Court: Insurance Firms may Sue
Customers for Fraud
Tuesday, March 14, 2006

The New Jersey Supreme Court today made it easier for insurance companies to sue their policyholders and make them pay for filing fraudulent claims.

In a 5-2 decision, the high court ruled it requires only a “preponderance of the evidence” to prove civil fraud under the Insurance Fraud Prevention Act. The ruling reversed lower court decisions requiring proof of fraud by “clear and convincing evidence,” a much tougher standard.

Under the Insurance Fraud Prevention Act, policyholders found to have “knowingly misrepresented” the facts underlying an insurance claim can be required to pay the insurance company three times the amount of the claim, plus its investigative costs and lawyers’ fees.

Writing for a majority of the court, Justice James Zazzali reasoned that insurance companies were already able to sue policyholders for common law fraud - which must be proven by clear and convincing evidence - and that the Insurance Fraud Prevention Act was intended to make it easier to uncover and punish fraud that had become widespread.

The Insurance Fraud Prevention Act was originally passed in 1983 and has been repeatedly amended to make it tougher.

"Insurance fraud is a problem of massive proportions that currently results in substantial and unnecessary costs to the general public in the form of increased rates,” Zazzali wrote, quoting a 1992 Supreme Court decision.

Justices Barry Albin and Virginia Long dissented.

“Our system of justice is imperfect and erroneous judgments are inevitable,” Albin wrote. Using the law’s lowest standard of proof - preponderance of the evidence - in insurance fraud cases increases the risk that an innocent policyholder could be ordered to pay tens of thousands of dollars to an insurer, Albin wrote.

With so much at stake, he added, the court should require the tougher standard of clear and convincing evidence, which is also required to collect punitive damages. Albin also noted that someone found to have filed a fraudulent automobile insurance claim faces a mandatory one-year driver’s license suspension.

In a footnote, the majority said a higher standard of proof might be needed to trigger the mandatory license suspension for auto insurance fraud. It left that issue for another day.

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