The New York State Insurance Fund (NYSIF) paid a workers' compclaim it knew was a fake and others that were totallyunsubstantiated, according to an appeals court ruling that anattorney said could have far-reaching consequences.

"This is going to force a change in the Insurance Fund qualityof service," predicted Mark Dreux and attorney with Arent Fox lawfirm in Washington, which represented the Photocircuits Corp. whenit challenged the fund for failing to defend it againstunauthorized payments.

The Glen Cove, N.Y. circuit board maker argued that NYSIF hadasked the company to pay $466,100 in additional workers'compensation insurance premiums to cover four claims that it hadevidence were completely bogus or unsubstantiated, according tocourt papers.

The New York Appellate Division First Department Court inManhattan earlier this month agreed with the company's argumentsthat the claims at issue should have been contested, and rejected alower court judgment for the fund and sent the case back forfurther action.

The fund asked Photocircuits for the additional $466,100 inpremium money based on coverage the company had under aretrospective rating plan policy, which bases premiums on claimsexperience during a policy period and can adjust them up ordown.

According to Mr. Dreux, there is "lots of anecdotal evidence" ofmany other unhappy customers of the fund, which serves as aninsurer for a third of the employers in New York State.

Photocircuits action against the fund was supported in a friendof court brief by Independent Insurance Agents and Brokers of NewYork.

In making its ruling, in an opinion written by Justice Luis A.Gonzalez, a panel of the Appellate Division noted that among otherthings, "it is uncontested that the fund paid benefits to a knownimposter."

According to the decision, in 1996 when the board investigated aclaim against Photocircuits by a claimant named Traore Sekou, itwas told by Mr. Sekou "that he had never worked for Photocircuitsand that he suspected a former roommate had used his name andSocial Security number to file for Workers' Compensation and hadtaken the checks."

The court found that despite this information the fund, whichhad started making payments to the imposter in 1992, paid himanother $39,000 for a total of $66,626.

In a second case, the court said the fund paid out $116,501 to aclaimant who produced no medical evidence that her injuries wererelated to her job.

The fund, according to the court, paid another claimant $367,762and ignored evidence of a pre-existing medical condition that underlaw would have reduced the award by $328,798.

Another case, according to the decision, involved the fund'sloss of a case file and failure to lodge an appeal despite evidenceof questionable billing.

Normally the fund would be protected against a bad faith claimbased on a deficient investigation or mismanagement, but "in thiscase there is clearly a question of fact as to whether the fund metits basic obligations to perform its duties to Photocircuits underthe policy in a reasonable manner," Justice Gonzalez wrote. Thedecision noted it was "uncontested that the fund paid benefits to aknown impostor."

The decision also stated that "the Fund has an important role inprotecting against runaway and fraudulent claims. If the fund doesnot properly investigate a claim or fails to invoke the statutoryprotections given to employers," the Workers' Compensation Boardcannot "sort out the real claims from the inflated and falseones."

A spokesman for NYSIF, when asked if the agency would appealforwarded an e-mail statement that "it would be inappropriate tocomment while the matter is still in litigation."

The statement also claimed that NYSIF "has dramaticallyincreased the efficiency of its services by leading the fightagainst fraud and introducing the latest technology to its claimsand policyholder operations."