Investigating fraudulent claims: Keep detailed records to recover costs

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A California appellate court decision suggests that insurers that want to recover their costs of investigating fraudulent claims may need to maintain records and logs demonstrating how much time they spend investigating each individual claim — or be barred from recovering their expenses.

The Case

Alyce J. Williams pleaded guilty to making a false statement in support of an insurance claim. Pursuant to her plea agreement, the court dismissed the other count of presenting a false motor vehicle claim and ordered her to serve three years of summary probation and to pay victim restitution, including to Farmers Insurance, in an amount to be determined.

Related: How insurers can identify fraudulent claims before they are paid

At an evidentiary hearing to determine how much, if any, Farmers was owed as victim restitution, prosecutors presented evidence of a cost model employed by Farmers in which the company used an average investigator’s annual salary, benefits, company car expenses, administrative costs, and travel expenses, which number it then divided by 126, the average number of claims each of its investigators annually investigated. Using that formula, Farmers requested restitution in the amount of $1,042.17 for costs it incurred in the investigation of Williams’ claim.

The trial court found Farmers was entitled to $1,042.17 in restitution for its investigative costs. In support of this finding, the trial court noted there was a strong public policy underlying California insurance law to ensure that investigative costs expended by an insurance company be reimbursed, which was necessary in Williams’ case because, without Farmers’ investigation, her fraud never would have been detected.

Therefore, the trial court rejected Williams’ contention that the preexistence of a fraud investigative unit barred recovery of investigative expenses. It concluded that Farmers’ request was “very conservative” in seeking victim restitution.

Williams’ appealed.

The appellate court’s decision

The appellate court vacated the award to Farmers.

In its decision, the appellate court explained that Farmers “clearly” qualified for a restitution award, as it was a “victim” of Williams’ fraud.

It then pointed out that a trial court had “broad discretion” to set the amount of restitution and could use “any rational method” of fixing the amount of restitution “reasonably calculated to make the victim whole.”

Related: 5 in New York charged with auto insurance fraud

Moreover, the appellate court added, there was “no requirement the restitution order be limited to the exact amount of the loss,” and no requirement that the order reflect the amount of damages “that might be recoverable in a civil action.”

Nevertheless, the appellate court then ruled that because Farmers’ model did not take into account the actual — or even estimated — costs Farmers had incurred as a result of its investigation into Williams’ activity in submitting her insurance claim, the trial court had abused its discretion when it ordered her to pay Farmers the “average cost per file” of $1,042.17 in victim restitution.

Calculation of restitution award

Victim restitution to Farmers, the appellate court said, had to be based on “economic loss as a result of the defendant’s conduct.” The appellate court noted that Farmers’ investigator had not kept logs or records or otherwise accounted for his time and expenses in investigating Williams’ claim. The appellate court therefore ruled that the calculation of Farmers’ restitution award lacked a “factual nexus” to the losses or costs it had incurred as a result of Williams’ submission of what turned out to be a fraudulent claim.

Accordingly, the appellate court vacated the award of $1,042.17 to Farmers. It concluded that although Farmers apparently had no records or logs to show the time its investigator and Farmers spent investigating Williams’ claim, Farmers should have the opportunity to prove up its entitlement, if any, to victim restitution. The appellate court did not explain how Farmers could do that in the absence of time sheets.

The case is People v. Williams, Nos. D072783, D266562 (Cal. Ct.App. May 31, 2018).

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Steven A. Meyerowitz, Esq., (smeyerowitz@meyerowitzcommunications.com) is director of FC&S Legal, editor-in-chief of Insurance Coverage Law Report, and founder and president of Meyerowitz Communications Inc.