I've recently been asked to serve as an expert in a case where an employer has been criminally charged over how they reported information regarding Workers Compensation insurance classifications. Essentially, this business owner has been charged with multiple counts of insurance fraud over how he reported information used to classify his employees.
Now, I obviously cannot comment about any specifics of this case. But it does remind me that this sort of thing is not uncommon--indeed, it is a growing phenomenon, judging from the news stories I read, and my own experience as an expert witness. And I think it's something that business owners don't think much about--at least, not until someone accuses them of criminal activity over how their Workers Comp insurance premiums have been calculated. Then it likely becomes the only thing they can think about.
Insurance companies have been active in recent years in funding specialized units within local prosecutors' offices, units to focus just on cases of alleged Workers Compensation fraud. Now, it might be argued that there are some ethical questions associated with accepting funding from the insurance industry to create prosecute employers whom the insurance industry thinks have cheated. But the answer to that, I think, is that prosecuting financial fraud is in the public interest regardless of where the funding comes from. The trick lies in not allowing the insurance companies undue influence over such prosecutions, and that is something that I suspect is easier said than done.
After all, the very act of charging a business owner with Workers Comp premium fraud creates terrible financial and professional burdens. The cost of effective legal defense is not cheap, even if it eventually produces an acquittal. And there are all the terrible non-financial costs associated with such criminal charges.
Just in my own limited experience, I have seen a marriage broken up when one spouse was criminally charged, I have seen insurance brokers lose their livelihood and their licenses, and I have seen a family business threatened with extinction, because prosecutors charged them with Workers Compensation premium fraud.
And of course, there is that little matter of being sent to prison if one cannot win acquittal.
Now clearly, a significant number of the people who are criminally charged for Workers Comp fraud may well be guilty as charged--I wouldn't want to think that our criminal justice system is utterly broken---but my own experience as an expert witness and consultant also has shown me that the power of prosecutors is considerable, and that even some people who end up pleading guilty have done so because they concluded the costs of fighting the charges were just too high, in spite of the fact that they truly felt they were innocent.
The rules about how Workers Comp insurance premiums are supposed to be calculated are complicated---complicated enough that the insurance industry itself often makes significant errors in applying those rules. After all, I make my living correcting those errors by the insurance industry, and if they didn't make a lot of errors I would have to find some other means of paying the mortgage.
Those complicated rules mean that prosecutors can, I suspect, sometimes be persuaded by insurance company personnel to see fraud on the part of an employer where there really may only be imperfect understanding of those rules by employers.
Also, there is this. I think I would have greater respect for the application of criminal charges over Workers Comp insurance premiums if it weren't just employers and workers being charged. I am unaware of any insurance company personnel being prosecuted for committing fraud over Workers Comp premiums, even though I have seen situations that strongly suggested deliberate wrongdoing.
Mind you, the overwhelming majority of the errors we find by insurance companies look to be genuine errors, not something more deliberate and sinister. But that being said, there have been some insurers who have engaged in systemic practices that sure seem like they might have violated some laws.
Remember a decade or so ago, when then New York Attorney General Eliot Spitzer caught AIG systematically rigging the New York Workers Comp insurance system? Those AIG practices eventually led to a billion dollar lawsuit between the rest of the insurance industry and AIG. But I do not believe any AIG executives were criminally prosecuted.
There have been other instances I have been aware of where insurance companies have made Workers Comp insurance premiums higher than they should have been, by systematically ignoring certain rules and regulations, and when caught, there were financial costs, but no criminal charges.
Insurance regulation is handled, on a state by state basis, by specialized regulators. But the oversight and regulation of Workers Compensation insurance premiums has been degraded substantially over the course of the past thirty years, and the staffing and budgets of many state insurance regulators have been cut drastically. So regulatory oversight of Workers Compensation insurance premiums has been turned into a paper tiger, in many instances. And insurance companies know it.
Those insurance companies would characterize this development differently--they would say that deregulation of Workers Compensation insurance has produced a more competitive market that benefits employers. And there is some genuine truth to that argument. But those benefits are unevenly available to employers, and diminished regulatory oversight creates the opportunity for some insurers to exploit their advantage unfairly.
And now, one of those advantages increasingly appears to be the veiled threat that if an employer ticks off an insurer too much, the insurer might whisper in the ear of a prosecutor.