States Crack Down on Premium Fraud
2014 has been a busy year so far for workers’ comp reform. Recent months have seen state governments cracking down on premium fraud, investigating companies and stepping up criminal prosecution.
Headlining the movement is New York’s Grand Jury investigation from September, 2013 to February, 2014.
The panel found that employee misclassification was a common practice among employers in the construction industry looking to avoid high premiums, costing the city and state millions in lost revenue and uncovered healthcare costs. The investigation built on a June 2013 study by the Fiscal Policy Institute that estimated that employer fraud in the construction industry cost New York about $500 million in 2011.
“We were looking at financial transactions involving workers’ comp fraud, and that developed into a series of investigations. I was then able to see that there were aspects of the system that could use some legislative and administrative changes” said Gilda Mariani, Assistant DA in the New York County District Attorney’s Office.
The Grand Jury found that it was far too easy for “unscrupulous” employers to submit false information on the applications to the New York State Insurance Fund, which covers 40 percent of the state’s workers’ comp needs. While misclassification was the most common offense, employers also skirted high premiums by paying employees off the books, under-reporting the number of employees on payroll, or neglecting to secure insurance altogether.
When companies don’t pay the appropriate premium, “it affects a lot of people,” Mariani said. “The employers who are really legit have to pay all of this overhead. The employees get hurt because they’re probably not getting withholding, or benefits, or all their rights as an employee. It affects consumers and taxpayers as well.”
Michael Newman, partner at Barger & Wolen LLP, a law firm specializing in insurance litigation, agreed that injured employees suffer at the hands of fraudster employers.
“An injured employee who is improperly designated as an independent contractor is not able to obtain the benefits of workers compensation protection,” he said. “If injured on the job, their only recourse is to sue the business for negligence, which may or may not garner them a full recovery.”
The Grand Jury report recommended that New York’s workers compensation law be revised to include stronger criminal provisions, like gradating the degree of felony offense proportionate to the fraud. It also suggested that criminal fines be increased and that judges have the power to impose fines as large as two or three times the amount of the fraud. Currently, fines are sometimes lower than the amount of fraud committed.
The report also recommended the creation of a standard electronic application form for all carriers to be submitted through the Workers’ Compensation Board, as well as an integrated database storing application, audit reports and certificates of insurance.
Finally, the report highlighted the vast trickle-down effects of premium fraud by calling for educational initiatives with a community approach that include both employers and employees.
“We did a joint program with a bar association where we did a series of two-hour classes for small businesses in the community that covered what their obligations are,” Mariani said. “We partner with community leaders and we also reach out to first responders so they can be more aware of what info to collect on the scene of an injury.”
Education is a key component as well in Tennessee initiatives. Earlier this month, Tennessee’s Department of Labor took action on several recommendations made by the Employee Misclassification Advisory Task Force to identify employer fraud. In addition to providing speakers at conferences around the state, the Workers’ Compensation Division also launched a website delineating the differences between employees and independent contractors.
Also similar to New York, Tennessee took a more aggressive approach to criminal prosecutions with the establishment of a referral process, hiring of three additional investigators, and planned implementation of fraud detection software.
California and New Jersey are playing offense as well.
In May, the California Department of Insurance announced that it had issued $95 million in grants over the past three years to district attorneys to target workers’ comp fraud. According to the department website, the district attorneys reported a total of 819 arrests in fiscal year 2011-2012, with 708 convictions. The total chargeable fraud was $341,084,553.
In New Jersey, a roofing company executive got hit with jail time in addition to a hefty fine when he was found guilty of misrepresenting his company to carriers. By asserting that his company did not, in fact, deal with the installation and maintenance of roofs, but rather used subcontractors, he avoided $265,044 in workers’ comp premiums.
“There is no question that employee misclassification in the workers’ compensation context has begun to get more attention from governmental entities in recent months,” Newman said. “It appears that prosecutions are indeed on the rise.”
A Snow Job
As work-related injuries go, back claims are fairly ubiquitous. So it was no surprise to me that there was another batch with my new loss reports. One of them contained an employer’s letter, disputing a claim and requesting a thorough investigation. I complied and attempted to make phone contact with Liz, the employee.
When the claim came up on diary, I still hadn’t heard back from Liz. I contacted the employer, and the supervisor told me that Liz, 48, was hired nine months prior as a stock room clerk. Her duties included unpacking merchandise — typically clothing, bathroom/bedroom furnishings and small appliances — and placing them on stockroom shelves. The employer mentioned that Liz had often been late and was given three verbal warnings. A fourth would result in termination.
Liz’s accident occurred on a Monday and was unwitnessed. She alleged low back strain while shifting boxes and unloading microwaves, toasters and bulky quilts. On Tuesday, Liz worked half a day and told her supervisor that she felt unwell and wanted to go home. Liz remained out until Thursday.
When she returned, she told her supervisor about the back injury, admitting she hadn’t brought it up at the time of occurrence. She said she thought it would get better on its own. She produced a note from her doctor indicating he was treating her for a low back injury. The note said Liz could only work if there was no bending, squatting or lifting. Since that was not feasible, the supervisor sent her home with a disability claim form.
When I hadn’t received any progress report from Liz’s doctor, I made several attempts to call Liz, but failed to reach her. A week later the employer called to tell me they received a denial from the disability carrier citing the industrial nature of the injury. I sent a final claimant contact letter. Ten days later, I received an attorney representation letter.
Around the same time, I received a report indicating that Liz had a prior back injury from falling on a train platform the previous year, with a diagnosis of herniated disc. The report noted there had been a compromise settlement. I called the treating physician’s office requesting an update. All they would advise was that Liz couldn’t work and remained under care. An independent medical exam was scheduled five weeks out so it didn’t seem there was much I could do at that point but wait.
A huge snowstorm the next day closed our office. Interestingly enough, I happened to pass through the town where Liz lived so I drove down her street. Quite a surprise awaited me as I saw Liz outside — shoveling snow in her driveway.
I called the attorney and he recommended immediate surveillance. Within three days, we had film of Liz cleaning up snow, though not as actively as I had initially observed. In the meantime we received a report from Liz’s doctor stating that Liz remained disabled and needed surgery. Curiously, the independent medical exam found her employable, not requiring treatment, and with no residual disability.
Initial settlement efforts were futile. We got a hearing scheduled for three months out. A pre-trial settlement attempt also failed but we hadn’t played our trump card yet. At the hearing, defense counsel showed the surveillance video to the arbitrator and opposing counsel. Liz’s attorney reluctantly agreed to withdraw the claim. The arbitrator dismissed the case with prejudice, neatly closing the case of Liz and the snow job.
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.