10 ‘Red Flag’ Warning Signs of Workers’ Compensation Fraud
Workers’ compensation insurance premium fraud is a serious problem. Not only is it illegal, it adversely affects the bottom lines of producers and carriers, and leads to higher insurance premiums for honest businesses. It causes a loss in commission for agents, creates an unfair business advantage for the perpetrator (affording a “bidding/sales advantage” due to their reduced operating costs) and has a negative impact on a state’s rate-making system.
Equipped with the right information, independent insurance agents – who are a key conduit between policyholders and insurance carriers – can play a valuable role in identifying and preventing workers’ compensation insurance premium fraud.
In order to protect the interests of policyholders and their own businesses, agents should be aware of the different types of premium fraud and their warning signs. They should also know what to do if they suspect premium fraud.
Types of Workers’ Compensation Insurance Premium Fraud
There are three basic types of premium fraud: underreporting payroll, misclassification of employees, and experience modification evasion.
Underreporting of payroll occurs when a policyholder fails to accurately report their entire work staff to the insurance company, often by paying employees off the books or presenting employees as sub-contractors or independent contractors versus actual employees of the company.
The second type is the misclassification of employees. For example, when a high-risk employee, such as a construction worker, is classified as a person with low-risk clerical duties, a company will pay less in workers’ compensation premiums.
The third type of premium fraud is experience modification evasion. This occurs when a company closes, then attempts to re-emerge as a new company on paper in order to obtain a lower experience modification factor, but the new business is actually unchanged from the original business.