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Bad Faith and Lady Justice

Statutes of Lady Justice are visible throughout the world, including this beautiful representation I found in Rome, Italy. Lady Justice and the meaning behind the symbol is very significant in the academic world. When I wear my hat as a college professor or as Program Chair, I ensure that the concept of Lady Justice is a consistent theme of my work. The blindfold often seen shielding her eyes represents objectivity before the law, the downward facing sword signifies punishment, and the scale in her left hand is meant to illustrate the weighing of evidence. As counter fraud professionals, do we feel that fraud is prosecuted to the fullest extent of the law? Let’s discuss.

Very often, fraud cases take lower priority in court as prosecutors have a tendency to favor more glamorous cases. It is quite common for fraud cases to either not be accepted in the first place, or get taken out of the pending due to various reasons; in any event, the end result is a lack of overall prosecutorial support. Let’s not blame it all on the legal system though and reflect on the activity of the carriers and how this may affect if justice is served in fraud cases.

In many states, policyholders are allowed to file a bad faith suit accusing an insurance company of breaching the good faith provision of their original business contract. This is a tort action that allows recovery of the basic benefit and also additional damages above and beyond the policy limits. These suits have the potential to be very dangerous legal situation for a company, as the risk of financial and image damages can be quite high. If an insurance company fails to settle a legitimate claim, the company can be held liable for excess verdicts for bad faith, which is a very undesirable situation. Studies reveal that states that allow bad faith actions are characterized by insurers who report higher claim costs, which indicates that carriers operating in these states may have a higher proclivity to settle questionable fraudulent claims to avoid bad faith allegations. Interestingly, states that allow bad faith claims are also characterized by a lower degree of investigative intensity, as insurers are cautious of bad faith allegations. These alarming facts illustrate how bad faith allegations can have a negative impact on the prevention of insurance fraud offenses, as companies operating within these parameters will have a tendency to settle instead of investigate. Due to the increasing competition in the insurance industry, and the desire for the insurance companies to retain as many policyholders as possible, fraud investigations could become a low priority due to bad faith cautiousness.

This contention is supported when one analyzes the results of bad faith reform in West Virginia. In 2005, West Virginia passed S.B. 418. The Third Party Bad Faith Act eliminated the rights of third-party claimants to file lawsuits against an insurance company if they felt that they were treated unfairly, or in bad faith. West Virginia eliminated this legal right for claimants and instead provided them with an administrative procedure as an alternative, thus removing this process from the litigation environment. The result was that paid losses declined significantly starting in 2005, when S.B. 418 was adopted, and continued to fall until the measurement conclusion in 2010. Quantifiably, this reform reduced costs approximately $200 million from 2005 to 2010, an extremely significant result.

As we are always looking for ways to improve our counter fraud efforts, make sure you explore your legal stance and protocol for handling your claims; this could yield unforeseen results.

Stay safe!

Dr. Fraud

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