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.
Warning Signs for Employees
There are several “red flags” that are common in workers’ compensation premium fraud. While none on its own is necessarily cause for alarm, the presence of two or more should raise suspicions and trigger an investigation.
1) Monday morning report of injury. The alleged injury occurs first thing on Monday morning, or the injury occurs late on Friday afternoon but is not reported until Monday.
2) Employment change. The reported accident occurs immediately before or after a strike, job termination, layoff, end of a big project, or the conclusion of seasonal work.
3) Suspicious providers. An employee’s medical providers or legal consultants have a history of handling suspicious claims, or the same doctors and lawyers are used by groups of claimants.
4) No witnesses. There are no witnesses to the accident and the employee’s own description does not logically support the cause of the injury.
5) Conflicting descriptions. The employee’s description of the accident conflicts with the medical history or injury report.
6) History of claims. The claimant has a history of a number of suspicious of litigated claims.
7) Treatment is refused. The claimant refuses a diagnostic procedure to confirm the nature or extent of an injury.
8) Late reporting. The employee delays reporting the claim without a reasonable explanation.
9) Claimant is hard to reach. The allegedly disabled claimant is hard to reach at home.
10) Changes. The claimant has a history of frequently changing physicians, addresses or jobs.
Warning Signs for Businesses
In addition to the red flags related to employees, there are also common warning signs that business owners are attempting to commit workers’ compensation fraud. The presence of two or more of the following should raise suspicions:
1) The business address is a mail drop or the business is physically located in another part of the state from its mailing address.
2) A prior carrier has dropped coverage for the business or the business has frequently changed carriers.
3) An excessive number of certificates of insurance are issued on a small policy.
4) Reported injuries not consistent with purported job titles or duties.
5) There is an unusual ratio of clerical to non-clerical staff for the type of business.
6) The business avoids audits or has never been audited.
How Agents Can Protect Themselves
Sometimes agents can be accused of advising policyholders to commit fraudulent acts. There are simple steps agents can take to protect themselves and assist in workers’ compensation fraud investigations. Foremost, they should diligently watch for the common warning signs of fraud and work with carriers that offer proactive anti-fraud programs.
Beyond that, agents should maintain detailed records of their policyholder interactions, including all e-mail correspondence. They should obtain original signatures on all applications and verify the policyholder or person of contact with a driver’s license. By keeping this information on file, agents will help protect themselves against false accusations and will help prosecutors pursue a criminal case, if necessary.
If agents ever suspect a policyholder is engaging in workers’ compensation premium fraud, they should inform the carrier’s special investigation or fraud investigation unit. In certain cases, the agent may feel the need to elevate the referral of suspected premium fraud directly to the appropriate law enforcement agency.
If charges are eventually filed against a policyholder, the evidence an agent possesses will be important to the prosecution’s case. Typically, when a prosecutor serves a subpoena or search warrant for an agent’s records, the types of evidence most often sought are applications, copies of checks used for payments, correspondence (including e-mail) with the accused policyholder and any documents signed by a person responsible for the business.
Agents serve as a critical frontline defense against workers’ compensation insurance premium fraud and play an important role in preventing it. It is important to be aware of the different types of fraud and the common warning signs. Agents should never hesitate to report any suspicious activities to a carrier for further investigation.