Insurance Fraud Litigation

October 30, 2009

Fraudulent insurance claims have been around as long as there has been insurance. In urban centres across North America, certain fraudulent schemes have become commonplace, the sophistication of such schemes has increased and a unique stream of litigation has ensued. Auto insurers in particular have been drawn into such cases and often respond with vigorous claims of their own.

In vehicle theft and fire claims, for example, several motives exist to make fraudulent claims. In the classic case, an insured obtains high-risk financing for a luxury vehicle that the insured cannot or will not be able to afford. Faced with a lease or finance company determined to enforce onerous contractual terms, some insureds find the most cost-effective solution to the problem is to dispense of the vehicle and trigger insurance indemnity to satisfy obligations to the creditor. Indeed, in theft claims, there is substantial profit to be made through use of the vehicle after it is reported stolen.

Many such fraudulent claims have been uncovered with evidence that advanced anti-theft technology in most new vehicles make traditional methods of theft far less likely. Cellular phone site technology and other traditional investigative methods have also assisted investigators in undermining many such claims.

Similarly, for personal injury claims, a wide range of frauds have become commonplace. One scheme involves a "staged accident" - in which vehicles are made to collide to create claims for vehicle damage or personal injury. While the ordinary insured is not inclined to participate in such a scheme, those already involved in criminal activity seem to gravitate toward it.

When fraudulent claims are denied, many insureds abandon their claims, but others further the fraud by initiating litigation. This pits insurers, and other non-complicit parties, in litigation against a criminal element.

For the legal profession, a particularly disturbing aspect of these schemes is that they frequently attempt to co-opt a lawyer to advance the fraudulent claim through the courts. For counsel thrust unwittingly into that position, the threshold issue is the same as that faced in a criminal defence - one rarely knows that one's client has concocted or fraudulently exaggerated the claim.

However, the civil process depends far more on what the client advises. And when the client is a plaintiff, counsel must advance the claim rather than defend allegations. In such cases, the fraud is not only committed on the insurer and the court, it is also committed against one's own lawyer. Unlike the usual case where the issue before the court is whether the delict was committed, the question in a fraudulent insurance claim is whether the fraud is actually being committed before the court.

This unique dynamic touches on many ethical principles. A fundamental canon of legal ethics is to refrain from aiding, counseling or assisting any person to act contrary to the law. The Law Society of B.C.'s Professional Conduct Handbook provides that: "The office of the lawyer does not permit, much less demand, for any client, violation of law or any manner of fraud or chicanery."

Yet, not unlike the accused criminal, the party against whom an allegation of insurance fraud is not proven is entitled to have his or her counsel "endeavour by all fair and honourable means to obtain for the client the benefit of any and every remedy which is authorized by law." The conundrum faced by counsel in these circumstances thus can be more complex and fluid than in the criminal context. Further layers of complexity may come into play when contingency fee arrangements are in place or claims of bad faith have been made against the insurer.

The civil trials resulting from the more complex of such claims often look at a glance more like a criminal conspiracy trial than insurance litigation. Unsavoury, reluctant and recanting witnesses are the norm, as are police witnesses and experts in vehicle technology or engineering.

Insurers in B.C. face a high level of gang activity and organized crime in the Vancouver area. Insurers have attacked claims that have revealed broad insurance fraud schemes as well as many individual fraudulent claims. The courts, both judges and juries, recognize the enormous cost to the premium-paying public of fraudulent claims and have awarded large judgments, including punitive damages, investigative costs and court costs in appropriate cases.

Many defendants speculate that such judgments are not collectible, but motor vehicle and insurance legislation throughout the country makes it very difficult to avoid the effects of such judgments.

While deterrent claims by insurers in Canada may reduce the likelihood of organized fraudulent claims being made in the future, organizations throughout North America who follow these trends suggest there is little evidence that the claims will subside anytime soon, and the recent economic downturn fuels financial motives for fraudulent claims.

If reports of the increasing scope of fraudulent insurance claims and growth of gang and organized crime activity are any measure, then the sophistication and frequency of such claims, and resulting litigation, will continue to rise.

Michael Hewitt is a partner at Singleton Urquhart LLP in Vancouver, and he was counsel for the Insurance Corporation of British Columbia in several of the actions described in this article. Contact Michael Hewitt today.

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