Insurer’s Anti-Fraud Unit Beset by Suits : Farmers Group Faces Accusations of Improprieties and Bias

In 1981, the Farmers Group of insurance companies--convinced, according to its chairman, that insurance fraud “was immense enough that we should develop our own organization of fraud investigation”--established a Criminal Investigation Department.

The department, directed by a former Los Angeles Police Department narcotics investigator and staffed by 78 “experts,” launched the most intensive anti-fraud crackdown by any insurance company in the United States.

By 1984, Farmers’ then-president claimed, the department had saved the company $92.2 million and its work had resulted in the arrest of 1,487 people.

But today, the investigative unit, pared to only a few staff members, is the target of lawsuits and accusations of illegalities by private investigators who worked for the unit and of improprieties by consultants hired by Farmers to investigate it.

Even before then-Farmers President Joseph E. Metschan extolled the unit’s success in 1984, the first of a series of lawsuits had been filed by private investigators alleging wrongdoing in the unit. Its name had already been toned down to “Investigation Department.”

Since 1984, the company-ordered inquiry has charged the Investigation Department with “serious improprieties.” Los Angeles-based Farmers, the second-largest auto insurance seller in California and third largest in the nation, has also suffered a judgment for $500,000 in one lawsuit and what is reported to be a costly settlement in another. According to two attorneys suing the company, the department has only three or four staff members left.

The former Los Angeles police officer who directed the unit, Michael D. Conn of Hacienda Heights, quit in February, 1985, and, claiming that he was forced out, is suing Farmers for wrongful termination, breach of good faith and fair dealing, defamation, and intentional infliction of emotional distress.

A class-action suit, filed by the Western regional counsel for the National Assn. for the Advancement of Colored People (NAACP), charges that the unit compiled a list of 1,600 policyholders it believed to be Africans or American blacks and turned it over to the California Highway Patrol and other law enforcement agencies as possible perpetrators of insurance fraud when the great majority of them had never even made a claim.

The company itself will not comment in detail on the controversy. Farmers spokesman Jerry Clemans said last week that he “went to great length” to discuss with the firm’s legal department a Times’ request for a response from Farmers. But, he said, “For a variety of reasons, they decided they didn’t want to get into a commentary at this time. . . . There are a lot of strange aspects in this thing, and it is not being construed as being helpful from our legal standpoint to comment.”

Asked later for a specific response to accusations against the company by Conn and by NAACP counsel Nathaniel Colley Sr. of Sacramento, Clemans, after consultations, read a statement he said had been drafted by the company’s legal department:

“Farmers is presently engaged in litigation in which numerous and often contradictory allegations have been made by the plaintiffs. It is our practice not to comment upon matters which are related to court proceedings. We have requested that these cases be submitted to juries so that all the facts and evidence can be viewed impartially. We are confident the lawsuits will be concluded in our favor.”

The company has tried hard to keep details of the lawsuits involving its Investigation Department private, seeking to have papers in the suits sealed and declining public comment even in the lawsuit resolved against it. Many people in the industry are unaware of the controversy. Officials of the California Department of Insurance said they were unacquainted with the matter.

Moving Toward Climax

But, behind the scenes, the dispute is moving toward a climax.

Conn’s suit, now pending in Los Angeles Superior Court, charges that he was forced to resign after “various audits and investigations” had been undertaken against him by the company and “numerous requests of personnel of defendant Farmers Insurance Group to commit improper and possibly illegal activities, including the commission of perjury.”

Conn, who served nine years on the Los Angeles police force before being hired by Farmers in 1980, asked for $23 million in damages--$11 million from Farmers and $12 million from the Florida consultants hired by the company to investigate him and his unit.

In a telephone interview last week, Conn said Farmers executives at first were grateful for the money his investigative unit had saved the company and had given him their full backing.

But he said their attitude changed after, under the personal instructions of Board Chairman Richard G. Lindsley, he and his aides began an intensive investigation of alleged internal irregularities in the company’s operations.

“We came up with some facts they didn’t want to face,” Conn said. “Since then, Farmers has tapped my phone, put me under surveillance, spent about $500,000 investigating me and come up with nothing.” Farmers spokesman Clemans would not respond to Conn’s specific allegations, citing the pending litigation.

A “confidential report” prepared by a Miami-based firm of private investigators, National Research Systems Inc., and submitted to Farmers’ vice president and general counsel Jason L. Katz in May, 1985, concluded that there had been “serious problems and improprieties” in Conn’s unit.

The report has been filed as an exhibit in lawsuits against the company. It was provided to The Times by Peter J. Diamond, a Coos Bay, Ore., private investigator who is suing Farmers for breach of contract and who has collected documents in cases against the firm.

In a summary, National Research Systems said its review “disclosed . . . (1) Misrepresentation of facts to senior management (2) Internal corruption (3) Improper expenditures (4) Conversion of company assets for personal benefit (5) Unethical disposition of records (6) A lack of professionalism (7) Absence of guidelines for case referral and investigation (8) Insufficient training and a lack of expertise, leading to great legal exposure (9) Inadequate procedures (10) Abuse of checks and balances.”

Among the instances cited of what the report calls “wrongdoing” were staff meetings at which “liquor was available and was consumed to excess” and “entertainment was provided in the form of pornographic films,” the attendance by Conn and an aide at a three-month “wiretap school” when “there is no conceivable reason why Farmers’ personnel should have received this kind of training” and the securing of three concealed weapons permits for investigative unit use from “the chief of police of a four-man police department located 762 miles from Los Angeles.” The town was not named.

In addition, the report cited a $40,000 investigation by Conn’s unit in Las Vegas. Although it said the operation apparently had to do with identifying people involved in auto theft rings and insurance adjusters, including Farmers adjusters, taking kickbacks, the consultants added that the file they had examined relating to it “was devoid of investigative reports or memoranda explaining the nature of the operation, why it was initiated and what conclusions resulted.”

“This is a glaring example of a department running amok,” the report said. “What actually occurred in (the operation) may never be known. If nothing else, this example demonstrates the total disarray and insufficiency of the Investigative Department’s records and the total lack of accountability that exists in this department.”

Report Looks Ahead

The report said the investigation unit “actually functioned as an adjunct to law enforcement agencies.” Farmers, it said, “should continue to cooperate with law enforcement, but not to the extent that it does law enforcement’s job and assumes the expenses.”

(Many major insurance companies participate in a joint industry anti-fraud effort, the Insurance Crime Prevention Institute, a course which Farmers specifically rejected.)

Conn’s lawsuit, which names National Research Systems and its president, Nathan Horowitz, as defendants along with Farmers, charges that the report “is false” and “libelous on its face.” It says, in customary legal language, that it “clearly exposes (Conn) to hatred, contempt, ridicule and obloquy.”

Among the suits filed against Farmers, and some against Conn as well while he was still head of the investigative unit, are several by private investigators in Oregon, Arizona, Texas and Northern California who claim that they had been dismissed by either Conn or other Farmers officials, in breach of oral contracts, after they had refused to go along with orders from Farmers officials that they commit illegal acts.

For instance, Petaluma insurance adjuster Ronald Blanquie and his firm, Insurance Consulting Associates, claimed in a 1981 lawsuit that he was cut off from working with the Criminal Investigation Department after he refused to participate in what he considered illegal intelligence gathering.

‘Ebony File’

The project that Blanquie refused to join was what the Investigation Department called its “Ebony file” of suspected potential fraud perpetrators.

In trial testimony and depositions in his suit, Blanquie said that after the company was informed by law enforcement that a ring of people with Nigerian names had organized a fraud ring, the company’s investigators went through the files of policyholders and came up with a list of 1,600 names of people who might be members of such a ring.

He said it not only included Nigerian names, but also such names as Washington and Jefferson that are sometimes associated with blacks. He said the list was then distributed by company officials to law enforcement agencies at a meeting at the California Highway Patrol office in Hayward in February, 1981. It is not known what the agencies did with the information.

A $500,000 judgment was rendered against Farmers in the Blanquie case by a Marin County jury in 1984. Farmers declined to comment on the case even after the verdict was returned. But two attorneys representing plaintiffs in pending cases, David Markowitz of Portland, Ore., and Daniel Street of San Jose, both said the judgment has been paid.

Clemans declined to comment on the so-called “Ebony file” and Conn said his attorney had advised him not to discuss such specific cases.

Racial Bias Charged

The suit by NAACP attorney Colley alleges that, in undertaking to compile and distribute the list, Farmers “was at all times motivated by racial prejudice” and “knew that (it) was violating the rights of each and all plaintiffs.” Those who compiled the list unwittingly listed some people who turned out to be white, according to the suit. The suit asks $50 million in damages.

A former Farmers’ investigator, Charles R. Viorel of Sacramento, sued Farmers for $20 million and later agreed to an undisclosed settlement that sources said was large. Viorel himself could not be reached for comment.

Viorel’s suit claimed that Farmers, Conn and others involved in the investigative unit had required that he “participate in development of policies and procedures in violation of California and federal law,” and that he had been threatened with death “if he did any act which would interfere with (the) defendants.”

In depositions taken before the case was settled, Viorel alleged that he had been asked to commit illegal break-ins against suspected fraud perpetrators; that Farmers kept a double set of investigative files on insurance cases; that when courts ordered it to produce files on a specific case, it would produce only the more innocuous set, and that Conn had kept dossiers on top Farmers insurance executives to have something to hold over them if they objected to what his unit was doing.

Transcript Cited

Conn, however, said in the interview last week that the only dossiers he kept related to possible internal fraud by Farmers officials. He cited his transcript of a lengthy conversation that he had secretly taped with Viorel in February, 1981, as proof that he had never countenanced illegal acts.

In the transcript, filed along with a Conn deposition in the Viorel suit, Conn praises another investigator for his unwillingness to commit illegal acts. The transcript also contains indications that the real reason Viorel may have been disenchanted with Conn was that he had not been hired in Conn’s place.

However, according to papers Viorel’s attorney filed with the court, Viorel had also warned Conn in a memo in February, 1981, that compilation of the “Ebony file,” the list of suspected fraud perpetrators, could expose Farmers to “a massive class (action) suit.”

“It seems to me that the material . . . in and of itself creates a class which contains some 1,600 Farmers insureds,” Viorel’s memo said. “It is obvious that publishing a written document including the names of Farmers insureds for purposes other than intra-departmental use creates an exposure to civil liability based on: (1) defamation (either libel or slander) (2) invasion of privacy (3) potential for a civil rights action either based on state or federal statute regarding discrimination . . . .”

More Lawsuits

Several other lawsuits seeking large damages have been filed by private investigators who claim they were wrongfully dismissed from working for the Farmers’ investigative unit. These are still pending.

Although Farmers has not commented on the suits in detail, Board Chairman Lindsley testified about the case in depositions in the Insurance Consulting Associates case in 1983.

At one point in a deposition, he said, “I know of no written direction or verbal direction, oral direction for that matter, that would proscribe illegal activities on the part of either Farmers people or anyone representing Farmers people.”

However, a moment later, he commented, “In my view, in my corporate capacity, there is no way that Farmers’ board of directors, top management, would condone unlawful activity on the part of anyone connected with the Farmers organization.”