Workers' compensation insurance premium fraud is a major issue affecting our industry. Not only is it illegal, it hurts the bottom lines of both producers and carriers and leads to higher insurance premiums for honest businesses. It can also cause a loss in commission for agents, have a negative impact on a state's rate-making system and create an unfair business advantage for the perpetrator through artificially reduced operating costs.
To protect their interests as well as the interests of honest policyholders, agents need to be aware of the different types of premium fraud and their warning signs. Agents also need to know the steps to take if they suspect premium fraud. Armed with the right information, independent insurance agents - who are a key conduit between policyholders and insurance carriers - can play a crucial role in identifying and preventing workers' compensation insurance premium fraud.
Types of Workers' Compensation Insurance Premium Fraud
There are three basic types of premium fraud: under-reporting payroll, misclassification of employees and experience modification evasion.
Under-reporting of payroll occurs when a policyholder inaccurately reports its work staff to the insurance company, often by paying employees off the books or presenting employees as sub-contractors or independent contractors rather than actual company employees.
The second type of premium fraud is the misclassification of employees, which occurs when a high-risk employee such as a construction worker is classified as a person with lower risk, like an office clerk. This misclassification is intended to result in a lower workers' compensation premium for the perpetrator.
The third type of premium fraud is experience modification evasion. It occurs when an established company with a greater than average loss history attempts to re-emerge as a new company on paper to obtain a lower experience modification factor. However, the business is actually unchanged in its operations and still presents a greater than average risk.
Warning Signs for Agents
Here are common warning signs that indicate business owners may be attempting to commit workers' compensation premium fraud. The presence of two or more of the following should raise concern and warrant further examination:
- The business address is a mail drop or P.O. box, or the business is physically located in another part of the state from its mailing address.
- A prior carrier has dropped the business or the business frequently changes carriers.
- An excessive number of certificates of insurance are issued on a small policy.
- Reported injuries are not consistent with purported job titles or duties.
- There is an unusual ratio of clerical to non-clerical staff for the type of business.
- The business avoids audits or has never been audited.
How Agents Can Protect Themselves
Agents are not immune from being accused of advising policyholders to commit fraudulent acts. There are simple steps agents can take, however, to protect themselves and assist in workers' compensation fraud investigations. Foremost, they should be aware of and monitor for the common warning signs of fraud and work with carriers that offer active anti-fraud programs.
Agents should also maintain detailed records of their interactions with policyholders, including all e-mails. Agents should verify the identity of the policyholder or person of contact with a driver's license, and original signatures should be obtained on all applications. By keeping this information on file, agents can help protect themselves against false accusations and help prosecutors in a criminal case, if necessary.
If agents ever suspect a policyholder is engaging in workers' compensation premium fraud, they should inform the carrier's special investigation or fraud investigation unit. In certain cases, law enforcement may also need to get involved.
If criminal charges are eventually 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 required are applications, copies of checks used for payments, correspondence (including e-mail) with the accused policyholder and any documents signed by a person responsible for the business.
Agents play an important role as a critical front line defense against workers' compensation insurance premium fraud. It is important for agents to be aware of the different types of fraud and their common warning signs. They should never hesitate to report any suspicious activities to the carrier for further investigation.
