Zenith First Workers' Comp Carrier to Sue Under Calif. Anti-Fraud Law

February 5, 2004

Zenith National Insurance Corp. announced that its wholly owned subsidiary, Zenith Insurance Company ("Zenith") began serving summons and complaints today upon a Santa Ana medical clinic, its owner and manager, accusing them of taking part in a large-scale scheme designed to defraud the company's policyholders.

Zenith becomes the first workers' compensation insurance company in the state to sue under a statute that the California Legislature passed specifically to help combat workers' compensation fraud.

The lawsuit, filed in the Orange County Superior Court and which first became public today, details how these individuals in the medical profession have reportedly engaged in fraud, ranging from charging for services that were never rendered, to various fraudulent billing practices.

"Zenith has a zero tolerance for fraud," said Stanley Zax, Zenith's chairman and president. "We will use every means available under the law to halt those who are taking advantage of a system that is designed to help injured workers. It is unfair for businesses and honest individuals to pay for the actions of a few dishonest people. Zenith has been committed for many years to taking the profit out of fraud."

The $8.5 million lawsuit seeks not only the return of the money wrongfully obtained by a doctor, his clinic and a former chiropractor, who had his license revoked, yet is running this clinic, but also treble damages permissible under the statute, penalties and an injunction preventing the defendants from defrauding Zenith or other insurance companies.

The individuals are accused of a pervasive scheme of upcoding and billing for treatment and examinations that were never rendered. The civil complaint details how the defendants allegedly attempted to justify excessive charges by misleading Zenith regarding the services performed. They are also alleged to have billed for a variety of medical services that were never performed at all.

Zenith began this investigation in March 2003, when its team of fraud investigators found indicators that the medical clinic and its owners knowingly and intentionally were submitting fraudulent medical reports and billings to Zenith.

"Zenith has developed a statewide team that is designed to detect precisely this type of fraudulent activity," noted Zax. Once they investigate and confirm the improper activities, they then help to civilly and criminally prosecute the perpetrators. In addition to filing this civil action to recoup damages and obtain a court order forbidding this conduct in the future, Zenith has cooperated with state and local law enforcement and has offered its assistance in bringing these individuals to justice.

Zenith is represented by Dennis Kass, Manning & Marder, Kass, Ellrod, Ramirez, LLP.

Q & A regarding the lawsuit released by the company.

Q. Why has Zenith chosen to pursue a civil lawsuit?
A. Zenith is doing its part to fight workers' compensation fraud. As the Governor and Insurance Commissioner have made clear, we are facing a workers' compensation crisis in California. Insurance fraud harms every business in the State of California and unnecessarily causes premiums to rise. A successful fight against fraud requires a multifaceted approach. The efforts of the governor, the legislature, the Department of Insurance and the Local District Attorneys are necessary to fight fraud. Now insurance companies can join the fight, with laws that allow the carriers to recoup money, obtain other damages and get court orders preventing future fraud.

Q. Under what legal provisions are you filing this suit?
A. The lawsuit is filed under the California Insurance Fraud Prevention Act, Insurance Code s1871.7, as well as Business and Professions Code s17200 for unfair business practices. California has enacted a novel, anti-fraud law which was designed to help combat workers' compensation fraud. The law allows for a penalty of $5,000-$10,000 per false claim, three times the false claim for compensation, all attorney fees, expenses and costs, as well as an injunction against further fraud.

Q. How did the insurance fraud scheme operate?
A. This was a complex and sophisticated scheme that involved billing for services never rendered and using billing codes that describe far greater services than were actually provided. For example, using universally recognized billing codes, on over 750 occasions, the defendants billed Zenith using a code reserved for seriously ill or injured patients. In truth, the large majority of the workplace incidents involved minor accidents such as slips or falls, where the injuries were sprains or strains, not injuries that could lead to death or debilitating injuries, as defendants indicated. Further, in billing for over 10,000 therapy visits for the 137 patients noted in this lawsuit, it was learned that on over 8,600 occasions, the defendants tried to improperly bill for a service that was not performed.

Q. How much did the perpetrators take from Zenith?
A. Because the defendants took such great efforts to hide their fraud, it is difficult to know the precise amount. Zenith is presently aware of 137 claims, involving over 9,200 examinations, and over 10,000 treatments. Zenith has paid losses totaling over $830,000. Defendants have billed Zenith over $2.5 million. This scam operated from at least April, 1999 to present, though the volume of false billings increased dramatically beginning 2001.

Q. How long had the Zenith investigation been going on?
A. Zenith first suspected that the defendants were attempting to submit false and fraudulent claims in March, 2003. Zenith has a team which specializes in detecting insurance fraud and who began a detailed and comprehensive investigation. The investigation revealed that the defendants were attempting to pass off false claims to Zenith. Zenith's investigation is continuing at this time. More claims may be added to the lawsuit and the claim for damages may grow further.

Q. Will these defendants be prosecuted as criminals?
A. Zenith has offered its full cooperation to the California Department of Insurance and the Orange County District Attorney who have the authority to make these decisions.

Q. Is the Zenith investigation complete?
A. No. By its very nature, fraud is deceptive. Zenith has a statewide Healthcare Investigation Team which focuses on individuals who are attempting to submit fraudulent claims. Zenith's investigators are continuing to monitor claims submitted by the defendants and continue their investigation into other questionable claims submitted by the defendants.