Tuesday, October 26, 2010

Another Employer Going to Jail Over WC

An Arizona man has been sentenced to a year in county jail for defrauding the Arizona State Fund of $72,000 in Workers Comp premiums over several years.

Damian Andre had been president of Arizona Payroll Systems,Inc., a PEO type operation. Mr. Andre was convicted of misreporting classifications and payrolls to the fund. More info can be found here.

This is representative of a trend in recent years, one I have written about in the past--employers getting in legal trouble for taking aggressive and improper actions to reduce Workers Compensation insurance costs. Once upon a time, I think it was less likely that employers would face criminal prosecution for such wrongdoing. But those times, they are a'changing.

Just last year, I worked as an expert on a federal criminal case against a former head of an Illinois-based PEO (Professional Employer Organization.) That woman (a very bright, engaging, professional businesswoman) is now serving time in a federal correctional institution. So employers need to keep in mind that what they think of as just playing hardball with their insurance company can sometimes produce disastrous consequences.

This news item puts me in mind of another case of mine, one that has just recently been concluded. In this case, I had been hired by the insurance company rather than by an employer. The policyholder in this case had initiated legal action against the insurer, claiming that the insurance company had overcharged them by about $1.5 million. I believe this suit was the result of a review by an outside consulting company, which had reported to the employer that various improper claims handling techniques had caused the employer to be overcharged by that $1.5 million dollar amount over five years.

The problem was that, when the insurance company hired us to review other aspects of these Workers Comp premium charges, it was found that the employer had been systematically misreporting the kinds of work being done by many employees. So at the end of the day, the employer had not been overcharged, they had been significantly undercharged due to their misreporting.

The bottom line is that the case was settled, with the employer not receiving the $1.5 million dollar refund they had sought, but instead by agreeing to pay an additional $2.5 million dollars to the insurance company. Not exactly the outcome the employer had anticipated when they filed suit.

But while this employer is likely not happy over the outcome of this case, I would point to the example of this Arizona employer and suggest that he count his blessings.