When an insurer forms a special investigation unit (SIU), it hires highly qualified, trained and experienced investigators to help it avoid paying fraudulent claims. The job of a fraud investigator is drastically different from that of many other roles. Each skilled professional provides a unique skill set and breadth of knowledge on which the insurer relies. Traditionally, SIU investigators are well paid and not subject to mandatory overtime requirements.

In Frank Foster, On Behalf of Himself and All Others Similarly Situated v. Nationwide Mutual Insurance Company, 710 F.3d 640 (6th Cir. 03/21/2013) 91 current and former special investigators (SI) employed by Nationwide Mutual Insurance Company, appealed from the judgment entered against them with respect to their collective claims that Nationwide improperly classified SIs as administrative employees exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) (29 U.S.C. §§ 207 and 213(a)(1)) and analogous provisions of New York and California law.

A Job Overview

The SIU operates alongside the claims-adjusting units, which are likewise led by a director who oversees claims managers and claims adjusters. As Nationwide's internal document described it, the SIU “'exists to service its corporate partners by providing the highest quality and expedient investigative, informational, and consulting services to detect and deter fraud and to support other objectives of Nationwide.'” The SIU's work is aimed at reducing the number of non-meritorious claims that are paid in order to keep Nationwide's insurance products competitively priced.

With an average annual salary of $75,000, a typical SI generally receives favorable compensation. He or she is usually an experienced investigator with a prior background in law enforcement or in handling insurance claims. Per the evidence established at trial, such professionals tend to “spend the majority, if not an overwhelming majority, of their time carrying out investigations of suspicious claims.”

FLSA Stipulations

The FLSA requires overtime pay for each hour worked in excess of 40 hours per week but exempts any employee employed in a bona fide executive, administrative, or professional capacity. The regulations provide:

Compensated…at a rate of no less than $455 per week.
Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers.
Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The exemption is to be narrowly construed against the employer, and the employer bears the burden of proving each element by a preponderance of the evidence.

Plaintiffs waived their right to jury trial and the district court presided over a bench trial that included considerable focus on the work performed by Nationwide's SIs. Based on the evidence heard, the district court made the factual determination that the primary duty of Nationwide's SIs is to conduct investigations into suspicious claims with the purpose or goal of resolving indicators of fraud present in those claims.

The SIs uniformly described the tasks of their investigations as including: “resolving the indicators of fraud, gathering information, taking statements, interviewing witnesses, making referrals to law enforcement and the [National Insurance Crime Bureau (NICB)], recommending the retention of outside vendors [such as accident reconstruction or fire origin experts], supervising outside vendors, and recommending and [sometimes] conducting [examinations under oath (EUOs)].”

At the outset, plaintiffs argue that the Department of Labor's (DOL) general regulations broadly provide that “investigators” do not qualify for the administrative employee exemption. In fact, the general regulations caution that a job title alone is not determinative of an employee's exempt or non-exempt status.

General Business Operations

Plaintiffs contend that the district court erred as a matter of law in finding that the special investigators' primary duty includes the performance of work “directly related” to Nationwide's “general business operations.” To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.

Plaintiffs argued that SIs are engaged in day-to-day production work because Nationwide's “business” is actually selling the promise of asset protection. The record supports the district court's rejection of that characterization and its determination that Nationwide is in the business of creating and marketing insurance policies to the public.

Insurance claims adjusters generally meet the duties requirements [elements two and three] for the administrative exemption, whether they work for an insurance company or other type of company, if their duties include activities such as interviewing insureds, witnesses, and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.

This supports the conclusion that claims adjusting work performed for an insurance company is ancillary to an insurer's primary production activity. Although Nationwide severed some of these activities from the investigative work of the SIs, the investigators' work remains integral to the claims adjusting function; is performed in partnership with claims adjusters; and involves making findings that bear directly on the adjusters' decisions to pay or deny a claim.

Just as claims adjusting is ancillary to Nationwide's general business operations, the SI work that drives adjusting decisions with respect to suspicious claims is also directly related to assisting with the servicing of Nationwide's business.

Discretion and Independent Judgment

The regulations explain that “discretion and independent judgment involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered,” 29 C.F.R. § 541.202(a), and requires “more than the use of skill in applying well-established techniques, procedures or specific standards in manuals or other sources,” 29 C.F.R. § 541.202(e).

It is left to the investigator to decide whom to interview; what documents to review; which leads to pursue; and similar tactical matters. Sure, some direction is provided by the SI's action plan, which in turn defines the scope of the investigation and to which adherence is required. However, SIs are integrally involved in developing such action plans for their respective insurance investigations.

Turning to the resolution of fraud indicators in the claims investigated by SIs, Plaintiffs argue that Nationwide is attempting to not only comply with state laws that prevent unlicensed individuals from adjusting insurance claims and avoiding bad faith litigation, but also at the same time assert the job of the SI involves providing recommendations to management, an activity conceivably encroaching upon that which may only be done by licensed adjusters.

Matters of Significance

In the court's view, terms such as “factual findings,” “relevant,” “pertinent,” and “resolve” connote a degree of discretion and judgment inherent in the investigatory process undertaken by the special investigators.

Nearly all of the testifying SIs characterized their investigations as searches for truth or attempts to determine whether or not the subject claims are legitimate. A doctorate in philosophy is not required to realize that “truth” is not an entirely objective concept. Determining truth requires “factual findings,” a process that necessarily requires judgment and discretion.

Nationwide's SIs use their experience and knowledge of fraud to distinguish the relevant from the irrelevant, fact from fiction, in order to resolve competing versions of events. Accordingly, the Sixth Circuit Court concluded that through the resolution of indicators of fraud, SIs exercise discretion and independent judgment. It further concluded the discretion exercised by these SIs impacts matters of significance.The facts developed by the SIs during their investigations have an undisputed influence on Nationwide's decisions to pay or deny insurance claims. Paying insurance claims is central to Nationwide's business, and payment of fraudulent claims would threaten to make the company less competitive in its industry.

The DOL regulations only require that the primary duty of an administrative employee “include” the exercise of discretion and independent judgment. The discretion and independent judgment exercised in determining and communicating (albeit informally) the legitimacy (or illegitimacy) of suspicious claims referred for investigation is a matter of significance to Nationwide. That being the case, the Sixth Circuit concluded it did not need to address the novel question of whether the discretion and independent judgment exercised in deciding whether to refer claims to law enforcement or the NICB would also be related to “matters of significance” since the SI's efforts dealt with matters of significance.

The Lessons Here

It is amazing that an SI would defeat his or her own professionalism by claiming that “SIs are engaged in day-to-day production work” just like the person who puts a single transistor on a production line making digital alarm clocks. Such investigators clearly are professionals. They have organized into the International Association of Special Investigative Units (IASIU), thereby conducting regular training sessions to prove their professionalism. Rather than bringing suit against an employer for overtime to which they are not entitled the SI should, rather, prove his or her professionalism and demand an increase in wage as a result of their good work.

An investigator's job is not typically confined to the 9-to-5 schedule. It takes a great deal of skill and experience. No investigator should be willing to lower his or her reputation in the eyes of an employer by claiming the SIU does is nothing more than “production work.” If that is indeed true, then those professionals are simply not doing what is required of an SI.

Special Reports /

Are Your Special Investigators Being Compensated Fairly?

Related Stories

Recommended For You