Good vs. Evil: Gathering Information in a Good Faith Environment
"Today, evil still lurks in the minds of some men [and women too], but the mind is no longer the only repository of evil. We now have easy access to thousands of databases that, in the hands [and minds] of a few people, can cause much evil." - Jack Bologna, JD, CFA
As I sat down to research and write this paper, my intent was to focus strictly on the manner that investigators and adjusters collect information during an insurance claim investigation from a legal perspective. During my research I was astounded as to how bold some investigators and "information brokers" are in their collection methods.
I was further amazed how some individuals and companies actually advertise on the internet, in magazines, and in the yellow pages their various services, products, and information gathering techniques that are out-right illegal or unethical. I wondered in amazement if these people were profoundly ignorant of the many laws, regulations, and case law that govern the collection and distribution of information that is not public record.
I came to believe that many of these information providers probably knew the laws but disregarded the possibility that they would be caught or confronted on how they obtained the information they were selling. What I do know is that these kinds of individuals and companies tarnish the image of the professional, licensed, and law-abiding investigators and information brokers that provide a valuable service to their clients day in and day out.
This paper is intended to provide investigators, adjusters, information brokers and those who use these services an introduction into the legal, ethical, and practical privacy issues of Gathering Information in a Good Faith Claims Environment.
NAIC Insurance Information and Privacy Protection Model Act
In 1980, the National Association of Insurance Commissioners adopted this Act for several reasons. The two main purposes for the Act, was to establish standards for the collection, use, and disclosure of information gathered in connection with insurance transactions by insurance institutions, agents or insurance support organizations; and to maintain a balance between the need for information by those conducting the business of insurance and the public's need for fairness in insurance information practices.
There are three key areas of the Act that I wish to highlight for the purposes of this paper:
1. Within the confines of the Act, Insurance Support Organization is defined as:
"Any person who regularly engages, in whole or in part, in the practice of assembling
or collecting information about natural persons for the primary purpose of providing the information to an insurance institution or agent for insurance transactions, including:
a) The furnishing of consumer reports or investigative consumer reports to an insurance
institution or agent for use in connection with an insurance transaction, or
b) The collection of personal information from insurance institutions, agents or other insurance support organizations for the purpose of detecting or preventing fraud, material misrepresentation or material nondisclosure in connection with insurance underwriting or insurance claim activity.
There are currently 20 states and the District of Columbia that have adopted all or part of NAIC's Model Act. These states include: Arizona, California, Colorado, Connecticut, Georgia, Hawaii, Illinois, Kansas, Maine, Massachusetts, Minnesota, Montana, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Virginia, Washington.
Also, Arkansas, Iowa, Mississippi, New Hampshire and Utah are currently working on state legislation that would adopt provisions of the Model Act.
2. The Act also defines Pretext Interview as:
- "an interview whereby a person, in an attempt to obtain information about a natural person, performs one or more of the following acts:
1) Pretends to be someone he or she is not:
2) Pretends to represent a person he or she is not in fact representing;
3) Misrepresents the true purpose of the interview; or
4) Refuses to identify himself or herself upon request.
Section 3 of the Model Act states, "No insurance institution, agent, or insurance support organization shall use or authorize the use of pretext interviews to obtain information in connection with an insurance transaction; provided, however, a pretext interview may be undertaken to obtain information from a person or institution that does not have a generally or statutorily recognized privileged relationship with the person about whom the information relates for the purpose of investigating a claim where, based upon specific information available for review by the Commissioner, there is reasonable basis for suspecting criminal activity, fraud, material misrepresentation or material nondisclosure in connection with the claim."
The Model Act clearly carves out an exception for those gathering information to use pretext interviews as long as they have "specific information"…that there is a reasonable basis for suspecting fraud or material misrepresentation. Although I have not found any case law to interpret the "specific information" requirement of this Act, I would propose that a professional investigator could equate the standard with "articulatable suspicion" and/or "reasonable and prudent man" found in other areas of the law.
With the exception of Minnesota, each of the states and the District of Columbia that enacted the Model Act have adopted the provisions stated above, including the exception for the investigation of fraud.
Minnesota Statutes Annotated 72A.493 - Obtaining Information by Improper Means
- An insurer, insurance agent, or insurance-support organization must not obtain information or authorize another person to obtain information in connection with an insurance transaction by:
1) pretending to be someone else;
2) pretending to represent a person;
3) misrepresenting the true purpose of the interview; or
4) refusing to provide identification upon request
State legislation, the NAIC Model Act, and court decisions are a reflection of societal attempts to strike a balance between an insurers right to investigate and an individual's right to privacy. See, Figured v. Paralegal Technical Services Inc. 555 A.2d 663 (N.J. Super. Appropriate. Div. 1989); McCain v. Boise Cascade Corp. 553 P.2d 343 (Ore. 1975); Forster v. Manchester, 189 A.2d 147 (Pa. 1963); Tucker v. American Employer's Insurance Co., 171 So.2d 437 (Fla. Dist. Ct. Appropriate. 1965).
In an earlier paper Larry Henning, Vice President - MJM Investigations, wrote on Surveillance and The Law he addressed several cases where the courts have addressed certain investigative pre-text and ruse situations. In Green v. State Farm, 667 F.2d 22 (9th Cir. 1982) an adjuster, among other things, falsely identified himself as a state policeman, and questioned neighbors of the insured regarding a fire of the insured's barn. The adjuster implied that the insured had set the fire. The court found the adjuster's investigative conduct to be unreasonable and tortuous and upheld a large punitive damage award based upon the conduct of the insurer, including obtaining information using a pretext. Obviously, impersonating a law enforcement officer carries severe criminal penalties in every state, as well.
The courts found no fault with the investigators conduct in Turner v. General Adjustment Bureau, 832 P.2d 62 (Utah Appropriate. 1992) where two investigators posing as representatives of a market research company tried to repeatedly gain access to a claimant's home over a period of three months. They gathered information on the claimant's activity that was later used in the claim evaluation process. The court found that the investigators conduct caused no damages, and had the claimant's consent to enter his home.
My research failed to find any court decision specifically addressing the fraud and misrepresentation exceptions found in the NAIC Model Act or any of the states that have enacted the Insurance Information and Privacy Protection Act. I did find however, that although Indiana has no case law addressing pretext interviews, Indiana courts have determined that the tort of bad faith can arise after litigation has begun if bad faith was not an original part of the litigation. Since the claim for bad faith can arise after litigation in first party cases, an insured could allege that the use of a pretext interview constitutes misrepresentation by the insurer and may provide a cause for a claim of bad faith.
Various jurisdictions have addressed the proposition that an insurer cannot insulate itself from liability for bad faith arising out of behavior of its agents or independent contractors. Some courts have determined that insurers can be liable for acts committed by independent adjusters or independent contractors because the duty to treat an insured with good faith and fair dealing is a non-delegable duty. Other states have held that insurers can be held liable for such acts even if the insurer had no knowledge that the investigator or agent conducted an interview using a pretext.
I recently read an article in a private investigation trade magazine, in which a self-reported private investigative expert was giving advice to the readers on how to use a pre-text to illegally obtain entry to a private community protected by locked gates and security. Whereby, the investigator could obtain the necessary information and/or photographic documentation for his client's assignment. All professional investigators and adjusters have to remember that their responsibility is to gather information in an unbiased, legal, and ethical manner so that their evidence will be admissible in court. Otherwise, the unscrupulous investigator or adjuster [and their employer] could be subjected to civil and criminal actions, including large punitive awards for bad faith.
I am not proposing that pretext interviews never be utilized, however I do offer a few simple guidelines to be included in your decision-making process: (1) never perform pretext interviews on represented claimants or individuals with privileged relationships; (2) never impersonate members of actual organizations or people; (3) never impersonate police, fire, clergy or other position protected by law; and (4) always perform investigations keeping in mind good faith and fair dealing. In light of the competing public interests reflected in the Model Act, state legislation, and court rulings, there still remains very little guidance as to when pretext interviews may be appropriate.
Obtaining Information by False Pretenses
In several areas of the country states have enacted laws prohibiting the obtaining and/or release of information by use of False Pretenses. These laws may be found in various sections of the statutes. For example, in the Alabama Workers' Compensation Code [Section 25-5-294] the code states "any person who willfully makes a false statement or representation to obtain information under this section, either for himself or for any other person, who uses any information for any purpose other than the performance of his or her official duties, or in any manner misuses the information, shall be guilty of a misdemeanor."
Good Faith
The relationship that exists between an insurance company and their policyholder are based upon a reliance on trust and confidence. The courts throughout the United States have often found that a spirit of good faith and fair dealing is inherent in any insurance contract. There continues to be a considerable amount of judicial and legislative regulation dealing with insurance contracts and claims handling, including the evolution of bad faith law. Generally, bad faith implies some type of fraud, misleading or deception of the insured, a neglect or refusal to fulfill a duty or obligation under the contract, or engaging in intentional wrongful conduct.
Insurance companies, and therefore adjusters and investigators employed or retained by them, are held to a broader legal duty while investigating, evaluating, and negotiating claims; and courts often hold that a "covenant of good faith and fair dealing is implied in every insurance policy."
Many states have Unfair Claims Settlement Practices Acts setting forth specific guidelines concerning the management, investigation, and adjustment of insurance claims. There is considerable similarity among states; many jurisdictions have adopted unique requirements that an insurer [or their agent] need to follow in order to be in full compliance with the statute. Failure to do so, may subject the insurer to claims and evidence of bad faith.
If an insurer or its private investigator conducts an investigation in a malicious manner that is not reasonably limited to obtaining information needed for evaluating or defending a claim, or deliberately conducts an investigation and illegally and/or unethically gathers information that intentionally violates the privacy of the subject of the investigation, the investigator and the insurer may be liable for civil and criminal remedies.
In his book, The Art of Interrogation in Private Practice, Barry Zalma [a prominent California insurance defense attorney] was correct when he said, "Insurance professionals must convey the image that they are only seeking the information to be of assistance to the witness….The professional must always be aware there are no right or wrong answers to questions posed to an insured, witness, or claimant. The only right answer is the one that provides truthful information about the risk or loss."
These are but a few reasons why insurers, third-party administrators, and self-insured corporations must use due diligence to evaluate and select the professional investigative organization that understands the concepts of Good Faith and Unfair Claims Practices. They must also understand and be in compliance with the myriad of federal, state, and local statutes and regulations that govern private investigative companies and anyone who is involved in the process of gathering information for insurance claim purposes.
Tips for Avoiding the Bad Faith Minefield
Fair Credit Reporting Act>
USC, Title 15, Section 1681 - was originally adopted in 1971 and amended in 1996 and 1997. The Act restricts the information that business entities, governmental bodies, or individuals can provide to other business entities, governmental bodies, or individuals, relating to a consumer's "creditworthiness, credit standing, character, general reputation, personal characteristics, or mode of living" with the intent of establishing eligibility for credit, employment, or other specified purposes.
Congress wanted to ensure that consumer-reporting agencies utilize reliable and accurate credit reporting practices while also maintaining confidentiality of the consumer reports by limiting access to those with a specific and legitimate purpose for obtaining the information. Further complicating the life of an adjuster or investigator is the fact that the use to which the information may be put, may determine whether or not its use is lawful. Simply put, information obtained for one purpose may be lawful, but if utilized for another purpose, may be illegal.
There is exhaustive research and written material on the use of credit reports and consumer investigative reports. For an excellent discussion of the relevance of FCRA in the investigation of insurance claims, see "Privacy and Confidentiality Issues – Use of Information" [February 2000] by W. Lane Neilson. See also, e.g. St. Paul Guardian Ins. Co. v. Johnson, 884 F.2d 881 (5th Cir. 1989), Hovater v. Equifax, Inc., 823 F.2d 413 (11th Cir. 1987), Houghton v. New Jersey Mfr. Ins. Co., 795 F.2d 1144 (3rd Cir. 1986)
In the insurance claims investigation context, the more cautious approach for insurers and investigators obtaining of an individual's credit report should be predicated upon a signed written authorization from the individual granting the requestor to obtain the credit report.
Other Federal Privacy Legislation
-This Act was an amendment to the Federal Wiretap Act of 1968
-This Act was an amendment to the Privacy Act of 1974
There are hundreds of privacy legislation proposals pending before the federal and state governments. Many of these pending legislative bills are focused on protecting the collection and use of social security numbers, medical records, financial records, and other personal online records.
Two pieces of legislation of note is HR 30 introduced by Rep. James Leach (R-Iowa), which would make pretexting illegal, and Rep. Gerald Kleczka (D-Wisc.) has introduced HR 1450, which would tighten the rules on credit headers and Social Security numbers.
Gathering Information From Non-Government Sources
Financial Institutions
The Right to Financial Privacy Act, the Gramm-Leach-Bliley Act, and various state laws and court decisions throughout the country have resulted in a generally accepted implied duty of financial institutions to keep their customers' accounts secret, unless there is some public duty to disclose. Some states allow the consumer a cause of action for unauthorized disclosure of account information. Keep in mind that although bank records are confidential, they are not protected from discovery in a civil or criminal action.
One new provision enacted under Gramm-Leach-Bliley, that will take effect July 1, 2001, is that the Federal Trade Commission is giving fraud investigations some protections and "carve outs," but appears to forbid credit bureaus from divulging to third parties any non-public personal information [including credit header information] unless a consumer consents.
Employment Records
There is generally no right of privacy concerning an individual's work history records. However, limits have been imposed on the kinds of information employers can collect and disclose about their employees through two pieces of legislation. See, The Employee Polygraph Protection Act, 29 U.S.C. Section 2001 and The Americans with Disabilities Act, 42 U.S.C. Section 12101.
Medical Records
There are a host of federal and state statutes and regulations dealing with the protection and confidentiality of an individual's medical records. Most regulations state that a physician or other medical provider may not disclose a patient's records except to the patient, an individual acting on behalf of the patient, or another health care provider, without the express written authorization of the patient. However, like banking records, an individual's medical records are discoverable in a civil or criminal court action.
Private Databases
There are literally hundreds of data vendors and many thousands of databases accessible for free or on a fee-for-service basis. Unfortunately, there are too many unscrupulous information re-sellers who sell illegally obtained, outdated, or inaccurate information and far too few government officials to take enforcement action against those violating the law.
You can search the Internet using various search engines and quickly locate hundreds and hundreds of sites that will sell you allegedly protected and confidential personal information on individuals and companies.
These web sites offer for sale [usually at a premium price] long distance toll records; cellular records; registry of numbers sent to a pager; personal savings, checking and investment records; and many other confidential personal records.
Beth Givens, Director of the Privacy Rights Clearinghouse, had this to say in a 1998 speech in Utah, "There are a number of information vendors that appear to work outside the law. They promise they can get this type of information…and they can. But they're not using the Internet, or even subscriber based services to get that information. They're using old-fashioned [unfortunately not obliterated] private investigator tricks of pretext interviews -- using phony stories and pretending to be you, for example, to get your long distance phone calling information or your medical records -- or having an inside contact whom they pay off."
Clients often ask if we can obtain personal confidential records [without a written authorization] on an individual that they have a pending insurance claim. My answer is usually, "yes we can - but - NO WE WON'T." The great majority of time, the requestor has no idea of the laws or regulations governing the release of the type of records on which they inquired. They only know the records may be helpful in their evaluation of the claim, and they may have seen the same Internet advertisements that I have. [Remember the earlier discussion of Bad Faith and Unfair Claims Practices?]
As with various financial and medical records, other personal records [telephone, cellular, utility, etc.] enjoy some degree of legal protection and are not generally within the "public domain." All of these types of private records may be discovered in a civil or criminal proceeding through the issuance of a valid subpoena, or may be legally released with a valid written authorization from the individual to whom the records pertain.
Conclusion
The struggle for personal privacy has affected all areas of our lives, and as new innovative technologies are developed and new investigative strategies applied, new personal, legal and legislative battles for personal privacy are initiated. It is fundamentally clear that for the past 10 years, and for the foreseeable future, we are in a technology revolution brought on by the explosion of information available on the Internet. The conflict between individuals, financial services institutions, private businesses, and various government agencies will continue, because of the ongoing balancing test between an individual's right to privacy and the insurers right to investigate and validate claims.
Attorneys will be content to know that this area of the law will probably always be unsettled, because the various state and federal laws being enacted are often in conflict with one another, and different people have different ways of interpreting what is appropriate, legal, and ethical.
Note: Michael J. Malone is the Chairman & CEO of MJM Investigations, Inc., a national provider of surveillance and investigative solutions to the insurance claims process headquartered in Raleigh, NC, and sits on the Privacy Task Force of the Coalition Against Insurance Fraud. To contact Mr. Malone: 1-800-927-0456.
provided by:MJM Investigations
MJM Investigations, 8001 Aerial Center, Suite 300, Morrisville, NC 27560. Tel: 800-927-0456; Fax: 800-927-2239.