Insurers Must Demand & Prove Restitution Required to Make Them Whole
Read the full article at https://lnkd.in/gnDzsuff and see the full video at https://lnkd.in/gUrv9FDB and at https://lnkd.in/grQrQrnG and at https://zalma.com/blog plus more than 4450 posts.
Defendants Alfredo Ayala and Juan Luis Ayala owned farm labor contracting businesses and shared business offices and office staff. Defendants were charged with insurance and tax fraud by underreporting their payroll amounts. Alfredo and Juan pleaded no contest to workers’ compensation insurance fraud and tax fraud, agreed to pay restitution to the Employment Development Department (EDD), and requested a restitution hearing to determine restitution owed to their workers’ compensation insurance companies. After a hearing, the trial court awarded restitution to the insurance companies measured by the amount of lost premiums caused by defendants’ false payroll reporting.
In The People v. Alfredo Ayala, The People v. Juan Luis Ayala, F083941, F083974, California Court of Appeals, Fifth District (March 16, 2023) a lengthy opinion reviewing facts in detail and evidence from the defrauded workers’ compensation insurers affirmed the restitution orders based on the evidence presented by the insurers.
FACTUAL BACKGROUND
Defendants stipulated to a factual basis for their pleas based on police reports and grand jury proceedings. Juan pleaded no contest to workers’ compensation fraud and tax evasion by false statement, Alfredo pleaded no contest to tax evasion by false statement.
Alfredo waived time for sentencing, and the trial court reduced count 21 to a misdemeanor and ordered Alfredo to serve a three-year term of probation with conditions that Alfredo obey all laws, pay restitution to EDD, and return for a restitution hearing. The trial court held a restitution hearing as to both defendants on July 9, 2021, and announced its decision on August 24, 2021. The trial court denied defendants’ subsequently filed motion for reconsideration on December 17, 2021, and sentenced Juan to three years in prison, suspended execution of that sentence, and placed him on probation for two years.
PREMIUM FRAUD
Typical workers’ compensation insurance policies are based on estimates. The experience modification is determined by comparing a specific employer’s payroll and losses to other similar employers. The experience modification can lower the premium if the employer has good safety practices but can result in a higher premium if the employer has a negative history of accidents.
TRIAL COURT RULING
The trial court stated that restitution should make the victims whole and not entitle them to profit but, in this case, the trial court used the findings of the insurance company auditors whom “[q]uite frankly, [it] just felt … were more credible.”
DISCUSSION
California crime victims have a constitutional and statutory right to receive full restitution for economic losses suffered as a result of a defendant’s criminal conduct. When a defendant is convicted and sentenced to state prison, section 1202.4 limits restitution to losses caused by the criminal conduct for which the defendant was convicted.
The Trial Court Did Not Abuse Its Discretion In Determining that Defendants’ Criminal Conduct Was Responsible for the Insurance Companies’ Lost
Premiums and the Amounts of those Losses.
At a restitution hearing, the prosecution is required to establish the amount of the victim’s economic loss, not the criminal conduct underlying the charges. Restitution hearings are intended to be informal and do not require any particular kind of proof. The trial court may accept a property owner’s statement made in the probation report about the value of stolen or damaged property as prima facie evidence of loss.
Defendants argued that the trial court could not award restitution unless the prosecution presented direct evidence that defendants intentionally falsified payroll and submitted falsified payroll to generate lower premiums.
Defendants’ pleas of no contest and accompanying waivers were sufficient to support the trial court’s award of restitution based upon defendants’ massive underreporting of payroll to the insurers to reduce their policy premiums.
The Trial Court Did Not Abuse Its Discretion Ordering Restitution Because It Used a Rational Method to Determine the Insurance Companies’ Economic Losses
Defendants’ pleas of no contest established that defendants intentionally and falsely underreported their monthly payroll to the insurers to pay lower premiums. Furthermore, the willful underpayment of insurance premiums constitutes an economic loss.
The methodology adopted by the trial court appeared rational to the Court of Appeals and it concluded did not produce an arbitrary result.
By the plain language of the statute, the victim’s economic loss must come as a result of the defendant’s conduct. Victims are only entitled to an amount of restitution so as to make them whole, but nothing more, from their actual losses arising out of the defendants’ criminal behavior. The Court of Appeals concluded that the trial court did not abuse its discretion in awarding restitution for the total amount of unreported payroll as opposed to limiting the award to the payroll amounts reflected in the voided payroll check register even if it had not rejected defendants’ evidence.
To the extent the scope and nature of defendants’ misconduct precludes an exact determination of the insurers’ losses, the equities favor the insurers as far as calculating the amount of restitution that is due. After reviewing all the relevant considerations, the Court of Appeals was satisfied there was a factual and rational basis for the trial court’s restitution order. No abuse of discretion or other ground for reversal has been shown.
The Court of Appeals, therefore, concluded that the trial court did not abuse its discretion in calculating restitution in this case and affirm the judgments.
ZALMA OPINION
Insurance fraud convictions, especially workers’ compensation insurance fraud convictions, are rare. The fraudsters often get away with their crime. When there is a conviction, like that of the Ayala brothers, the convicted defendants must make restitution to the workers’ compensation insurers who they admitted they defrauded. The court reviewed the testimony of each insurer and ordered restitution based upon the evidence from the insurers about the premiums they should have received. Those insurers should be emulated by every insurer that is the victim of insurance fraud where the fraudster is convicted and provide evidence and demand full restitution, as did the insurers who were defrauded by the Ayalas. Restitution is often paid promptly because failure to pay defeats probation and the defendants will go directly to jail.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.
Consider subscribing to my publications at substack at https://barryzalma.substack.com/publish/post/107007808
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected]
Follow me on LinkedIn: www.linkedin.com/comm/mynetwork/discovery-see-all?usecase=PEOPLE_FOLLOWS&followMember=barry-zalma-esq-cfe-a6b5257
Write to Mr. Zalma at [email protected]; http://www.zalma.com; http://zalma.com/blog; daily articles are published at https://zalma.substack.com. Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library.
Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://lnkd.in/gfFKUaTf.
Consider subscribing to my publications at substack at https://lnkd.in/gcZKhG6g
Barry Zalma, Esq., CFE is available at http://www.zalma.com and [email protected]
The Largest Residential Burglary of All Time
Post 5407
Fraud & the Fear of Bad Faith Suits
Posted on July 22, 2026 by Barry Zalma
See the full video at https://lnkd.in/gWQQEySW and at https://lnkd.in/gyhdK6wv
This is a Fictionalized True Crime Story of Insurance Fraud explaining why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is one of a collection designed to help to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime.
This is a Fictionalized True Crime Story of Insurance Fraud explaining why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is one of a collection designed to help to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime.
After ...
Chutzpah is not Enough
Post 5397
Posted on July 20, 2026 by Barry Zalma
See the video and at https://lnkd.in/gNUs2XzT and at https://lnkd.in/g2MawyzX
Magistrate Issues a Search Warrant if there is a Fair Probability that Contraband or Evidence of a Crime will be Found in a Particular Place.
In United States Of America v. Frank Suess, et al., CRIMINAL No. 3:24-308, United States District Court, M.D. Pennsylvania (July 16, 2026) a federal grand jury indicted Frank Suess, Melissa Driscoll, and others in a 55-count health care fraud and anti-kickback prosecution arising from an alleged scheme involving medically unnecessary prescription “foot baths.”
As part of the investigation, the FBI obtained an August 19, 2022 warrant to search Driscoll’s Sterling Pharmacy Yahoo email account for emails from January 1, 2018 through December 31, 2020. Driscoll moved to suppress the resulting evidence, arguing that the warrant lacked probable cause, was overbroad, and rested on material misstatements and omissions.
LAW:
The ...
Fraud Shouldn’t Pay
Post 5396
See the video and at https://rumble.com/v7ctgmq-the-great-jewel-theft.html at https://youtu.be/aRbQ2sJfGwA
This is a Fictionalized True Crime Story of Insurance Fraud explaining why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is one of a collection designed to help to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the ¬¬¬Perpetrators than any Other Crime.
The Insured purchased, for the first time in his life, a policy of Personal Articles Floater Insurance (PAF) scheduling $125,000 worth of ladies jewelry. He advised the insurer that the jewelry was always kept in a class E safe at his residence. He also told the insurer that he was employed full time as the owner of a gasoline service station and that he had never been canceled or suffered a previous loss.
One month after the policy was ...
Day Care Owner Loses Subsidies Because She Criticized State
Post 5421
Posted on August 11, 2026 by Barry Zalma
First Amendment Right Will be Allowed to Go to Trial
In Betsey J. Grant v. Maine State Department Of Heath And Human Services, No. 1:25-cv-00490-JAW, United States District Court, D. Maine (August 6, 2026), Betsey J. Grant, a licensed childcare provider and operator of Tiny Tikes Daycare in Trenton, Maine, sued Maine DHHS and several employees after she publicly criticized DHHS before Maine’s Government Oversight Committee and alleged that officials retaliated against her.
She claimed DHHS imposed and extended a conditional license, published stigmatizing information, interfered with subsidies and program funding, removed her from a food program, rescinded an expansion grant, and used biased or falsified evidence in licensing proceedings. Following the March 10, 2023, GOC testimony, Ms. Grant alleges that foster children's subsidies (approximately $30,000) were withheld; she was removed from the ...
Rescission for Material Misrepresentation
Post 5418
Posted on August 5, 2026 by Barry Zalma
An Insurer May Rescind An Insurance Policy Where The Applicant Made A Material Misrepresentation In The Application.
In Union Mutual Fire Insurance Company v. 844 Knickerbocker, LLC, et al. No. 2024-10359, Index No. 602824/22, 2026 NY Slip Op 04789, Supreme Court of New York, Second Department (July 29, 2026) Union Mutual Fire Insurance Company issued commercial insurance policies to 844 Knickerbocker, LLC, and Sanjaya Mallick based on applications stating that the insured property contained two apartment units. After an underlying personal injury action was filed, Union Mutual determined that the property actually contained three apartment units and rescinded the policies on the ground that the defendants had made a material misrepresentation in the applications.
LAW:
A misrepresentation is material if the insurer would not have issued the same policy, or would have issued it only on different terms, had the true ...
Rescission for Material Misrepresentation
Post 5418
Posted on August 5, 2026 by Barry Zalma
An Insurer May Rescind An Insurance Policy Where The Applicant Made A Material Misrepresentation In The Application.
In Union Mutual Fire Insurance Company v. 844 Knickerbocker, LLC, et al. No. 2024-10359, Index No. 602824/22, 2026 NY Slip Op 04789, Supreme Court of New York, Second Department (July 29, 2026) Union Mutual Fire Insurance Company issued commercial insurance policies to 844 Knickerbocker, LLC, and Sanjaya Mallick based on applications stating that the insured property contained two apartment units.
LAW:
A misrepresentation is material if the insurer would not have issued the same policy, or would have issued it only on different terms, had the true facts been disclosed. To establish materiality as a matter of law, the insurer must submit documentation of its underwriting practices, such as manuals, guidelines, bulletins, or rules addressing similar risks.
DISCUSSION/ANALYSIS:
As a result, the...