Workers’ compensation insurance premium fraud has long been a serious problem in Florida and across the country. When business policyholders falsify company data to reduce their premium, it has negative financial and legal ramifications for everyone, including independent agents. However, equipped with the right information, agents can play a key role in identifying and preventing premium fraud.
Continuously faced with financial pressures no matter what the economic climate, some policyholders are unfortunately tempted to manipulate data in order to lower their workers’ compensation insurance premiums. Not only is this fraud illegal, it adversely affects producers’ and carriers’ bottom lines, leads to higher costs for honest businesses, and often places additional legal burdens on agents.
Agents are the key conduit between policyholders and insurance carriers, providing a critical service and expert advice to policyholders with diverse needs. In order to protect the interests of policyholders and their own businesses, agents must remain aware of the different types of premium fraud and their warning signs, and know what to do if they suspect premium fraud.
There are three basic types of premium fraud: underreporting payroll, misclassification of employees, and experience modification evasion.
Underreporting of payroll occurs when policyholders fail to accurately report their entire work staff to the insurance company, often by paying employees off the books or falsely presenting employees as subcontractors or independent contractors.
When misclassification occurs, it usually involves a high-risk employee, such as a construction worker, being classified as a person with clerical duties in an attempt to lower the company’s workers’ compensation premium.
Experience modification evasion occurs when a company attempts to re-emerge as a new company on paper in order to obtain a lower experience modification factor, but the business is actually unchanged.
Independent agents should be aware of several red flags that can help identify potential workers’ compensation premium fraud. Experience shows that the occurrences of two or more of these factors are typically present in cases that have been prosecuted for premium fraud:
- Business address is a mail drop or P.O. Box
- Business is physically located in another area of the state
- Prior carrier drops the business or the business frequently changes carriers
- Excessive number of certificates of insurance have been issued on a small policy
- There is an unusual ratio of clerical to non-clerical staff for the type of business
- Business avoids audit or has never been audited
- Reported injuries are not consistent with purported job titles or duties
In addition to remaining vigilant for these red flags, agents should maintain detailed records of all of their policyholder interactions, including e-mail correspondence. This will be very important if a policyholder is suspected of premium fraud, and will protect the agent should a policyholder accuse the agent of advising it to commit fraudulent acts. Precautions agents should take include obtaining an original signature on applications, identifying the policyholder or person of contact with a driver’s license, and determining and identifying the responsible parties within the company. By keeping this information on file, agents can help protect themselves against false accusations and also help prosecutors in a criminal case, if necessary.
If agents suspect a policyholder is engaging in workers’ compensation premium fraud, they should articulate their suspicion to the carrier’s special investigation or fraud investigation unit. In certain cases, the agent may feel the need to elevate the referral of suspected premium fraud directly to the appropriate law enforcement agency.
If charges are filed against a policyholder, the evidence agents possess will be important to the prosecution’s case. When a prosecutor serves a subpoena or search warrant for an agent’s records, the types of evidence most often sought are applications, copies of checks used for payments, correspondence (including e-mails) with the accused policyholder, and any documents signed by a person responsible for the business.
By working with a carrier offering proactive anti-fraud programs, agents benefit from an additional level of protection for their business and help keep premium costs down for their law-abiding policyholders. Certainly, agents serve as a critical frontline defense against premium fraud and can play an important role in preventing workers’ compensation premium fraud by being aware of the different types of premium fraud and the warning signs, and reporting any suspicious activities to the carrier for further investigation.