Workers Compensation Insurance Fraud in California

 

My introduction to Premium Fraud:

When I first started my job as a Workers Comp Claims adjuster, I was assigned a very puzzling claim file.  First, I noticed the worker’s injury had occurred a year before the claim was reported to the insurer.  Secondly, the worker (let’s call him Bill Watson) had suffered a nearly catastrophic injury.  Bill had been working as a roofer.  He was walking with a long pole on his shoulders with two buckets of hot tar balanced on each end.  Bill stumbled and was severely burned over most of his body  when the buckets of hot tar poured over him. 

Bill already had two surgeries before the claim was reported to the insurer (my employer).  Bill’s employer, the roofing company insured by my carrier, had not reported the claim.  Bill’s attorney had reported it to us, over a year after the injury.

 

As a new claims adjuster, I was puzzled—Why had our employer failed to report this very serious injury?  At the time, I had not heard the term “Premium Fraud” , but I was about to get some “on the job” training. 

I called our policyholder (let’s call them LCS Roofing, owned by Larry and Cassie Smith) to ask them about the injury.  I made several phone calls to the Smiths and left semi-frantic voice mails.

Later, I received a call from an attorney who said he was representing Mr. and Ms. Smith.  The attorney  said I was to stop calling Mr and Ms Smith and communicate only with him.  I was flabbergasted.  I told the attorney,I am the assigned claims adjuster for the Smith’s.  If they refuse to cooperate with the claims investigation, we will cancel their policy.  Of course, the attorney replied that the Smiths are not refusing to cooperate, but they did not want to speak with me directly. This attorney said the Smith wanted me to deny the claim because Bill Watson was not their employee.

During the phone call, I finally realized something was wrong.  I called a Senior Payroll Auditor named Jane and asked her opinion of the situation.  I heard Jane gasp on her end of the line.  “The Smith’s have never reported any payroll for the past ten years they have been insured with us.”  Obviously, they had employees.  There was Bill Watson.  Also, in the emergency room report, they noted that two co-workers had driven Bill to the ER.  So that sounded like three employees, and the Smith’s had not reported payroll for any of them.

Business owners commit Premium Fraud when they give misleading information to their workers comp insurer in order to pay a lower premium amount than they should.  Insurers calculate the premium for the employers based on three primary factors—their gross amount of payroll, the type of work their employees due (as defined by the class codes for each profession) and their loss experience.

After speaking with Jane, I understood why the Smiths did not report Bill’s injury and did not want to speak to me now.  They had not reported any payroll, so they could not admit they had a work who had been injured.

At that point, I contacted our Special Investigation Unit (SIU) about the claim.   An SIU investigator named Doris was assigned to investigate the situation.  Doris worked with Jane in Audit and our Legal Department to complete the investigation.   Our attorney deposed Bill Watson and got his side of the story:

Bill worked for the Smith’s as a roofer for about two years before the accident.  As Bill was in the hospital recovering from the burn injury and the first skin graft surgery, Larry Smith told Bill he had no workers compensation insurance and that Larry would pay for his medical treatment out of pocket.  This was a lie.  The Smith’s were insured for workers comp with my company at the time Bill was injured.

As Bill recovered, Larry Smith paid Bill his regular wages in addition to the medical costs.  After three months, Bill’s doctors recommended a second skin graft surgery.  Larry Smith continued to pay Bill’s wages and for the medical treatment.  After nine months, Bill’s doctors said he needed a third surgery.  At that point, Larry Smith said he could no longer afford to pay for the wages and medical care and he cut Bill off. 

Bill was left on his own, unable to work due to his continuing pain and unable to pay for the medical treatment he needed.  Bill went to an attorney for help.   He chose a Personal Injury attorney because Larry Smith had told him he had no workers comp insurance.  However, the PI attorney checked with the Workers Comp Insurance Rating Bureau and found the Smith’s were insured with my employer.  Then the PI attorney filed the claim which landed on my desk.

After the deposition of Bill Watson, our in house attorney recommended we accept Bill’s claim and pay for his third surgery (and all the other benefits he should have been getting all along). 

Doris, the SIU investigator, reported the case to the local District attorney and Department of Insurance offices.  The DA filed felony fraud charges against Mr. and Ms. Smith.   During the DA’s investigation, they had obtained information from the State Payroll Tax authority and found the Smith’s had continually reported their employee payroll taxes to the State and Federal government, even though they had reported no payroll to their workers comp insurance carrier.

When the DA investigator confronted the Smith’s with this information, Mr. Smith admitted that he had been advised by an attorney to report his payroll correctly to the State and Federal government while not reporting any to the workers comp carrier.  He said he was told, “You don’t want to risk getting caught cheating by the tax man, but the insurance company probably won’t catch you cheating them”.

This case was the first time I was called to testify for a Grand Jury.  Jane the auditor and Doris the SIU investigator were called to testify also.  The Smith’s entered a guilty plea and agreed to pay nearly $300,000 in restitution to the insurance carrier for the insurance premiums they should have been paying for years.  Jane the payroll auditor was able to calculate the amount of premium the Smith’s should have been paying us by using the payroll numbers they had reported to the State.

I will never forget how Ms. Smith looked as she and her husband stood before the judge sentenced them.  She seemed to be shaking with anger.  I wondered if she was angry at the judge, the DA’s prosecutor, the insurance company, or Bill Watson.  I think she was mad at her husband for letting the situation get so far out of hand.  

Bill Watson got his third surgery and back pay for temporary disability benefits.  Later, we gave him a Stipulated settlement to take care of his future medical needs.

The Smiths were allowed by the judge to pay the restitution in monthly payments.  They also asked  us to give them credit for Bill’s medical care they had paid for, but we declined.

My lesson learned---If a policyholder tells you a workers comp claimant is not their employee, take it with a grain of salt.  Start asking questions. There is probably more to the story than they want to tell you.