 sworn peace officers as California insurance fraud investigators (called detectives) with the mission to protect the public by investigating insurance fraud and arresting insurance fraud offenders. They work within these four primary programs:

  • Automobile Insurance Fraud.
  • Workers’ Compensation Fraud.
  • Property, Life and Casualty Fraud.
  • Disability and Healthcare Fraud.

Types of Fraudulent Conduct

Given the many types of insurance available these days, it is no surprise that insurance fraud cases are not all alike. In fact, there are many, many ways to commit insurance fraud, all of which are illegal. Any type of insurance can be the target of criminals who try to obtain a payout they don't deserve, use falsehoods to obtain insurance with a lower premium or, from within an insurance company, wrongfully deny the benefits of a policy to an insured.

Here are a few of the many scenarios that can be investigated as insurance fraud by the Fraud Division:

  • Automobile collision policy: deliberately caused accidents by sudden stops, appearing to yield the right of way but not doing so, etc.
  • Automobile property policy: faked or inflated property damage claim; excessive billing for damage; vehicle arson.
  • Medical insurance: orchestrated slip-and-fall; inflated pharmacy billing; deliberate food contamination; fake disability claim.
  • Life insurance policy: suspicious death; murder of insured to collect policy; misrepresentations about health on application.
  • Workers' comp insurance policy: employers misclassifying or misrepresenting wages or experience of workers; inflated billing by attorney whose services are covered by insurance.
  • Fire insurance: residential arson; commercial arson; excess billing for damage.
  • Property insurance: false reports of theft; overstatement of value of stolen objects; insurance agent fraudulently backdating policy to cover a theft loss.
  • Healthcare: using the identity of someone else to get medical coverage; overbilling or fraudulent billing by a medical provider; medical providers soliciting insured to undergo expensive medical procedures they do not need.

Criminal Penalties for Insurance Fraud

Just like there are many types of insurance fraud, the potential criminal penalties vary considerably between offenses. In general, insurance fraud charges tend to be wobbler offenses that can be charged either as misdemeanors or felonies. Misdemeanors are lesser offenses in California that carry a potential jail term of a year in county jail and a fine of $10,000 or less.

Felony insurance fraud, on the other hand, can be punished by up to five years in prison and very large fines. For example:

  • The fine for workers' compensation insurance fraud can be up to $150,000 or three times the fraud amount.
  • The fine for intentionally damaging an insured vehicle in order to collect insurance is punishable by imprisonment of up to five years and a fine of upto $50,000.
  • A conviction for unemployment insurance fraud can result in up to three years in prison and a fine of up to $20,000.

The law in California also sets out several situations in which penalties for insurance fraud can be enhanced. One noteworthy enhancement is prior convictions. For many types of insurance fraud, a prior felony conviction for insurance fraud can increase the sentence by two years for each conviction. That means that two prior felony convictions for insurance fraud can add four years to the prison sentence.

Civil Suits for Insurance Fraud

California law also provides for civil suits against those who commit insurance fraud. The California Insurance Frauds Prevention Act (IFPA) makes it possible for members of the public to file private litigation against anyone involved in insurance fraud in the state. The IFPA provisions are intended to enlist the public to fight insurance fraud, especially in the areas of health, automotive, and workers' compensation insurance.

An individual who brings suit under the IFPA files a complaint that is kept under seal for 60 days while the district attorney and the Insurance Commission decide whether to intervene in the case. If they do, the person bringing the initial complaint recovers a percentage of any recovery against the wrongdoer

Fines against defrauders range from $5,000 to $10,000 for each violation, plus three times the amount the fraud cost the victims. Typical complaints brought under the IFPA include those for overbilling by hospitals and medical specialists, fraudulent billing of auto insurance providers by repair shops for services not provided, and employers' underreporting of employees to lower workers’ compensation insurance rates.