Can An Insurance Company Commit Insurance Fraud?

Just about every day, Google News finds another story for me concerning Workers Compensation fraud (that's because I ask it to, of course, demented soul that I am.) And guess what? The guilty parties (or the accused parties, sometimes) are always workers who, according to the charges, falsified or exaggerated their injuries, or else they are employers who, according to the charges, avoided proper and legitimate Workers Compensation insurance premiums by various devious means.

Then I read this article. and something in it triggered a thought I have sometimes entertained: how come insurance companies are never prosecuted under the various Workers Compensation fraud statutes that states have enacted in recent years? As the mother of this injured young worker wrote:

Why isn’t there a place in the Virginia State Police Insurance Fraud Program to include and investigate this obvious type of abuse and misuse by law firms such as this one? This has been typical and repeated for the last 5 years!

“Insurance fraud is a crime that occurs when someone tries to make money from insurance transactions through deception” –This definition was copied from the State Police website.

Now, I don't know anything about this particular case. But this mother does raise a valid point, I think. How come insurance companies aren't held to the same standard as employers and workers? On a regular basis, in our consulting work, we find instances of insurance companies making errors that overcharge employers for Workers Compensation insurance. And we can usually get those corrected for our clients. But what about all the employers who don't hire someone like Advanced Insurance Management? The insurance regulatory system isn't proactive--it only requires insurers to reverse overcharges when someone knows enough to complain, and how to make that complaint in an effective manner. But in most states,  insurance department's aren't routinely double checking how insurance companies compute premium charges for employers--insurance companies are on the honor system, I guess.

I still believe that many, perhaps most, of the overcharges we find are indeed the result of honest mistakes. The insurance underwriters and auditors I have known over the years have been among the most ethical and honest business professionals I have ever met. And yet---and yet, one sometimes wonders, when one sees how certain insurance companies seem to have adopted aggressive audit tactics, or when one reads of lawsuits by one major insurer accusing another major insurer of deliberate and systemic deceptions regarding Workers Compensation insurance premiums, and one sees insurers time and time again "innocently" forgetting or misinterpreting insurance regulations meant to protect employers from excess premiums--sometimes one wonders.

Illinois Employer Fined Ten Grand For Lack of WC

Ah, the Illinois Workers Compensation Commission has penalized another Illinois employer for refusing to obtain Workers Compensation insurance. According to news reports, John Linek has pled guilty to a class four felony and been fined $10,000 for failing to obtain Workers Comp insurance for his business, SMS Logistics of Chicago.

It's one of the lesser-known responsibilities of the ILWCC, to investigate employers who appear to lack the required Workers Comp coverage. As the news article indicates, this employer was apparently given opportunities to obtain coverage and failed to do so, resulting in the eventual felony and fine. As a general rule, ILWCC tries to just get the non-conforming employer to obtain valid coverage. I don't know why this particular employer failed to obtain coverage, but as a general rule ILWCC is willing to give an employer the opportunity to correct the problem before seeking criminal sanctions.

It reminds me of a story I was told a few years ago, regarding the enforcement efforts of ILWCC. According to my sources, one investigator for ILWCC started checking the Workers Comp status of some popular bars around Springfield (our state capital) and discovered a number of them lacked the required coverage. But when enforcement proceedings were begun, some Illinois legislators tried to intervene on behalf of their favorite watering holes. Ultimately, I am told ILWCC stuck to their guns, and the legislators' favorite after-hours spots had to obtain Workers Comp coverage. Which is pleasantly surprising, given how my home state of Illinois sometimes works in regards to political influence.

Large Deductible Policies

For many larger employers, so-called Large Deductible policies have become a common option (or sometimes, not an option but the only choice offered outside of the Assigned Risk plan.) These programs can offer employers the opportunity to reduce Workers Comp costs, if losses are kept under control. Of course, if losses are not so under control, the opposite can occur.

But whether losses are low or high, we've been noticing some peculiar things going on when some insurers calculate the charges for Large Deductible programs. We can't provide details here, but the problems we're seeing seem to be wide-spread enough that we would encourage any employer insured under a Large Deductible policy to let us take a look, to see if your charges contain these overcharges.  So far, our examinations of a number of these programs, from various different insurers, have found a disturbing pattern that results in employers being overcharged. So we would encourage employers covered by Large Deductible policies to give us a call, at 800-288-9256, or email us at AIM@cutcomp.com, to discuss how we can check, at no cost, whether or not your company appears to have been overcharged.

Undocumented Workers Eligible for Iowa WC

The Iowa Supreme Court has unanimously ruled that undocumented workers in the state are eligible to receive Workers Compensation benefits. The high court has ruled that Pascuala Jiminez, a worker for a temp staffing agency known as Staff Management, was eligible for WC benefits in spite of her undocumented status.

This has been a contentious issue in recent years, with a few states deciding to deny such workers benefits under their Workers Comp statutes. Such exclusions, in this author's view, are misguided and mistaken, and can end up rewarding employers who use undocumented workers.

The benefit for employers who use undocumented workers comes in by means of the experience modification factor, which adjusts Workers Compensation insurance premiums based on the past loss history of an employer. If an injured undocumented worker cannot make a Workers Comp claim, the employer will be rewarded with lower insurance costs when compared with competitors who employ documented workers. Thus, the inadvertent consequence of policies that seek to discourage the employment of undocumented workers would be to encourage the hiring of undocumented workers.  Along with, of course, allowing employers to injure or maim workers without having to take care of them, violating the intention of our Workers Compensation laws, along with basic human decency.

Top 10 States For Workers Comp

Yesterday I recapped the top 25 WC insurers, per a recent A.M. Best news item. Today, from that same source, is the listing of the top 10 states in terms of Workers Comp insurance premium volume.

The top 10 states with  the most workers’ comp direct premiums written in 2012:

1. California ($9.00B; 18.8 percent)
2. New York ($4.75B; 9.9 percent)
3. Illinois ($2.60B; 5.4 percent)
4. Pennsylvania ($2.53B; 5.3 percent)
5. Texas ($2.45B; 5.1 percent)
6. Florida ($2.01B; 4.2 percent)
7. New Jersey ($1.93B; 4.0 percent)
8. Wisconsin ($1.73B; 3.6 percent)
9. North Carolina ($1.24B; 2.6 percent)
10. Georgia ($1.13B; 2.4 percent)

It's interesting to note that this ranking doesn't neatly track with state populations. For example, my home state of Illinois is number 5 in terms of population in 2012, but is number three in terms of total Workers Comp premium. Texas is number 2 in terms of population, but 5 in terms of WC premium.

Top WC Insurers

A.M. Best has released the latest rankings of Workers Comp insurers,by premium totals and market share,  and the list is as follows:

The full list of the top 25 workers’ comp insurers, based on net premiums written and market share:

1. Liberty Mutual ($3.83B; 9.3 percent)
2. Travelers ($3.44B; 8.4 percent)
3. The Hartford ($2.99B; 7.3 percent)
4. AIG ($2.82B; 6.9 percent)
5. State Insurance Fund of New York ($1.94B; 4.7 percent)
6. Berkshire Hathaway ($1.04B; 2.5 percent)
7. Chubb Group ($961M; 2.3 percent)
8. Zurich Financial Services ($951M; 2.3 percent)
9. Texas Mutual Insurance ($927M; 2.3 percent)
10. State Compensation Insurance Fund of CA ($888M; 2.2 percent)
11. Fairfax Financial Group ($833M; 2.0 percent)
12. CNA ($824M; 2.0 percent)
13. W.R. Berkley Group ($805M; 2.0 percent)
14. Old Republic ($759M; 1.9 percent)
15. Accident Fund Group ($644M; 1.6 percent)
16. Employers Insurance Group ($570M; 1.4 percent)
17. ACE INA Group ($557M; 1.4 percent)
18. NJM Insurance Group ($441M; 1.1 percent)
19. Pinnacol Assurance ($431M; 1.1 percent)
20. SAIF Corp. ($416M; 1.0 percent)
21. Farmers Insurance Group ($397M; 1.0 percent)
22. Nationwide Group ($370M; 0.9 percent)
23. Great American P&C Insurance Group ($356M; 0.9 percent)
24. Auto-Owners Insurance Group ($345M; 0.8 percent)
25. Meadowbrook Insurance Group ($345M; 0.8 percent)

Estimated Audit Armageddon

At the A.I.M. offices today, it was a bit hectic as we (well, okay, my son and partner Scott, actually) worked against the clock to save a client from an estimated audit billing that threatened to put the company out of business. The insurer had issued an estimated audit billing for an additional premium of $190,000 (when the original premium on the policy had been under $20,000.)

The client had only gotten us involved in this dispute recently, as the insurance company had put the proverbial gun to his head: pay the additional premium or have the current policy cancelled as of Monday. Actually, it had been the client's insurance agent who reached out to us, when it became clear he could not get the insurer to back off the payment demand/cancellation threat. And without current Workers Comp coverage, this client would be out of business.

This case illustrates a couple of important points that warrant sharing with a wider audience. First off, the idea of an "estimated" audit may need some explanation, as it sounds like a classic oxymoron, kind of like "jumbo shrimp" or, as some veterans like to suggest, "military intelligence". I mean, by definition an audit is supposed to determine actual final premium for the policy, based on the audited payrolls. so how can it be an estimate?

Insurers issue estimated audit billings when they have concluded that they can't get the data they need to determine actual audited premium, or when they feel the data they have gotten is unreliable. In this client's case, the owner had made some inadvertent errors in allocating payroll amounts among various classifications, and then had gotten defensive when pressed by the auditor. So the auditor and the insurer moved all payroll into the most expensive classification listed on the policy--and in the process, produced a quantum leap in premium.

It took a fair bit of work to get the auditor to trust the actual payroll allocations we developed, but with proper documentation it was accomplished. But then, because the policy had been issued by the Assigned Risk facility in Michigan, it took further effort to get the folks at that AR facility to accept the revised audit payroll allocations.

At the end of the day, as time was running out (remember, the current policy was going to be cancelled effective Monday) we got everyone to agree that an additional premium of $4,000 was appropriate and acceptable, and had the client wire the money over.

Beyond illustrating the potential pitfalls of estimated audits, this case also makes clear a principle I have often stressed in the past: it's important to avoid alienating the auditor. If you make the auditor suspicious by a perceived lack of cooperation or misleading or inaccurate information, the auditor can and often will calculate an "estimated" audit premium based on a worst case scenario. So it's usually in the best interest of the policyholder to be as cooperative as possible, and to avoid creating an impression on the part of the auditor that something is being hidden or misrepresented. Keeping a good working relationship with the premium auditor can avoid an estimated audit armageddon. and that is something that every sane business owner wants to do.

Small Business and Workers Comp

In recent years a lot of states have enacted what they call workers compensation reform. They round up the usual suspects, have some hearings, and then figure out creative ways to reduce or limit the benefits that are paid to injured workers and healthcare providers. Now, it isn't a bad idea to try to prevent genuine fraud and profiteering in the matter of Workers Comp claims--far from it. It's vital, in fact, to prevent the crooks from crashing the system.

But something often gets overlooked in that process. What such reforms often forget is that, for most businesses, the cost of Workers Comp is really the cost of Workers Comp insurance. And while the cost of claims does ultimately drive the cost of insurance, there are other, purely insurance related factors, that can be the most damaging for small employers. And it is insurance reform that is usually the area that is left off the reform agenda.

A few years ago, when Illinois was having hearings on the subject of Workers Compensation reform, I offered this testimony. This input was, unsurprisingly, ignored.

At the time, I was a member of the Workers Compensation committee of the Illinois Chamber of Commerce. So I got to have a ring side seat for the Chamber's efforts to reform Workers Comp. and it was all focused on benefits paid to workers and medical costs. Try as I might, I was unsuccessful in getting much attention paid to the issue of insurance reform. I'm not that good a politician, I guess.

When we here at A.I.M. help keep a small business in business, as we periodically do, the crisis hasn't been brought about by benefits costs or medical fees--it's been because of abusive or careless actions by an insurance company.  Workers comp, in theory, is supposed to be well regulated. This is in recognition of the unique nature of this line of insurance. It's mandatory, for one thing, for all but the self employed.  And the protection of injured workers is viewed, rightly, as a high priority policy matter.

But in actual practice, regulatory oversight of Workers Compensation insurance has been slowly but surely eroded over time, so that insurers know they can often bend or break rules without much consequence. For a perhaps extreme example of this, one need only examine the lawsuits against AIG in recent years over how that major insurer apparently flouted rules in a systemic fashion.

Larger employers often have greater resources, in terms of legal and insurance advisors, to resist the excesses of Workers Comp insurers. Small employers, often insured through Assigned Risk programs, can be left with the equivalent of a "pay up or die" demand, when an audit for a huge and unexpected additional premium arrives. Sensible and reasonable insurance reform could provide some much needed protections for small employers, who are so important to our economy, yet who are always among the most vulnerable of our economic drivers.

Recommended Reading

For those interested in learning more about Workers Compensation insurance, here is a list of books that might be useful and/or interesting:

Workers Compensation: A Field Guide for Employers
Alright, I know it's perhaps immodest to put my own book at the top of the list, but I really do think that, for many readers, it may be the best combination of technical information and accessibility.

The Accidental Republic
I know I mentioned this book the other day, but it really does a superb job of explaining the history of how Workers Compensation got started in the U.S.

Workers Compensation Guide
This somewhat slim book does a good job of explaining the standard WC policy, although the list price is very high for what you get. The technical language may also be a bit dry for the lay reader.

Workers Compensation A Reference and Guide
Another somewhat pricey but useful book, also somewhat technical in its approach.

Workers Compensation Benefits, Costs and Safety under Alternative Insurance Arrangements
Another pricey and technical book, although I see there are inexpensive versions available either used or as an ebook. Some useful information here, though.

Fallen Giant
This book isn't focused on Workers Compensation insurance, but rather on one of the titans of the insurance industry (and one of the most controversial insurers in existence, and its equally controversial founder.) I found it very interesting reading, though.

That's it for the moment. Happy reading. Oh, and when you've had your fill of reading about insurance, I might also modestly recommend something completely different:

Cosa Nosferatu
My own strange little novel featuring Al Capone, Eliot Ness, and the Undead. Has nothing to do with Workers Compensation, for better or for worse.

Understanding How Workers Comp Insurance Premiums Are Calculated

Working day in and day out checking over Workers Comp insurance audits and policies, it's sometimes easy to forget that, for a lot of small or new employers, there can be a lot of mystery and misinformation surrounding the cost and coverage of a Workers Compensation insurance policy. Insurance agents don't always do as good a job as they might explaining the fine details of these matters, particularly in the case of small businesses that don't generate a lot of premium and commission.

We've put up a lot of information on these subjects on our website, cutcomp.com. In fact, we have a whole online guide to these subjects.  You can find out detailed information there about remuneration, classification codes, experience modifiers, premium audits, and related matters.

NCCI

In the past few weeks, there have been a number of relatively routine news stories about NCCI filing new rates and loss costs in various states. Florida just approved a 0.7% increase in average loss costs, based on NCCI recommendations. And Connecticut just approved a 3.2% increase in WC loss costs that had been filed by NCCI. In August, NCCI filed a 4.5% decrease in Illinois Advisory Rates for Workers Comp.

This all got me thinking that a lot of folks might not have a good understanding of what NCCI-the National Council on Compensation Insurance- is and how it operates. And so, this short primer on the organization that is so central to Workers Compensation insurance rates and premium in so many states.

NCCI was organized in 1922 and became operational in 1923, establishing rates for Workers Compensation in ten states. Workers Compensation laws in the U.S. had begun just a decade earlier (The Accidental Republic by John Fabian Witt gives a great history of this.) In the ensuing years, NCCI has significantly increased the number of states where its ratemaking services are used so that a majority of U.S. jurisdictions now use NCCI as the rating bureau for Workers Comp.

That means that, in those states, NCCI has loss and payroll data reported to it by member insurance companies so that NCCI can calculate future rates and rate components (like loss costs) and experience modification factors. NCCI also writes the various manuals of rules that govern premium computation in those states.

But to understand what NCCI is, one should also understand what it is not. It is not a government agency. It is a not-for-profit corporation created by the insurance industry (and technically owned by its member insurance companies.) Insurance company executives constitute a majority of the board of directors of NCCI. And most of NCCI's revenue comes from the fees that insurance companies pay to it. So it's a mistake to characterize NCCI as a regulatory agency, given this close relationship between NCCI and member insurance companies. Yet NCCI is independent of those insurance companies, at least, as independent as an organization can be with such close ties to the industry.

The rates and rating manuals developed by NCCI must be filed with and approved by the various state insurance regulators, but in many states such regulatory oversight is, in this writer/s opinion at least, not as vigorous and well-funded as it might be. And in my experience, NCCI's own internal enforcement of its rules and regulations over member insurers has not always been as thorough and vigilant as policyholders might wish. At the end of the day, NCCI places a high priority on keeping its customers happy. And NCCI's customers are insurance companies, not the policyholders/employers who buy insurance from NCCI member companies.

Another Criminal Conviction For Premium Avoidance

A California employer got a rather unpleasant Halloween trick--he was convicted of defrauding his Workers Comp insurer of $52,000 in premium. His sentence is 364 days in jail and thee years probation.

More and more often, employers who have improperly shaved their Workers Comp premium charges face the threat of criminal prosecution. This may come as a shock to some old school employers, who have occasionally taken a sort of "all's fair in love and Workers Comp" approach to their insurance costs.

Of course, I have yet to hear of an insurance company executive facing reciprocal criminal penalties, even though insurance companies do overcharge employers with some regularity. Mind you, it's not that I condone premium fraud by employers--just the opposite. But many in the insurance industry have got a very selective sense of moral outrage when it comes to Workers Comp insurance premiums.  Mistakes that lower premium are viewed with great suspicion of criminal intent, while mistakes that increase premiums are honest mistakes.

Most overcharges we find really do appear to be genuine mistakes--but they are mistakes that could be greatly reduced, if insurers only gave as much effort to catching mistakes that increase premiums as they do to catching mistakes that lower premiums. And some of our recent projects have identified at least some insurers who appear to be doing something more systemic and deliberate with certain kinds of mistakes. We can't talk about those things publicly yet, but sometime in the near future some of these things may be reported in the press, at least in the insurance trade press.

Maryland State Fund Morphs into Mutual Insurer

Maryland's Injured Workers Insurance Fund, or IWIF, has transformed itself into a mutual insurance company named Chesapeake Employers Insurance.  The idea is to protect the loss reserves that have been set aside to take of injured workers from the depredations of greedy politicians who might wish to divert those reserves for other uses.

Chesapeake will be limited to writing Workers Compensation coverage for Maryland employers only. This continues a trend of recent years, as former state funds in other states (like Colorado) have done the same kind of transformation into mutual insurers.