How Ghost Policies Haunt Other Employers

So when is a Workers Comp policy not a policy? When it's a "Ghost Policy". And these ghosts can do more than just scare a business owner late at night--they can pick your pocket. Or rather, enable your insurance company to do so.

Perhaps some background info is in order, for those unfamiliar with this paranormal version of a Workers Comp insurance policy. A "Ghost Policy" is when a small business, usually a sole proprietor, buys a Workers Comp policy to satisfy the demands of some customer, but then excludes himself from the policy. Now, if that sole proprietor is the only person actually doing work for his company, the policy actually covers no one, since it would only cover for injuries sustained by employees of the sole proprietor, not the sole proprietor himself.

But--the Ghost Policy enables an agent to issue an all-important Certificate of Insurance for the sole proprietor, satisfying the request of a customer for evidence of WC coverage. Oftentimes, the sole proprietor is unaware that he or she is doing anything improper---agents often suggest that this is just standard operating procedure and a mere formality. 

But a recent case of mine illustrates how these Ghost Policies can haunt a company that relied upon such a Certificate of Insurance.

My client was a very small business and relatively unsophisticated when it comes to insurance. He used the services of a couple of independent contractors, and knew enough to request Certificates of Insurance from them.

But when my client's Workers Comp insurer performed the annual audit, and saw those Certificates, the insurer did a little cross checking with their own records. See, the large and well known insurer who wrote the policy for my client also wrote the policy for one of those independent contractors. So this large and well known insurer learned something that had been hidden from my client--the policy written by that same large and well known insurer for the independent contractor had been a Ghost Policy. So said large and well known insurer charged my client for these independent contractors, saying that since the Ghost Policy didn't actually cover the I/C, they were entitled to charge premium.

Now, my client didn't know this had been a Ghost Policy--The Certificate of Insurance that had been provided to him indicated it wasn't a Ghost Policy. But the insurer knew otherwise, because they had the benefit of being able to look up the details of this I/C's policy from their own records.

Nice work if you can get it. You provide a misleading (dare I say fraudulent?) Certificate of Insurance, and then, much later, you spring the trap for my client, based on the information that was withheld.

Now, we've referred this matter to the Illinois Department of Insurance, where we expected it to be a pretty open and shut case that would be resolved quickly for my client. Turns out, not so. Everybody from the department to the NCCI-sponsored appeal board has, so far, been frantically trying to pass the buck. Everybody was eager to suggest my poor little Lithuanian-born small business owner would need to hire an attorney (at considerable expense) if he wanted to pursue this dispute. I didn't like that answer.

It looks like the department is reconsidering this matter now, after I helped my client arrange a few phone calls from his state legislators. But it's still far from settled.

But this case is an abject lesson in how Ghost Policies can leave unsuspecting business owners exposed to a Shock Audit (as I like to call them), because the insurers sometimes have information that has been withheld on the Certificate of Insurance.

This isn't the first time I've seen a large insurer play this game. And it does make me wonder just how widespread this practice may be. This is an issue I'm currently researching, and I would love to hear from anyone with information on this subject.

To protect yourself from being victimized by a Ghost Policy by one of your independent contractors, you must first realize a painful truth about the insurance industry: Certificates of Insurance have been designed by the insurance industry to be essentially unreliable. When push comes to shove, the fine print says that the insurer really doesn't stand behind the information provided by a Certificate, so more fool you if you believe them.

If desiring evidence of coverage from a very small business, like a sole proprietor, you need a copy of the policy itself. And maybe, just to be sure, insist on something in writing from the agent or broker that states that the policy in question doesn't exclude anyone. If you don't, you may be setting yourself up for a haunting. Not to mention a drive-by Shock Audit.