"Here's my strategy on the Cold War: We win, they lose." -- Ronald Reagan

By Barry Zalma

National Underwriter reported on June 27, 2007 that George Fay, executive vice president, worldwide property and casualty claim for Chicago-based CNA Financial, said: "It is absolutely, morally wrong to pay a fraudulent claim. My company will not commit moral wrongs, nor will I permit anyone who works for me to commit a moral wrong. Is there anything that anyone does not understand about committing a moral wrong?"

This is a major change in the feelings of most insurance claims executives who prefer to settle fraudulent claims rather than pay lawyers to defeat them. It should be honored and emulated by every insurer doing business in the United States. Not only is paying a fraudulent claim "morally wrong" it is bad business and a payment that cannot be predicted accurately by an actuary.

Those insurers that compromise and pay fraudulent claims for fear of litigation are as responsible for the fraud as the perpetrator. They will be unable to compete if the majority of insurers refuse to pay fraudulent claims. It is time that the insurance industry recognize that when it compromises and pays a fraudulent claim it is aiding and abetting the fraud and advertising to the fraud perpetrators that this insurer can be taken by merely threatening litigation.

Every insurer should tell insureds or claimants who the insurer has evidence to establish are presenting a fraudulent claim that they will receive no money until a court, affirmed by a court of appeal and the Supreme Court orders the insurer to pay. The fraud perpetrator will take the criminal activity to another insurer who is an easier mark. Fighting fraud makes the insurer more profitable because the fraud perpetrators will learn of the position taken by the insurer and will avoid that insurer.

Contemptible Behavior Suing Insurers

U.S. District Court Judge William Acker recommended that the U.S. Attorney for the Northern District of Alabama prosecute Richard Scruggs, the high-profile trial lawyer who has become famous for suing insurers, and his law firm, Scruggs Law Firm, P.A. for contempt. Judge Acker concluded that Mr. Scruggs violated a court order about the handling of documents in a case relating to insurance claims that flowed from the destructive power of Hurricane Katrina.

The case involves Cori Rigsby Moran and Kerri Rigsby, sisters who were employees of E.A. Renfroe & Co., an insurance-services company hired by State Farm Insurance Co. to evaluate Hurricane Katrina claims. According to court documents the Rigsbys photocopied documents that they thought contained evidence of misconduct by State Farm in its dealings with its policyholders. The Injunction stated:

[D]efendants, Cori Rigsby Moran and Kerri Rigsby, and their agents, servants, employees, attorneys, and other persons in active concert or participation with them who receive actual notice of this order by personal service or otherwise (with the express exception of law enforcement officials) are hereby MANDATORILY ENJOINED to deliver forthwith to counsel for plaintiffs all documents, whether originals or copies, of each document and tangible thing, in any form or medium, that either of the defendants or anyone acting in conjunction with or at the request or instruction of either of them, downloaded, copied took or transferred from the premises, files, records or systems of Renfroe or of any of its clients, including, but not limited to State Farm Insurance Company and which refer or relate to any insurance claims involving damages caused or alleged to have been caused by Hurricane Katrina in the State of Mississippi.

In February 2006, the sisters retained Scruggs, a family acquaintance, to act as their lawyer and provided him with State Farm documents. At the time, Scruggs was pursuing litigation against State Farm and other insurers for denying Katrina claims. The sisters, Cori Rigsby Moran and Kerri Rigsby, are now "consultants" for the Scruggs Katrina Group, to the tune of $150,000 a year.

Renfroe sued the Rigsbys in September 2006, alleging they violated their employment agreements and stole trade secrets. In December 2006, Judge Acker issued an injunction ordering that all documents be returned to Renfroe's counsel.

In his ruling June 15, 2007 Judge Acker said that Scruggs shared the State Farm documents with the Mississippi Attorney General in violation of the court's order. "Scruggs is an experienced attorney and an officer of the court," Judge Acker wrote in a court order. "His brazen disregard of the court's preliminary injunction is precisely the type of conduct that criminal contempt sanctions were designed to address."

In addition, Judge Acker stated: "Taking Scruggs's word for it, he was arrogating to himself the right to substitute his judgment for the court's judgment. That spells 'defiance.'"

Judge Acker, perhaps recognizing the political situation also said: "If the government declines this request," Judge Acker warned, "the court will appoint another attorney to prosecute the contempt."

It has been alleged that instead of complying with the court's order Mr. Scruggs shipped the documents to Mississippi Attorney General Jim Hood, who was pursuing a criminal probe of State Farm. The documents were intended to help Mr. Hood make the criminal case against State Farm and Mr. Hood in turn, it is alleged, worked to convince State Farm to settle with Mr. Scruggs. The Wall Street Journal described the situation as "a sort of tag-team mugging. State Farm eventually settled for more than $130 million, and only afterward were the documents returned." Judge Acker noted that the essential elements of criminal contempt are that the court:

"entered a lawful order of reasonable specificity, it was violated, and the violation was willful. Whether the order is reasonably specific is a question of fact and must be evaluated in the context in which it is entered and the audience to which it is addressed. In criminal contempt, willfulness means a deliberate or intended violation, as distinguished from an accidental, inadvertent, or negligent violation of an order. Each of these elements must be proven beyond a reasonable doubt in order to determine guilt and impose punishment."

Judge Acker found that the injunction required Scruggs, as an attorney or agent of defendants, to deliver forthwith to Renfroe's counsel "all documents . . . that either of the defendants . . . downloaded, copied took or transferred from the premises, files, records or systems of Renfroe or of any of its clients . . . which refer or relate to any insurance claims involving damages caused or alleged to have been caused by Hurricane Katrina in the State of Mississippi." Judge Acker also found that "It is undisputed that Scruggs had in his possession the exact documents that fell within the scope of the injunction and that were and are the whole subject of the controversy. Instead of complying, Scruggs promptly sent the documents to Hood for the calculated purpose of ensuring noncompliance with or avoidance of the injunction's clear first paragraph. Scruggs's motive seems clear from the undisputed facts."

Even after Hood "voluntarily" sent the documents to counsel for Renfroe at Scruggs's request, Scruggs wrote to Hood requesting another copy of the same documents for himself and ostensibly for the Scruggs Katrina Group described Mr. Scruggs' explanation that he was doing his duty to help a prosecutor as "such a strained construction and so contrary to the injunction's clear terms as to lack any credibility whatsoever." Judge Acker indicates that Mr. Scruggs and Mr. Hood teamed up to bully State Farm into civil and criminal settlements.

Mr. Scruggs sent the documents to Mr. Hood, Judge Acker writes, "for the calculated purpose of ensuring noncompliance with or avoidance of the injunction's clear first paragraph."

The court concluded its order:

In accordance with Rule 42(a), Fed. R. Crim. P., the court will formally request that an attorney for the government prosecute Scruggs's contempt. If the government declines this request, the court will appoint another attorney to prosecute the contempt. Because in the context of criminal contempt proceedings the undersigned has acted as the functional equivalent of a grand jury for finding probable cause, he will have the criminal contempt proceedings against Scruggs reassigned to another judge.

State Farm Moves to Disqualify Scruggs

State Farm, on June 19, 2007 moved the court to remove Scruggs and his firm off a case for alleged ethical violations, including the use of "stolen" State Farm documents. The motion to disqualify Richard "Dickie" Scruggs, his Oxford, Miss. law firm and the Scruggs Katrina Group was filed in Mississippi three days after Judge Acker asked the U.S. attorney there to prosecute Mr. Scruggs for criminal contempt.

State Farm filed its motion in a case brought by a Biloxi, Miss., couple--Thomas and Pamela McIntosh--who are disputing the insurer's engineering report concerning the amount of Hurricane Katrina damage to their home.

According to the insurer, Kerry Rigsby worked on the McIntosh claim, and the Rigsby sisters "stole thousands of State Farm's confidential documents"--including an engineering report on the McIntosh case--and gave them to Mr. Scruggs.

Mr. Scruggs, "in turn, rewarded the sisters for their cooperation by paying them an annual salary of $150,000 each to serve as #litigation consultants' for him and his associates at the Scruggs Katrina Group&"

The insurer also argued Mr. Scruggs is prevented from representing a party in a proceeding where he is likely to have to testify. In the McIntosh case, State Farm said he has knowledge of exculpatory facts that bear directly on that claim.

State Farm, in its papers, contends it did not make its move lightly, but deposition testimony, public statements and other evidence shows Mr. Scruggs committed "repeated ethical violations and traduced the Federal Rules," making State Farm's attorney "duty bound to bring these issues to the attention of the court." We will report the results of this motion when we learn of it.

Reply from Scruggs

Following the truism that the best defense is a good offense, on June 20, 2007, the Scruggs Katrina Group said it filed a federal racketeering suit against State Farm Fire and Casualty Co., E.A. Renfroe Co. and Forensic Analysis and Engineering Co. in U.S. District Court, Southern District of Mississippi, on behalf of 21 policyholders. The suit was filed under federal Racketeer Influenced and Corrupt Organizations Act statutes. The RICO suit alleges the three companies threatened experts who disagreed with their desired results, concealed information, destroyed or falsified reports, placed pressure on engineers to use inaccurate and deceptive language, fired engineers who declined to cooperate and intimidated policyholders in the mediation process.

Conclusion

Dealing with a disaster is difficult for insurers. Litigation seems a certainty and Katrina has proved it so. However, insurers should not be required to defend against a plaintiffs bar that believes it is above the law and that, at least in the opinion of Judge Acker, contumaciously refuses to obey legitimate court orders -- if it will not profit counsel or the clients -- and can be held in criminal contempt. The press and public are ready to condemn insurers for their wrong-doing. We shall see if the same condemnation falls upon the plaintiffs' bar.

N.Y. Attorney Suspended for Funding More Than 200 Loans to Clients

Although not directly an insurance case the decision of the New York Appellate Division concerning attorney James J. Moran shows the depths to which a lawyer -- faced with the volume of money earned from legitimate and illegitimate personal injury claims -- will fall. Money, especially large sums of money, easily obtained caused a lawyer to violate the rules of professional conduct and loan money secretively to his clients to keep them as his clients. Because of his failure of judgment the lawyer is now suspended from the practice of law for 18 months because of 200-plus loans the attorney made to his own clients via intermediaries.

A unanimous New York Appellate Division, 4th Department, panel found that James J. Moran made more than 200 loans totaling more than $700,000. The panel said that the loans through third parties for non-litigation-related expenses did not "directly" violate the Code of Professional Responsibility, but that Moran's actions nonetheless "circumvented" the code, which in itself is a violation.

Moran conceded, according to the ruling , that he knew his conduct violated disciplinary rules, but "he stated that he provided the financial assistance so that his clients would not be required to borrow funds from lending companies at exorbitant rates of interest."

The panel found six other violations:

1. DR 1-102 (a) (2) (22 NYCRR 1200.3 [a] [2]) -- circumventing a disciplinary rule through actions of another;

2. DR 1-102 (a) (4) (22 NYCRR 1200.3 [a] [4]) -- engaging in conduct involving dishonesty, fraud, deceit or misrepresentation;

3. DR 1-102 (a) (5) (22 NYCRR 1200.3 [a] [5]) -- engaging in conduct that is prejudicial to the administration of justice;

4. DR 1-102 (a) (7) (22 NYCRR 1200.3 [a] [7]) -- engaging in conduct that adversely reflects on his fitness as a lawyer;

5. DR 1-104 (b) (22 NYCRR 1200.5 [b]) -- failing to make reasonable efforts to ensure that a lawyer over whom he has direct supervisory authority conforms to the disciplinary rules;

6. DR 2-105 (c) (1) (22 NYCRR 1200.10 [c] [1]) -- stating that he has been recognized or certified as a specialist in a particular area of law or law practice by a private organization without identifying the certifying private organization and including the required disclaimer; and

7. DR 5-101 (a) (22 NYCRR 1200.20 [a]) -- accepting or continuing employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by his own financial interests.

The lawyer was found to have, "with full knowledge of the prohibition, funded loans to clients for more than eight years and engaged in deceptive and deceitful conduct to conceal his role as lender. Respondent has expressed a shocking lack of remorse for his misconduct. He conceded that he loaned money through intermediaries in order to circumvent the disciplinary rules, and he continued to represent clients who had obtained loans funded by him until as late as the commencement of the hearing conducted by the Referee in this matter. Accordingly, after consideration of all of the factors in this matter, we conclude that respondent should be suspended ..."

Moran, 58, was admitted to the New York bar in 1973. His firm, Moran & Kufta, specialized in personal injury and medical malpractice. (Wednesday, the firm's Web site was out of commission, and a receptionist said the firm had recently changed its name to Valerio & Kufta.)

The panel also found that Moran violated disciplinary rules by failing to disclose the existence of one such loan during a client's bankruptcy proceeding and by failing to include a required disclaimer when referring to himself as a trial specialist on his Web site.

The panel however rejected the referee's findings that loaning money via intermediaries directly violated the disciplinary rules, that Moran loaned money directly to clients, that it was improper for Moran to compare the quality of his firm to others' on his Web site or that he engaged in "misleading" conduct by posting information about the rival firm.

Justices Robert G. Hurlbutt, Salvatore R. Martoche, Nancy E. Smith, John V. Centra, and Erin M. Peradotto sat on the panel.

Insurers Also Do Wrong

Law firms Wiley Rein and Coughlin Duffy, two law firms and the insurer they represented, Zurich American Insurance Companies, have been assessed $1.25 million in sanctions by Southern District of New York Judge Alvin Hellerstein. The basis for the sanctions started when the judge learned that:

"On the day of the terrorist attacks, Zurich's chief underwriter for the United States, Mary Merkel, asked her assistant to print a copy of the then-existing primary policy from the computer system Zurich uses to generate its policies. She retained the print-out, a 62-page document (the "9/11 Document"), in her files in Schaumberg, Ill. The 9/11 Document, and the specific wording of the endorsements that were part of the 9/11 Document, contradict Zurich's contention that the Net Lessees, excepting Westfield, were not Named Insureds under the Policies. In particular, the 9/11 Document contained a "Broad Form Named Insured" endorsement that listed as named insureds:

World Trade Center Properties, LLC c/o Silverstein Properties, Inc. and any subsidiary company as now formed or constituted, and any other company over which the named insured has active control so long as the named insured or any subsidiary company has an ownership interest of more than 50% of such company."

Just four days after Brunner's instruction to destroy nothing was issued, Zurich underwriter Lynn Maier sent an e-mail to two assistants and her supervisor saying, " As per our conversation, please confirm ASAP, that the old version of the policy has been deleted from the Document Library and replaced with the final corrected policy. This information needs to be relayed to the ... home office."

In March 2003, Zurich's attorneys took possession of the 9/11 Document, or a copy, from Mary Merkel's office. The document was not produced until February 18, 2005, after depositions had been completed and following pointed inquiries by opposing counsel, following up trace references in other of Zurich's productions.

By signing, filing, or otherwise representing to the Court that something is or is not so, the attorney certifies that he has complied with each of the foregoing obligations to the best of his knowledge, information, and belief, formed after an inquiry reasonable under the circumstances. If, after notice and an opportunity to respond, the court determines that an attorney has not complied with his obligations set forth in Rule 11(b), it may impose an appropriate sanction on the attorney, law firm, or party that violated or is responsible for the violation.

The court reasoned:

A baseless factual contention poses a greater threat to justice than a baseless legal contention. The evidentiary foundation upon which an attorney rests his assertions of fact is, for the most part, exclusively within the control of the attorney and his client. In order to function, the court must repose trust in the attorneys who come before it to make factual representations supported by evidence. The legal process contemplates and requires that when the time comes for a judge or jury to find facts, both sides will have legally sufficient evidence to present in support of those facts. In a complex case, baseless factual contentions can delay the time for presentation of evidence to the fact-finder for years, at an expense running into the millions of dollars. An attorney who abuses the trust of the court in this manner, and who causes such delay and needless expense thereby, should be penalized. In contrast, a misstatement of law is much more easily remedied, by the adverse party's research, or the court's own research.

* * * Zurich denied that the Port Authority was entitled to Additional Insured status, arguing that because the only Named Insured on the policy binder was WTCP, and because the Port Authority did not lease the World Trade Center to WTCP, but rather to the Net Lessees, the endorsement providing additional insured coverage to the "lessor" did not extend coverage to the Port Authority.

* * * Simply put, Zurich's position made no sense, because the parties would not have agreed to insure a holding company with no operations and no direct holdings, without an understanding and intent to insure the subsidiary entities that would actually be exposed to premises liability. See Hametz Decl., Ex. 7 (deposition testimony of Zurich employee Mark Elias). Nor has Zurich offered any evidence to the contrary, arguing not that it was right, but that in the absence of evidence, the Port Authority could not prove it was wrong. This approach shielded Zurich from judgment on Port Authority's motion for judgment on the pleadings, but it will not suffice under Rule 11. The Port Authority's motion for sanctions pursuant to Rule 11, Fed. R. Civ. P., is GRANTED.

* * * I impose Rule 37 sanctions in the amount of $500,000. Of this amount, $250,000 shall be payable to the Port Authority, and $250,000 to Westfield, to defray the costs they unreasonably incurred in the wasted discovery proceedings. The sanction is imposed jointly and severally against Zurich, Wiley Rein LLP, and Coughlin Duffy LLP, subject, as with the Rule 11 sanction, to review and re-allocation at the request of any of them. The sanction is additive of the sanction imposed pursuant to Rule 11, for a total sanction of $1,250,000.

It was "clearly important," and "not the type of document that becomes lost without a trace," Hellerstein wrote in In re September 11th Liability Insurance Coverage Cases, 03 Civ. 332. The discovery abuses also concealed that Westfield Corporation, a major retailer at the site, was one of the "additional insureds" that Zurich was obligated to cover under its policies with Silverstein.

"Zurich's 'culpable state of mind' is established by evidence that it intended to delete, and deleted, the electronic version of the 9/11 document, and by evidence that Zurich, or its attorneys, or both, had possession of the printed version of the 9/11 document, but failed to produce it," according to the order.

While the electronic version of the document was destroyed on Sept. 11, a paper version remained in a file cabinet in Illinois. "Wiley Rein attorneys obtained and copied the 9/11 document in March of 2003, but they left it buried in a box for nearly two years and failed timely to produce it. ...Counsel's failure to recognize the importance of this document, and to produce it timely, especially when alerted to its possible existence by opposing counsel, also constitutes a violation of discovery obligations."

Refusing to accept an explanation of inadvertence, the judge concluded: "The explanation is not apt," he said. "A finding of negligence or worse would appear to be a more appropriate characterization, and I so find."

"Clearly, Zurich's decision to assert and maintain its denials and defenses regarding the Port Authority's status as additional insured multiplied proceedings, caused substantial expense to the parties, caused substantial waste of court time, and insulted public and judicial expectations of the standard of conduct expected of attorneys and insurance carriers."

Intentional Acts

Judge Cardozo, in 1923 stated a simple and obvious rule of law that "no one shall be permitted to take advantage of his own wrong." [Messersmith v. American Fidelity Co., 232 N.Y. 161, 133 N.E. 432 (1921)].California, by statute, covers has codified Judge Cardozo's statement. Almost every insurance policy issued in the United States excludes the intentional acts of the insured. Those that do not are covered by the public policy adopted by most states.. To insure against wrongful acts would be to allow people to act wrongfully with no adverse effect since their victims would be compensated by insurance.

For example, California Insurance Code Section 533 sets the public policy of the state that no insurer may ever pay for the intentional acts of its insured. In 2006 the California Court of Appeal, in Combs v. State Farm Fire & Casualty Co., 143 Cal.App.4th 1338, 49 Cal.Rptr.3d 917 (Cal.App. 2006) clarified and reiterated the public policy created by the enactment of California Insurance Code Section 533. It noted that Section 533 is incorporated into all policies issued in California and creates a prohibition against indemnity for intentional acts. In so doing the court agreed that an insurer was not only relieved of its obligation to pay indemnity for intentional acts but was also relieved of an obligation to pay court ordered attorneys fees to the victim of the intentional acts.

The court concluded that a judgment that requires a defendant to pay the attorney fees of the opposing party only becomes payable if and when the insured has been found liable. In this case the attorneys fees were ordered paid only as a statutory consequence of the liability of the defendant. If the wrongdoer was permitted to insure against the consequence of his actions would, just as allowing the wrongdoer to be indemnified for the damages he or she must pay as a result of willful misconduct, undercut the public policy behind section 533 and permit the wrongdoer to avoid what may be a significant consequence of the wrongdoing.

State Farm provided Combs with a defense, under a reservation of rights, to a complaint filed in federal district court by Fair Housing of Marin (FHOM) charging Combs with racial discrimination in the management of a San Rafael apartment complex in violation of federal and state law.

In March 1999, the district court entered an order striking Combs' answer and entering his default, based on findings that his "failure to produce documents was not only the 'fault' of the defendant, but was a willful and bad faith attempt to obfuscate the discovery process and mislead FHOM and the court," that he had "not only failed to produce documents as ordered, but that he misrepresented to both counsel and to the court the very existence of such documents," that his "gamesmanship" had caused prejudice.

Following an evidentiary hearing, the trial court found "direct evidence of racial animus . . . amply present on this record" and "the record on liability" to be "damning," and awarded plaintiff compensatory and punitive damages. Thereafter, following the receipt of a report and recommendation from a magistrate judge, the district court awarded FHOM some $508,000 in attorney fees as the prevailing party pursuant to the provisions of both the underlying federal and state statutes.

The judgment was affirmed in all respects by the 9th Circuit Court of Appeals. Thereafter, the judgment was augmented by attorney fees of an additional $131,000 incurred on appeal and in opposing a petition for a writ of certiorari.

Combs was insured by a State Farm "Apartment Policy" that provided comprehensive business liability coverage for bodily injury, property damage, personal injury and advertising injury as defined in the policy.

The court concluded:

There is no doubt that intentional discrimination, such as the district court found Combs to have committed, is willful conduct for which section 533 precludes indemnification. Combs does not pursue a claim to be indemnified for the compensatory and punitive damages for which he was held liable, implicitly acknowledging that coverage for such liability is barred by section 533.

Section 533 prohibits coverage for any "loss" caused by the willful misconduct of the insured. Liability for the adversary's costs and attorney fees in this case is a loss caused by and incurred as a result of the insured's intentional racial discrimination. Attorney fee awards may not normally be considered as "damages" in that they do not compensate claimants for the injury for which they brought suit.

A similar public policy was found to be the policy of the state of Nebraska. In Virginia, "Public policy will not permit an insured to benefit from his or her own intentional wrongdoing." "[P]ublic policy generally bars coverage for an insured's intentional wrongdoing or criminal misconduct."; St. Paul Ins. Co. v. Talladega Nursing Home Inc., explaining that under Alabama law all contracts insuring against loss from intentional wrongs are void as against public policy.

This same conclusion has been reached in refusing to permit an insurer to provide coverage for attorney fees awarded under Code of Civil Procedure section 1021.4, to a plaintiff who has prevailed based on the commission of a felony for which the defendant has been convicted. The "violation of law" -- a variation of the "intentional act" exclusions -- set forth in both insurance policies issued by an insurer are unambiguous and include within their scope the conduct of the insured upon which the claim is based. The court found that the exclusion does not contravene public policy in American Family Mutual Insurance Company v. Hadley.

Not all states agree with Judge Cardozo. Some have different statements of their public policy. In Texas, insurance for punitive damages is not against public policy.

Those states that allow insurance against intentional acts should reconsider their position. Insurance should, by definition, only insure against fortuitous acts. To do otherwise would be to encourage fraud.

More on the Silicosis Scandals

In a situation that requires all insurers to carefully supervise their employees and independently evaluate claims charging silicosis and asbestosis two adjusters paid out $34 million dollars to a less than honorable lawyer who bribed them with a new BMW automobile and only $3 million in cash. Since most adjusters and claims managers are underpaid the new BMW and wallets full of cash should have raised some red flags.

A 14-count federal indictment issued in Houston accused John Prestage and Rachel Rossow, who formerly worked at The Hartford, and attorney Warren Todd Hoeffner that included charges of conspiracy, mail and wire fraud, and the laundering of millions of dollars. The attorney allegedly paid millions in bribes to the insurer's employees to obtain favorable settlements for his clients with silicosis claims.

According to the allegations in the indictment, between February 2002 and November 2004, Warren Todd Hoeffner, the general partner of Hoeffner & Bilek law firm, located in Houston, Texas, bribed and paid kickbacks in litigation settlement funds to Rachel Rossow and John Prestage, then employees of The Hartford insurance company located in Hartford, Connecticut for recommending to The Hartford that it settle the claims of Hoeffner's clients against The Hartford and its insureds.

Mr. Prestage and Ms. Rossow were arrested in Connecticut on June 28, 2007 according to the U.S. Attorney's Office of the Southern District of Texas in Houston.

The indictment charges that between February 2002 and November 2004, Mr. Hoeffner bribed the two Hartford employees to recommend that the company settle silicosis injury claims by Mr. Hoeffner's clients against the company and its insureds.

According to the indictment from a Houston Grand Jury Ms. Rossow and Mr. Prestage agreed to pay Mr. Hoeffner more than $34 million to settle his claims. The two former Hartford employees, in return, received more than $3 million and each a new BMW automobile as part of the conspiracy from Mr. Hoeffner.

The indictment was unsealed June 28, 2007 after the arrest of the three defendants, according to the U.S. Attorney Office. Mr. Hoeffner was released on a $250,000 bond after appearing before U.S. Magistrate Frances Stacy, who set a trial date on September 4, 2007.

Hoeffner's silicosis cases, mostly in Texas, predated the mass filing of silicosis lawsuits in 2002 and 2003 in Mississippi that led to the discrediting of the lawyers who brought them. A federal judge in Corpus Christi, Janis Jack, reviewing the 10,000-plus cases that landed temporarily in her court, found the entire enterprise laced with fraud and deceit.

Her 2005 ruling helped stall the progress of what plaintiff lawyers had hoped would be the successor to asbestos litigation, which was beginning to play out. Because of the corruption she exposed, along with tort-reform measures enacted by Texas and other states, the plaintiffs' strategy of filing so many lawsuits that defendants had no option but to settle no longer proved viable.

Conspiracy to commit wire fraud and mail fraud carries a maximum punishment of five years of imprisonment, without parole, upon conviction. Each count of the four counts of wire fraud and two counts of mail fraud carries a maximum penalty of 20 years imprisonment, upon conviction. Seven of these counts also carry a maximum fine of $250,000 fine. The charge of conspiracy to commit money laundering carries a maximum penalty of 20 years imprisonment and a fine of $500,000 or twice the amount of the financial transactions. he maximum sentence for each of the six Monetary Transactions with Criminally Derived Property charges is 10 years and carries a maximum fine of $250,000 or twice the amount of the criminal derived property involved.

The indictment also seeks to forfeit the interest of each of the three defendants in the proceeds of the alleged scheme which includes a total of approximately $8,813,190 in cash, and two automobiles registered to Rossow and Prestage, which the indictment alleges were paid for by Hoeffner as part of the scheme to defraud The Hartford.

The prosecutor, U.S. Attorney Don DeGabrielle, said of the importance of the case: "There is a presumption of regularity and legality in the business of insurance litigation, which, when corrupted, damages our confidence in the integrity of the system."

Good News

From the Coalition Against Insurance Fraud:

* A Kentucky coal-mining firm bilked workers comp insurers out of $1.5 million in premiums by telling the insurers he had only half as many employees as he really did. Firm owner Harold Simpson paid some employees through checks, but kept a hidden payroll to pay many miners in cash. He said he was struggling to survive during a time of low coal prices and high operating costs, including comp coverage. Simpson also said insurers suffered no losses because he paid the hidden miners' medical bills out of his own pocket. But the federal court was unmoved, especially because he tried to avoid restitution by transferring ownership of one of his two mining firms to his wife. Simpson received three years, and must repay the $1.5 million in avoided premiums.

* The claims didn't add up. A former math teacher bilked her school district's health insurer out of $1,754 by submitting claims for 45 psychotherapy sessions she neither received nor paid for. Beth N. Gurtov taught at Central Middle School in Parsippany, N.J. She received three years of probation and lost her teaching license.

* A former Upstate New York doc billed 20 auto insurers more than $2 million for tests he never performed on accident victims. Juan Carlos Fischberg laundered the money through wire transfers to South America and Delaware. He pleaded guilty this week and faces up to five years in prison when sentenced.

* Hugo Salvador Argueta ran shell construction firms that provided fake workers comp policies to South Florida subcontractors who used the policies to obtain lucrative construction contracts. The shell firms Ortiz Construction Group and Mirada Construction received a percentage of the subcontractors' payroll. The subcontractors also employed illegal workers, paying them under the table to avoid state-required workers comp premiums. Another crony greased the suspected scam by offering a check-cashing service for the workers. Adam Segan, who ran Pronto Cash, showed up with vans loaded with cash to pay the illegal workers. Segan pleaded guilty in federal court Tuesday and faces up to 20 years when sentenced in August. Argueta pleaded guilty earlier and will be sentenced in July.

* A former claim adjuster and Baltimore cop stole about $150,000 in bogus workers comp checks from the city's workers comp program. Natalie Mack issued more than $153,000 in fake checks to former cop Andre Stover. Stover hurt his leg while in training. He started receiving $860 in comp money biweekly from CompManagement, the city's comp administrator. Stover and Mack, who handled his comp claims, became friendly during the claim process. They decided to open more case files in his name to illegally pad his comp money. Stover would meet Mack on a Baltimore street corner outside her office. He'd take the insurance checks, cash them at a nearby check-cashing store, then split the money with Mack. The Maryland fraud bureau investigated, and the AG landed the conviction this week. Mack faces up to 15 years in prison when sentenced in early August. Stover pleaded guilty in January and received six months of home detention.

* Insurance adjuster Jacinto Antonio Barrientos stole more than $45,000 from Unitrin Insurance, where he worked. The San Fernando Valley, Calif. man added crony Lisa Ann Hiersekorn's name to claims and split the checks with her when Unitrin paid the claims. The checks were as large as $8,363. Barrientos received checks on 16 of 19 attempts until Unitrin got wise and stopped the payouts. Barrientos pleaded guilty this week and received a year in county jail. He also must repay the stolen money.

* Andrea Renquist stole two blank prescription forms from the doctor for whom she worked, forged prescriptions for narcotics and presented them to a CVS pharmacy to fill. The pharmacy filled the prescriptions, which were paid for by insurers. The Clarksburg, W.Va., woman received one to four years in jail, suspended.

* A Pittsburgh pharmacist made up to $7 million in bogus claims for HIV/AIDS medicine and helped sell fraudulent painkiller prescriptions over the Internet. Anthony A. Grejda filed claims for the drugs, which he never dispensed to patients, through his Crafton pharmacy called TDI. He also filled hundreds of painkiller prescriptions for patients who doctors never saw. The prescriptions were based only on a brief Internet questionnaire the patients filled out. Grejda dolled out 3.7 million pills. He pleaded guilty in June 2007, and faces up to 40 years in federal prison when sentenced in October.

Convictions

Guilty Ex-Adjuster

Maryland Attorney General Douglas F. Gansler reports that Natalie L. Mack, a former insurance claims adjuster with CompManagement, Inc., pled guilty in the Circuit Court for Baltimore City to stealing approximately $153,000 in fraudulent workers' compensation checks from CompManagement Inc.

Judge John M. Glynn ordered a pre-sentence investigation and set sentencing for August 15, 2007. The maximum penalty for felony theft is 15 years in prison and a fine of $25,000.

Andre Stover, a former Baltimore City police officer, pled guilty to felony theft in January for his part in the conspiracy.

From Pennslyvania

In Bucks County, Adam Pelkowski entered a guilty plea to one count of Workers' Compensation Insurance Fraud (F3) and on May 23, 2007 was sentenced to serve 7 years probation and ordered to pay restitution of $28,851 and all court costs. Pelkowski suffered a leg injury while working as a dry wall taper for Toltech, Inc., on August 10, 2004. Guard Insurance Company paid Pelkowski $41,860 in workers' compensation benefits from August 2004 through October 2005. Pelkowski submitted LIBC-750 forms indicating he was not employed while receiving workers' compensation benefits. Investigation revealed that Pelkowski worked as a dry wall taper for another company on August 30, 2004 until October 11, 2005 earning $33,576.95 in wages. Pelkowski was receiving a paycheck and Workers' Compensation benefits at the same time, for over one year.

In Allegheny County, Lori Bradburn entered a guilty plea to one count of Insurance Fraud (F3) and one count of Forgery (M1) and on May 22, 2007 was sentenced to serve 7 years probation and ordered to pay $10,303 in restitution and all court costs. Bradburn was an employee for Aetna Insurance in their "call center" and had access to the computer files for Aetna insureds. Bradburn monitored the accounts of any insureds that had her same last name, looking for individuals who had not submitted claims to Aetna for a long period of time or were in the process of discontinuing their coverage. Bradburn changed the insured's address to her own personal address, submitted a claim and/or prepared a log entry and requested a reimbursement check be sent under the insured's name to her home address. Once the check was received, Bradburn changed the address back to the insured's. Investigation revealed that Bradburn obtained $10,303 from Aetna on fifteen policies and attempted to obtain another $2,000 but was unable to finalize the claim.

In Allegheny County, James Degore entered a guilty plea to one count of Insurance Fraud (F3) and one count of Theft by Deception (F3) and on May 29, 2007 was sentenced to served 3 years probation, ordered to perform 50 hours of community service, pay $13,842.89 in restitution, a fine of $750 and all court costs. Degore reported to police that his 2002 Dodge Caravan was stolen from a shopping complex and filed a stolen vehicle claim with Farmers Insurance Company. Degore's van was recovered burned and determined to be a total loss. The investigation revealed that Degore had hired someone to get rid of his van so he could collect the insurance proceeds.

In Delaware County, Joseph A. Morris entered a guilty plea to one count of Workers' Compensation Insurance Fraud (F3) and on May 7, 2007 was sentenced to serve 2 years probation, ordered to perform 50 hours of community service and ordered to pay restitution of $12,626.18 and all court costs. From February 2005 through October 2005, Morris received temporary wage loss benefits from the State Workers' Compensation Fund (SWIF) as a result of an injury he sustained while working for Greenhalgh Plumbing. At a deposition Morris denied working. Investigation revealed that Morris began working for another company from January 31, 2005 through September 17, 2006, overlapping with the SWIF benefits for eight months.

N.J. Chiropractor To Pay $1M To Insurer

On June 19, 2007, New Jersey Manufacturers Insurance Group announced that a New Jersey chiropractor agreed to pay the West Trenton, N.J. based insurer $1 million for conducting tests using unauthorized technicians, among them a 15-year-old boy.

The carrier said the settlement came after it sued Dr. Sean Nisivoccia for fraudulent nerve conduction velocity tests that were conducted at his chiropractic offices in East Orange, N.J. The tests were done on more than 60 individuals with auto accident claims from 1999 to late 2004. The company said it brought an action against Dr. Nisivoccia in 2005 after the insurer's Special Investigations Unit discovered he ordered the test conducted by technicians, one of whom was a teenager. The discovery spurred an in-depth review by NJM of all relevant patient files, the company said.

NJM's suit named another chiropractor and three doctors who allegedly referred patients to Dr. Nisivoccia for the illegal testing. NJM has provided evidence it obtained with regard to the case to the appropriate medical boards and the Office of the Insurance Fraud Prosecutor for further consideration.

"The Nisivoccia settlement will recover valuable funds for our policyholders and is a great accomplishment for our SIU," said Anthony G. Dickson, president and chief executive officer of NJM.

He added that "medical fraud involves more than just money. While most medical practitioners have the utmost concern for the well-being of their patients, dishonest doctors may take risks that can endanger their patients. Doctors who are proven to be dishonest should lose their licenses, be prosecuted to the fullest extent of the law and be sent to jail."

Agency Pays to Cover Fraud of President After Suicide

On June 22, 2007, North Dakota Insurance Commissioner Jim Poolman announced that policyholders defrauded by an insurance agent who killed herself in late March will be getting their premiums back in full, in a settlement of the largest insurance premium fraud cause in North Dakota history. The amounts returned range from about $338 to nearly $326,000. The total is about $675,000.

The money will be repaid by the family of Diane Cottingham, which runs the Cottingham Agency. Poolman said nearly a dozen staff members spent hundreds of hours working on the case.

Poolman said the state could have shut down the agency but wanted to avoid that because it has about a dozen employees and hundreds of policyholders. Diane Cottingham, of Underwood, who was the Cottingham Agency's president and secretary-treasurer, killed herself when state regulators became aware of the fraud. Her body was found March 24, near her car in a pasture near Max. She had been scheduled to meet that day with Poolman, who planned to order her to stop selling insurance policies.

Diane Cottingham did pay about $39,000 in claims on the fraudulent accounts, Poolman said. That amount was deducted from the $715,000 in fraudulent premiums when the restitution was calculated, he said.

Policyholders were being sent a letter Friday about the restitution agreement. To get their premium repaid, they must sign a release agreeing not to sue the Cottingham Agency, Poolman said.

Poolman's order sets a deadline of June 30 for the Cottinghams to repay the fraudulent premiums.

This column was first published in Zalma's Insurance Fraud Letter. Zalma's Insurance Fraud Letter (ZIFL) is published 12 months a year by ClaimSchool. Zalma serves as an expert witness or consultant in insurance coverage, claims handling, insurance bad faith and fraud. Zalma's law practice is limited to the representation of insurers and those in the business of insurance. He is available to provide advice and counsel concerning insurance fraud, first and third party insurance coverage issues, bad faith and first party insurance appraisals. It is republished here with permission.

You can read the full Insurance Fraud Newsletter at http://www.zalma.com.

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