What You Don’t Know About Insurance Fraud

Everyone has heard a worker comp fraud story. The worst of these tales are pretty egregious — like a worker purposely injuring themselves or an employer neglecting to file claims to avoid premium increases.

There’s so much talk about insurance fraud and, specifically, workers compensation fraud that it has sparked multiple national and state-level reforms. No one wants to pay more than they should for workers compensation. And no one wants to pay for other people’s crafty attempts out of paying their fair share. Nor should you!

Everyone has a role to play in combating fraud, but can you recognize workers comp fraud when you see it? Let’s dive into some statistics to learn more about the reality of workers compensation fraud and why there may be some fraud hiding under your nose.

$7B Annually: What Workers Comp Fraud Looks Like by the Numbers

Popular media tends to focus on one type of fraud: false injuries. Even for those who work in the insurance industry, the first image that comes to mind is a fake limp or an exaggerated minor injury used to get a few paid weeks away from work.

The truth is that everyone who interacts with the insurance industry has a role to play in fraud. Because every single person, from carrier to insured, can commit insurance fraud.

What does insurance fraud look like? It comes in many, many creative forms, including:

  • Employers:
    • Underreporting payroll 
    • Failing to report legitimate claims
    • Knowingly reporting false claims
    • Misclassifying employees
    • Providing false information to obtain workers comp policies at a lower premium
  • Employees
    • Knowingly reporting false claims
    • Incorrectly reporting a claim
    • Double-dipping (claiming workers compensation and working)
  • Brokers
    • Creating fake customer accounts with another customer’s premium
    • Skimming premiums before payments are sent to the insurer
    • Creating fictitious policies
    • Forging signatures to steal premiums
    • Churning
  • Carriers
    • Failing to pay valid claims
    • Altering claim evidence to support a denial
    • Operating as an unlicensed insurer
  • Third Parties

The list above doesn’t cover all potential instances of fraud, but they are the most commonly found in reports and convictions.

What’s the Cost of Workers Compensation Fraud?

The FBI estimates the total cost of all insurance fraud (excluding health) is over $40 billion a year. Out of that, workers compensation fraud costs an estimated total of $6-7 billion per year nationally. California thinks fraud costs the state $1-3 billion a year.

Just as the common imagination focuses on employee fraud over all other types, the insurance industry also portrays employee fraud as an expensive scourge. The truth: employee fraud happens and can be expensive, but dollar-for-dollar, it’s also the least costly form of workers compensation fraud.

How is the most recognizable form of fraud also the least expensive? It’s simple mathematics.

When an employee files a false claim, there’s a relatively low cap on the benefit they receive. They can only claim documented out-of-pocket expenses and lost paychecks. In reality, individual fraud tends to be a few thousand dollars. Return-to-work programs tend to usher injured employees back in the door, and carriers start investigating when claims drag on too long.

What Are the Most Expensive Types of Workers Compensation Fraud?

A worker with a false injury or who double-dips will never profit more than they earned in the first place. Meanwhile, employers have far, far more to gain, which makes underreporting payroll one of the most damaging causes of fraud in workers compensation. 

Let’s look at a few recent workers compensation fraud convictions to illustrate the issue.

At the end of 2020, a California court found the owner of a cleaning company guilty of underreporting payroll to the tune of nearly $5 million, costing three insurers nearly $700,000. A six-figure fraud claim is easier for an employer to hide than an employee, who would likely need to claim for years and face intense scrutiny to achieve the same result.

The case isn’t an isolated one. If you look back at the January 2020 workers compensation fraud convictions in California, you see a pattern. There was $164,414 in proven premium fraud that month. And a Beverly Hills orthopedist committed $1.87 million fraud.

In another month, February 2019, there were four convictions in California. Two cases featured premium fraud and two included employee false claim convictions. The two premium fraud cases produced a figure five times the value of the false injury claim convictions.

These numbers hold up across states and over a decade. In 2012, Texas Mutual reported $523,451 in fraud as the result of false claims by workers. The same year, employers committed $2.7 million in premium fraud.

Key Takeaway: While it’s important to investigate injury and illness claims thoroughly, brokers should pay at least as much attention to payroll reporting. The insurer will perform its own investigation into incidents, and it will run payroll audits. But brokers know their clients best, and if something in their payroll doesn’t add up, then you should dig deeper. 

How Common is Workers Comp Fraud, Really?

Fraud is a hot topic in insurance. And it should be: fraud costs everyone from the carrier to the broker to the insured — and even society as a whole. But is workers compensation fraud rampant? Or is it more occasional?

The answer is: we don’t really know. We tend to get answers from very interested parties, like insurance carriers. So, it’s no surprise that the estimates of the cost of fraud can vary wildly! In 2000, researchers estimated workers compensation fraud cost roughly $1.2 billion every year. At the same time, their scientific estimation was only a quarter of the insurers’ claim!

So who’s right? It’s hard to tell.

Estimates suggest the true fraud rate for employee claims is around 1-2%. Meanwhile, the Coalition Against Insurance Fraud says 12.4% to 20.5% of all construction workers were misclassified in 2018.

Not all fraud makes it onto regulator and insurer radar. Even when fraud becomes suspect, insurers can’t always prove it. The number of investigations and convictions suggests that persistent, obvious fraud doesn’t happen all that much; rather, it makes headlines, which can shape the way we think about fraud.

Workers Compensation Convictions in Texas and California

To get a real perspective of how often fraudsters get caught in the net of the law, let’s look at workers compensation fraud convictions by fiscal year in two states with a polar opposite approach to workers comp: Texas and California.

Texas has minimal workers compensation requirements, allowing most employers to opt-in (or be liable for injuries). California has one of the most robust programs in the country.

Yet, the numbers tell a different story:

Again, California has a population of 39.51 million people and a strict workers compensation program. Texas has a population of 29 million and an optional workers compensation program for most employers. The gaps should be bigger all things considered.

Learn to Spot Workers Compensation Fraud

Workers compensation fraud is a problem that costs upwards of $7 billion a year. And it’s your clients who end up paying the price through increased premiums. At the same time, the most common face of fraud doesn’t look much like the popular imagination: employers and third parties do far more damage than a workers’ exaggerated injury.

Ultimately, the best thing you can do as a broker to help prevent fraud is to get to know your clients. When you have strong relationships, you will have a better picture of their business and how it changes over time.

With value-added services and the right partnerships, your relationship will also help you earn them better policies and premiums and help them feel they get real benefit from their workers compensation protection.

Author: Foresight

We’re a team of compliance, safety, and commercial insurance professionals transforming workers compensation. We write about technology, trends, regulations, and value-adding services.