Insurers May not be Sued Under the Insurance Frauds Prevention Act’s Qui Tam Provisions

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Gilbert Ellinger sued as a qui tam plaintiff on behalf of the People of the State of California against Zurich American Insurance Company (Zurich), ESIS, Inc. (ESIS), and Stephanie Ann Magill under Insurance Code section 1871.7, a provision of the Insurance Frauds Prevention Act (IFPA). The trial court sustained defendants’ demurrers without leave to amend.

In The People ex rel. Gilbert Ellinger v. Stephanie Ann Magill et al., E076378, California Court of Appeals, Fourth District, Second Division (March 18, 2022) the court resolved the issue of the limitation of qui tam suits under the purpose for the enactment of the California Insurance Frauds Prevention Act.

Defendants filed demurrers. They argued that insurers and their agents, such as a claims administration company and a claims adjuster, could not be held liable in a qui tam action under section 1871.7. The trial court sustained defendants’ demurrers without leave to amend. It concluded that defendants could not be held liable under section 1871.7 for any failures of Magill in the claims handling or review process. The court concluded that insurance carriers are not subject to liability under the IFPA for claims handling practices.

DISCUSSION

The clear purpose of the legislation is to reduce fraud against insurers in order to benefit policyholders. The Legislature enacted the IFPA to combat insurance fraud committed against insurers by individuals, organizations, and companies. 

First: Ellinger has not sufficiently alleged a violation of Penal Code section 550 and thus has not properly alleged that defendants committed any kind of fraud. Insurers and their agents cannot be sued under the IFPA. That holding is not surprising, because the IFPA expressly targets only deceptive conduct directed at insurers, not improper conduct by insurers.

ZALMA OPINION

There is no question that an insurance company can commit insurance fraud.This action was creative but wrong. I support insurers using section 1871.7 against fraud perpetrators but condemn using 1871.7 to punish insurers.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE,  is available at http://www.zalma.com and [email protected].

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