Another Employer Going to Jail Over WC

An Arizona man has been sentenced to a year in county jail for defrauding the Arizona State Fund of $72,000 in Workers Comp premiums over several years.

Damian Andre had been president of Arizona Payroll Systems,Inc., a PEO type operation. Mr. Andre was convicted of misreporting classifications and payrolls to the fund. More info can be found here.

This is representative of a trend in recent years, one I have written about in the past--employers getting in legal trouble for taking aggressive and improper actions to reduce Workers Compensation insurance costs. Once upon a time, I think it was less likely that employers would face criminal prosecution for such wrongdoing. But those times, they are a'changing.

Just last year, I worked as an expert on a federal criminal case against a former head of an Illinois-based PEO (Professional Employer Organization.) That woman (a very bright, engaging, professional businesswoman) is now serving time in a federal correctional institution. So employers need to keep in mind that what they think of as just playing hardball with their insurance company can sometimes produce disastrous consequences.

This news item puts me in mind of another case of mine, one that has just recently been concluded. In this case, I had been hired by the insurance company rather than by an employer. The policyholder in this case had initiated legal action against the insurer, claiming that the insurance company had overcharged them by about $1.5 million. I believe this suit was the result of a review by an outside consulting company, which had reported to the employer that various improper claims handling techniques had caused the employer to be overcharged by that $1.5 million dollar amount over five years.

The problem was that, when the insurance company hired us to review other aspects of these Workers Comp premium charges, it was found that the employer had been systematically misreporting the kinds of work being done by many employees. So at the end of the day, the employer had not been overcharged, they had been significantly undercharged due to their misreporting.

The bottom line is that the case was settled, with the employer not receiving the $1.5 million dollar refund they had sought, but instead by agreeing to pay an additional $2.5 million dollars to the insurance company. Not exactly the outcome the employer had anticipated when they filed suit.

But while this employer is likely not happy over the outcome of this case, I would point to the example of this Arizona employer and suggest that he count his blessings.

Washington State Ending Game of Monopoly?

The state of Washington is considering ending its monopoly fund for Workers Compensation. Specifically, Initiative 1082 will be voted on by Washington citizens in November, and if passed would allow private insurance for Workers Compensation for the first time since 1911.

Employers there argue that the monopoly state fund there is inefficient and expensive. I don't know enough about the Washington state fund to comment on the wisdom of either side in this debate, but I can offer some perspective. A number of other states have made this change in recent years (West Virginia and Nevada) and the change appears to have worked fairly well so far. In general allowing competition via private insurers can help some employers obtain some price relief for WC. The problem is that for many smaller employers, the competitive benefits never really materialize, because there isn't any effective competition for a lot of smaller employers.

In theory, a state operated monopoly fund ought to be able to achieve some price advantages, as such a system doesn't have to operate at a profit. But state run monopoly funds can easily degenerate into politically-distorted bureaucratic boondoggles--Ohio comes to mind in this regard.

Employers in Washington should go into this with their wide open: the private insurance system comes with its own problems. Insurance companies can be bureaucratic and high-handed in some of their decisions, so scrapping the state bureaucracy doesn't guarantee an end to such problems.

Competition can help address such problems, but insurers don't always compete for smaller employers. And if a major insurer goes belly up (think Casualty Insurance in California and Illinois) it can cause real disruptions. So the private insurance system is no panacea.

It will be interesting to see which way the voters of Washington call this shot. And heck, if they choose to allow private insurance, it will at least open up one more state in which my company can offer consulting services.

Workers Comp Premium Plunge Not Good News For Employers

In 2009, Workers Compensation insurance premiums plunged. The top 25 WC carriers saw premiums decrease collectively by 13.2%. The entire WC insurance premium volume declined by 12.4%. For some carriers, the decline was more pronounced: AIG saw premiums drop by 22.2%.

This wasn't the result of rate decreases--it was caused by precipitous drops in payroll, as the economic crisis roiled its way through the country. As carriers performed audits for 2009 policies, again and again they saw that large Return Premiums were due policyholders, due to significant declines in payroll.

Now, not only is this bad news for employers in that it reflects slashed payrolls, it also portends an era of tightened underwriting standards by employers. As carriers deal with lower premium volume, they are tightening up their criteria for writing business. The net effect of this will be a significant increase in Assigned Risk policies (and in most states, the Assigned Risk programs carry much,much higher premium charges, and much poorer customer service.)

Oh, and for the folks out in California, their rating bureau, the WCIRB, has announced it wants a rate increase of around 30%. That may never come to pass, due to political pressure, but some significant rate increase seems likely.

So all in all, we would appear to be heading into a period of significantly higher Workers Comp insurance premiums, at least for those employers still in business (more on that in my next post.)

A Glowing Review For The New Book

Okay, can I share something of which I am inordinately proud? My latest book, Workers Compensation: A Field Guide for Employers, just received a glowing review in the "Workers Compensation Law Section Newsletter" published by the Pennsylvania Bar Association.

The reviewer, David B. Torrey, is a Workers' Compensation Judge in the PA Department of Labor & Industry, and here are a few excerpts from his kind and generous review:

"His chapters on classification and experience rating, meanwhile, may be the most lucid explanation currently available."

The judge also wrote: "I know that I have read and annotated the book repeatedly, and am always picking up nuances that I can relate to the cases that I have heard (and hear) litigated before me."

Judge Torrey concludes his review thusly: "So buy a copy of Mr. Priz' book and take in a critical explanation and account of fronting--and a myriad of other insurance customs, practices, and procedures. Like a new Beaujolais, breathe it in, drink it in, get lost in it, and don't ever let some risk manager catch you unaware on the topic of insurance coverage."

My goodness, I don't believe I've ever heard anyone wax rhapsodic about a Workers' Compensation book, but I am delighted (and humbled) that Judge Torrey has found my work so useful.

Workers Comp Consultant Convicted of Fraud

A consultant based on South Carolina who specialized in helping employers reduce Workers Compensation insurance charges has been convicted of fraud in federal court. Robert A. Kohn of Charleston, South Carolina, was found guilty of submitting fraudulent payroll information to Companion Property & Casualty for his client, Knight's Services, a pipe-fitting contractor in Charleston.

This is, of course, a black mark on the industry of which I am a part, but it is fortunately a notable exception. Most consultants in this field (that I'm aware of, at least) provide ethical and professional services. But as in every field, there are always some bad apples.

Still, this story illustrates the need for some regulation and oversight of our industry. At the moment, no state licenses or regulates consultants on Workers Compensation premium reduction. I have drafted model legislation here in the state of Illinois that would provide such regulation, but at the moment it has attracted no interest from the legislature.

This is not the first time there have been unscrupulous operators in this field, and it surely will not be the last. Employers who are interested in having a review of their Workers Compensation costs performed would be well advised to check carefully into the background and credentials of any consultant who offers to save them money.

A good consultant can save you a lot of money. A crooked one can involve you in insurance fraud.

New Book Reviewed at AllBusiness.com

My newest book, Workers Compensation: A Field Guide for Employers, has received a very nice review in AllBusiness.com. Take a look at the review here.

AIG Musings

AIG is in the news today again, as Joseph Cassano (former head of the Financial Products Division) testified in Washington that he believes the disastrous derivatives trades that destroyed the company would have ultimately worked out just fine, if only the U.S. had not unwound them so quickly when the Feds had to rescue AIG. I dunno, that does seem to ignore the fundamental point that, if those trades were all so hunky-dory, why exactly did the government have to invest $80 billion or so in loose change to keep the company from going under?

But AIG is (once again) on my radar screen today for another reason as well. I just received a phone call and email from a former policyholder of AIG's who wanted to alert me to another instance (so he says, anyway) of AIG playing fast and loose with the rules.

This former AIG policyholder says that AIG failed to apply the maximum payroll caps that applied on payroll his company paid to New York workers. It was only when he independently learned of these payroll caps from another employer that he was able to get AIG to correct the audits and return the premium overcharges.

Now, it seems to me that knowing what the particular payroll maximums are in a given state is something that premium auditors at AIG should have known about. It was certainly their responsibility to know about that. But beyond the overcharges that happened to this individual employer, he raised an important point to me: how many other New York employers were overcharged by AIG in this manner?

This is a question I cannot answer at present, but I would certainly encourage all New York employers with highly paid individual employees to look into this issue.