When most people think of workers' compensation fraud, theyenvision an employee filing a claim for a leg injury only to becaught running a marathon a few weeks later. But it is a differenttype of scam — premium fraud — that can have the highest totalsocietal cost.

Workers' compensation premium fraud occurs when an employerfalsifies an employee's classification, understates the size ofpayroll, or attempts to evade coverage requirements.

It may seem like a victimless crime because the employer usuallystill pays for some workers' compensation coverage, just not hisfull and fair share. But that underpayment robs the state of validtax revenue and prevents insurers from having enough premium moneyto cover claims. An even bigger impact is on companies who arefully paying their premiums. Because these companies are paying ahigher amount for coverage than their unscrupulous competitors,they often lose out in bidding for new business because their bidshave to cover their higher insurance costs.

Even though workers' compensation rates have dropped the pastfew years, premium fraud has continued unabated. No one knows howmuch premium fraud occurs in Florida, but state officials say it isa growing problem whose impact cannot be underestimated. “This isone of our big issues of concern,” said Major Simon Blank, chief ofthe Bureau of Workers' Compensation Fraud in the Florida Departmentof Financial Services (DFS).

Tom Koval, senior vice president and general counsel atSarasota-based FCCI Insurance Co. and a spokesman for the FloridaInsurance Council, said the problem remains, despite tougherregulations enacted in 2003. “We don't believe it is as bad as itwas, but we know the fraud continues,” he said.

Despite aggressive investigative programs, in fiscal 2008 thestate was successful in getting convictions in only a handful ofworkers' compensation premium fraud cases, according to thedepartment's annual report. The relatively low number ofconvictions is one indicator of how difficult premium fraudstersare to catch, Blank said.

Under the current economic climate, Blank and other officialsfear more companies will see workers' compensation premium fraud asa way to give them an edge in competing for business or to savemoney.

A National Problem

The problem is by no means confined to Florida. A study byCornell University researchers in 2004 concluded that more than39,500 employers throughout New York State misclassify workersannually. In California, some employers in high-risk industries mayhide as much as 75 percent of their payroll, costing insurers up to$3.8 billion a year in lost workers' compensation premiums,according to a 2007 study by University of California at Berkeleyresearchers. Nationally, there are estimates that workers'compensation premium fraud losses run into the billionsannually.

The following are among the premium fraud schemes: Employersfalsifying employment records to represent that their employeeswork safer jobs than they do; contractors falsely claiming that thesubcontractors on their jobs are independent contractors when theyare in fact not; and business owners skipping workers' compensationcoverage altogether to gain a competitive cost advantage.

“Legitimate business owners are almost forced to cheat or go outof business to compete with those who commit premium fraud,” Blanksaid.

In Florida, the fight against premium fraud has spanned thedecades. In the late 1990s, the construction industry, the stateWorkers' Compensation Oversight Board, and the House ofRepresentatives Committee on Financial Services all lobbied forincreased enforcement of premium fraud and stiffer penalties foremployers. Eventually, a special strike force was mobilized solelyto fight premium fraud, and the state prosecutor even impaneled astatewide grand jury to hear complex insurance fraud schemes suchas premium fraud.

More recently, state officials uncovered ten constructioncompanies that avoided paying more than $200 million in workers'compensation premiums, according to a presentation by the DFS'Division of Insurance Fraud and the Eighteenth Statewide Grand Juryreport on money laundering by check cashers. All told,investigators found $409 million in lost workers' compensationpremiums and state and federal employment taxes.

Millions in Revenue Lost

Col. Vicki Cutcliffe, director of the Division of InsuranceFraud, said that premium fraud is typically run by “organizedrings” and the money often is funneled out of the country to beused in other types of crimes. She said millions of dollars in cashfrom premium fraud has been tracked headed to the Middle East.

How bad is it?

“Tens of millions of dollars a year,” Cutcliffe said. She notedthat the state pays a price because if companies are avoidingworkers' compensation premiums, they also are avoiding statepayroll taxes.

DFS officials have a host of strategies to catch premium fraud,including showing up on worksites to see that everyone is accountedfor on the policy.

Officials have noted a significant increase in the sale andbrokering of illegal certificates of workers' compensation coveragein the past year, particularly in the construction industry.According to the Bureau of Workers' Compensation Fraud, the overallnumber of cases presented for prosecution increased by 17 percentand the number of arrests jumped by 29 percent.

The state has diverted some resources to target check-cashingstores that often are used to help contractors “hide” employees.These stores are used by fraudulent contractors to help pay workersthey want to keep out of their real payroll. “There is anunderground economy that uses check-cashing stores to hide payrolland avoid premiums,” Blank said.

The DFS works in conjunction with the Office of FinancialRegulation, which audits the check-cashing stores to help catchemployers hiding employees. With inter-agency cooperation, Blanksaid the state can be more proactive in going after fraud insteadof waiting for hot-line tips.

“We have several check-cashing store investigations underwaynow,” Cutcliffe said. Blank emphasized that not every check-cashingstore is facilitating a crime, but when the same employer's checksshow up repeatedly at these outlets, it does raise a red flag.

A Never-Ending Fight

State and federal prosecutors go after premium fraud, Cutcliffesaid, “and those who are convicted will go to jail.”

Florida is one of six states — California, Illinois, New Jersey,New York, and Texas are the others — that have made workers'compensation premium fraud a specific felony, according to theCoalition Against Insurance Fraud.

Blank said premium fraud is the biggest problem the workers'compensation fraud agency is seeing today. However, he added, “InAlex Sink we have a CFO who is very active and keeping on theforefront of it.”

In addition to leveling the playing field, successfully fightingpremium fraud offers employers a financial benefit. State officialssay their ability to better police fraud is a major factor fortoday's lower workers' compensation premiums.

Since the 2003 legislative reforms, the Florida workers'compensation marketplace has experienced an overall average ratedecrease of more than 60 percent. Insurance Commissioner KevinMcCarty noted two primary reasons for the continued ratereductions: claim frequency for workers' compensation claims hasbeen decreasing faster than medical costs have increased, and thecontinued crackdown on companies that fraudulently avoid paymentfor workers' compensation insurance has added millions of dollarsto Florida's premium base while providing greater protection foremployees.

Reports show that state enforcement actions caused employers infiscal 2008 to add nearly 6,500 employees to their workers'compensation coverage, with an additional $8 million being paid toinsurers. In the past three years, efforts by investigators haveresulted in the addition of nearly 25,000 employees topolicies.

According to the Division of Insurance Fraud, it received nearly10,000 referrals during the 12 months ended June 30, 2008;investigations resulted in 873 arrests and 663 convictions.

Fraud — and the battle against it — is sure to intensify thelonger the economic meltdown continues.