Workers’ compensation insurance premium fraud has long been a serious problem in Florida and across the country. When business policyholders falsify company data to reduce their premium, it has negative financial and legal ramifications for everyone, including independent agents. But equipped with the right information, agents can play a key role in identifying and preventing from policy fraud.
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.
Agents are the key conduit between policyholders and insurance carriers, providing a key service and expert advice to policyholders with diverse needs. In order to protect the interests of policyholders and their own businesses, agents should constantly remain vigilant of the different types of premium cheat, the warning signs and know what to do if they suspect premium bluff.
There are three basic types of premium spoof: underreporting payroll, misclassification of employees, and experience modification evasion. Underreporting of payroll occurs when a policyholder fails to accurately report their entire work staff to the insurance company, often by paying employees off the books or presenting employees as sub-contractors or independent contractors versus actual employees of the company. The second type is the misclassification of employees. For example, when a high-risk employee, such as a construction worker, is classified as a person with clerical duties, this may result in a lower workers’ compensation surcharge for a company. Finally, a third variety of premium fraud is experience modification evasion, which 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.
Independent agents should be aware of several “red flag” indicators they can use to identify potential workers’ compensation premium fraud. Following is a list of “red flag” indicators predominately seen in premium fraud cases. Experience shows that the occurrences of two or more of these factors are typically present in cases that have been prosecuted for premium fraud:
• Business address is a mail drop or P.O. Box
• Business is physically located in another area of the state
• Prior carrier drops the business or business frequently changes carriers
• Excessive number of certificates of insurance issued on a small policy
• Unusual ratio of clerical to non-clerical staff for type of business
• Business avoids audit or has never been audited
• Reported injuries not consistent with purported job titles or duties
In addition to remaining vigilant for the “red flag” indicators commonly associated with incidents of premium fraud, agents should remain diligent in maintaining detailed records of all of their policyholder interactions, including all e-mail correspondence. This will be very important in the event a policyholder is ever suspected of premium fraud and will protect the agent should a policyholder accuse the agent of advising them to commit fraudulent acts, which is typical of policyholders who are accused of committing fraud. Some of the precautions agents should take include obtaining an original signature on applications, identifying the policyholder or person of contact with a driver’s license and determining who the responsible parties are within the company and identifying them. By keeping this information on file, agents will help protect themselves against false accusations and will help prosecutors in a criminal case, if necessary.
If agents ever suspect a policyholder is engaging in workers’ compensation premium fraud, they should articulate their suspicion to the carrier’s special investigation or fraud investigation unit. In certain cases, the agent may feel the need to elevate the referral of suspected premium fraud directly to the appropriate law enforcement agency. Eventually if charges are filed against a policyholder, the evidence agents possess will be important to the prosecution’s case. Typically, when a prosecutor serves a subpoena or search warrant for an agent’s records, the types of evidence most often sought are applications, copies of checks used for payments, correspondence (including e-mail) with the accused policyholder and any documents signed by a person responsible for the business.
Independent agents realize additional value by partnering with a carrier offering dedicated fraud investigation resources. By working with a carrier offering proactive anti-fraud programs, agents benefit from an additional level of protection for their business and help keep premium costs down for their law-abiding policyholders. Certainly, agents serve as a critical frontline defense against premium fraud and can play an important role in preventing workers’ compensation premium fraud by being aware of the different types of premium fraud, the warning signs and reporting any suspicious activities to the carrier for further investigation.