Understanding Work Comp Insurance Fraud

Workers’ compensation fraud has increased over the past few years and costs insurers and employers about $6 billion a year, according to the Coalition Against Insurance Fraud (CAIF). Employee fraud and employer fraud are the two main types of insurance fraud for workers’ compensation. Below is some information from an article by John Swedo in the Florida Underwriter Magazine and another article by Ranney Pageler in Property Casualty 360.

Employee Fraud

Claimant fraud trends have been on the rise in recent years, reflecting current economic conditions. Claimant fraud occurs when false or exaggerated injury claims, such as those not received on the job, are filed. The National Insurance Crime Bureau (NICB) reports that as the economy has deteriorated over the last several years, the number of suspicious or questionable claims has increased. For instance, the NICB states that the number of questionable claims related to workers’ compensation increased 71 percent between the first quarter of 2008 and the first quarter of 2009 alone.

Equally troublesome is the impact increased medical costs have had on workers’ compensation. Traditionally, 60 percent of injury claim amounts covered the indemnity payment while the remaining 40 percent covered medical costs. Today, the relationship has reversed, illustrating how dramatically medical costs have risen, while frequency and indemnity payments have decreased.

Such a significant increase in medical costs can be partially attributed to a rise in provider fraud, when medical or treatment providers exaggerate treatments for minor injuries or bill for treatments not actually provided. The increased involvement of organized crime can drive up medical costs as well. Such crime can include storefront clinics where no treatment is rendered or durable medical equipment providers that do not supply equipment to patients.

Employer Fraud

Employer premium fraud is another aspect of workers’ compensation fraud facing the property and casualty insurance industry. Employer fraud occurs when an employer underreports payroll, misrepresents job classifications or business type, or misclassifies employees as independent contractors in an effort to reduce workers’ compensation insurance premiums.

Underreporting of payroll occurs when policyholders fail to accurately report their entire work staff to the insurance company, often by paying employees off the books or falsely presenting employees as subcontractors or independent contractors.

When misclassification occurs, it usually involves a high-risk employee, such as a construction worker, being classified as a person with clerical duties in an attempt to lower the company’s workers’ compensation premium.

Experience modification evasion occurs when a company attempts to re-emerge as a new company on paper in order to obtain a lower experience modification factor, but the business is actually unchanged.

Continuously faced with financial pressures no matter what the economic climate, some policyholders are unfortunately tempted to manipulate data in order to lower their workers’ compensation insurance premiums. Not only is this fraud illegal, it adversely affects producers’ and carriers’ bottom lines, leads to higher costs for honest businesses, and often places additional legal burdens on agents.

Fighting Workers Comp Fraud in Florida

The industry is currently fighting back hard against the problem of fraud, focusing on two major antifraud efforts: fraud awareness and investigation/enforcement. In regard to fraud awareness, insurers are placing greater emphasis on fraud training for claims adjusters and underwriters to help them identify signs of suspect behavior or claim patterns. Furthermore, support for public fraud awareness and education has been broad, involving not only insurers but the CAIF, consumer interest groups, and the NICB as well.

In Florida, the Department of Financial Services Division of Insurance Fraud reported that in fiscal year 2009-2010 it received and reviewed 12,820 insurance fraud referrals that resulted in 1,234 cases presented for prosecution and 1,042 arrests. The 706 convictions resulted in court-ordered restitution totaling $63,061,289.

Of the total number of fraud referrals, 13 percent—or 1,676 referrals—were for suspect workers’ compensation cases.

According to a 2007-2008 report from the CAIF, Florida’s Division of Insurance Fraud leads the nation in the recovery of insurance fraud-related losses through court-ordered restitution. In fiscal year 2008-2009, cases presented for prosecution by the Division of Insurance Fraud resulted in more than $34 million in court-ordered restitution. According to the Coalition’s 2007-2008 statistics, Florida ranks in the top four among all states’ fraud divisions and bureaus in key measurements of success, including:

During 2009 and 2010, the Florida Bureau of Workers’ Compensation Fraud was restructured and now is a completely independent unit within the Division of Insurance Fraud. According to the division, the restructuring will enable a more focused approach to combating various types of workers’ compensation insurance fraud. It will also make the bureau more responsive to changing trends, since all fraud referrals are channeled through one contact point within the division.

To report workers’ compensation fraud, click here for contact information.