As insurance companies continue to bring more and more civil suits for insurance fraud, defendants are raising a variety of arguments in an effort to delay—and sometimes to significantly delay—the insurers’ actions, or even to avoid judgment altogether. Two interesting new cases—one from the U.S. District Court for the Eastern District of New York, State Farm Mutual Automobile Insurance v. Mittal, No. 16-CV-4948 (FB) (SMG) (E.D.N.Y. June 25, 2018), and one from a Nevada federal district court, Allstate Insurance v. Shah, No. 2:15-cv-01786-APG-CWH (D. Nev. June 18, 2018)—reflect these developments. This column explains why the insurers were able to prevail in both instances.
The Stay Request
The insurer in the New York case alleged that the defendants—various health care providers—had engaged in a conspiracy to defraud insurance companies by issuing fraudulent bills and medical records.
After the insurer filed its complaint, the parties disagreed about the order for depositions. The court directed the defendants to depose the insurer on Feb. 8, provided that two of the defendants would appear for depositions on Feb. 9 and 12, 2018. The insurer’s deposition went forward as scheduled, but the depositions of the defendants did not.
Instead, counsel for a number of the defendants informed the insurer’s counsel and the court that he had just learned that his clients were under investigation by the New York State Attorney General’s Office. Defense counsel also said that his clients had been the subjects of this investigation since at least July 2017, when the attorney general’s representatives executed a search warrant at the office of one of the defendants. The court granted the defendants permission to move to stay their depositions, and then issued a decision on their motion.
The Stay Denied
In its decision, by U.S. Magistrate Judge Steven M. Gold, the court denied the motion, finding that the circumstances weighed “strongly” against the issuance of a stay. The court explained that, in the U.S. Court of Appeals for the Second Circuit, courts consider the following six factors as a rough guide for district courts to exercise their discretion when deciding whether a related criminal action warrants issuance of a stay:
- The extent to which the issues in the criminal case overlap with those in the civil case;
- The status of the case, including whether the defendants have been indicted;
- The private interests of the plaintiffs in proceeding expeditiously weighed against the prejudice to the plaintiffs caused by the delay;
- The private interests of and burden on the defendants;
- The interests of the courts; and
- The public interest.
The court found that the first factor weighed “slightly in favor” of the defendants. It reasoned that although no criminal charges had yet been brought against the defendants, the criminal investigation likely overlapped at least to some degree with the issues in the civil case given that a search warrant had been executed by the attorney general’s auto insurance fraud unit, which seized numerous patient files, and the insurer alleged in its complaint that the defendants had submitted fraudulent bills for medical services rendered to their patients.
Next, the court decided that the second factor weighed “heavily against issuing a stay.” It explained that courts generally do not issue a stay absent an indictment or special circumstances such as government concerns about harm to ongoing investigations. Here, the court noted, the only event in the criminal investigation identified by the defendants was the search warrant. The court again pointed out that no charges had been brought against the defendants, adding that it was “impossible to say” whether any would be brought. Moreover, the court said, the defendants had not presented any evidence of “special circumstances” or other unique concerns that would warrant a pre-indictment stay in this case.
The court found that the third factor also supported denying a stay, reasoning that it had been almost two years since the insurer had brought its action against the defendants but that the insurer had yet to conduct the defendants’ depositions. If a stay were issued, the court continued, there was “no telling how long it would last; the potential delay could be for years, even before an indictment is returned.” The court also said that issuing a stay “would likely increase the risk” to the insurer that assets that might be available to satisfy a judgment would be moved or depleted in the interim.
The court decided that the fourth factor tilted “slightly” in favor of issuing a stay. The court acknowledged that the defendants contended that, without a stay, they would be faced with the choice of either invoking their Fifth Amendment right against self-incrimination when deposed in this case, likely resulting in an adverse inference, or running the risk of making statements that might be used to incriminate them. The court ruled, however, that the burden the defendants faced was “relatively small” because it appeared that there had been no activity in the criminal investigation for nearly a year, and there was “no reason to think” that a criminal prosecution was “inevitable.” The court also found that the potential for prejudice was “diminished” because the plaintiff in this case was a private party, not the government, making it less likely that the civil discovery process would be used as a cloak to conduct criminal discovery.
In the court’s opinion, the fifth factor weighed in favor of denying a stay because the court had an interest in advancing its docket and avoiding further delay, particularly for an “indeterminate amount of time.”
The court concluded that the last factor—the public interest—strongly was in favor of denying a stay. The court said that the case was not small and it did not only affect the parties, given that the insurer alleged that the defendants had submitted “hundreds of thousands of dollars of potentially fraudulent claims.” If true, the court said, the defendants had imposed “substantial costs” on the insurer that undoubtedly had been passed on to consumers in the form of higher premiums.
Federal Witness Immunity
In the Nevada case, insurance companies sued a number of doctors and their office, alleging that the defendants were inflating their patients’ medical bills so that the patients could extract more money from the insurers in personal injury lawsuits. According to the insurers, the defendants had conspired with 213 claimants’ personal injury attorneys to inflate their patients’ bills.
The defendants moved for summary judgment. In addition to asserting that the insurers’ claims were barred by Nevada’s litigation privilege, which protects communications made in the course of judicial proceedings—a contention the court rejected—the defendants argued that federal witness immunity barred the insurers’ claims because the defendants would be witnesses in the patients’ civil lawsuits.
The insurers responded that federal witness immunity did not apply to their claim that the defendants had fabricated medical and billing records.
The court agreed with the insurers and denied the defendants’ summary judgment motion, ruling that federal witness immunity did not apply to the defendants’ alleged nontestimonial acts of falsifying medical treatment and billing records.
In its decision, the court explained that, under federal law, witnesses were “immune from liability for testimony at trial.” The court added that this witness immunity also extended to “preparatory activities inextricably tied to testimony, such as conspiracies to testify falsely.”
However, the court continued, this immunity was “not limitless.” Witness immunity, the court noted, did not shield an “out-of-court, pretrial conspiracy to engage in nontestimonial acts such as fabricating or suppressing physical or documentary evidence or suppressing the identities of potential witnesses.” Moreover, the court continued, if a witness happened to be involved in fabricating evidence, there was “no reason” that that participation should be “insulated from liability” simply because of his or her dual roles as witness and fabricator.
Here, the court decided, federal witness immunity did not bar the insurers’ claims because the insurers alleged that the defendants had fabricated evidence by falsifying their medical and billing records. Although related to the defendants’ anticipated testimony, these records existed independently of that testimony, the court pointed out. They were documentation of a physician’s treatment of his or her patient and the amount the physician charged for those services. As such, the court noted, they were evidence of the injured parties’ damages.
The court concluded that the alleged fabrication of that evidence was not protected by witness immunity, even though the doctors later would testify consistent with what those records purported to show. Therefore, the court denied the defendants’ motion for summary judgment based on federal witness immunity.
The courts in Mittal and Shah were unwilling to delay—or to end—the insurers’ civil cases alleging insurance fraud. Although there may be times when criminal prosecutions should take precedence over an insurer’s civil action, the decision in Mittal makes it clear that courts will carefully review the facts before acceding to a defendant’s request for a delay. Moreover, although federal immunity can play a role in an insurer’s civil action, Shah makes it clear that that doctrine does not immunize fraudulent actions or the fabrication of evidence. These decisions no doubt will be useful for insurers facing similar arguments by defendants in insurance fraud cases in the future. Evan H. Krinick is the managing partner of Rivkin Radler in Uniondale.