Guess It Wasn't Such A Good Idea To Buy Workers Comp "Insurance" From An Indian Named Chmliewski

Sometimes, you read about Workers Comp-related news items and just have to scratch your head and wonder at the Rube Goldberg style things that are sold as alternatives to Workers Compensation insurance.

Case in point, as Rod Serling used to say: this news item about an insurance executive named Gregory Chmielewski, who sold Workers Compensation "coverage" to California employers--"coverage" that was created by mean of an Indian tribe and a PEO arrangement.

See, the Indian tribe angle enabled the evasion of state insurance regulations, and the PEO set up enabled them to emulate a Workers Compensation vehicle that is widely used (if sometimes abused).

And surprise, surprise, the company ended up bankrupt, leaving some injured workers without coverage and the man behind the curtain going to jail for misappropriating funds.

I understand that employers are sometimes really hard-pressed to afford real, traditional Workers Comp insurance. God knows, we get calls every week from desperate employers who are being premiumed out of existence by insurance companies (fortunately, a lot of the time we can help these employers reduce those premium charges.)

But really---Workers Compensation coverage from an Indian tribe, using a PEO (you know, Professional Employer Organization, aka employee leasing.) From an Indian named Chmliewski?

Before my Dad changed our family name, it was Przyborowski, so I guess I could say I'm a member of the same tribe as a guy named Chmliewski--and let me tell you, our tribe ain't from west of the Pecos. But truth to tell, I don't want to belong to any tribe that would let a flim-flam man like this remain in good standing. Guess I'll have to raise the issue at our next Pow-Wowski.

Criminal Liability for Employers From Their Workers Comp Insurance

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.

Workers Comp Opt-Out Plans

My friend, Peter Rousmaniere, has an interesting column on the subject of Workers Compensation Opt-Out plans as existing or proposed in various states. This article suggests that Peter, a long time wise observer of things related to Workers Compensation, is changing his view on Opt-Out programs.

Myself, I'm of a mind that these programs are kind of like socialism--possessing intriguing aspects in theory, but in actual practice pretty goddamned terrible--terrible for people who suffer injury or illness from their workplace, at any rate.

This country created our Workers Compensation system as a grand bargain, a compromise that protected employers from potentially catastrophic liability while giving employees a system that supposedly provided no fault benefits, including medical care and disability and death benefits, that could be relied upon. The Opt-Out programs I have reviewed impose draconian and unfair limitations and penalties on workers. I know that I sure as hell would not want to be relying upon the one-sided rules that Wal-Mart imposes on its poor workers if I were injured while working in one of their increasingly-depressing retail operations.  I've had a little first hand experience with how fair and impartial Wal-Mart is in the area of Workers Compensation, as a family member once was injured while working there. Hell, if they took decent care of their injured workers then the Walton heirs might have to sell off some of their art collection, and we can't have that.

Look, Workers Comp costs are a real issue for a lot of employers--nobody knows that better than I do, because I've devoted my professional life to helping employers control the cost of Workers Compensation insurance. But the solution to this problem isn't to screw over decent people who get injured or made ill due to their work. There are things that can be done to reduce fraud and inefficiencies in the system without taking unfair advantage of people.

Here in my home state of Illinois, the traditional Workers Compensation system has seen significant reductions in the cost of Workers Compensation claims that were achieved through a combination of medical fee schedules and some other reforms that did not destroy the no-fault Workers Comp system. Illinois employers are seeing real reductions in Workers Comp insurance manual rates, and would likely see further reductions if some common sense insurance reforms were enacted.

Some Questions Raised Re: Big PEO Workers Comp

Barrett Business Services, Inc.(BBSI) is a very large PEO-Professional Employer Organization, also known as an employee leasing firm. Such companies provide Workers Compensation coverage, among other services, to client companies by means of contractual agreements that make the PEO the "co-employer", at least on paper, of the workers of the client company.

Now come reports that BBSI is under investigation regarding how the company reported certain charges associated with its Workers Compensation costs.

California passed a new law in 2014 that prohibited PEOs from self-insuring their Workers Comp obligations. So BBSI entered into what is known as a fronting arrangement with ACE. A fronting arrangement is one where an insurance company that is licensed to write Workers Comp insurance in a state enters into a behind-the-scenes arrangement, typically with a captive insurer that isn't eligible to write Workers Comp. The fronting insurer issues a policy, but enters into a reinsurance arrangement with the captive so that the fronting insurer isn't responsible for paying claims up to an agreed upon amount. So in the BBSI case, ACE was passing back all claims up to five million dollars.

The investigation isn't whether or not this all was kosher--surprisingly, these arrangements are not unheard of, although insurance regulators really don't have a good handle on the practice. The investigation of BBSI involves the question of whether they violated securities laws requiring providing accurate financial information to investors.

See, that's the weird thing, to me. This whole complicated structure of having a PEO provide WC coverage to thousands and thousands of smaller companies, and to do it by means of a fronting arrangement where the insurance company that everyone thinks if providing coverage really isn't--that all likely is done according to the rules. Which leads me to ask the question--who the heck ever decided that such complicated arrangements were such a good idea?

The answer is that no one decided it, really. The insurance industry figured out how to structure these deals in such a way that the insurance regulators never really had a good idea of what was going on, how widespread the practice has been, and how wobbly some of these houses of cards might be--not until the cards collapse, that is.

Now, in this particular case of BBSI, there is absolutely nothing in the published reports that indicate any wrongdoing. Not yet, at any rate. But this early news report does make me recall other situations involving big PEOs that did turn out to be card-constructed housing units.

Time will tell how this one turns out. Stay tuned.

Workers Comp "Reform": Babies and Bathwater

In the field of Workers Compensation, employers are understandably and legitimately concerned about the cost of Workers Compensation. Here in my home state of Illinois, for example, employers are often pushed to the wall by the cost of Workers Compensation insurance, and we here at Advanced Insurance Management often get to help them (and other employers all over the U.S. as well) successfully dispute Workers Comp insurance charges that are unwarranted and excessive. On a regular basis, we get to help keep some small employer in business, as they tell us that if they have to pay a recently-received "Shock Audit" for more money than they have, they will have to close their doors. It's always a special professional pleasure to help in those situations.

And in Illinois, our home state, employers are often told that Illinois is too lenient and corrupt when it comes to awarding Workers Comp benefits to workers, and in neighboring Indiana they know how to do things more efficiently and economically, and thus WC rates and insurance premiums are much, much lower there. And its true, Indian has much lower WC insurance rates (and lower benefits) than in Illinois.

I've written about this disparity before, and how much of the difference in costs between Indiana and Illinois are due to wage differences between the states and the much more restrictive benefits rules in Indiana. But now a new article in Slate makes clear the unintended consequences of some of the Workers Comp "reforms" that some employers and insurers advocate for, in the name of reducing claims costs. And those consequences can sometimes be measured in painful deaths and financial ruin for families, particularly if an employer fights a Workers Comp claim in ways both fair and foul.

To be fair, employers have every right in the world to fight for reasonable laws to combat fraudulent or exaggerated Workers Comp claims. Indeed, they have a responsibility to fight against such claims, as they weaken and undermine the entire Workers Comp system. And fraudulent or exaggerated claims are a reality most employers have to deal with, sadly. In response, many states have greatly increased efforts at catching and punishing fraudulent Workers Comp claims, with considerable success.

But I think it can be a terrible mistake to enact "reforms" that leave seriously injured or ill workers without benefit of the laws we have enacted to protect and compensate us all from the risks of occupational injury and illness. And we do not want to remove the financial incentives that currently exist to pressure employers to maintain safe workplaces.

Most employers, in my experience, want to maintain safe workplaces. They understand the need to keep their workers safe from the potential hazards of work. But even with the best of intentions, unexpected things can happen that result in serious claims. And sometimes it can be unclear if a questionable claim has been exaggerated or misrepresented. And, being human, employers (and their insurers) can be prone to sometimes allowing financial interests to cloud their judgement on such things.

That's why I tend to view arbitrary restrictions on Workers Comp claims as often throwing the baby out with the bathwater. The consequences of creating too many hurdles and barriers for those who are injured at work (or who claim to be so injured) can be devastating to people, and often contrary to the long term interests of the employer as well.

I know there are no easy solutions to this--because if there were, we would have done them already. But some of these proposed reforms strike me as just that--easy solutions for complex problems. That usually doesn't end well.

And our Workers Comp system is never going to be perfect, sad to say. But we need to keep in mind that unintended consequences can be powerful and long lasting, and that the unintended consequences of some of the proposed "reforms" to our Workers Compensation systems will be painful death, needless maiming, and financial ruin for decent people. We can do better than that.

Pay As You Go Workers Comp From Intuit

Intuit, Inc. has launched an interesting "pay as you go" Workers Compensation insurance service for small employers, utilizing the services of twenty insurance companies. The whole idea of "Pay as you go" WC is to avoid what we call "shock audits", where the annual premium audit generates an unexpectedly large additional premium. Pay as you go uses actual payroll information, rather than an initial estimate. The Intuit service, for instance, uses that company's Quickbooks payroll data to develop WC premium charges in real time.

Of course, these kinds of "pay as you go" programs can only address one cause of Shock Audits--that is, fluctuations in payroll. But payroll isn't the only cause of these painful audits, and pay as you go doesn't address those. Changes in classifications, changes in payroll allocation, or use of uninsured independent contractors can still ambush employers with unexpected bills. But programs like the Intuit service (and Intuit is far from the only provider of this kind of service) can offer small employers access to voluntary market coverage, when so many other sources of WC are focused on larger accounts and leave smaller employers to the mercies of Assigned Risk plans.

A Disturbing Trend

This is an alarming article, to anyone who thinks we need to make our current system for injured workers better, not crappier. Our current system is far, far from perfect, but giving workers poorer and more restricted benefits is not the way forward. Once again, this trend would seem to give an even bigger slice of the economic pie to those who already feast, while impoverishing those who already struggle. Not a recipe for long term social justice and prosperity, in this writer's view.

Our existing system of Workers Compensation was created in response to cruel workplace tragedies at tremendous effort. We should not be quick to dismantle something so important.