Insurers are the only entities who are required by law to investigate and help in the prosecution of criminals seeking to defraud the insurer. All other persons and entities, when they are the victim of a crime, report it to a police agency who investigates the crime. Reporting a crime, like a robbery, to police has no consequences to the person reporting the crime nor does that person have any obligation past reporting the crime.

Insurers are compelled to investigate customers whom they believe may have committed a fraudulent act. Thus, they may find themselves being charged with breach of the covenant of good faith and fair dealing, exposing insurers to tort damages and punitive or exemplary damage. The privilege provided to protect those who report suspected crimes to police agencies is often ignored or sidestepped by the courts, as the Court of Appeal did in Frommoethelydo v. Fire Insurance Exchange, 42 Cal. 3d 208, 721 P.2d 41, 228 Cal. Rptr. 160 (Cal. 07/24/1986). Insurers who deny claims for fraud (whether the insured is arrested or not) will always find themselves defendants in cases brought by the insured seeking both indemnity and punitive and exemplary damages in a bad faith lawsuit. Even if the insurer obtains a defense verdict, the cost of defending a bad faith lawsuit is often greater than paying the person the insurer believes had attempted to defraud it.

Anti-Fraud Statutes & Regulations