New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on April 15, 2002, representing the position of the New York State Insurance Department.

Re: Suspected Insurance Fraud by a Licensed Insurance Broker

Questions:

1. Does an insurance company have an affirmative duty to report suspected insurance fraud by one of its licensed brokers even if the acts do not meet the definition of a "fraudulent insurance act" found in the New York Penal Law § 176.05 (McKinney 2001)?

2. Does the insurance company have an affirmative duty to report the crime to the appropriate district attorney?

3. Are there any other New York insurance statutes and regulations that govern the insurer’s duty to report suspected insurance fraud?

Conclusions:

1. Yes. As described in the following analysis an insurance company which suspects that an insurance transaction may be fraudulent has a duty under N. Y. Insurance Law § 405 (a) (McKinney 2000) to report the transaction to the Insurance Department which will in turn conduct an investigation.

2. This question would have to be addressed to the appropriate criminal authorities.

3. N.Y. Ins. Law § 405 (a) (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, § 86.5 (2000) (Reg. 95) govern an insurer’s duty to report instances of suspected fraudulent insurance transactions.

Facts:

There were no facts provided. The questions were of a general nature.

Analysis:

1. Under N.Y. Ins. Law § 405 (a) (McKinney 2000), an insurer who has reason to believe that an insurance transaction may be fraudulent or has knowledge that a fraudulent insurance transaction is about to take place, or has taken place must report the transaction to the Department. The Department has the burden of investigating and determining whether the alleged fraudulent transaction is indeed fraudulent. N.Y. Ins. Law § 405 (McKinney 2000) states in relevant part:

(a) any person licensed pursuant to the provisions of this chapter, and any person engaged in the business of insurance in this state who is exempted from compliance with the licensing requirements of this chapter, …, who has reason to believe that an insurance transaction may be fraudulent… shall, within thirty days after determination by such person that the transaction appears to be fraudulent, send to the insurance frauds bureau on a form prescribed by the superintendent, the information requested by the form and such additional information relative to the factual circumstances of the transaction and the parties involved as the superintendent may require. The insurance frauds bureau shall accept reports of suspected fraudulent insurance transactions from any self insurer, including but not limited to self insurers providing health insurance coverage or those defined in section fifty of the workers’ compensation law, and shall treat such reports as any other received pursuant to this section. (emphasis added)

(b) the insurance frauds bureau shall review each report and undertake such further investigation as it deems necessary and proper to determine the validity of the allegations.

N.Y. Ins. Law § 405 (a) and (b)(McKinney 2000)

The above reporting obligation of the insurer is applicable in all instances where an insurer has reason to suspect that an insurance transaction may be fraudulent. The Insurance Law does not contain a definition of a "fraudulent insurance transaction" therefore, one must assume its common sense meaning. The reporting requirement of N.Y. Ins. Law § 405 (a) (McKinney 2000) is written broadly and is not limited to only those instances where the suspected transaction falls within the definition of "a fraudulent insurance act" found in the N.Y. Penal Law § 176.05 (McKinney 1999 & Supp 2001).

Furthermore, N.Y. Ins. Law § 406 (McKinney 2000) confers immunity upon persons who in the absence of fraud or bad faith, report a suspected fraudulent insurance transaction to law enforcement officials and/or to the Insurance Frauds Bureau.

3. N.Y. Ins. Law § 405 (a) (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, § 86.5 (2000) (Reg. 95) govern an insurer’s duty to report instances of suspected fraudulent insurance transactions. N.Y. Comp. Codes R. & Regs. tit. 11, § 86.5 prescribes the manner in which a report of suspected insurance fraud may be made to the Department. It states in pertinent part that:

Reports shall be submitted on the prescribed reporting form issued by the Insurance Frauds Bureau or upon any other form approved by order of the superintendent. Reporting may also be done by means of any electronic medium or system approved by order of the superintendent.

N.Y. Comp. Codes R. & Regs. tit. 11, § 86.5 (2000) (Reg. 95)

For further information you may contact Senior Attorney Adiza Mohammed at the New York City Office.