By STEVE TUCKEY, who has written on insurance issues for a decade for several national media outlets
With the nation's economy bleeding hundreds of thousands of jobs a month one can expect workers' compensation overall premium to decline at a similarly fast clip.
But the question remains how much of the decline is legitimate and how much stems from employers using myriad schemes to get out of paying their fair share to the system that protects their workers from the ravages of injuries on the job.
According to the latest figures from the National Council of Compensation Insurers Inc., private carriers reported about $34 billion workers' compensation premium in 2008, representing about a 10 percent decline from the previous year. And the numbers should only worsen once the 2009 figures are tallied.
Don Marshall, vice president for the Woodland Hills, Calif.-based Zenith Insurance Company, said the downturn in the economy has helped shine a spotlight on the issue of ensuring employers keep to the straight and narrow in reporting payroll statistics for compensation purposes.
"It is not so much that it was not happening before the economy was in a downturn, but the focus moves toward it because of the economy and the downturn," he said.
Maureen O'Connell, deputy district attorney for the San Bernardino County, Calif., district attorney's office would find not fault with that argument. She has had to double the staffing of the fraud unit she heads up because of the uptick in both employer and claimant workers' compensation insurance fraud. "The theory is that in a difficult economic climate, crime tends to go up as does fraud," she said.
As a result of the increased staffing, her unit has been able to increase the number of surprise visits to employers to ensure a company's reporting matches reality. Failure to carry proper workers' compensation coverage can result in a $10,000 fine and up to a year in jail.
Like virtually all forms of insurance fraud, putting a precise dollar figure on the losses from premium or employer fraud to the workers' compensation realm remains as much an art as a science.
Three years ago, the Fiscal Policy Institute estimated that New York employers cheated the workers' compensation network in that state by up to $1 billion in premiums, or up to 20 percent of payments.
Laurence LaPointe, director of the division of confidential investigations, for the New York State Insurance Fund, does not believe things have improved much since then. "I couldn't give any precise figures but I imagine with the recession that number must have risen," he said.
The institute came to its conclusion by comparing the $389 billion in payroll reported to the state in 2003 for unemployment insurance calculations to the $311 billion in payroll reported to state agencies tracking workers' compensation coverage. "We were surprised to find this level of noncompliance," said James Parrott, chief economist for the institute.
And that, of course, is just one state.
In California, a 2007 study conducted by researchers at the University of California at Berkeley found that as much as 75 percent of payroll in high-risk industries is not reported, costing insurers up to $3.8 billion in lost workers' compensation premiums.
Underreporting schemes have not changed much over the past few decades. Companies can misclassify workers by claiming they work in jobs with lower risk levels such as a roofing company employing 20 file clerks and five roofers when in fact there are 20 roofers and five file clerks. .
Or some firms may resort to the independent contractor ruse for employees whose jobs really do not qualify for such status, and in which not only workers' comp premium but also taxes and other revenues vanish.
Jon Coppelman, senior vice president of Wellesley, Mass.-based consulting firm Lynch Ryan & Associates, said that businesses that employ a high number of contract, temporary or seasonal workers are rife with potential for fraud.
"In some industries such as general contracting, honest employers may also suffer a competitive disadvantage since fraud perpetrators have a lower cost of doing business and can offer lower prices in competitive or bidding situations," he said.
Lynn Szymoniak, a West Palm Beach, Fla.-based attorney specializing in workers' compensation issues, said that in the construction industry subcontractors are required to show their certificates of comp insurance to the general contractor. "You don't know when you are holding a certificate of insurance in your hand if it insures 10 people or 100 people," she said.
One of the most infamous cases of workers' compensation fraud involved the 2003 Station Club Fire in West Warwick, R.I., when a family of the four deceased employees found out the business was without coverage.
Then there is the problem of alternative workers' compensation insurance products that fail to deliver the goods when the time comes, which may or may not constitute employer fraud but still contributes to the undermining of the entire comp realm.
Szymoniak said that deregulation, industry competition and tough economic times have led to products coming to the market that are either out-and-out fraudulent or could leave insureds exposed to significant risks because of the hidden complexities of the policies.
"It has always been a risky business when you advertise something that is an alternative to comp because most of the time it is not," she said.
Tough times may increase the allure of alternatives that promise to cut comp premiums by 50 percent only to have employers find out eventually why the product was so priced.
"I am seeing more products that are being fronted by legitimate companies but are really complex offshore captive arrangements that I have a lot of doubt about," she said.
Some programs present ways of becoming self-insured without going though state red tape that is usually associated with that process.
And there are the cases of those companies that sell so-called "fake" insurance policies, which impacts numerous lines but in comp can have particularly lethal results.
Szymoniak recalled the case of Regency Insurance Company that resulted in $10 million in unpaid claims and about a dozen executives going to jail.
The Regency case involved the issuance of bogus workers' compensation contracts to Professional Employee Organizations (PEO). PEOs take over the payroll and human resource functions for smaller companies, and those employees technically become employed by the PEO.
Szymoniak said that some of these schemes have gotten so large and crossed so many state lines that the U.S. Justice Dept. has gotten involved in some prosecutions. In some cases the insureds, such as employee leasing organizations, have been proven to be in on the scam while in other cases they could be victims themselves, she said.
Fullerton, Calif.-based workers' compensation expert Art Levine said PEOs can serve a valid function in obtaining discounted workers' compensation premiums due to scale as well as the kind of sophisticated safety programs that may be beyond the reach of a smaller employer.
"But unfortunately, some unscrupulous PEOs and premium hungry insurers have wreaked workers' compensation havoc," Levine said.
Among their crimes include the traditional misclassification of employees along with so-called "piggy-backing" of other PEO's insurance. "Some employers have also entered into employee leasing arrangements in order to avoid experience modification," Levine said. "This is illegal."
Szymoniak said that in some cases coverage will be provided through a captive arrangement, utilizing protected cells with the insured PEO sharing the risk with the reinsurer, with side agreements coming into play that may ultimately doom the injured employee way on down the line. "The devil is in the details and the details are in the side agreements," she said.
While such side agreements may fall more under the category of carrier fraud or abuse rather than employer shenanigans, in the end the potential claimant could be out on a limb.
Writing in the spring 2009 issue of John Liner Review, New York City-based attorney John Nevius said such agreements can lead to large additional costs for the policyholder and tie up their credit.
Some agreements have been to unlawfully limit a policyholder's legal recourse to just arbitration, which leads to the overall problem of their lying for the most part beyond the scope of state insurance regulation. The use of side agreements is illegal in some states, said Szymoniak. "You might be looking at a policy that is absolutely standard and approved by the regulators but none of the side agreements have."
While complex insurance programs of dubious legitimacy present one piece of the deficient premium problem, plain old fraud schemes still present the greatest challenge to the first line of defense in the carriers' premium audit and special investigation units and ultimately state and county law enforcement officials.
Zenith's Marshall, said a seamless garment-like connection between premium audit and Special Investigation Units insurance companies is critical for detection and where applicable criminal prosecution of premium fraud activity.
"When I am working a premium fraud case it is an absolute team effort between premium audit and SIU," he said.
Marshall reported that in a number of cases, suspected premium fraud was detected by premium audit but the subsequent investigation by both SIU and premium audit led to the conclusion that there was no criminal intent on the part of the insured.
Marshall said there has been no sudden shift in the various ways employers fraudulently attempt to cut down on the comp premium costs. "But I think the one we see more often, at least by smaller employers, is cash payments that results in payroll underreporting," he said.
O'Connell said that partial cash payments have also come up in her unit's investigations over the past year along with traditional misclassification schemes.
Identification comes during the claims process when the injured worker is told his disability payment will be based on the wage he gets in his check rather than the total of his check and cash wage.
Such activity tends to take place in companies in the construction and food service industries with a transient employee base, or in companies that are less sophisticated than Fortune 500 companies.
Marshall said the job of SIU in this instance is to determine whether or not the claimant actually received the wages he claimed and therefore deserved the higher disability payment. In addition, he has to determine whether an action took place that must be reported to state authorities.
And finally, it must keep the premium audit unit in the loop to determine whether the employer's policy in question should be dropped.
"Premium audit knows exactly what we are doing every moment we are doing it because in many cases we need their help," Marshall said.
The states themselves have taken on the overall insurance fraud fight with varying degrees of vigor with comp premium fraud just one aspect.
Szymoniak said that Liberty Mutual and Travelers are two carriers that have made the greatest effort in participating in the numerous task forces that have arisen over the years to fight fraud. Such efforts can involve quite a commitment of taking part in quarterly meetings.
Tasha Carter, chief of bureau of compliance of the Florida Division of Workers' Compensation, said her department has also seen a rise in cash payments as a means of falsifying workers' compensation premium increasing in the past couple of years.
The Florida Department of Financial Services, which houses her unit, has undertaken efforts to target those check-cashing stores that are used by contractors to carry out the premium fraud scheme. In addition, Carter has seen an increase in the sale and brokering of illegal workers' compensation insurance certificates in the past year with a special emphasis in the construction industry.
According to the Florida Bureau of Workers' Compensation Fraud, the overall number of cases presented for prosecution in 2008 increased by 17 percent over the prior year, and the number of arrests in 2008 jumped by 29 percent over the previous year for this particular scheme.
LaPointe of the New York State Insurance Fund said that his company's 38 percent market share in the state means that both the general contractors and their subcontractors can be insured by them, which can facilitate comparisons in which abuses can be uncovered.
"In many of the cases we are bringing to prosecutors now are cases that were surfaced when an auditor discovered the subcontractor we insured has not been reporting all of its sales because we picked up payments from the general contractor to the subcontractor and those are not shown," he said.
The millions of dollars of concealed sales can oftentimes indicate a concealment of payroll, he added.
LaPointe has also come across some rudimentary certificate of insurance counterfeiting schemes. "They do these primitive scams with white-out and photocopying over and over again until you get it grainy enough so it can pass by," he said.
State funds, such as those in New York, Texas and California, have taken for the most part a much more active role than have private carriers in covering premium fraud, LaPointe asserted.
Employers of course are not the only ones who have taken it on the chin in this downturn and may therefore be tempted to cut some corners in trying to erase some comp premiums. The states themselves have seen tax receipts diminish and could be tempted to trim fraud-fighting efforts, as well.
But Carter said that has not been the case in Florida, and O'Connell's doubling of her staff in California indicates this is one area state accountants have refrained from cutting.
If that is the case, it could be due in part to the California Department of Insurance 2007 annual report that said for every $1 invested in workers' compensation anti-fraud efforts, $6.17 is returned to the comp system.
Not too many programs can produce such numbers.
October 15, 2009
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