Prices, Hard Market Spur Comp Fraud A souringeconomy and dramatic premium increases are working to create aclimate where workers compensation insurance fraud is on theupsurge, according to experts who monitor the problem.

“There does appear to be an increase in the amount of workerscomp fraud,” said Dennis Jay, executive director of the CoalitionAgainst Insurance Fraud based in Washington, D.C.

He said there are no figures at the moment to back up hisperception. But, his observation is based on talks withinvestigators and state fraud bureaus. And, he said, hisorganization is in the process of doing a study in the next fewmonths that he expects will bear out his observations.

Discussing the type of fraud that may be on the increase, Mr.Jay said it is not limited to workers filing false or malingeringinjury claims. It also takes the form of premium fraud. Others inthe fraud fighting business mentioned increasing concern about theactivities of fly-by-night professional employer organizations thatoften fail to get workers comp cover.

Employer cheating most often is said to involve reporting thewrong worker job classification number or amount of employees intheir workplace in an effort to reduce their premiums.

“When times get tough, it is not surprising,” Mr. Jay said. “Itis done by both large and small companies; Im surprised there isntmore.”

From the claimants viewpoint, workers comp fraud is much easierto commit than many other forms of insurance fraud because theemployee has the benefit of the doubt, Mr. Jay observed. But hestressed that his observations were anecdotal in nature.

“We do not have a good handle on the rate of workers compfraud,” said Mr. Jay, adding that it varies by state and the typeof business involved.

“In an industry that has a lot of claims, fraud is not going tostick out as much. Construction is a classic example where there isa lot of back strain and soft tissue injury. There it is easy tocommit fraud, said Mr. Jay. Also, when people are in situationswhere they work alone and there is no one to witness an injury,fraud is a lot more difficult to prove.

“Another red flag is a situation where workers are very athleticand suffer Monday morning injuries,” added Mr. Jay.

The economy comes into play when there are a lot of layoffs.There may be some legitimate cases, said Mr. Jay, but there areothers who look to take advantage of benefits as they see theirjobs disappear.

Adding to the workers comp fraud climate are health careprofessionals who extend a patients period of care beyond what isneeded, he said.

As companies clamp down on costs by capping health carepayments, some providers might look to increase their incomethrough extending the amount of time a patient is under theproviders care. And the patient may not even know it is happening,according to Mr. Jay.

“Workers comp is a mysterious Bermuda Triangle,” said Tim Fargo,president of Omega Insurance Services, which does fraudinvestigation for insurers. “I think when things get tough [in theeconomy], there is an increase in the number of people who fileworkers comp claims and it makes companies a little moreskeptical.”

In February, the consulting firm Accenture released a reportthat said 25 percent of the adult public thought it was acceptableto overstate an insurance claim. (See NU Online NewsService, Feb. 19.) It also found that two-thirds of the 1,030surveyed said people are more likely to commit insurance fraudduring an economic downturn.

In response to the survey, Mr. Fargo noted that his firminvestigated more than 15,000 cases of workers comp fraud lastyear, a 45 percent increase over last years numbers.

“Right now, our first quarter is up 40 percent, and it appearsthe numbers will continue to trend up,” said Mr. Fargo. “Part ofthat is going out and chasing market share. But part of that is agreater number of people taking a chance on workers comp fraudwhile trying to find the next job–and carriers being more diligentthan in the past.”

“Typically, when you see things going bad, these things begin tohappen,” added Mr. Fargo. “In general, crime of all sorts bumps upbecause people get desperate.”

One area seeing dramatic increases in fraud is professionalemployer organizations. These organizations contract employees tocompanies looking for employees, but not wanting to hire them on apermanent basis.

A favorite form of fraud in these programs is the creation ofphony workers comp insurance programs that are sold to the PEO inconnection with the employees work program, said Jim Quiggle,director of communications for the Coalition Against InsuranceFraud.

Often these programs are not discovered until an injuredemployee files a claim. The claim goes unpaid, hurting theemployee, the professional employer organization and health careprovider. It is largely happening to smaller PEOs that aredesperate to find coverage and grab anything they can find.

A hard market, coupled with an increasing number of carriersleaving the underwriting, is also contributing to the workers compfraud related to these organizations, said Phyllis Stockfisch, vicepresident for Cedar Hill Insurance Agency, a managing generalagency for Zurich dealing in professional employer organizationunderwriting.

Some of these organizations lose their workers comp coverage andfail to inform the employers they contract with while they arelooking for new coverage. Again, no one becomes aware of thesituation, she said, until a claim is filed.

Bill Bradbury, deputy commissioner and director ofinvestigations for the North Carolina Department of Insurance, saidmany of the PEOs have good intentions in the beginning, but fail tofollow up with notification to their clients and findingcoverage.

“It may not be out-and-out fraud, but at some point there comesa time when they have to say to folks that they cant offer thiscoverage,” said Mr. Bradbury. “And there is a point in time whenthe intent [to cover up] becomes clear.”

Another fraud scheme activity takes place when one PEO that lostcoverage “piggy backs” with another PEO that has coverage and“purchases” the other at a nominal fee.

The carrier is never informed of the transaction and suddenlyfinds itself getting claims for more employees and inclassifications that it never underwrote for. This is aparticularly big problem in Florida, she noted.

“It can be a mess,” added Ms. Stockfisch. “Some are doing theright thing, but there is a lot of cash flow in this business andthere are a lot of small [PEO] companies starting up, looking tocut corners. It is the poor worker looking for coverage andbenefits that dont exist who gets hurt.”

She predicted that the fraud crackdown by regulators wouldultimately produce a shakeout in the industry, resulting in “amajor reduction in PEO players who are not truly professional.”Once that happens, she said, insurers would once again beginunderwriting the business.

Reproduced from National Underwriter Edition, May 12, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.