Pursuant to the Workers' Compensation Act, an injured employee'sexclusive remedies against the employer are generally limited tosuch benefits as temporary total disability payments and reasonableand necessary medical expenses. The underlying legal theory is thatwhile claimants forgo an extensive range of tort damages availableto them in other personal injury actions, they receive speedy andcertain medical and lost-time payments and are not required toprove fault.

Fraud, however, has been a growing concern in the workers' comparena. Employees who elect to abuse the system do so at the risk ofhefty criminal and civil penalties. Nonetheless, claim managers andadjusters who suspect fraud also should be cognizant of therelationship between fraud, slander, and libel actions, and theanti-retaliation and whistle-blower laws that operate to protectthe rights of injured workers.

Caution should be exercised in the investigation of suspectedfraud. Claim professionals should not make unsupported statementsor premature decisions based on a mere hunch that fraud is present.Overly zealous fraud investigations could lead to defamation orother civil lawsuits. Accordingly, claim professionals should avoidactions that create unnecessary and costly legal exposures.

Fraud

An “occupational” illness/injury is generally present where: (1)there is some causal connection between the loss and employment;(2) it had its origin in a risk incidental to, or connected with,employment; (3) it flowed from as a natural consequence ofemployment; or (4) it occurred within the period of employment at aplace where the employee may reasonably be and while reasonablyfulfilling the duties of employment or engaged in doing somethingincidental to employment. Conversely, claims that do not meet thecriteria of being work-related are fraudulent.

Everyone pays the price of bogus claims. Fraud results in higherpremiums and greater company expenditures. This translates intohigher cost margins, which get passed on to consumers. Claimprofessionals, therefore, should be on the lookout for fraud whileadjusting workers' comp losses.

Legal Definition of Fraud

Like other categories of fraud, insurance fraud is a crime. Thestatutes of the jurisdiction in question should be reviewed todetermine how fraud is defined. A claim, however, is likelyfraudulent when someone knowingly and with the intent to defraudthe carrier presents a statement that is materially false andmisleading in order to obtain a benefit.

Fraud comes in a variety of forms. Employers may misrepresentmaterial facts on applications or misclassify workers to attain anartificially lower rate. Medical professionals may inflate claimswhen billing for services. Employees may embellish detailsregarding losses or even allege job-related injuries that neveroccurred. A fraudulent claim may even involve a staged accident.According to a study conducted by the National Insurance CrimeBureau, the cities with the highest incidents of staged car crashesare Miami, Los Angeles, Houston, Chicago, and Philadelphia. WithTampa and Orlando ranking at numbers six and eight respectively,Florida holds the distinction of having three cities in the top10.

States and municipalities have gotten tough on fraud byinstituting a broad spectrum of initiatives to address it. Manyhave established workers' comp insurance fraud bureaus. Louisianaoffers an online form wherein suspected fraud may be reportedanonymously, as well as a toll-free fraud hotline, as does NewYork, Texas, and Oregon, among several other jurisdictions. The LosAngeles County District Attorney Workers' Compensation FraudDivision investigates and prosecutes fraud, and has targetedorganized “claim mills,” which is viewed as a growing problem inSouthern California. Claim mills include individuals who arerecruited to file fraudulent claims, and are referred to a doctoror lawyer who is in on the scam.

As part of its anti-fraud reward program, Florida offers up to$25,000 to individuals providing information leading to the arrestand conviction of persons committing fraud. In October 2006,Florida's Department of Financial Services announced the arrests ofthree individuals on workers' comp fraud charges.

Red Flags of Fraud

While there are no sure-fire indications of fraud, warning signsdo exist. Disgruntled workers may try to even the score withemployers by filing false claims. An employee in line for earlyretirement may seek to bridge the gap by fraudulently seekingbenefits. Likewise, a claimant who is impossible to reach duringworking hours may be earning extra money “moonlighting” while onno-work status.

Other red flags include:

• Untimely report of claim
• Multiple prior accidents
• Injury inconsistent with the nature of the insured'sbusiness
• Date, time, and place of accident is unknown
• Refusal to communicate with adjuster
• No witnesses to the accident
• Co-workers suspect fraud
• Varying accounts of the claim by the employee, witnesses, andmedical professionals

Because a reasonable explanation may exist even if several ofthese warning signs are present, the claim professional shouldnever jump to conclusions. The better course of action is to keepan open mind and prudently investigate if fraud is suspected.

Defamation

While fraud is properly on the claim professional's radarscreen, defamation is a potential danger zone for those whoinvestigate this activity. A mishandled fraud investigation couldresult in an expensive defamation lawsuit.

An employer puts himself at risk of such litigation by givingfalse and mean-spirited accounts of the claimant's workers' compclaim to third parties such as prospective new employers. Anadjuster also could create a legal exposure by making improperstatements regarding a claimant, employer, or health-careprovider.

Defamation of character includes slander and libel. In general,slander occurs when false statements that are injurious to thereputation or good name of another are made with knowledge of itsfalsity. Conversely, libel is defamation in its written form, andcan appear in a letter, e-mail, or report concerning the loss. Inboth instances, the defamation must be published.

Whether or not the statement rises to the level of legaldefamation depends on the circumstances. For a plaintiff to prevailin a defamation action, he must show that a false and defamatorystatement was made by the defendant to someone else. In otherwords, even the most scandalous false statements that are shoutedin a desolate and uninhabitable area where no one can hear them arenot actionable.

The plaintiff also needs to prove that he suffered damages as aresult of the slander or libel. Although damages in the defamationcontext typically involve injuries to one's reputation, dependingon the jurisdiction, it may be sufficient to show that theplaintiff suffered mental anguish. Additionally, truth is a defenseto defamation. Consequently, irrespective of how damaging orinappropriate the statement is, the plaintiff has no claim if it istrue.

Nevertheless, from a practical perspective, the claimprofessional who wishes to minimize the potential of being named ina defamation lawsuit should guard against uttering damagingstatements to a claimant's supervisor based on a mere gut feelingof fraud, of sending an e-mail to the claimant's co-worker thatdiscusses a perceived staged workplace accident, or of publishing areport that warns other claim professionals that a particulardoctor, therapist, or attorney is involved in a claim mill. Asthese types of actions could give rise to litigation, claimprofessionals should exercise extreme discretion regarding whatthey say or write about anyone — even if fraud is stronglysuspected.

Workers' Comp Retaliation Laws

Consideration also should be given to the statutes that protectthe rights of claimants who lawfully pursue remedies afforded themunder the Workers' Compensation Act.

Many states have laws barring workers' comp retaliation.Although there is some variation in the construction of thesestatutes, they generally bar employers from retaliating againstemployees who assert their rights to workers' comp benefits. Thepublic policy prohibiting the retaliation of claimants isself-evident. After all, employees would be reluctant to filelegitimate workers' comp claims if they feared that their currentor future jobs could be on the line for doing so.

Thus, an inappropriate or premature fraud allegation could blowup into a retaliation claim. An employee with a legitimate claimcould take the position that the fraud investigation is retaliatoryin nature and was initiated with the express purpose ofintimidating him. Consequently, the claim professional should bevigilant of conduct that could put the insured at risk of aretaliation lawsuit.

Florida is one state among many that expressly prohibitsworkers' comp retaliation. In 1979, the Florida legislature enactedFla. Statute ? 440.205, which states, “No employer shall discharge,threaten to discharge, intimidate, or coerce any employee by reasonof such employee's valid claim for compensation or, attempt toclaim compensation, under the Workers' Compensation Law.”

But the employer who is on the hook for the occupational loss isnot the only party who could face a retaliation lawsuit. A Floridaclaimant who sustained a compensable workers' compensation injurywith one company subsequently took a job with another company wherehe was identified as being a “W/C risk.” Shortly thereafter, he wasdischarged. The employee instituted a lawsuit against the secondemployer alleging wrongful discharge based upon his prior workers'comp claim. After the defendant was granted summary judgment by thetrial court, Florida's First District Court of Appeals reversed.The court held that to interpret Section 440.205 as the trial courtdid would result in a chilling effect on an employee's decision tofile a legitimate claim for fear of retribution by subsequentemployers.

To prevail in a retaliation lawsuit, the plaintiff typicallyneeds to prove that he: (1) was an employee entitled to receivebenefits under the workers' compensation program; (2) engaged insome protected activity, such as filing a workers' comp claim; (3)suffered an adverse employment action, such as involuntaryseparation or other change in the terms or conditions ofemployment; and (4) that there existed a causal connection betweenthe employer's actions and the protected activity.

Whistle-Blower Acts

Uncorrected safety concerns or practices that could lead tooccupational injuries/illnesses might induce the claimant to blowthe whistle on unsafe working conditions. The Occupational Safetyand Health Act (OSHA) is one law that protects claimants who speakout against unsafe or unhealthful conditions in the workplace andfor engaging in other related protected activities. Section 11(c)of the Act prohibits any person from discharging, or fromdiscriminating against, any employee in any manner because thatemployee has exercised rights under the Act, including complainingto the Occupational Safety and Health Administration orparticipating in an OSHA inspection. Discrimination can includesuch actions as firing, laying off, demoting, failing to promote,disciplining, or intimidating the worker.

Additionally, several states have enacted their ownwhistle-blower statutes. For instance, on Jan. 1, 2004, Californiaextended its Whistle-Blower Protection Act to employees. Thestatute established a hotline within the California Office of theAttorney General for workers who wish to report violations of thelaw, and requires the attorney general to refer these calls to theproper authority.

Like the anti-retaliation laws, whistle-blower statutestypically allow claimants to bring civil actions in situationswhere they have suffered some harm as a direct result of engagingin protected activities. Thus, an injured worker who was firedafter filing an OSHA complaint might bring a private whistle-blowerand retaliation action against the employer seeking damages.

Although these civil lawsuits are brought against the employerand generally do not involve the workers' compensation carrierdirectly, chances are strong that the claim adjuster will be on theplaintiff's witness list and, therefore, be subpoenaed fordeposition and possibly trial. Likewise, there exists a goodpossibility that plaintiff's counsel will seek to obtain the claimfile during the discovery process. Depending on the outcome,matters could come full circle and lead to a bad faith claim —against the insurer. Thus, the recommended strategy for the claimprofessional who adjusts workers' comp losses involving suspectedfraud is to combine diligence with equal amounts of discretion andcaution.

Kathleen M. Bonczyk is a litigation associate with PowersMcNalis & Torres in West Palm Beach, Fla.