Independent Agents: Frontline Defenders Against Premium Fraud

Insurance premium fraud has long been a serious problem across all lines of insurance, especially workers’ compensation. When policyholders falsify company data to reduce their premium, it has negative financial and legal ramifications for everyone, including independent agents. But armed with the right information, agents can play a key role in identifying and preventing premium fraud.

Faced with continued financial pressures in these tough economic times, some policyholders unfortunately will be tempted to manipulate data in order to lower their premiums. Not only is this fraud illegal, it affects producers and carriers’ bottom lines, leads to higher costs for honest policyholders and often places additional legal burdens on agents.

Agents are the key conduit between policyholders and insurance carriers, while ensuring great service and expert counsel to policyholders with diverse needs. And in order to protect the interests of policyholders and their own businesses, agents should constantly remain aware of the different types of premium fraud, the warning signs and what to do if they suspect premium fraud.

There are three basic types of workers’ compensation premium fraud: 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 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 premium for a company. Finally, 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.

Independent agents should be aware of several red-flag indicators of workers’ compensation premium fraud. Experience shows that the occurrences of two or more of these factors are typically present in cases that have been prosecuted for premium fraud:

• The business address is a mail drop or P.O. box.

• The business is physically located in another area of the state.

• A carrier drops the business or the business frequently changes carriers.

• An excessive number of certificates of insurance are issued on a small policy.

• An unusual ratio of clerical to non-clerical staff for type of business.

In addition to remaining vigilant for the red flag indicators com¬monly associated with incidents of premium fraud, agents should remain diligent in maintaining detailed records of all of their policyholder interactions. This is 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 commit 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 a company. 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 an agent ever believes a policyholder is guilty of workers’ compensation premium fraud, he/she should articulate their suspicion to the claim examiner and 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 that may be committing fraud, 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 honest policyholders. Certainly, agents serve as a critical frontline defense against premium fraud and can play an important role in preventing workers’ compensation fraud by being aware of the different types of fraud, the warning signs and reporting any suspicious activities to the carrier for further investigation.

Ranney Pageler (rpageler@employers.com) is vice president of the Fraud Investigations Department at the Employers Compensation Insurance Company.