Friday, December 19, 2014

Some Cautionary Thoughts on Employers' Workers Comp "Fraud"

Been seeing a number of blog posts and articles about when employers commit "fraud" in relation to Workers Compensation insurance. Now, don't get me wrong--there are indeed employers out there who are gaming the system to lower premiums. And by gaming, I mean deliberately misrepresenting the nature of their operations or the nature of the work done by certain workers.  I've seen my share of cases where that was done, so I'm not being naive about the problem.

But I've also seen more than a few instances where the actual facts of the case were more complicated than the tales of greed painted by insurers and prosecutors.

I know of a high profile case where the business owner got pressured to plead guilty by an ambitious prosecutor in order to save a pending sale of a separate company that was going to greatly benefit his family. His choice was to fight the fraud charges that his attorney strongly felt he could defeat but scuttle a huge financial windfall for his family, or fall on his sword, plead guilty, and let his family benefit from a huge payday from the sale of the other company. It had been made clear to him that the sale would not go through if the unrelated company got dragged in, and it was also made clear that if he fought the charges that unrelated company would, indeed, get dragged in. What limited technical knowledge I have of the case suggests to me that the "misrepresentation" charged was exaggerated and that the fraud charges might not have held up under closer examination.

But cutting a deal with the prosecutor meant that such closer examination never happened. But the sale of the unrelated company went through.

I once saw a case where two insurance brokers were convicted on criminal charges over premium fraud committed by the policyholder. My own careful review of the evidence convinced me these brokers had done no wrong, had only sent in applications for WC coverage that had been based on prior audits by other insurers.  But I suspect the prosecutor wanted these brokers to roll over on the policyholder, who was politically connected to a well known (now retired) Chicago politician. So the prosecutor got the jury to convict the brokers, even though the policyholder had already reached a plea deal before the trial began. So there was indeed fraud there, but no indications that the brokers had been in on it. Didn't matter.

I saw another case where an inexperienced businesswoman was convicted of Workers Comp premium fraud even though it seemed to me she pretty clearly was not the mastermind behind the scheme. But she had made the mistake of hiring a woman she met at church--a woman who had served time in the past for Workers Comp premium fraud. The businesswoman was sure this nice lady from church had learned her lesson and would never risk going back to jail again by repeating her offense. So she hired her as an office manager for her new PEO--and guess what?

Only the repeat offender cut her deal with the prosecutor first, while the naive businesswoman fought on, believing that an innocent person had nothing to fear from our legal system.  For that assumption, she went to jail and lost her business, her reputation, and her marriage.

Keep in mind, the system for calculating Workers Comp insurance premiums is complex and often counter-intuitive. The system is complex enough that insurers make plenty of mistakes in administering it. So it should not be surprising that policyholders sometimes make the mistake of applying common sense to issues such as proper classification codes.  The manuals that spell out the technical details of classifications (including instances where common sense doesn't really apply) and audited premiums are not available to policyholders (and even if policyholders knew how to purchase them it would be a difficult read). So it can be difficult, if not impossible, for many policyholders to understand many of the fine points of WC premium computations.

I'm not saying there aren't genuine crooks out there looking to rip off the system--God knows, there are plenty of them. Some employers know from experience lots of ways to shave premiums by being less than honest.

I'm just saying it's not always as cut-and-dry as some in the insurance business (or the prosecutor's office) might have you think. So the next time you see some newspaper article painting an employer as the biggest crook since Yellow Kid Weil, take it with at least a small grain of salt.

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