National Organization of Injured Workers

Workers' Compensation Fraud By Employers Rising.

By Kathy Robertson

Workers' compensation fraud by employers appears to be up significantly in California, potentially cheating insurers out of millions and raising rates for businesses statewide.

The number of suspected fraudulent claims by California employers increased to 2,056 in the fiscal year ended June 30, 2006, almost five times as many as the 417 in fiscal year 2003, according to the state Department of Insurance.

Fraud by medical and legal providers also is on the upswing, with 872 cases of suspected fraud in fiscal 2005, more than double the 429 identified in fiscal 2003.

It's unclear whether more fraud is happening or more is simply being reported and prosecuted, but the trends align with growth in workers' compensation premium fraud by employers and medical/legal providers nationwide, according to a study released this month by the Coalition Against Insurance Fraud in Washington, D.C.

The coalition is a nonprofit alliance of consumer groups, insurers and government agencies combating insurance fraud. The study is considered a barometer of the nation's annual progress against insurance fraud, which costs up to $80 billion annually. It concludes that a handful of fraud bureaus appear to be particularly effective in detecting and rooting out illegal behavior, and California tops the list.

Most action, most money
California convicts more insurance swindlers than any other state -- one of every three insurance fraud convictions in the nation, according to the study. The state fraud bureau logged a record 1,546 convictions in 2005, ahead of runners-up Florida at 493 and New York at 450.

California reported the most referrals of suspected fraud at 27,687, followed by New Jersey at 26,000. The referrals come from a variety of sources such as insurance companies, local law enforcement and calls to the fraud hotline.

The state also brings the most resources to the table to fight fraud, both in dollars and employees. California's $36.8 million fraud division budget is the richest in the country, followed by New Jersey at $29.7 million. The California fraud division is also the largest, with 298 staffers, followed by New Jersey at 270.

"It's fair to say the California Department of Insurance is one of the more active state agencies in terms of criminal enforcement," said Matt Jacobs, a former U.S. Attorney who is now a partner in the Sacramento office of DLA Piper. "It's an agency that has an enforcement staff that does cases. Some agencies don't have enforcement staff. Some have staff and don't do cases."

Not a victimless crime
Insurance is a $115 billion industry in California with a direct impact on the economy, said Dale Banda, deputy commissioner of the enforcement division at the insurance department.

"When you add up car, life, long-term disability and workers' comp insurance, it's a significant amount of your budget in business and personal life," Banda said. "Insurance fraud is not a victimless crime. It increases costs for everybody."

Workers' Compensation fraud by employers falls into three categories:

Those who do not have workers' comp insurance.

Those who deny benefits rightfully owed to employees and.

Premium fraud, which can mean underreporting payroll or misclassifying employees.

One local example of some of the gray areas in the law is Sacramento business owner Stephanie Nishikawa's citation for not providing workers' comp insurance for some relatives who work at her store, The Paper Garden.

Benefit denials run the gamut from employers telling undocumented immigrants they'll be reported to immigration authorities if they file a claim to situations where "injured workers are being rolled up and dropped off at an emergency room while the employer speeds away," said Rick Plein, fraud bureau chief for regional offices in Sacramento, Benicia and Morgan Hill.

Premium fraud takes lots of forms and adds up fast. The five cases filed statewide during the current fiscal year total more than $60 million.

"We are seeing some pretty major dollars," Plein said.

In one Sacramento case last year involving North Pointe Enterprises Inc., a large residential framing contractor, three Elverta residents were arrested and charged with underreporting employees' wages by $1.9 million. An audit indicated the business owed $2.7 million in additional premiums.

Work-related injuries are a big cost driver in the construction industry, Banda said, so there are cases where employers under-report injuries to reduce the "experience modification," or the formula to determine rates based on a company's history of payroll and insurance claims, that cranks up rates.

The underground economy is a big issue, too, with employers paying cash under the table and under-reporting wages.

"It's tough to know how much fraud is out there when we only know what's reported to us," Banda said. Once identified, investigators still have to prove there was specific intent to defraud in order to make charges stick.