Twin Traps For a Small Employer

Got a call from a local small business who has already stumbled into a classic small business Workers Comp trap, and who was about to stumble into another. The first one was a $6,000 fine from the Illinois Workers Comp Commission for running a biz without Workers Comp insurance. Since their only worker was the owner of the company, they thought they didn't need a WC policy. They did not realize that the 1099 workers they used were counted the same as W-2 type workers, so when the WCC came checking they had a little bit of trouble on their hands.

But the second trap, the one they didn't realize they were about to step in until we talked, was that they were now insisting these 1099 people obtain their own WC policies--without realizing that those 1099 people were being sold "Ghost" policies.

A Ghost policy is where the 1099 worker excludes himself or herself from coverage. So technically, the policy only covers any possible other workers this individual might hire. But with the Ghost policy, there aren't any workers, so the policy actually covers...no one. But for a minimum premium of around $1,000 it allows a Certificate of Insurance to be issued. And some unscrupulous agents don't bother to fill in the information on that Cert that would identify it as a Ghost policy.

The trap gets sprung when the insurance company audits the company that uses those 1099 people and figures out that these Certificates are really for Ghost policies. Major insurers, especially the ones writing Assigned Risk business, are getting really good at spotting Ghost policy Certificates (mainly because they themselves write those policies, through the Assigned Risk Plan.)

Now, the poor small business that relied upon these Ghost Certificates doesn't realize the Certs are misleading. And the insurance companies don't explain these little details until after the audit is done (that is, at the end of the policy, when it's too late to do anything about it.) And then the insurance company charges additional premium for these Ghosts, premium the small business didn't anticipate because they relied on those Certificates.

I was able to warm this particular small business about the perils of this second trap, so he can take action to avoid getting caught on his next audit. I wasn't consulted in time to help a different small business last year, though, and he suffered the full financial impact of this trap.

He had relied upon Ghost Certificates without ever being told the limitations of those Certificates (and the Certs in question made no mention of the limitations of the policies, even though they should have.) So when his major Assigned Risk insurer did the audit, they billed him an unexpected $20,000 additional premium for those 1099 people who produced Certificates of Insurance that didn't really cover anyone.

We tried to get help from the Illinois Department of Insurance, but all they would do was suggest this poor sap should request a legal hearing at the Department. And since this small biz couldn't afford the five grand or so it would cost for an attorney, he elected to not pursue that option. And thus died a small business, squeezed out of existence by a classic Workers Comp Premium Trap.