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In August, Massachusetts Superior Court judge Frances McIntyre agreed with them, citing a statute written to attack a frequent abuse in workers' compensation.

The study prompted new legislation so aggressive that Neil Johnson, who runs premium audits for Liberty Mutual says that the state is "light years" ahead of other states.

The statute presumes that workers are employees. For a worker to be an independent contractor, the employer has to demonstrate that the worker is not under its direction and control. Also, the worker must not be in the same line of business as the employer. And the worker must hold herself out as an independent contractor. Judge McIntyre ruled that the lounge did not pass all these tests.

Florida later passed even tighter standards and many other states are following suit. It takes years for state legislatures to get around to passing reforms. Meanwhile, state-level studies continue to underscore the problem.

Besides independent contractor abuses, an employer might report to its insurer half its payroll and pay the others in cash. A company might say its field workers are office staff.

Ernst & Young's experts have estimated that as much as 20 percent of premium can be lost from all these shenanigans.

Premium fraud costs the workers' comp system at least as much as does claimant and medical provider fraud combined. Premium fraud operates in synergy with tax fraud and labor abuses. This is the underground economy doing what it does best--evading the law.

I wonder how resourceful and determined insurers are at containing this problem.

Dax Craig, CEO of Denver-based Valen Technologies Inc., which sells premium audit software, thinks that insurers field audit too many large and not enough small policyholders, in part because they don't fully analyze the risk of premium abuse. He says insurers can screen for payroll inaccuracies and trigger field audits by analyzing external databases containing more than 100 employer attributes.

Lynn Szymoniak, a Florida attorney who tackles premium fraud cases for insurers and regulators, said insurers can do more to bring fraudsters to trial. She told me, "They may audit and get their additional premium or cancel the policies and be happy with that. Other companies are quite okay passing through their losses in terms of rate increases. They are not going to put any money into it, they are not going to put eight people together in their company to attack the problem, because they don't think there is any profit in it."

Insurers may by deterred by the headaches of litigation and by fear of gaining a reputation for muscling their accounts. Okay, but according to Szymoniak, an alarming number of premium fraud investigations are not even reported by insurers to regulators when insurers are required by law to do so.

Let's have a progress report on containing premium fraud, no matter how much cooperation it requires by state agencies. Meanwhile insurers should confirm publicly that they're doing something about it.

PETER ROUSMANIERE is a Vermont-based columnist for Risk & Insurance®.

October 1, 2009

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