Ignore Employer Fraud At Your Own Risk
Insurers urged to adopt zero-tolerance policy, hike funding and training
Click on Good Morning America, and you might see a feature about crooked employees who open a karate studio or go skydiving while fraudulently collecting workers' compensation money for their supposedly achy backs, necks or limbs.
Bogus comp claims make colorful theater, and the stolen money is significant. But fraud fighters often have a skewed focus on scams by workers. This deflects attention and resources from widespread premium rip-offs by dishonest employers--the elephant in every comp insurer's living room.
Until fraud fighters make these cons a high priority, employer rip-offs will remain a significant crime spree that cuts into insurer profits, exposes injured workers to financial ruin, and gives cheating firms an unfair advantage over honest competitors in contract bidding.
Skullduggery ranges from complex ruses that help a firm illegally avoid paying full premiums to simply not buying state-required coverage at all.
Large, complex and well-camouflaged premium scams have caused large losses for insurers in recent years. The damage could easily reach several billion dollars annually, and equal or even trump losses from false claims.
Employer greed, spiraling workers' comp premiums and a sluggish economy are the usual triggers. The incentive is strong--premium swindles can easily save an ethically challenged business tens of thousands of dollars in premiums a year.
Construction is especially rife with premium rip-offs. Many builders are illegally ducking premiums that are skewed so high by the dangerous, injury-prone work that laborers perform. Dishonest builders gamble that overstretched regulators and insurers don't have the resources--or the will--to find every scofflaw. They're often right.
Thousands of builders in high-development California are cheating--in fact, as many as 60 percent of California roofers don't even carry workers' comp coverage, one state official estimated last year.
Florida is another center of comp fraud in construction. An accountant working for builders allegedly even tried to hire a hit man to whack a state fraud investigator and feed him to alligators!
Premium scams also keep surfacing in Professional Employer Organizations and employee leasing firms. Two large California employee leasing firms illegally reduced their workers' comp premiums $1.3 million by illegally hiding a large part of their payroll from their insurer.
Premium schemes also victimize workers--especially recent immigrants. Many Hispanic workers, for example, don't even know their employer may be legally required to buy workers' comp coverage. Hispanic workers often stay quiet when they learn they're illegally uncovered. They fear whistle-blowing will jeopardize their jobs or immigration status.
With nearly 15 million Hispanics now working in the United States, and millions more arriving as immigration accelerates, workers' comp insurers face an unsettling problem that likely will grow far more costly unless they deal with it now. It's especially notable in construction--a field that is one of the largest employers of Hispanics.
Despite signs that more states are beginning to grapple with premium rip-offs, this swindle largely remains a stepchild in workers' comp antifraud efforts.
Many prosecutors and fraud bureaus lack the expertise, will and resources to unravel the complex paper trails of shell firms and cooked books. Bogus injury claims by workers are usually much easier and cheaper to bust.
State regulators often are outgunned as well. They may make periodic sweeps of construction sites, for instance, and shut down a handful of uninsured projects. But the sheer volume of businesses--especially in fast-developing areas--means large numbers of wrongdoers slide through the dragnets.
Solutions must occur at many levels.
o First, insurers should adopt a zero-tolerance policy, aggressively seek prosecutions, and widely publicize cases of fraud.
In part, this means stepping up training of their investigators about the red flags and forensics of premium fraud. Either that or they must hire more specialists with well-embedded expertise.
o Insurers also could fund specialized fraud-bureau investigators and prosecutors in trouble-prone states.
Funding training programs for prosecutors also can make a difference. It won't take many convictions to recoup those modest investments.
o Targeted laws like California's, which make premium fraud a specific crime with jail time, will give prosecutors better tools to nail cheaters.
More state workers' comp fraud laws should place penalties for premium fraud on an equal footing with claim cons by workers--and both should be crimes. Many state workers' comp fraud laws either don't even mention premium fraud, or punish bogus injuries more heavily than premium cons.
o Quantifying premium fraud in problem states also can help galvanize action.
A study in Massachusetts last year, for example, found that businesses misclassified thousands of workers, at great cost to insurers, honest businesses and the state. Widespread and well-publicized sweeps of construction sites should be an ongoing part of fraud-bureau antifraud strategies in trouble-prone states.
This action will create deterrence, encourage more businesses to pay their fair share, and, in turn, place downward pressure on rates, thus lowering the incentive for some businesses to cheat.
o Insurers and regulators also must better educate workers how the comp system works, when they're entitled to coverage, and what to do when they know their employer is illegally avoiding buying coverage.
This is especially true for immigrant workers. Such efforts now are sporadic, at best. The Coalition Against Insurance Fraud is working with Consumer Action, with funding from CNA, to launch a new program this year to help educate Hispanic workers.
Losses from premium swindles are huge and draining. Long-term relief will happen only when stopping these schemes becomes a higher priority for the workers' comp community. It's a question of commitment.
Dennis Jay is executive director of the Coalition Against Insurance Fraud in Washington, D.C. Go to www.InsuranceFraud.org for more information.
Flag: Rap Sheet
Head: How Employers Scam On Comp
Employer workers' comp swindles often involve complex networks of shell firms and accounting dodges that can be intimidating for investigators to unravel. Among the basic versions:
o Firms report that employees work safer jobs than they really do.
One now-defunct California builder lied to its workers' comp insurer that its roofers were clerks and sales staff.
A second builder fleeced insurers out of $300,000 by saying his firm worked in concrete construction, when in fact his firm built with structural steel--a riskier building technique with higher premiums.
oCompanies hide workers off the books to illegally lower payroll.
Havingfewer employees on the books can reduce premiums significantly. One construction materials firm in California bilked its workers' comp insurer out of $3.5 million by stashing employees in a network of shell companies.
In Massachusetts, a scaffolding firm paid employees cash under the table to shrink its reported payroll and erase any incriminating paper trail.
A Chicago security firm simply low-balled the number of workers it claimed it had posted at public-housing complexes.
"Long-term relief will happen only when stopping these schemes becomes a higher priority for the workers' comp community."