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.
5 & 5: Rewards and Risks of Cloud Computing
Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.
ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:
5 benefits of cloud computing
1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.
2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.
3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.
4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.
5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).
1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.
2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.
3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.
4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.
5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.
Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.
Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.
To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?