In Patel v. Allstate New Jersey Ins. Co., et al., No. 15-2513 (3d Cir. May 3, 2016), the Third Circuit affirmed the dismissal of claims brought by a medical doctor alleging that the New Jersey Attorney General and the Office of the New Jersey Insurance Fraud Prosecutor had improperly outsourced criminal investigations to the special investigative units of several insurance companies. The court found that the plaintiff lacked standing because he had not alleged “that there is – or ever was – a criminal investigation or prosecution against him.” Id., Slip op. at 6. Accordingly, plaintiff could not “demonstrate the requisite injury to support constitutional standing.” Id., at 7.

Plaintiff Dr. Harshad C. Patel, owner of A.P. Diagnostics Imaging Inc., filed suit against Allstate New Jersey Insurance Company, its CEO and the New Jersey Attorney General’s Office in May of 2014 alleging that the state illegally outsourced criminal investigations to insurance companies in violation of the New Jersey Insurance Fraud Prevention Act, N.J.S.A. § 17:33A-1, as well as the Fifth and Sixth Amendments to the U.S. Constitution. He alleged that his constitutional rights were circumvented by the use of insurance companies’ special investigation units in order to violate his right against self-incrimination, right to counsel and the requirement under state law that he be provided notice as a target of a criminal investigation and the requirement to convene a grand jury. Dr. Patel alleged there was a close, symbiotic working relationship between the State and insurance companies to share investigative materials and information.

Dr. Patel claimed that Allstate used the investigation and discovery process in another matter, Allstate New Jersey Ins. Co. v. Lajara, 2015 N.J. LEXIS 797 (N.J. July 16, 2015) a case involving 227 patients who were treated from 2002 to 2008, to conduct a criminal investigation on behalf of the State. The Attorney General intervened in that matter. Dr. Patel alleged that Allstate conducted a wide-ranging investigation of alleged crimes against Patel and others that had nothing to do with the civil allegations of the case, including alleged money laundering and violations of the Bank Secrecy Act. Dr. Patel also alleged that Allstate investigators harassed his family and threatened possible civil and criminal actions and that a local police department was improperly ordered by Allstate to interrupt the wedding ceremony of his son in order to serve a subpoena.

Dr. Patel’s suit here, under 42 U.S.C. § 1983, sought a declaratory judgment that the practice of the State in outsourcing criminal investigations to the insurance companies violated the U.S. and New Jersey Constitutions, specifically, his Fifth and Sixth Amendment rights, sought to enjoin that practice, and sought punitive damages. Dr. Patel argued that the insurers have a vested economic interest in prosecuting insurance fraud, and that such outsourcing circumvented constitutional protections.    

To establish standing to assert such claims, plaintiff would have to establish, inter alia, an injury-in-fact. Here, the District Court ruled there was no injury-in-fact and dismissed all claims for lack of standing. On appeal, the Third Circuit affirmed, stating that Dr. Patel did not prove he suffered an injury and therefore lacked standing. As the court noted, Dr. Patel never alleged that there was a criminal investigation or prosecution against him, and he conceded that he was not charged with any criminal violation, and was not the focus of, or advised that he was the target of, a criminal investigation or prosecution. The Third Circuit did reverse in part, however, vacating the District Court’s dismissal with prejudice and ruling that dismissal should be without prejudice. The Third Circuit noted that because dismissal was based on lack of standing, it precluded a decision on the merits of the case.

Fraud and violations of state and federal law are affirmative defenses that insurance companies should investigate and assert when applicable. Insurance fraud investigations by local prosecutor’s offices commonly begin with a referral from an insurance company. Although the plaintiff here was found to lack standing to challenge the relationship between state prosecutors and insurance company fraud investigators, insurance companies should be careful not to coordinate too closely with state agencies in ways that may be viewed as an attempt to circumvent state law and constitutionally protected rights, so as to prevent possible civil rights and conspiracy claims from individuals who may be investigation targets.

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