Grand Jury Recommends Four Steps to Cut Workers’ Comp FraudMay 2, 2014 | |
Employers, employees, taxpayers, and insurance carriers all are heavily burdened by the costs of Worker’s Compensation insurance fraud in New York and in the rest of the tri-state area. As just one example, consider what Charles Kelcy Pegler Sr. admitted to in a guilty plea entered just days ago in a New Jersey state court.
Pegler was the president of New Jersey-based Roof Diagnostics, Inc. (“RDI”), which employed about 400 people. In pleading guilty, Pegler admitted that between June 11, 2003 and October 5, 2009, he created the false impression to New Jersey Casualty Insurance Company, a subsidiary of New Jersey Manufacturers Insurance Company, that RDI was not a roofing company, that it did not employ roofers, and that it did not install, maintain, or repair roofs. An investigation by New Jersey’s insurance fraud prosecutor determined that, as a result, RDI paid $265,044 less in Worker’s Compensation insurance premiums than it should have paid.
Moreover, Pegler also admitted that between January 15 and December 9, 2009, he created the false impression to USF Insurance Company, now called Atain Insurance Company, that all roofing and re-roofing services offered by RDI were performed by subcontractors. Through this fraud, prosecutors contended, Pegler avoided paying $134,087 in general liability insurance premiums that he owed to the insurance company.
In New York, the fight against Worker’s Compensation fraud is longstanding. By statute, the state has a Worker’s Compensation fraud inspector general who is tasked with investigating possible fraud and other violations of the laws and regulations pertaining to the operation of the Worker’s Compensation system, among other things. A search for “Worker’s Compensation fraud” on the website of the New York Department of Financial Services led to over 600 results going back over a decade, from arrests to numerous and varied efforts to cut down on Worker’s Compensation fraud by all involved parties.
Nevertheless, the problem of Worker’s Compensation fraud persists. In late March, in fact, a New York State Supreme Court Grand Jury, impaneled by Robert M. Stolz, acting Supreme Court Justice, at the request of Manhattan District Attorney Cyrus R. Vance, Jr., released a report finding that the financial loss from insurance premium fraud in the construction industry in New York City alone approached $500 million annually. In a statement, Vance said that the report stemmed from investigations by his office’s Money Laundering and Tax Crimes Unit into false information provided to the New York State Insurance Fund in connection with applications for, and audits of, Worker’s Compensation policies. Since 2013, his Money Laundering and Tax Crimes Unit has recovered approximately $4.8 million from criminal defendants who pleaded guilty to defrauding New York State by violating the Worker’s Compensation Law.
After briefly highlighting different aspects of Worker’s Compensation fraud, this column will review the grand jury’s recommendations.
The Workers’ Comp Rules
Worker’s Compensation insurance in New York is approximately a $6 billion per year business, with nearly 40 percent of the Worker’s Compensation market handled by the New York State Insurance Fund. State law generally requires that every employer obtain worker’s compensation insurance, basing an individual employer’s premium on each covered employee’s job classification, as determined by the New York Compensation Rating Board. A rate for a relatively safe job may be as low as two cents for each $100 of payroll, whereas the rate for a more inherently dangerous job could be as much as $35 for each $100 of payroll.
Fraud can arise in a variety of ways. For example, because employers are self-reporting, they can misclassify employees. Employees can inflate or misrepresent a claim or submit a false claim. Health care providers can submit false medical reports or inflated bills. Worker’s Compensation fraud is a class E felony, punishable by fines and/or prison time. Subsequent violations are a class D felony.
It was within this context that the grand jury issued its Report.
The grand jury’s recommendations in the report fell into four general categories:
- increased penalties to ensure that sentences were proportionate to the magnitude of the fraud;
- increased transparency by reforming the application and audit process, thereby making it more effective and less susceptible to fraud;
- increased dissemination of information into the hands of those charged with investigating and prosecuting fraud; and
- increased education for employees and the community at large about the Worker’s Compensation system and its value to the public, so that everyone could be better able to protect the system from fraud.
Now, let’s examine each of these four categories in more detail.
Penalties: The grand jury found that the current Worker’s Compensation Law was the result of a “patchwork development,” with crimes scattered throughout the statute and with no offenses containing any degree enhancement for the magnitude of a fraud. As a result, the grand jury recommended that the relevant statutes be amended to include a graduated series of crimes, distinguished by monetary thresholds, so that the charge could reflect the magnitude of the wrongdoing. In addition, it said, both the Penal Law and the Worker’s Compensation Law should be changed to make it clear that the laws were intended to cover all forms of premium fraud, whether committed by lying about a fact relevant to the premium calculation, by refusing to submit to an audit, or by refusing to provide required documents during an audit.
In addition, the grand jury recommended that the Legislature amend the money-laundering statutes and the enterprise-corruption statute to include Worker’s Compensation Law felonies as possible predicate offenses. In the grand jury’s opinion, this amendment not only would provide prosecutors with additional tools to fight premium fraud, but also would emphasize the seriousness of this form of wrongdoing.
The grand jury also said that it believed that the criminal fines currently available did not constitute a sufficient financial penalty or an effective deterrent – and that they could in many cases be far smaller than the amount of unpaid insurance resulting from Worker’s Compensation fraud. To remedy this, the Report recommended that the law be amended to increase the criminal fines as a general matter and to give judges the option of imposing a fine that was double or triple the amount of the fraud.
Another recommendation was that the Worker’s Compensation Board be required to publish information on its Web site about all criminal dispositions. In the opinion of the grand jury, over time, this would inform the public about the nature of this type of fraud and the penalties that could result.
Applications and Audits: In its second category of recommendations, the grand jury advocated “overhauling” the application process by employers and the audit procedure of the employer/policyholder, declaring that these changes were “vital” to curb the “high incidence” of premium fraud. In particular, it recommended:
- a uniform Worker’s Compensation insurance application;
- vigorous and thorough annual audits by all insurance carriers;
- issuance of a Worker’s Compensation insurance card to every employee;
- revision of certificates of insurance to include more detail; and
- requiring issuers of 1099 forms to file an annual report with the Worker’s Compensation Board.
In connection with these ideas, the report suggested that a uniform Worker’s Compensation insurance application be used by every insurer, and that the application should be electronically transmitted to the Worker’s Compensation Board. According to the grand jury, this would make it easier to catch discrepancies or irregularities because a standard electronic application would be readily searchable. Standard electronically-stored applications also would create a “powerful database of background information” about employers, the grand jury noted.
Next, the grand jury proposed “vigorous and thorough annual audits” by all insurance carriers. Currently, it explained, the timing of the typical audit, which usually occurred 15 to 18 months after a policy was issued, created difficulties for the auditor. As the grand jury pointed out, by the time of an audit in the construction industry, “the construction project may have been completed, the jobsite vacated, and the laborers sent on to other locations, facts that make it difficult to verify the identity, number, and trade of the employees.”
The report said that auditors should be required to make on-site physical inspections, particularly in the construction industry; there should be a thorough document review, not just a cursory telephone inquiry; and documents produced during an audit should be electronically transmitted to the insurance carrier, so that they could be available for examination if there were a later allegation of fraud.
The Worker’s Compensation identification card would make it easier to determine which employees were covered by an employer’s insurance policy and which were not, the grand jury said. It suggested that each card contain the name of the employee, the employer, and the insurance carrier, noting that it could be presented when an employee sought medical services or prescription drugs in connection with a job-related injury or illness. It also could be shown to general contractors, owners, law enforcement, first responders, and auditors, the grand jury observed.
Certificates of insurance should be more detailed, according to the grand jury, listing the workers insured and their code classifications. In addition, at construction sites, the certificate should be publicly posted, just as the relevant permits were.
To address instances in which employers intentionally misclassified employees as “independent contractors” to lower the amount of the Worker’s Compensation insurance premium, the grand jury recommended that any business required to provide a federal Form 1099 for services performed also should be required to report independent contractors to the Worker’s Compensation Board. These reports would provide a database that could be used to verify information provided during a Worker’s Compensation audit, the grand jury said.
Dissemination of Information: Given the technological world in which we live, it may be surprising to realize that applications and audit exit reports now are not digitally maintained by the Worker’s Compensation Board. The grand jury would change this, recommending broader data collection, wider collaboration among state and local agencies and between public and private sectors, and the implementation of analytical methods to detect patterns of fraud. To effectuate this, the grand jury said that it would be necessary to:
- create an integrated database to combat Worker’s Compensation insurance fraud;
- include in that database all applications, audit exit reports, and certificates of insurance; and
- create a real-time database of information from commercial check cashers available to the Worker’s Compensation Board.
The grand jury stated that this database would yield many benefits to those who investigate or prosecute premium fraud, including more effective use of resources and more efficient selection of subjects. In the grand jury’s view, it also would enable cross-agency compliance checks and foster cooperation among state and local agencies, as well as between the government and the private sector.
The final grand jury recommendation was for broader education directed to a wider audience. In its view, this should provide employers with knowledge of their obligations under the system, especially including new employers who need counseling on their obligation to provide appropriate coverage for all employees.
Another aspect of this recommendation was to teach law enforcement how to fight premium fraud. The grand jury suggested that first responders at a workplace accident or at a traffic incident involving a commercial vehicle should be collecting information about Worker’s Compensation coverage. The grand jury stated that police officers, emergency medical technicians, and firefighters, if made aware of the importance of this information, could become a “front line in the fight against premium fraud.”
Next, the report suggested that the public should have more information about the need for coverage, the significance of certificates of insurance, and the reasons for proper classification of employees. With this knowledge, the report added, they could become the “eyes and ears of law enforcement” in detecting premium fraud.
The report also advocated more outreach to employees. The report said that employees “need to be informed about the benefits they forfeit by being driven underground” and “enlightened about the dangers of being treated improperly as independent contractors.” It also said that other educational projects could be launched through trades associations or chambers of commerce or by local bar associations in partnership with state and local government agencies and prosecutors’ offices.
For the most part, the report’s recommendations do not seem particularly ground-breaking. Nevertheless, if implemented – and it is far from clear how many, if any, of the proposals will see the light of day – they very well could help to cut Worker’s Compensation fraud. Making a significant dent in this problem would, indeed, be a boon to the state’s economy.
 Press release, “President of Roofing Company Pleads Guilty to Felony for Scheme to Avoid Paying Hundreds of Thousands of Dollars in Insurance Premiums,” available at http://nj.gov/oag/newsreleases14/pr20140417a.html.
 See New York Worker’s Compensation Law § 136. The current inspector general is Paul D’Emilia. See Office of the Worker’s Compensation Fraud Inspector General, available at http://www.wcb.ny.gov/content/main/fraud/Fraudpg.jsp.
 See http://search.its.ny.gov/search?q=workers%27+compensation+fraud&btnG=Google+Search&ud=1&sort=date%3AD%3AL%3Ad1&output=xml_no_dtd&oe=UTF-8&ie=UTF-8&client=dfs_frontend&proxystylesheet=dfs_frontend&wc=200&wc_mc=1&exclude_apps=1&site=dfs_collection (last accessed April 18, 2014).
 Report of the Grand Jury of the Supreme Court State of New York First Judicial District Issued Pursuant to Criminal Procedure Law Section 190.85 Subdivision (1)(c) (the “Report”), available at http://manhattanda.org/sites/default/files/Workers’%20Comp%20GJ%20Report.pdf.
 Press Release, “DA Vance: Grand Jury Recommends Significant Changes to Prevent Worker’s Compensation Insurance Fraud,” available at http://manhattanda.org/press-release/da-vance-grand-jury-recommends-significant-changes-prevent-workers%E2%80%99-compensation-insur.
 It is worth noting that during its term (which ran from September 12, 2013 through February 27, 2014), the grand jury returned two indictments charging two people with multiple felony charges relating to Worker’s Compensation insurance premium fraud as well as other tax-related charges.
 The Report, supra n. 4.
 See “The Crime of Worker’s Compensation Fraud,” available at http://www.wcb.ny.gov/content/main/TheBoard/WhatIsFraud.pdf.
 Penal Law Section 470.00 et seq.
 Penal Law section 460.00 et seq.
 The grand jury suggested that all confidential information could be protected with built-in firewalls and data encryption, limiting the number of users with access.
Reprinted with permission from the May 2, 2014 issue of the New York Law Journal. All rights reserved.