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Employee Misclassification

Premium Fraud in the Spotlight

A Grand Jury report suggest that workers' comp premium fraud in New York is rampant.
By: | April 11, 2014 • 2 min read
construction

Unpaid workers’ comp premiums are costing New York hundreds of millions of dollars, according to an official. In the wake of a grand jury’s report, New York County Prosecutor Cyrus Vance is calling for major changes to the system.

The release of the report by the New York State Supreme Court Grand Jury coincided with the 103rd anniversary of the Triangle Shirtwaist Factory Fire in Greenwich Village that killed 146 people. The state’s workers’ comp law was closely associated with the tragedy.

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“The widespread premium fraud detailed by this Grand Jury Report is deeply troubling and underscores the critical need to reform the workers’ compensation system,” Vance said in a statement. “My office’s Tax Fraud and Money Laundering Unit will continue to pursue those who cheat the system, but the best protection for New York’s workers is a system that is itself protected from fraud and abuse.”

The report followed investigations by the unit into false information provided to the New York State Insurance Fund in connection with applications for, and audits of, workers’ comp policies, the statement said. Vance said investigations by his office looked at incidents of insurance premium fraud that, among other things, cost New York City and state “substantial revenue.”

As Vance explained, an employer’s premium is based on each covered employee’s job classification. Rates for a relatively safe job can be much lower than that for a dangerous job.

“This system, which requires employer self-reporting, is easily abused by unscrupulous employers who misclassify employees,” Vance said. “Employers can easily lie about what work a particular employee performs, for example, reporting a roofer as a clerical worker, and thus paying a significantly lower premium. More egregious is fraud where an employer misclassifies a worker who is required to be insured under the system as an independent contractor, but is an employee.

Estimates indicate New York City’s construction industry in 2011 cost the city and state about $500 million due to worker misclassifications. This lost money is typically made up by cost shifting from somewhere else.

The grand jury’s report included a variety of recommendations from the following categories:

  • Increased penalties to ensure that sentences are proportionate to the magnitude of the fraud.
  • Increased transparency by reforming the application and audit process, thereby making it more effective and less susceptible to fraud.
  • Increased dissemination of information into the hands of those charged with investigating and prosecuting fraud.
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  • Increased education for employees and the community at large about the workers’ comp system and its value to the public, so that everyone is better able to protect the system from fraud.

“A well-functioning workers’ compensation system not only generates significant revenues for the City and the state, but also fosters equality in the marketplace and allows small businesses to flourish, creating the sorely-needed jobs. It benefits every employer, every employee, every consumer, and every taxpayer,” the report said.

Nancy Grover is co-Chair of the National Workers’ Compensation and Disability Conference and Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at riskletters@lrp.com.
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Column: Workers' Comp Dispensation

The Many Aspects of Fraud

By: | April 11, 2014 • 5 min read
John D’Alusio has more than 30 years of experience in insurance and claims. He can be reached at riskletters@lrp.com.

I was recently reading an industry column on the ubiquitous subject of workers’ comp insurance fraud. The author of that piece postulated that there were essentially two types of fraud: premium fraud and claimant fraud.

Of course, claimant fraud is the usually the first thing people think about when they think at all about fraud. Most likely a far distant second thought to claimant fraud is premium fraud. That is usually the province of unscrupulous employers attempting to save on workers’ comp premiums by intentionally under reporting the amount of employees they have working, or misreporting the class code exposures of those workers.

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If only life was so simple. Regrettably, there are various other strains of fraud that have plagued our existence at various times, for example, the California situation in the early ’90s. Anyone who was around and connected with workers’ comp insurance in California could not overlook that bane of existence for insurance carriers and employers during that time.

The impetus for this massive viral strain of workers’ comp fraud in California was that the workers’ comp law required employers/carriers to pay for medical exams for workers on contested cases such as continuous trauma and occupational exposure claims. With this incentive, clinics actually began to start law firms, which the clinics surreptitiously owned, with the overriding intention of feeding the clinics “patients” to examine. Applications to the Workers’ Comp Appeals Board were then filed by the law firms alleging various and sundry disabilities that required myriad medical exams to quantify the permanent impairment rating as well as future regimen of treatment recommendations.

A battery of medical examinations often yielded charges exceeding $10,000 in total. The applicants’ attorneys were more often than not willing to settle the claims on compromise and releases for a minimal amount of money to the claimants, because that was not the point of the entire endeavor. Once the case was concluded with the claimant, the medical liens had to be addressed. This resulted in a windfall revenue stream for the clinics that viewed the law as a license to steal, and did so with a frightening degree of efficiency and regularity.

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Where did the clinic owned attorney firms obtain their workers’ comp “clients”? That was another innovation. It was basically the workers’ comp version of ambulance chasing. They would go down to the unemployment offices and “cap” them off the lines of people there to collect their unemployment check, or to make a claim. This one can be filed under doctor and attorney fraud. However, one must admit to the simple elegance of this system, which added incredible cost burdens to an already overwhelmed workers’ comp system in the state with the largest population base in the country.

There have also been cases of claims adjuster fraud in the industry. These involve “enterprising” claims professionals who typically devise methods to embezzle funds out of their employer in the form of fraudulent claim payments made to bogus medical providers. This scheme usually entails setting up a medical provider in the payment system that the adjuster has “founded.” Durable medical equipment is a favorite choice in this realm. The key is to spread the payments to the provider (whose address is invariably a post office box) over a group of files so as not to attract any undue attention of claim and/or financial auditors. Over the course of a year or two, these adjusters can accumulate tens of thousands of dollars. The ones that have been caught either were too greedy, and streamed a surfeit of payments over a short period of time to the “vendor,” or else were simply the victim of a serendipitous audit that discovered the fraud.

Another not entirely unknown adjuster-perpetrated fraud involves seeking willing accomplices to initiate false claims that the adjuster would most likely handle. The adjuster makes payments to the claimants, who then split the claim payment “proceeds” with the adjuster. Although this is more likely in a liability claim scenario than a workers’ comp case, there have been incidents of this nature in the workers’ compensation landscape.

Let us not overlook possible producer fraud. There have been a number of situations over the last several decades involving premium being collected by an agent for coverage, and then not being forwarded to the insurance carrier. This is an audacious form of fraud as the corrupt producer is gambling that there will be little or no claims turned in on the supposed in-force policy. Of course, in the workers’ comp arena, at least seven out of every 10 claims involves no compensable lost time (“Medical Only” in the vernacular), and these claims are usually minimal in cost. Moreover, in many instances, the accident reports are sent directly to the agent, who can then pay for the medical treatment out of the embezzled premium funds. One must have nerves of steel to engage in this type of fraud, but it has been done.

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The medical community is also not entirely pristine in this area. I have seen several instances in my own career where bills for medical appointments that never took place have been submitted for payment. These are often most difficult to discover, especially if the modalities are many over an extended period of time. But it has happened.

As is evident, there are many more types of fraud than simply claimant and employer generated. As the aphorism goes, where there is a will, there is a way. Vigilance is always necessary.

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Sponsored: Aspen Insurance

Minimize the Risks of Client Lawsuits

Approach client communications as if you were writing directly to a future jury. If a client ever sues, it could save the day.
By: | April 7, 2014 • 4 min read
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When a top litigator prepares a case for a trial, part of the process is mapping out a clear, written story to put in front of a jury. Professionals looking to avoid or minimize the impact of client lawsuits would be smart to follow that lead, according to Christopher Piety, underwriting counsel, Professional Lines Risk Management, Aspen Insurance.

“Just like when a talented lawyer faces a jury, the better prepared you are, the stronger your case will be and the more likely you will prevail,” Piety said. “That means being very clear when writing an email or a letter to a client. Approach these communications as if you were writing directly to a future jury.”

Piety explained that in the wake of several recent sizeable professional liability claims, lawyers and other professionals (i.e., accountants, architects and engineers) must deliver clear, concise written communications, to create a record of what happened along the way. “On some of the larger claims that I’ve been involved in, whether it is with lawyers, accountants, architects or engineers, it really boils down to managing client expectations. And to do that requires effective written documentation,” he said.

For example, Piety said that in a recent professional liability claim, a lawyer did nothing wrong other than failing to put into writing advice that the circumstances of the client’s case changed, which typically translates to an added risk that the desired outcome may not be achieved.

SponsoredContent_Aspen“When you write an email or letter, it’s critical to include specifics. It will go a long way to avoid potential trouble, especially if the situation ends up in court,” Piety said. “A good defense is a strong offense.”
– Christopher Piety, underwriting counsel, Professional Lines Risk Management, Aspen Insurance

“The attorney didn’t spell out in writing that the evidence no longer supported the client’s seven-figure expected outcome,” Piety said. The client eventually dropped the case and then sued the lawyer for malpractice, claiming that the attorney’s failures cost them a positive result. Without written documentation advising the client about the risks, the attorney could not prove the client had been advised.

Screen for Bad Apples

“Professionals need the courage to ‘fire’ a potential problem client should any serious red flags emerge,” Piety said. “Not every piece of business is a good one.” Along those lines, he offered a few bits of advice to avoid potential problems when choosing clients:

  • Obvious Red Flag: A potential client that “burned through” multiple professional services firms. Worse, have they sued any of them?
  • Reputation Check: After completing a credit check and/or litigation search, research the potential client’s reputation in the local business community.
  • Financial Stability: Check to see if the client is financially sound.  Sometimes, problem clients manage to transfer their financial problems to their professionals in the form of unpaid fees and/or malpractice claims.
  • Available Staff: Make sure your firm is prepared and staffed to properly do the work requested.

Clarity is Critical

“When you write an email or letter, it’s critical to include specifics. It will go a long way to avoid potential trouble, especially if the situation ends up in court,” Piety said. “A good defense is a strong offense.”

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Professionals need to carefully detail the scope of work when starting a new project or case, particularly if the client is also new. From a risk management perspective, it’s most critical to completely outline limitations and risks.

In addition, specific risks to various types of professionals may include:

  • Law Firms: Never offer guarantees for specific results, and understand that silence can be interpreted by a jury as agreeing with a client’s unrealistic expectations.
  • Architects and Engineers: Specify what you will and will not be responsible for. Never agree to indemnify anyone outside the firm.
  • Accountants: Advise clients and others using your work that attest engagements only provide limited assurance of no material misstatement in the financials, but do not guarantee the absence of fraud or financial problems with the attest client’s business.

Communicate Frequently

“Throughout the entire business relationship, it’s a good idea to document any ongoing changed circumstances, no matter how seemingly small, and advise clients of any new related risks and/or performance limitations,” Piety said. He outlined these examples:

  • Accountants: Quickly advise clients in writing when the client’s own poor record-keeping is causing the audit work to be more expensive and/or creating risk of material misstatement requiring additional client action.
  • Lawyers: Advise clients in writing when discovering evidence that may potentially change the value of the case.
  • Architects and Engineers: Communicate in writing when change orders on a project require expensive design changes that may negatively impact the overall project budget.

“Just like when a talented lawyer faces a jury, the better prepared you are, the stronger your case will be and the more likely you will prevail. That means being very clear when writing an email or a letter to a client. Approach these communications as if you were writing directly to a future jury.”

Act Promptly

Piety said the failure to act quickly often causes confusion, which can in turn lead to unnecessary and unforeseen problems. To stop that from occurring, he offered these insights:

  • Communicate immediately, via writing, any emerging issues that affect a client’s expectations and your ability to meet them.
  • Clients who fail to pay in a timely manner or seem unhappy early on in the relationship probably have an issue that should be addressed immediately.

In the end, only by having a clear written record of what actually occurred can professionals ensure they will reduce, or even prevent, the threat of a claim. Do not give your future opponent an opportunity to fill in the gaps with their own version of reality designed to sway a jury against you.

“Always focus on the fundamentals because fundamentals are what will really help a defense,” Piety concluded. “In so many cases, written communication will prove to be the critical factor between winning and losing.”

This article was produced by Aspen Insurance and not the Risk & Insurance® editorial team.
This article is provided for news and information purposes only and does not necessarily represent Aspen’s views and does constitute legal advice. This article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update the article.

Aspen Insurance is a business segment of Aspen Insurance Holdings Limited. It provides insurance for property, casualty, marine, energy and transportation, financial and professional lines, and programs business.
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