Search
 

The Law of Unintended Consequences

Insurers are the only entities who are required by law to investigate and help in the prosecution of criminals seeking to defraud the insurer.

By Barry Zalma | Updated on April 01, 2011
The law of unintended consequences is not statutory but is rather a law of the nature of people. It is an adage or idiomatic warning that an intervention in a complex system always creates unanticipated and often undesirable outcomes. It can be stated that actions of people, especially of governments, always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it.

Insurers are the only entities who are required by law to investigate and help in the prosecution of criminals seeking to defraud the insurer. All other persons and entities, when they are the victim of a crime, report it to a police agency who investigates the crime. Reporting a crime, like a robbery, to police has no consequences to the person reporting the crime nor does that person have any obligation past reporting the crime.

Insurers are compelled to investigate customers whom they believe may have committed a fraudulent act. Thus, they may find themselves being charged with breach of the covenant of good faith and fair dealing, exposing insurers to tort damages and punitive or exemplary damage. The privilege provided to protect those who report suspected crimes to police agencies is often ignored or sidestepped by the courts, as the Court of Appeal did in Frommoethelydo v. Fire Insurance Exchange, 42 Cal. 3d 208, 721 P.2d 41, 228 Cal. Rptr. 160 (Cal. 07/24/1986). Insurers who deny claims for fraud (whether the insured is arrested or not) will always find themselves defendants in cases brought by the insured seeking both indemnity and punitive and exemplary damages in a bad faith lawsuit. Even if the insurer obtains a defense verdict, the cost of defending a bad faith lawsuit is often greater than paying the person the insurer believes had attempted to defraud it.

Want to continue reading?
Become a Free
PropertyCasualty360 Digital Reader.

INCLUDED IN A DIGITAL MEMBERSHIP:

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.

Already have an account?

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Recommended Stories

PropertyCasualty360

Join PropertyCasualty360

Don’t miss crucial news and insights you need to make informed decisions for your P&C insurance business. Join PropertyCasualty360.com now!

  • Unlimited access to PropertyCasualty360.com - your roadmap to thriving in a disrupted environment
  • Access to other award-winning ALM websites including BenefitsPRO.com, ThinkAdvisor.com and Law.com
  • Exclusive discounts on PropertyCasualty360, National Underwriter, Claims and ALM events

Already have an account? Sign In Now
Join PropertyCasualty360

Copyright © 2024 ALM Global, LLC. All Rights Reserved.