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Recognizing Fraud and Fighting It in the Courtroom, Part III – Fighting Fraud at the Courthouse

Wed, 21 May 2014
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Published in Articles


The cost of fraudulent insurance claims in the United States is estimated to be $120 billion dollars per year. Fraud is responsible for 10 percent of the property/casualty industry’s sustained losses and loss adjustment expenses, according to Best’s Review. Even though the majority of fraud involves healthcare claims, a significant portion involves property and casualty claims submitted to private insurance companies. Claims representatives are on the front line of fighting the never ending war against insurance fraud. This three-part series discusses ways to recognize potentially fraudulent property and casualty claims and fight them in the courtroom. In Part I and II, we looked at the myths surrounding insurance claims and the signs that may indicate a potentially fraudulent claim. In this issue, we look ways to fight these claims at the courthouse.


Assume that after a thorough investigation and examination under oath, a determination is made that a claim is fraudulent. That determination is conveyed to the policyholder and despite the evidence against him, he files suit alleging that the insurance company breached the policy contract and is guilty of “bad faith” and violations of the Texas Deceptive Trade Practices Act and the Texas Insurance Code. Many companies simply defend the denial of the claim with the objective of causing the policyholder to walk away from the courthouse with no recovery. However, in the process, the policyholder has cost the insurance company many thousands of dollars in investigative and legal expenses. So, on the bottom line, the insurance company loses even if it wins. Some companies are now considering the prospect of fighting back and filing counter-claims against policyholders that assert fraudulent claims in Court. The remainder of this paper will discuss the factors involved in asserting counter-claims against policyholders who litigate a fraudulent claim.


There are a number of different avenues by which an insurance company can file a counter-claim when it is sued by a policyholder that is seeking to enforce a fraudulent claim. Some of these avenues have been available for years, others are fairly new. The following is a brief discussion of each of these avenues.


The cause of action for common law fraud has been available for centuries. The elements of the cause of action are:

  • A person makes a representation;
  • The person knows that the representation is false;
  • The false representation is relied upon by another;
  • The other party takes action as a result of reliance upon the false representation; and
  • The action taken results in financial damage.

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has been some thought that fraud can only be used in circumstances where the insurance company pays a claim and then later learns that it was fraudulent. The reasoning is that the denial of a fraudulent claim, prior to payment, means that the insurance company did not rely upon the false representations made in the claim and did not suffer any financial damage. However, this argument ignores the fact that, at least in the beginning stages of the claim, the insurance company does rely upon the representations made by the policyholder when it opens a file, assigns an adjuster and begins the investigation of the claim. Also, all of the routine activities that take place whenever a claim is made has a financial impact on the insurance company. In fact, there may be occasions when the cost of investigating a claim is as much or more than the amount of the claim itself.

If the insurance company successfully establishes a cause of action for fraud, it can recover its actual damages, court costs, interest and punitive damages, which can include attorney’s fees.

Since the insurance company, who is defending a denial of a claim based upon fraud, has the burden of proving fraud anyway, there appears to be no legal reason why an insurance company cannot assert fraud as both a defense and a counter-claim. However, there may be practical considerations which would preclude such an action from being taken.


Typical property insurance policies contain a number of requirements that a policyholder has to fulfill during the course of the claims process. For example, the policyholder is required to submit a proof of loss and, if requested by the company, submit to an examination under oath. These obligations impliedly require the policyholder to provide truthful information to the insurance company. If the insurance company can prove that the policyholder lied on the proof of loss or the examination under oath, it can establish a breach of contract on the part of the policyholder.

The elements of a cause of action for breach of contract are:

  • An agreement (the insurance policy);
  • The failure of the policyholder to comply with a provision of the agreement; and
  • As a foreseeable result of the policyholder’s breach, the insurance company has sustained damage.

If an insurance company successfully establishes a breach of contract on the part of the policyholder, it may recover its actual damages, court costs, interest and attorney’s fees.

Asserting a counter-claim for breach of contract is especially applicable in claims that are fraudulently exaggerated. It may be that the burglary occurred, but the insured really did not lose five sets of golf clubs as he claimed. The burglary may have really happened, but the policyholder has breached the policy requirements by exaggerating his claim. However, this does not mean that breach of contract cannot be asserted in every case involving a fraudulent claim.


These Rules of Civil Procedure, which are essentially the same, provide an avenue for a litigant to recover attorney’s fees and expenses if it can be established that a lawsuit was filed without a reasonable basis after a reasonable investigation. These rules apply not only to the litigants, but also to their attorneys. The determination as to whether these rules have been violated is made by the judge. Unfortunately, they are rarely enforced.

The remedies available under these provisions are the recovery of attorney’s fees and expenses.


As a practical matter, the insurance company, in order to successfully defend a lawsuit based upon a fraudulent claim, must prove all of the elements, which would give it the basis for making a counter-claim against the policyholder. However, there are also practical reasons why a counter-claim may not be appropriate. For example, if the policyholder had no resources from which to pay a judgment, an insurance company may decline to assert a counter-claim. Also, in some cases, it may appear that the insurance company is “piling on” which may have a tendency to antagonize jurors and result in an adverse verdict against the insurance company.


Given the right circumstances, insurance companies, in my view, ought to not only aggressively defend suits based upon fraudulent claims, but also assert counter-claims seeking recovery of attorney’s fees and expenses in defending against fraud. Juries can be made to understand the costs of fraud. They also understand that fraud results in higher premiums, which we all end up paying. Finally, Jurors do not appreciate our Courts being used to perpetuate dishonesty, lies and the intentional destruction of property.


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