Fighting insurance fraud is getting harder. While the world was distracted by on-again, off-again rules of pandemic life, courts and state legislatures across the U.S. were finding new ways to influence the insurance claim process that may speed claims payments but will hinder fraud-fighting. So say Jeffrey G. Rapattoni and Michael Sweeney in an article appearing March 2 in the Journal of Insurance Fraud in America, a publication arm of the Coalition Against Insurance Fraud.

Both Rapattoni and Sweeney are attorneys with the Marshall Dennehey Warner Coleman and Goggin practice in New Jersey, and both practice in areas of fraud investigation, coverage and bad faith.

Rapattoni and Sweeney say these fraud-weakening efforts are happening in state legislatures and in state courts. State lawmakers are lowering the threshold for bad faith exposure while stiffening penalties for violations. At the same time, plaintiff attorneys have been pushing courts to broaden the definition of insurer to open claims adjusters to personal liability.

Meanwhile, lawmakers are pushing for tighter controls on premium increases. The results are a financial strain on insurers with increased costs from greater compliance and additional training and a higher incidence of and potential for fraud, say Rapattoni and Sweeney. The authors warn that lawmakers enacting tougher compliance standards could end up with “a less attractive environment for high-quality insurers to do business” in their states.

Unintended consequences of excessive penalties, say the authors, are a much greater risk of fraudulent claims and a greater chance of plaintiffs pursuing a windfall for questionable claims.

The authors delve into the recently passed New Jersey law, the Insurance Fair Conduct Act, as a prime example of what they see as a growing trend to increase litigation between insureds and their insurer by providing a huge financial incentive. The new law spikes potential damages up to three times the coverage limit. The new act, which was signed into law on Jan. 18, creates a private right of action for first party claimants whose claim is unreasonably delayed or denied. While the new law seems limited to payment of benefits under UM/UIM coverage, some legal experts think it could open all violations under Unfair Claims Settlement Practice Act (UCSPA) to private lawsuits. The law became effective immediately.

Their white paper points to the use of “unreasonable” in the new law, calling it vague; whereas, the existing UCSPA prohibited acts are specific and, heretofore, enforceable only by the regulator as applied to an insurer’s general business practices, not a single claim. The authors also point out that policyholders in New Jersey already have a private right of action against their insurer for bad faith. The new law seems to alter who has the burden of proof.

Washington State is also on Rapattoni and Sweeney’s radar. Its nearly identical Insurance Fair Conduct Act became effective in December 2007. In 2018, a Washington State appellate court interpreted the language of the act to find a claims representative could be sued personally for bad-faith claims handling. This result was overturned a year later by the Washington State Supreme Court in a narrow 5-4 margin.

Rapattoni and Sweeney say this “near miss…emboldened the plaintiff’s bar. Attorneys in similarly regulated jurisdictions recognized there was an opportunity” to reach the pockets of the claims handlers.

A similar case is pending in Colorado, say Rapattoni and Sweeney. The Colorado Supreme Court heard oral arguments in January where an insured sued the insurance investigator for allegedly breaching Colorado’s extra-contractual law by denying his UIM claim. While the decision could go either way in Skillet v. Allstate, the authors recall a piercing question made by one justice on the panel: “Who in their right mind would wanna take this job of being a claims adjuster if you’re staring down the barrel of this kind of liability on a regular basis?”

Texas is not immune to the trend that Rapattoni and Sweeney discuss. Mark S. Humphreys, an attorney in Dallas-Fort Worth, noted in his blog on Feb. 28 that a similar case was heard in north Texas.

The case started in state court, when Art Dallas Inc. claimed wind and hail damage, naming both the insurer and the adjuster as defendants. The insurer successfully moved the case to federal court. Then, the federal court removed the adjuster as a defendant and retained jurisdiction in the case, providing an analysis that said the plaintiff had no reasonable basis to predict the plaintiff could recover against the adjuster.

In Texas, the relevance of suing the adjuster is that including him can keep the case in state court, the venue generally preferred by Texas plaintiffs.

Humphreys recommends that attorneys involved in similarly situated cases read the pleadings and opinions in Art Dallas Inc. v. Federal Insurance Company and Derek Franks, Northern District of Texas-Dallas Division.