Insurance Code section 1871.7 provides a private right of action to sue perpetrators of insurance fraud on behalf of the State of California. Although modeled on federal False Claims Act, 31 U.S.C. §§ 3729-3733, section 1871.7 is an attractive tool that offers significant advantages. Section 1871.7, like other qui tam actions, is premised on an arrangement where the government cloaks private parties with power to police against those who have defrauded the government by allowing them to sue and recover money on its behalf. The arrangement benefits the government by remedying fraud while defraying some of the burdens of collecting the money it is owed. Private parties who sue on the government’s behalf—called relators—also benefit, as they are rewarded with a portion of the money recovered.
The most significant advantage of section 1871.7 is that there is no requirement that the government be directly harmed by the fraud. Section 1871.7 is unique because relators may bring suit where the only direct victim—i.e. the one who suffers an immediate financial loss—is not the government but a private insurer. The state still has an interest in remedying this, however, as the public at large is indirectly victimized as well. (See People ex rel. Allstate Ins. Co. v. Weitzman (2003) 107 Cal. App. 4th 534, 562.) This is because private insurers mitigate some of their fraud-related losses by shifting a portion of the burden to their customers. Thus, as insurance fraud becomes more prevalent, the people of California pay correspondingly higher premiums. To that end, a portion of money the government obtains from successful section 1871.7 suits is reinvested into preventing, investigating, and prosecuting insurance fraud in an effort to reduce the prevalence of insurance fraud. (Ins. Code, § 1871.7, subd. (g)(iv).)
Section 1871.7 combats the submission of “false or fraudulent claims,” but also contains a prohibition against the use of ‘runners, cappers, or steerers.’ That provision states: “It is unlawful to knowingly employ runners, cappers, steerers, or other persons to procure clients or patients . . . to perform or obtain services or benefits under a contract of insurance that will be the basis for a claim against an insured individual or his or her insurer.” (Ins. Code, § 1871.7, subd. (a).) The Office of the Legislative Counsel clarified that the prohibition is intended to combat informal agreements to buy business by offering illegal commissions—colloquially known as “kickbacks.”Section 1871.7 claims are also notable because they offer relators some of the most generous bounties of any qui tam statute in the country. If a relator successfully prosecutes the action without the aid of the District Attorney or Insurance Commissioner, he or she is entitled to between forty to fifty percent of the proceeds, plus reasonable attorney’s fees, expenses, and costs. (Ins. Code, § 1871.7, subd. (g)(2).) On the other hand, if the District Attorney or Insurance Commissioner intervenes in the lawsuit, the relator usually still stands to gain a substantial bounty—between thirty to forty percent of the proceeds, plus attorney’s fees, costs, and expenses. (Ins. Code, § 1871.7, subd. (g)(1).)