This story is reprinted with permission from the Insurance Coverage Law Center, the industry's only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.

An appellate court in California has upheld a multi-million dollar insurance fraud judgment against a woman who allegedly created sham law firms and then filed and recovered on insurance claims – even though there was no indication that the claims themselves were fraudulent.

The Case

Allstate Insurance Company and several related companies (collectively, “Allstate”) filed a lawsuit under California Insurance Code Section 1871.7 against Christine Suh, Christina Chang (Suh's mother), and others, alleging insurance fraud in violation of Penal Code Section 550, which makes it unlawful to submit false or fraudulent claims to an insurance company.

Suh was not an attorney and was not otherwise authorized to represent Allstate's insureds. As alleged by Allstate, she overcame that obstacle by creating and, with help from Chang and others, operating eight sham law offices.

According to Allstate, Suh paid several individual attorneys a monthly fee of $3,000 to use their names and state bar numbers. Suh and Chang procured Allstate's insureds as “clients,” filed 318 insurance claims on their behalf (not authorized by and without the knowledge of the individual attorneys), and diverted insurance proceeds to their personal use, Allstate asserted.

Allstate did not allege that the insurance claims contained false or fraudulent statements about the insureds but that obtaining insurance proceeds by posing as law firms was insurance fraud in violation of the Penal and Insurance Codes.

Allstate contended that it would not have released funds to the law firms had it known they were fake. Allstate's in-house investigator testified that it was illegal to “deal with third parties who are not lawyers purporting to represent [insureds].” Allstate's insurance fraud expert similarly testified that insurance companies “do not pay” claims “presented by sham law firms.”

The jury found that Suh had committed one or more violations of Section 550 in connection with 313 insurance claims and imposed $2.3 million in civil penalties and $2.8 million in assessments against her. The jurors also found that Chang had committed one or more violations of Section 550 in connection with 241 insurance claims and imposed $1.2 million in civil penalties against her.

The trial court enjoined Suh and Chang from engaging in insurance-related activities and awarded Allstate its attorneys' fees and costs.

Suh and Change appealed, arguing that Allstate's theory that the insurance claims they submitted were false or fraudulent “was based solely on the testimony that the claims submitted to it were submitted by a [sic] 'sham law firms.' No evidence was presented that the claims were 'false or fraudulent' in any other regard. There was no allegation of staged accidents, nor any claim that injuries were inflated or that treatment was not provided.”

According to Suh and Chang, because Allstate did not submit evidence that the insurance claims contained false or fraudulent statements, they did not violate Section 550 or submit “fraudulent claims” within the meaning of Section 1871.7, subdivision (b), of the Insurance Frauds Prevention Act.

The Appellate Court's Decision

The appellate court affirmed, concluding that Suh and Chang had committed insurance fraud in violation of Section 550.

In its decision, the appellate court found that Suh and Chang read the insurance fraud law “too narrowly.” According to the appellate court, unlawful conduct under Section 550 does “not require a misstatement of fact in the insurance claim.” Rather, the appellate court said, Section 550 requires only that a person “knowingly (1) present a claim that is false or fraudulent in some respect, (2) present, prepare, or make a statement containing false or misleading information about a material fact, or (3) conceal an event that affects a person's right or entitlement to insurance benefits.”

The appellate court added that an insurance claim was fraudulent under Section 550 and Section 1871.7, subdivision (b), when “characterized by deceit, dishonesty, or trickery, perpetrated to gain some unfair or dishonest advantage.”

The appellate court ruled that Suh and Chang had “perpetrated a deceitful insurance scheme designed to acquire insurance proceeds illegally for personal gain.” It found that they:

• Deceived Allstate into believing the attorneys whose names they were using actually and lawfully represented its insureds (although only attorneys, family members, adjusters, or other persons authorized by law may represent insureds);
• Misrepresented in their communications with Allstate that attorneys represented the insureds; and
• Concealed the fact they were masquerading as attorneys when they filed the insurance claims.

Finding that the misrepresentations were material given that Allstate would not have released settlement proceeds to Suh or Chang or their sham law firms had Allstate known the truth, the appellate court concluded that the conduct of Suh and Chang constituted insurance fraud under Section 550 and Section 1871.7.

The case is People ex rel. Allstate Ins. Co. v. Suh, No. B280293 (Cal. Ct. App. June 17, 2019; certified for pub. July 8, 2019). Attorneys involved include: Glenn A. Williams for Defendants and Appellants. Knox Ricksen, Thomas E. Fraysse and Maisie C. Sokolove for Plaintiffs and Respondents.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Mr. Meyerowitz is the Director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He may be contacted at smeyerowitz@meyerowitzcommunications.com.