(Editor's Note: The following article was contributed byBarry Zalma, Esq., CFE, who has been practicing insurancelaw in California for more than 40 years.)

As claims professionals well know, insurance fraud is rampant in the United States. Experts haveestimated the crime robs the industry of between $80 billion and$300 billion each year. Yet, no one knows the true amount becauseso many fraudulent insurance claims succeed. Those that do resultin a prosecution and conviction are rare. People convicted ofinsurance fraud are usually amazed at the conviction and willinvariably attempt to avoid the conviction by seeking reversal inthe appellate courts. The fact that they have funds to pursue anappeal is evidence of how successful and profitable insurance fraudcan be.

When an insurer conducts a thorough investigation of athird-party claim, if it is false and fraudulent, the fraudwill be detected. In California, every insurer is required to havea special fraud investigation unit and train all claims personnelannually about recognizing potential insurance fraud. When theclaims department and the SIU work together evidence will be foundand presented to a prosecutor through the Fraud Division of theCalifornia Department of Insurance.

A prosecution and conviction occurred in a case dealing with afake auto-against-pedestrian case recently. The case was appealedand reported in The People v. Joanne Rose Fawcett et al,No. C067575 (Cal.App. Dist.3 07/25/2012). The California Court ofAppeals was asked to reverse the conviction of two insurance fraudperpetrators who were found guilty in a trial by jury.

The evidence at trial showed that defendant Joanne Rose Fawcettfaked a knee injury to obtain an insurance settlement, and that herhusband, defendant Steven Gerald Fawcett, lied about her physicalabilities. The jury convicted Joanne of twocounts of knowingly submitting a false insurance claim and onecount of presenting a false statement as part of an insuranceclaim. The jury also convicted Steven of one count of presenting aknowingly false statement. The trial court sentenced both to thelow end of recommended sentences of only two years in prison and,attempting to do justice, suspended execution of sentence forSteven and placed him on probation. Both Fawcetts appealed, arguingthe sentences were too harsh and the convictions not founded infact.

Reviewing Case Facts

Dr. Jason London, a trauma surgeon, testified that on April 3,2007, he drove to a gym in his sedan. As he backed up slowly topark, he “felt a slap on the back of the car” and saw someonesitting on the trunk. A woman told him her leg had been hit by hiscar. She did not seem to be injured and “was pleasant, butforceful.” Both went inside the gym, but about 20 minutes later,the woman told him her leg hurt too much to exercise, and she left.Several months later, after the woman contacted him and said herknee was hurting and she had seen doctors, Dr. London referred herclaim to United Services Automobile Association (USAA), hisinsurance company.

Dr. Peter Sfakianos, an orthopedic surgeon with extensiveexperience, testified that he examined Joanne on January 20, 2010,at the request of USAA's legal counsel, and had reviewed hermedical records dating back to 1986. He focused on her left knee,although she mentioned other issues. She reported that knee wasswollen and painful, and she had fallen during “collapsingepisodes” as recently as two weeks before the examination. Shereported that at the time of the “subject accident” she had beendisabled because of her “back condition, her hand conditions, andher right elbow condition,” and that she remained disabled eversince the subject accident. He reviewed pre- and post-accident MRIsof her left knee, finding no evidence of trauma, only “normal wearand tear” and chondral calcinosis—also known as “pseudo gout”—whichis not caused by trauma. He opined that it was unlikely her kneewas altered by the alleged incident.

Paulette Rhyne had been an assistant manager for Homepointe, aproperty management company. For about six or seven months, Joanneand her husband contracted to clean apartments and do “hauling” forHomepointe, via a company called Craftsman For U. Joanne nevercomplained of any knee problems, and Rhyne never saw her limping orusing a cane. In February 2008, Joanne cleanedRhyne's own unit at 9032 El Cahon Way; Rhyne saw her there,scrubbing a window sill on her knees, and saw that some items to behauled had already been moved onto a truck. Eileen Stearman, adivision manager associated with Homepointe, knew both defendants,and testified that company records showed they did 17 cleaning jobsfor Homepointe between February 29, 2008 and May 14, 2008. Joannenever mentioned any left knee problem.

Jeremy Essex, an investigator for USAA, testified Joanne askedfor the policy limits of $100,000 to settle her claim. When shereturned a release for USAA to access her medical records, shemodified it to limit the release to records pertaining to being hitby a car on April 3, 2007. Essex interviewed Joanne on April 1,2008, at her home, and Steven was present. Joanne claimed “constantsevere pain” in her knee, which caused her to limp, prevented herfrom mounting stairs without Steven's help, and made it hard toenter and exit her van. She had not worked in “a few” years and hadbeen on disability; because of the accident she could neverwork.

James Papastathis, a private investigator, watched Joanne onseven dates in February and March 2008, and videorecorded heractivities. These recordings showed her loading and unloading hervan and moving a ladder and cleaning supplies. He did not see herlimping or having trouble entering or exiting her van.

The Defense Presents Its Case

Dr. Timothy Mar, an orthopedic surgeon, testified Joanne wasreferred to him in June 2007, and he thought her symptoms were“consistent with having an internal derangement in the knee jointand probably a crack or defect into the cartilage on the boneitself.” He performed arthroscopic surgery on her knee, whichrevealed some problems due to aging, but also showed an injury tothe cartilage that “appeared to have been impacted by some event.”She was in her early 60s and would eventually need knee replacementsurgery. However, Dr. Mar had not reviewed any of Joanne's priormedical records, including an X-ray report from 2002 that showed a“fibular fracture[,]” and he conceded the MRI taken the month ofthe alleged accident did not show any evidence of a severe impactto the knee. Neither defendant testified.

Steven's counsel contends that because Steven had not filed anyclaim of his own, “his culpability, if any, had to have been basedon the theory that he assisted or supported his wife's claim duringhis telephone conversation with Essex.” Steven's counsel alsocontended the “jury had to find that appellant knew of his wife'sunlawful purpose and specifically intended to aid, facilitate,promote, encourage, or instigate the commission of insurancefraud.”

But this contention fails. California Penal Code § 550 doesnot require that the defendant make a false statement in support ofhis or her own claim, nor does it require that the insurance claimitself be filed with fraudulent intent. It is enough that hepresents a knowingly false statement of material fact about anyinsurance claim.

Although the statute may be based on a person's acts ofassisting another person to make a false statement, Steven'sliability was predicated on his knowingly false statements to Essexabout his wife's condition, not based on aiding Joanne's falsestatements.

Sufficiency of Evidence

The transcript shows Steven gave many explicit answers that werecontradicted by other evidence presented to the jury and reasonableinferences from that evidence. Based on the evidence that Stevenand Joanne jointly operated an apartment cleaning business andworked together after the accident, and evidence that she enteredthe van and climbed stairs with no apparent difficulty, the jurycould rationally infer that Steven knew his answers were false.

The trial court denied probation and imposed the low term–twoyears in prison. (Pen. Code, § 550, subds. (a)(5) & (c)(1)[establishing a sentencing triad of “two, three, or five years” formaking a knowingly false insurance claim].) Given Joanne'spremeditated and protracted efforts to obtain $100,000 based on herfraudulent scheme, the appellate court concluded that there wasinsufficient evidence to conclude that the trial court abused itsbroad sentencing discretion by denying probation.

Closing Thoughts

This is a case of unmitigated gall. The defendants clearly andwithout compunction presented a false and fraudulent claim forinjuries that were never incurred. The evidence presented at trialshowed that the injuries both defendants claimed Joanne incurredwere false. Cleaning apartments on hands and knees and removingdebris without difficulty or complaint contradicts the claim ofinjury to Joanne's knee. That she had the gall to claim that thecourt, the jury, and the insurer were prejudiced against her andthat she was wrongfully convicted and over-sentenced isincredible.

This is a case where the insurer conducted a thoroughinvestigation and refused to pay a claim that was not founded infact or law. That a prosecutor took the case and convicted thedefendants is commendable and should give every insurance claimsprofessional hope that the necessary work to defeat insurance fraudwill be assumed by the state to place the miscreants in prison.

Barry Zalma, Esq., CFE, founded Zalma InsuranceConsultants in 2001 and recently published the e-books, including“Rescission of Insurance in California – 2013;” “Random Thoughts onInsurance,” a collection of blog posts. For more information,visit www.zalma.com.