By Taylor Steele and Sandra Vucinic
Following Knox Ricksen’s submission of an amicus brief on Allstate’s behalf, the California Court of Appeal recently published a key decision that makes it easier for insurers and whistleblowers to recover substantial statutory penalties, assessments, and attorney’s fees from those who commit insurance fraud. The decision affects fraud victims’ right to sue under the California Insurance Frauds Prevention Act (IFPA)1 where other victims or whistleblowers have already sued the same wrongdoers.
Just twenty-six days after Allstate sued Dr. Sonny Rubin, a Southern California pain-management physician, another insurer — State Farm — also filed suit against Dr. Rubin. Both Allstate and State Farm alleged that Dr. Rubin and others had submitted millions of dollars of fraudulent insurance claims for certain medical procedures. And both sued under the IFPA, a statute that deputizes whistleblowers, including insurers, to help the State combat insurance fraud by prosecuting civil claims on its behalf. To reward their efforts and as an incentive to root out fraud, the IFPA allows successful whistleblowers to share in the State’s monetary recovery.2
Because the IFPA is a qui tam statute, the law presents some obstacles absent from traditional fraud claims. For example, as the IFPA allows persons other than the direct victim to sue on the State’s behalf, the statute bars subsequent whistleblowers from suing a defendant based on facts that have already been alleged in a pending IFPA lawsuit.3 This rule — known as the “first-to-file” rule — prevents a multiplicity of similar lawsuits being prosecuted against the same defendants. It also incentivizes insurers and other whistleblowers to promptly come forward with evidence of fraud.
After being sued separately by both Allstate and State Farm, Dr. Rubin persuaded the trial court in State Farm’s action to dismiss State Farm’s later-filed complaint based on the IFPA’s first-to-file rule. The trial court sustained Dr. Rubin’s demurrer, ruling that State Farm’s complaint was based on facts Allstate had alleged just a few weeks before State Farm.
In a seminal decision based on legal issues addressed only by Allstate’s amicus brief (filed in favor of State Farm’s position), the California Court of Appeal reversed and allowed State Farm’s lawsuit to survive alongside Allstate’s. As the first decision to explore the extent to which a defendant may be subject to IFPA suits by multiple insurers, this ruling has key implications for the way insurers plead whistleblower actions going forward.
First, the court confirmed that an insurer can sue and recover under the IFPA for fraudulent claims that the defendant presented to other insurance carriers. Critically, Allstate’s complaint sought to recover against Dr. Rubin only for fraudulent claims submitted to Allstate, but State Farm sought to recover for claims submitted to all insurers, not just State Farm. The court recognized that each insurer has the discretion to define the scope of its own lawsuit — i.e., which insurer-victim’s claims would be at issue in the suit, and which would not. The court cited policy reasons to allow insurers to define the scope of their suit include containing litigation costs, clearly defining direct victims, and reducing risk.
Second, and as a matter of first impression, the court held that trial courts must determine exactly which victims are identified in each competing complaint in ruling on a first-to-file defense under the IFPA. Where a second, non-parasitic IFPA complaint seeks penalties based on “separate pools of victims,” the second suit is not barred even if it otherwise alleges the same fraud scheme. Even though the court determined that State Farm had in part alleged the same fraud scheme as Allstate, State Farm’s lawsuit could proceed because its complaint included victims that Allstate’s had not — i.e., insurers other than Allstate.
While State Farm v. Rubin advances California’s first-to-file jurisprudence, it is important to recognize its limitations. For example, the court did not rule upon the effect State Farm’s complaint would have had on Allstate’s had State Farm filed first — that situation was not before the court. Whether the complaint of an insurer-relator who generally pleads harm as to all insurers (but declines to specifically name those insurers in its complaint) bars a second relator who comes forward and identifies itself as a victim appears to remain an open question under California law. After all, the identity of the second insurer may never come to light in discovery, or the first insurer could decline to pursue those claims, and a windfall to fraudsters could thus result. This would be contrary to the IFPA’s purpose of stopping insurance fraud in California.
Overall, the decision makes it easier for insurers and whistleblowers to recover from those who commit insurance fraud where multiple lawsuits have been filed. However, because IFPA cases remain both legally and factually complex, carriers and whistleblowers should retain experienced counsel with a proven track record.
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[1] Codified at California Insurance Code § 1871, et seq.
[2] A successful relator is entitled to up to 50% of the proceeds, which include penalties of $5,000 to $10,000 per fraudulent claim, plus an assessment of three times the amount of each fraudulent claim. Cal. Ins. Code § 1871.7(b),(g).
[3] Cal. Ins. Code § 1871.7(e)(5).