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An Honorable System No More
Lynn Szymoniak, a former executive for the National Council on Compensation Insurance, has developed a legal specialty in rooting out abuses by both employers and insurers. Speaking to an audience in South Carolina, she estimated that 20 percent of the state's payroll is not covered by either insurance or self-insurance for workers' comp.
Her methods, admittedly, involved some guesswork, but that can be avoided when state agencies compare their payroll and insurance databases. Vermont found after a careful study, that about 10 percent of payroll is not covered, a figure that can serve as a conservative national estimate in light of other studies I've read. Employers are not just making honest errors. They are evading coverage. Many more workers are covered by unemployment insurance than workers' comp insurance, and workers misclassified as independent contractors miss out on coverage by both programs. The unemployment insurance agencies are as interested in finding these abusing employers as are the workers' comp agencies.
In fact, not buying workers' comp, or underreporting payroll to insurers, is the type of behavior you find in an underground economy: use of cash and other off-the-books schemes, evading licensing, ducking the scrutiny of regulatory and tax agencies. In March, Massachusetts launched a task force to look into this underground insurance economy with workers' comp abuses high on the agenda. The investigation was prompted, in part, by a 2004 study that estimated that 13 percent of employers in Massachusetts were underreporting wages. Among construction firms, one in four underreported. Massachusetts also estimated that between 2001 and 2003, employers in that state evaded as much as $100 million in workers' comp insurance, and a like amount of payroll taxes. A Fiscal Policy Institute study estimated annual premium shortfalls in workers' comp of at least $500 million. A lot of the undercoverage for unemployment insurance and workers' comp arises out of independent contractor dodges. The employer says that its workers are not really employees, a trend we saw a lot of in the 1990s, when vast numbers of employers--from big players such as Federal Express and Microsoft--undertook to shove their workers into independent contractor status. Massachusetts, which had enacted a law in 1991 to regulate who is an employee versus who is a contractor, in 2004 virtually eliminated independent contractors for workers' comp insurance. Enforcement by insurers is often painfully slow. According to Doug Sears, who works for the Massachusetts Department of Industrial Accidents, assigned risk pool insurers have, until recently, been using the wrong document to enforce independent contractor laws. Szymoniak said that insurers in South Carolina have done little to comply with anti-fraud regulations. As for insurer fraud, a brick-throwing contest has been going on between AIG and NCCI over falsification of insurer reports to state agencies. Workers' comp insurance depends heavily on the honor system, barring data links that need to be vastly improved. Until then, insurance fraud will be our huge black eye, costing much more than claimant fraud. PETER ROUSMANIERE is a Vermont-based columnist for Risk & Insurance®. July 1, 2008 Copyright 2008© LRP Publications |
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