Insurers Can Get Restitution For Investigating Fraudulent Claims, But Must Keep Detailed Records

A California Appellate Court held on May 31, 2018 that insurance companies wanting to recover costs for investigating fraudulent claims can do so, but may need to provide documented expense records and not just a general mathematical formula.  The case is People v. Williams, Nos. D072783, D266562 (Cal. Ct.App. May 31, 2018).

Alyce Williams plead guilty to making a false statement in support of an insurance claim as part of a plea bargain. Among the provisions of that bargain was an order to pay restitution to the victims, including Farmers Insurance.

Farmers, at a later evidentiary hearing, requested restitution in the amount of $1042.17 for the costs of investigating Williams’ fraudulent claims. The trial court, noting that California’s insurance law affords insurance companies the ability to recover investigative costs, found that Farmers was entitled to the amount requested. The court agreed that the investigative expenses were necessary to the discovery of the fraud, and the court observed that Farmers was “very conservative” in its demands.

Williams appealed. The appellate court agreed that Farmers was “clearly” qualified for restitution as a victim of fraud at the hands of Williams. It also noted that trial courts are afforded broad discretion in setting the amount of restitution, can use “any rational method… reasonably calculated to make the victim whole,” and not bound to limit the restitution order “to the exact amount lost.” 

But the appellate court nonetheless vacated the trial court’s restitution award to Farmers because the amount awarded was not based on actual documented manhours spent, or even an estimate of those manhours. The investigator delegated to Williams’ case never bothered to log or otherwise document his hours for that assignment. Rather, Farmers arrived at this figure by averaging the salary of a typical investigator, including benefits, company car costs, administrative and travel costs, and dividing that number by 126, the average number of claims filed in a year.

The court held that there was no “factual nexus” between the work done and the amount claimed, and thus the formula not did not constitute a “rational method” of calculating restitution.

This case is emblematic of the old phrase, “the devil is in the details.” Because of lax record-keeping, Farmers has deprived itself of restitution that it otherwise had every right to claim.