The National Association of Independent Insurers (NAII) filed a friend of the court brief on June 28 asking for a reversal of a California Superior Court ruling related to the case of Lugo v. Allstate Insurance Company. The brief argues that insurance companies have an absolute immunity from liability for reporting suspected arson to law enforcement officials.
The NAII feels that, if left standing, the ruling could hurt the effectiveness of future insurance investigations into suspected fraud and arson.
Sam Sorich, NAII vice president and western regional manager, believes that the industry’s fight against these criminal acts deserve the same protection given to other business entities. In this particular case, Jose and Esperanza Lugo had a homeowners policy with Allstate Insurance Company when their home burned down. Following the fire, Allstate investigated the claim and suspected arson. As required by law in the state of California, Allstate reported its suspicion to both the California Department of Insurance (CDI) and law enforcement officials. The couple was charged with arson and insurance fraud, but were later acquitted.
After the criminal trial, the Lugos sued Allstate for bad faith. During the course of the bad faith trial, Allstate’s reports to the CDI and to law enforcement officials were admitted into evidence. The couple’s lawyer argued that Allstate’s reports to law enforcement caused the criminal prosecution and the costs of the defense prevented the couple from paying their mortgage. The jury found bad faith and awarded the Lugos $3 million in punitive damages against Allstate, but Allstate appealed the decision to the Court of Appeal.
According to the NAII’s Sorich, the result of this ruling could be an increase in fraud and arson that will lead to higher premiums for the majority of policyholders who abide by the law.
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