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.