Friday, October 21, 2011

Attorney, Wife Liable for RICO Fraudulent Insurance Claims

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Two insurance companies succeeded—and three failed—in their RICO claims against an attorney who had participated in a scheme to defraud the insurers by submitting false claims for automobile insurance, the federal district court in San Juan, Puerto Rico, has ruled. Because the attorney’s RICO violations enriched both him and his spouse, their conjugal partnership was jointly liable for nearly a million dollars in damages that the attorney had caused.

Insurance Fraud Paradigm

Aetna Casualty Surety Co. v. P & B Autobody (43 F.3d 1546), a 1994 decision by the U.S. Court of Appeals for the First Circuit, provided a paradigm for analyzing RICO claims involving insurance fraud, the court observed. In accordance with Aetna, the insurers had to prove that: (1) each was an enterprise; (2) their business activities affected interstate or foreign commerce; (3) the defendant associated with each of them; (4) the defendant participated in the operation or management of each enterprise; and (5) the defendant’s participation in each enterprise was effected through a pattern of racketeering activity.

Enterprise, Interstate Commerce

The insurers were legitimate corporations authorized to engage in the business of insurance in Puerto Rico. Therefore, each insurer constituted a distinct enterprise. Moreover, to the extent that the insurers provided coverage to policyholders in the continental United States, their activities affected interstate commerce. The first and second Aetna criteria were therefore met, according to the court.

Association, Participation

As a policyholder or claimant under the plaintiffs’ insurance policies, the attorney associated with each of the insurers, the court reasoned. In addition, he participated in the conduct of the enterprises’ affairs by filing false claims that were paid by the insurers. RICO made it unlawful for any person who was employed by or associated with an interstate enterprise to “conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” In Reves v. Ernst & Young (CCH RICO Business Disputes Guide ¶8227), the U.S. Supreme Court construed the words “conduct or participate” to mean a defendant’s participation in the “operation or management” of the enterprise.

In this case, the attorney argued that he could not have participated in the operation or management of the insurance company enterprises because insurance company employees had not been involved in the scheme. Although some courts in the Second Circuit have adopted this “more restrictive” approach to the operation and management requirement (where participation required employee involvement in the fraudulent scheme), the attorney failed to fully develop his argument with respect to this approach. Alleging that insurance company insiders were not involved in the attorney’s fraud was insufficient to distinguish the holding in the Aetna case, which included insurance company employees as defendants. In light of the First Circuit’s liberal application of the RICO Act, and considering the role that insurance company employees had played in the Aetna scheme, the attorney’s argument was unavailing, the court concluded.

Accordingly, the third and fourth Aetna criteria were met, as well.

Pattern of Racketeering

The attorney contended that the insurers had to prove that two or more predicate acts were committed in connection with each enterprise. In the absence of any attempt to rebut this contention, and in light of the fact that case law appeared to be silent on the issue, the attorney’s “straightforward” interpretation of the fifth criterion was adopted. The undisputed facts showed that the attorney had committed a single act of racketeering in connection with each of three insurers. Accordingly, a pattern of racketeering was absent as to those insurers and their RICO claims failed. The claims asserted by the remaining two insurers, however, were successful. The attorney had committed multiple acts of racketeering in connection with each of them. Moreover, the acts were sufficiently related (they shared the same purpose, results, victims, and methods of commission) and they posed a threat of continued criminal activity, in the court’s view. The two insurers thus met all five Aetna criteria and prevailed on their RICO claims against the attorney.


The successful insurance companies were awarded a total of $955,703 in treble damages. The facts showed that the insurers had sustained losses of $112,500 and 206,068, respectively. After trebling, those damages increased to $337,500 and $618,203, respectively.

The September 30, 2011 case in Puerto Rico American Ins. Co. v. Burgos can be found at CCH RICO Business Disputes Guide ¶12,117.

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