New York Insurance Frauds Prevention Act and aiding unauthorized insurers (Ins. Law 401-405, 2117)

Why this objective matters

Insurance fraud is not just a private dispute between a claimant and an insurer. New York treats it as a crime against the whole insurance-buying public, because every fraudulent claim paid is eventually priced into everyone's premium. Article 4 of the Insurance Law, which the legislature named the Insurance Frauds Prevention Act, builds a framework for detecting, reporting, investigating and punishing it. A separate rule in the licensing article, Insurance Law section 2117, protects the public from a different danger: insurance sold on behalf of a company the state has never authorized. A producer can violate either one, so the exam tests both.

The Insurance Frauds Prevention Act

The legislature's findings explain the Act's purpose. The business of insurance, from licensing to issuing policies to adjusting and paying claims, involves many transactions with potential for abuse. The findings single out arson for insurance fraud as particularly damaging, because it destroys lives, property and neighborhoods and its losses show up in higher premiums for everyone in the state.

What counts as a fraudulent insurance act

The Act borrows its definition from the Penal Law: a fraudulent insurance act means insurance fraud as defined in Penal Law section 176.05. In plain terms, a person commits one by knowingly and with intent to defraud filing an application or a claim that contains materially false information, or by concealing a material fact for the purpose of misleading. Both halves matter on the exam: an outright lie and a deliberate omission are each fraud. An honest mistake is not, because the act requires knowledge and intent to defraud.

Fraud runs in both directions. Applicants can lie on applications (hiding a prior loss, misstating where a car is garaged); claimants can inflate or stage a claim; and producers can falsify applications, pocket premiums, or submit fictitious business.

Penalties

• Criminal. A fraudulent insurance act is a crime. The Penal Law grades insurance fraud by the amount involved, from a misdemeanor in the fifth degree up to a serious felony in the first degree for very large frauds.
• Civil. On top of any criminal liability, the superintendent may levy a civil penalty of **up to $5,000 and the amount of the claim, for each violation**. The penalty reaches anyone, expressly including licensees and their employees.
• Regulatory. Committing a fraudulent insurance act is also a violation of the Insurance Law itself, so a licensee who commits one faces license discipline as well.

The fraud warning on forms

New York requires a written fraud warning, in a form approved by the superintendent, on all applications for commercial insurance and for accident and health insurance, and on all claim forms. It states in substance that anyone who knowingly and with intent to defraud files an application or claim containing materially false information, or conceals material facts to mislead, commits a fraudulent insurance act, which is a crime, and faces a civil penalty of up to $5,000 plus the stated value of the claim. Automobile insurance applications and claim forms carry their own separate approved notice.

Insurers' fraud prevention plans and special investigations units

Insurers writing automobile, workers' compensation, or accident and health policies in New York (unless they write fewer than 3,000 such policies a year) must file a fraud prevention plan with the superintendent. The plan must provide for a full-time special investigations unit (SIU), kept separate from underwriting and claims, or a contract with an outside investigative provider. The plan also covers working with law enforcement and the Department, training underwriting and claims staff to spot fraud, and public awareness. A filed plan is deemed approved if the superintendent does not return it within 120 days. An insurer that fails to file or implement one can be fined up to $2,000 a day. Plans are confidential, and insurers report on them annually by March 15.

Reporting fraud, and immunity for doing so

Insurers and licensees are expected to report suspected fraud to the Department of Financial Services rather than quietly handling it themselves. To encourage reporting, the law grants immunity from civil liability: in the absence of fraud or bad faith, no one can be sued for furnishing information about suspected Insurance Law violations to law enforcement, to the Department's fraud unit, or about insurance fraud to the National Insurance Crime Bureau.

Who investigates

Fraud enforcement sits in the Financial Frauds and Consumer Protection Unit of the Department of Financial Services. It is the qualified agency to enforce Insurance Law article 4, and the superintendent may designate its employees as peace officers. When the superintendent is satisfied that fraud was committed or attempted, the matter is referred to the appropriate district attorney, the attorney general, and the relevant licensing agency. This does not displace other police or prosecutors, who keep their own authority.

Aiding an unauthorized insurer (section 2117)

An unauthorized insurer is one that does not hold a certificate of authority to do business in New York. Section 2117 forbids anyone in New York from acting as agent for, or in any way aiding, an unauthorized insurer in transacting insurance business: soliciting or negotiating its policies, delivering them, collecting its premiums, or otherwise helping it do business here. The reason is protection: an unauthorized company is not examined by the Department, and its policyholders are generally not protected by the state's guaranty funds if it fails.

The main lawful exception is excess line placement. A licensed excess line broker may place coverage with an eligible unauthorized insurer when the coverage cannot be obtained from authorized insurers, following the excess line rules. Reinsurance arrangements are also treated separately. Outside those channels, a producer who helps an unauthorized insurer sell in New York faces penalties and loss of license, and the Department also treats unlicensed activity as a separately punishable act, with penalties doubled when consumers are harmed.

Bottom line

Fraud requires knowledge and intent; it can be a lie or a concealment; it is a crime plus a civil penalty of up to $5,000 and the claim amount per violation; reporting it in good faith is protected; and helping an unauthorized insurer is prohibited except through the excess line system.