California Insurance Fraud Prevention Act

The California Insurance Frauds Prevention Act (“IFPA”), located under Section 1871.7 of the California Insurance Code, allows members of the public to file private qui tam suits against anyone who commits insurance fraud in the state.

The IFPA is designed to combat fraud committed against insurers by individuals, organizations and companies, and particularly fraud concerning health, automotive, and worker’s compensation insurance. The IFPA provides for fines against defrauders ranging from $5,000 to $10,000 per violation in addition to damages of three times the amount of money the fraud cost its victims. Examples of insurance fraud covered by the IFPA include:

  • Fraudulent billing or overbilling of health insurance companies by hospitals and medical specialists
  • Billing of auto insurance providers by auto repair shops for services not provided and/or parts not installed
  • Underreporting of total people employed by employers attempting to lower workers’ compensation insurance rates
  • Submitting multiple insurance claims for the same service rendered or part replaced.
  • Employing “runners, steerers or cappers” to recruit patients or clients (a/k/a providing kickbacks).

Similar to the qui tam provision of state and federal false claims acts, the IFPA allows individuals to sue those who commit insurance fraud covered by California law. However, unlike with non-insurance-related false claims qui tam actions, under the IFPA it is not necessary that the government suffer harm as a result of the fraud. This is due to the fact that insurance fraud usually harms a large number of people, as insurance companies frequently cite insurance fraud losses in raising rates for policyholders. (For example, the Act states that healthcare insurance fraud likely increases national healthcare costs by “billions of dollars annually.”) Thus, individuals who sue fraudulent actors under the IFPA are acting on behalf of themselves and every one of their fellow policyholders as well as for the State of California.

In an IFPA qui tam action, “any interested person” or insurer files a civil suit in the name of the State of California. The complaint and all related evidence are filed under seal with the relevant superior court and served to the local district attorney and the state insurance commissioner, who have 60 days to decide whether or not to intervene in the case. (Either official may, however, file to extend this deadline if they can show “good cause” to do so.) If either the district attorney or the commissioner decides to intervene, government attorneys may take over and lead the prosecution, or they may allow the relator to continue to do so and serve in a supportive role. In this scenario, the relator would be entitled to collect between 30 and 40 percent of all subsequent recoveries from the defendant, even if the case settles before final judgment. The State will calculate the “total recovery” using the total assets remaining after it has reimbursed both the relator and itself for reasonable attorneys’ fees, costs and expenses incurred during the case. Conversely, if the government declines to intervene, the relator would have the option of proceeding with the case alone, and would be entitled to between 40 and 50 percent of any eventual recovery. Additionally, if the court determines that the relator’s case is “based primarily” on information that was already publicly available – for example, legislative or administrative reports, news articles, or public hearings – the relator would only stand to receive a maximum of 10 percent of the eventual recovery.       

In all three scenarios, the relator’s reward will vary “depending upon the extent to which the person substantially contributed to the prosecution of the action.” However, parties who “planned and initiated” the underlying violation are barred from collecting rewards for filing qui tam actions under the IFPA. Regardless of their involvement in the reported violation, prospective relators who file “clearly frivolous” or vexatious claims, or claims “brought primarily for purposes of harassment,” may be ordered to reimburse the defendant for reasonable attorneys’ fees and expenses.

The IFPA also broadly protects employees from retaliation for filing or even supporting an IFPA qui tam action: The Act states that employees suffering retaliation for their involvement in reporting insurance fraud “shall be entitled to all relief necessary to make the employee whole.” Specifically, the IFPA requires that the employee reinstate the employee with the same senioirity the employee would have had if not for suffering the retaliation, pay the employee twice the amount of backpay he or she is due, plus interest, and compensate the employee “for any special damages sustained as a result of the discrimination,” including attorneys’ fees and reasonable litigation costs. Employees who suffer discrimination as a result of their involvement in an IFPA action and wish to pursue damages for their injuries must file suit within three years of after they discover “the facts constituting the grounds” for the action or within eight years of the retaliatory act.

For more information about the California Insurance Fraud Prevention Act, about the Act’s qui tam process and how it works, or to report an apparent violation of the Act and discuss your legal options, please contact Niall McCarthy or Justin Berger at (650) 697-6000.

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