Employer Premium Fraud Is Hurting Everyone — Including Honest Businesses

Insurers are prosecuting premium fraud, because it’s creating unfair competition for honest businesses unable to compare with cheats reducing their expenses by failing to care for their workers.
By: | October 15, 2018

Prosecuting employer premium fraud can be a delicate subject for workers’ compensation insurers.

Some insurers look the other way rather than help prosecute premium fraud because of the effort and expense investigations require. Insurers’ financial recovery, meanwhile, and the punishment premium fraud offenders receive are both typically negligible.


“Keep in mind that an insurance company is turning in their policyholder,” said Dale Banda, VP of the Anti-Fraud Alliance, which represents insurance investigators and law enforcement personnel.

So some insurers opt for attempts to collect additional premium even when they suspect a policyholder purposely underreported their payroll or misclassified workers. Or they help build criminal cases only when policyholders have moved on to obtain coverage elsewhere, Banda said.

“Sometimes they’ll say, ‘It’s just not worth it to spend a bunch of money and time investigating this when they are no longer our policyholder,’ ” Banda elaborated. “They will ask, ‘Why should we spend more money investigating when we are not going to get that money back anyway?’ ”

When to Take a Stand Against Fraud

Banda is not alone in noticing reluctance to investigate workers’ comp premium fraud. Some insurers see premium-fraud losses as the cost of doing business, observers said.

A December 2017 state auditor’s report on California workers’ comp insurance found significant variation in insurer rates for reporting fraud. Some insurers’ reporting rates are so low or non-existent that the auditors suspect the underwriters fail to report it.

Even those insurers with a reputation for taking action against premium fraud must tread cautiously to avoid targeting customers who have perhaps made a mistake rather than crossed the line into illegality.

“It’s a delicate investigation process, because you are investigating your customers and it’s definitely a small number who we determine are committing premium fraud, so we have to be very careful,” explained Grace Nicholas, senior manager of Texas Mutual Insurance Company’s special investigations department, which includes a unit specializing in premium fraud.

Paul H. Sighinolfi, executive director and chairperson, Maine’s Workers’ Compensation Board

No doubt though, some workers’ comp insurers, like Texas Mutual Insurance, do take a stand against premium fraud, particularly when policyholder behavior proves egregious.

In one case, for example, a landscape operation’s ruse unraveled in a Texas court. Employees, who were shown a building schematic, testified that a reported address for the company led only to an equipment storage closet, Nicholas said.

Creating shell companies to hide a poor experience modification and payroll used to calculate premium is a recurring tactic among employers looking to cheat workers’ comp underwriters, Banda explained.

In the Texas case, the landscape employer was unhappy with the quoted premium required to secure insurance coverage. The employer claimed it planned to fire its workers and replace them with independent contractors.

The employer instead created a second company and declared that company to be operating under Texas’ non-subscriber law, which allows employers to opt out of purchasing workers’ comp insurance. The Texas Mutual policyholder also moved its employees from the original company to the second without telling the workers their jobs moved to another operation.

In reality, though, the employees continued performing the same work, under the same foreman, employed by the original company, which essentially retained control of all their work conditions.

That meant the workers legally remained employees of the original company, and Texas Mutual Insurance, as that operation’s insurer, would be on the hook for their workplace injuries. The scheme denied the underwriter the ability to collect adequate premium for the risk.

“We write a policy [and] we can’t deny a claim just because the employees were not reported to us or the premium wasn’t paid,” Nicholas said.

“We have a duty to do the right thing and take care of that worker and worry about the premium after the fact.”

Mislabeling Workers Hurts Honest Businesses

Several experts cite construction operations’ misclassifying of workers as independent contractors or subcontractors as the most common scheme for perpetrating premium fraud nationwide.


Entities hiring drywallers, framers and other trades workers often operate under highly competitive conditions. The worker-classification codes insurers apply to calculate their premiums are at the high end to offset construction’s operational risks.

A certificate of insurance is often required from employers bidding on construction projects. Pricey premiums and mandatory coverage can result in attempts to game the system.

While different factors motivate employers to commit premium fraud, it often comes down to gaining a competitive edge, said Neil Johnson, VP and manager of the commercial premium fraud special investigations unit at Liberty Mutual.

“These companies call [their workers] independent contractors, and when you do the analysis of who [legally] is an employee and who is an independent contractor … These guys are clearly employees.” — Paul H. Sighinolfi, executive director and chairperson, Maine’s Workers’ Compensation Board

“For the most part they are trying to compete economically, and they will do whatever they can,” Johnson said.

Misclassification of employees and other types of workers’ comp premium fraud are also commonly found in janitorial services, home health care, trucking, employee leasing and restaurant work, observers said.

“We had a restaurant with 34 people working, and the owner tried to convince me that everybody was an independent contractor, including the busboy,” said Paul H. Sighinolfi, executive director and chairperson of Maine’s Workers’ Compensation Board.

The amount of cash restaurants handle provides opportunities to pay workers without it registering as a payroll expense, added Matt Zender, VP, workers’ comp product manager at AmTrust.

The practice is so common in New York, for example, that Zender said he suspects underwriters make up for it by “baking” it into the rates applied when calculating premiums for the city’s restaurants.

Sighinolfi added that about twice a month, union executives tip him off to construction employers misclassifying employees as independent contractors.

Neil Johnson, VP, manager, commercial premium fraud special investigations unit, Liberty Mutual

The unions tip him off because the scheme cheats union members out of performing work for honest employers who can’t compete against operations ducking their legal obligation to purchase workers’ comp insurance.

“These companies call [their workers] independent contractors, and when you do the analysis of who [legally] is an employee and who is an independent contractor, it’s not even close,” Sighinolfi said. “These guys are clearly employees.”

In addition to assessing penalties, “we try to get the attorney general’s office to prosecute under misclassification,” Sighinolfi explained. But the crime is a misdemeanor in his state, and Sighinolfi believes it needs upgrading to a felony to discourage the behavior, “because we have repeat offenders,” he said.

Minor punishments for premium fraud are common nationwide. In the Texas landscaper case, the convicted employer’s punishment amounted only to paying restitution.

Depending on the jurisdiction, some prosecutors aggressively pursue premium fraud while others don’t assign resources to combat it. Those who do prosecute workers’ comp fraud may focus more on claimant fraud, because it typically requires less investigation and is easier to prove than employer premium schemes.

Yet premium fraud generates larger losses than claimant fraud, Johnson said.

Employers, meanwhile, may view premium fraud as a victimless crime that only harms a powerful insurer. That attitude ignores the damage to honest businesses that can’t compete against cheats, reducing their expenses by failing to care for their workers.

And it’s still theft, Johnson said.

Efforts Growing to Stop Premium Fraud

Despite the challenges to prosecuting premium fraud, there are signs that efforts to eradicate the practice are improving, Nicholas said. She is hearing more insurance industry discussions about the need to take countermeasures.


And Banda said that over the last decade or so, California stepped up efforts to combat premium fraud.

“In California, the prosecutors are getting better at it, because they know there is a lot of money involved,” he said.

“If you talk about a construction company [for example] that has lots of payroll, and they have been doing it for a number of years, you can run into thousands and thousands of dollars the insurance company would have received.” &

This article is part of a three-part series on The Changing Landscape of Workers’ Comp Fraud.

Why Physician Fraud Rings Are a Major Workers’ Comp Issue And What You Can Do About Them explores the perils of provider fraud and the changing landscape of the obstacles investigators face.


Employer Premium Fraud Is Hurting Everyone — Including Honest Businesses addresses the various types of premium fraud, and why insurers are reluctant to investigate most offenders.


Why Are You Wasting Money on Pointless Workers’ Comp Claim Investigations? dives into the need for industry-wide investigative standards and how the trend toward worker advocacy is impacting the way employers approach worker fraud.

Roberto Ceniceros is a retired senior editor of Risk & Insurance® and the former chair of the National Workers' Compensation and Disability Conference® & Expo. Read more of his columns and features.

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The Betrayal of Elizabeth

In this Risk Scenario, Risk & Insurance explores what might happen in the event a telemedicine or similar home health visit violates a patient's privacy. What consequences await when a young girl's tele visit goes viral?
By: | October 12, 2020
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.


Elizabeth Cunningham seemingly had it all. The daughter of two well-established professionals — her father was a personal injury attorney, her mother, also an attorney, had her own estate planning practice — she grew up in a house in Maryland horse country with lots of love and the financial security that can iron out at least some of life’s problems.

Tall, good-looking and talented, Elizabeth was moving through her junior year at the University of Pennsylvania in seemingly good order; check that, very good order, by all appearances.

Her pre-med grades were outstanding. Despite the heavy load of her course work, she’d even managed to place in the Penn Relays in the mile, in the spring of her sophomore season, in May of 2019.

But the winter of 2019/2020 brought challenges, challenges that festered below the surface, known only to her and a couple of close friends.

First came betrayal at the hands of her boyfriend, Tom, right around Thanksgiving. She saw a message pop up on his phone from Rebecca, a young woman she thought was their friend. As it turned out, Rebecca and Tom had been intimate together, and both seemed game to do it again.

Reeling, her holiday mood shattered and her relationship with Tom fractured, Elizabeth was beset by deep feelings of anxiety. As the winter gray became more dense and forbidding, the anxiety grew.

Fed up, she broke up with Tom just after Christmas. What looked like a promising start to 2020 now didn’t feel as joyous.

Right around the end of the year, she plucked a copy of her father’s New York Times from the table in his study. A budding physician, her eyes were drawn to a piece about an outbreak of a highly contagious virus in Wuhan, China.

“Sounds dreadful,” she said to herself.

Within three months, anxiety gnawed at Elizabeth daily as she sat cloistered in her family’s house in Bel Air, Maryland.

It didn’t help matters that her brother, Billy, a high school senior and a constant thorn in her side, was cloistered with her.

She felt like she was suffocating.

One night in early May, feeling shutdown and unable to bring herself to tell her parents about her true condition, Elizabeth reached out to her family physician for help.

Dr. Johnson had been Elizabeth’s doctor for a number of years and, being from a small town, Elizabeth had grown up and gone to school with Dr. Johnson’s son Evan. In fact, back in high school, Evan had asked Elizabeth out once. Not interested, Elizabeth had declined Evan’s advances and did not give this a second thought.

Dr. Johnson’s practice had recently been acquired by a Virginia-based hospital system, Medwell, so when Elizabeth called the office, she was first patched through to Medwell’s receptionist/scheduling service. Within 30 minutes, an online Telehealth consult had been arranged for her to speak directly with Dr. Johnson.

Due to the pandemic, Dr. Johnson called from the office in her home. The doctor was kind. She was practiced.

“So can you tell me what’s going on?” she said.

Elizabeth took a deep breath. She tried to fight what was happening. But she could not. Tears started streaming down her face.

“It’s just… It’s just…” she managed to stammer.

The doctor waited patiently. “It’s okay,” she said. “Just take your time.”

Elizabeth took a deep breath. “It’s like I can’t manage my own mind anymore. It’s nonstop. It won’t turn off…”

More tears streamed down her face.

Patiently, with compassion, the doctor walked Elizabeth through what she might be experiencing. The doctor recommended a follow-up with Medwell’s psychology department.

“Okay,” Elizabeth said, some semblance of relief passing through her.

Unbeknownst to Dr. Johnson, her office door had not been completely closed. During the telehealth call, Evan stopped by his mother’s office to ask her a question. Before knocking he overheard Elizabeth talking and decided to listen in.


As Elizabeth was finding the courage to open up to Dr. Johnson about her psychological condition, Evan was recording her with his smartphone through a crack in the doorway.

Spurred by who knows what — his attraction to her, his irritation at being rejected, the idleness of the COVID quarantine — it really didn’t matter. Evan posted his recording of Elizabeth to his Instagram feed.

#CantManageMyMind, #CrazyGirl, #HelpMeDoctorImBeautiful is just some of what followed.

Elizabeth and Evan were both well-liked and very well connected on social media. The posts, shares and reactions that followed Evan’s digital betrayal numbered in the hundreds. Each one of them a knife into the already troubled soul of Elizabeth Cunningham.

By noon of the following day, her well-connected father unleashed the dogs of war.

Rand Davis, the risk manager for the Medwell Health System, a 15-hospital health care company based in Alexandria, Virginia was just finishing lunch when he got a call from the company’s general counsel, Emily Vittorio.

“Yes?” Rand said. He and Emily were accustomed to being quick and blunt with each other. They didn’t have time for much else.

“I just picked up a notice of intent to sue from a personal injury attorney in Bel Air, Maryland. It seems his daughter was in a teleconference with one of our docs. She was experiencing anxiety, the daughter that is. The doctor’s son recorded the call and posted it to social media.”

“Great. Thanks, kid,” Rand said.

“His attorneys want to initiate a discovery dialogue on Monday,” Emily said.

It was Thursday. Rand’s dreams of slipping onto his fishing boat over the weekend evaporated, just like that. He closed his eyes and tilted his face up to the heavens.

Wasn’t it enough that he and the other members of the C-suite fought tooth and nail to keep thousands of people safe and treat them during the COVID-crisis?

He’d watched the explosion in the use of telemedicine with a mixture of awe and alarm. On the one hand, they were saving lives. On the other hand, they were opening themselves to exposures under the Health Insurance Portability and Accountability Act. He just knew it.

He and his colleagues tried to do the right thing. But what they were doing, overwhelmed as they were, was simply not enough.


Within the space of two weeks, the torture suffered by Elizabeth Cunningham grew into a class action against Medwell.

In addition to the violation of her privacy, the investigation by Mr. Cunningham’s attorneys revealed the following:

Medwell’s telemedicine component, as needed and well-intended as it was, lacked a viable informed consent protocol.

The consultation with Elizabeth, and as it turned out, hundreds of additional patients in Maryland, Pennsylvania and West Virginia, violated telemedicine regulations in all three states.

Numerous practitioners in the system took part in teleconferences with patients in states in which they were not credentialed to provide that service.

Even if Evan hadn’t cracked open Dr. Johnson’s door and surreptitiously recorded her conversation with Elizabeth, the Medwell telehealth system was found to be insecure — yet another violation of HIPAA.

The amount sought in the class action was $100 million. In an era of social inflation, with jury awards that were once unthinkable becoming commonplace, Medwell was standing squarely in the crosshairs of a liability jury decision that was going to devour entire towers of its insurance program.

Adding another layer of certain pain to the equation was that the case would be heard in Baltimore, a jurisdiction where plaintiffs’ attorneys tended to dance out of courtrooms with millions in their pockets.

That fall, Rand sat with his broker on a call with a specialty insurer, talking about renewals of the group’s general liability, cyber and professional liability programs.

“Yeah, we were kind of hoping to keep the increases on all three at less than 25%,” the broker said breezily.

There was a long silence from the underwriters at the other end of the phone.

“To be honest, we’re borderline about being able to offer you any cover at all,” one of the lead underwriters said.

Rand just sat silently and waited for another shoe to drop.

“Well, what can you do?” the broker said, with hope draining from his voice.

The conversation that followed would propel Rand and his broker on the difficult, next to impossible path of trying to find coverage, with general liability underwriters in full retreat, professional liability underwriters looking for double digit increases and cyber underwriters asking very pointed questions about the health system’s risk management.

Elizabeth, a strong young woman with a good support network, would eventually recover from the damage done to her.

Medwell’s relationships with the insurance markets looked like it almost never would. &


Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

The use of telehealth has exponentially accelerated with the advent of COVID-19. Few health care providers were prepared for this shift. Health care organizations should confirm that Telehealth coverage is included in their Medical Professional, General Liability and Cyber policies, and to what extent. Concerns around Telehealth focus on HIPAA compliance and the internal policies in place to meet the federal and state standards and best practices for privacy and quality care. As states open businesses and the crisis abates, will pre-COVID-19 telehealth policies and regulations once again be enforced?

Risk Management Considerations:

The same ethical and standard of care issues around caring for patients face-to-face in an office apply in telehealth settings:

  • maintain a strong patient-physician relationship;
  • protect patient privacy; and
  • seek the best possible outcome.

Telehealth can create challenges around “informed consent.” It is critical to inform patients of the potential benefits and risks of telehealth (including privacy and security), ensure the use of HIPAA compliant platforms and make sure there is a good level of understanding of the scope of telehealth. Providers must be aware of the regulatory and licensure requirements in the state where the patient is located, as well as those of the state in which they are licensed.

A professional and private environment should be maintained for patient privacy and confidentiality. Best practices must be in place and followed. Medical professionals who engage in telehealth should be fully trained in operating the technology. Patients must also be instructed in its use and provided instructions on what to do if there are technical difficulties.

This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. Risk management services are provided or arranged through AWAC Services Company, a member company of Allied World. © 2020 Allied World Assurance Company Holdings, Ltd. All rights reserved.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]