Fraud Bureau Investigates

Criminal Investigation of Insurance Fraud Without Indictment Not Grounds for Stay of Civil Action

Barry Zalma

Jul 08, 2024

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BACKGROUND

Kith’s furniture plant and inventory were allegedly damaged in a tornado. While investigating Kith’s insurance claim, Plaintiff Liberty Mutual Fire Insurance Company learned information that called Kith’s claim into question and warranted further investigation. Kith insisted that Liberty continue making payments under the policy “during the pendency of this investigation.”

Liberty sued seeking a declaration that it need not continue making payments until it concludes its investigation. Simultaneously the Alabama Department of Insurance, Fraud Bureau opened an investigation into Kith’s insurance claim.

Liberty amended its complaint to add a new claim alleging fraud and Liberty alleged that Kith employees “intentionally damaged” “almost $500,000 worth” of “furniture that [Kith] could no longer sell to make it look like it had been damaged in the tornado.” Kith asked the Court to stay all proceedings in this action pending the Alabama Department of Insurance’s criminal investigation.

DISCUSSION

Kith contended that it will be substantially prejudiced by having to defend itself in this action while simultaneously facing a parallel criminal investigation. Liberty countered that, if this Court stays this action, Liberty will be substantially prejudiced by the very real risk that evidence would be lost and memories would fade.

This Case Significantly Overlaps The Related Criminal Investigation.

The Alabama Department of Insurance opened its criminal investigation on the very insurance claim at issue here. Kith asserted that the investigation and this case “involve the same legal theories and alleged conduct by Kith,” and are “practically identical.” Liberty dismissed Kith’s assertions as “entirely speculative,” emails exchanged between Liberty and a criminal investigator tend to corroborate Kith’s assertions.

Kith Has No Fifth Amendment Rights.

The Fifth Amendment privilege against self-incrimination does not extend to non-natural entities. Courts routinely hold parallel criminal proceedings and do not entitle corporate defendants to a stay of civil proceedings.

There Are No Pending Criminal Proceedings.

Among Liberty’s attempts to distinguish this case from those cited by Kith, one fact stands out: here, there are no pending or imminent criminal proceedings. The record does not indicate that anyone has been indicted, charged, or arrested for any crime related to this insurance dispute. The lack of pending or imminent criminal proceedings makes any potential avoidance of prejudice to Kith or any potential conservation of judicial resources by granting a stay entirely speculative.

Liberty Faces Potential Prejudice From Delayed Proceedings.

Liberty argued that staying this case would be putting Liberty’s civil action on the shelf to grow cold without the benefit of a criminal prosecution against Kith.

Although Alabama’s ongoing investigation somewhat mitigates the risk that evidence will be lost and memories will fade, the current absence of any arrests or criminal charges failed to assure the Court that Alabama’s investigation will be sufficiently “brief” and “exhaustive” to shield Liberty from all prejudice. This factor weighs heavily in Liberty’s favor. Therefore, Defendant Kith Furniture, LLC’s motion to stay proceedings was denied.

ZALMA OPINION

Liberty found evidence of fraud and needed to move forward with its action before evidence became lost or forgotten. A criminal investigation without an arrest or indictment is nothing more than that: an investigation. There was no reason for a stay of the civil action. My experience makes clear that state investigations into insurance fraud seldom result in arrest or trial while a civil action asserting fraud can be brought to trial quickly without the need a criminal investigation has to prove the fraud beyond a reasonable doubt.