Agents’ Role in Fighting Premium Fraud

Texas Mutual Insurance Company takes workers’ compensation fraud seriously. Last year, Texas Mutual saved, identified or recovered $5 million in fraud, two-thirds of which was premium fraud.

Premium fraud happens when employers knowingly misrepresent payroll, class codes or other information to artificially lower their premiums. Agents are in a good position to help us identify premium fraud because they may spot inconsistencies between lines of insurance or have knowledge about other operations.

But why should you, as insurance agents, help? After all, if your clients misrepresent information, it’s their business, right? Not necessarily.

Employers who commit premium fraud gain an unfair advantage over their honest competitors. By helping us identify premium fraud, you help ensure a level playing field for all employers and contribute to a stable workers’ compensation system in Texas. Follow these tips to help all of us win the fight against premium fraud.

Learn the basics
Most premium fraud cases fall into one of two categories. The first involves employers who misrepresent the status of employees as independent subcontractors. An employer’s workers’ comp coverage does not extend to legitimate independent subcontractors, and sometimes, employers mischaracterize their general labor as independent contractors. The second category involves employers who “hide” employees and report a smaller payroll to the insurance carrier by creating so-called shadow companies, which often share common management, locations and goals.

Ask questions
You can stop premium fraud scams before they start by simply asking questions. Review applications carefully, watching for appropriate class codes. Identify who is performing the labor, and ask questions about independent subcontractor relationships that do not make sense. Compare what the client represents on their workers’ comp application with what is on their applications for other lines of insurance. Explore the relationships between companies that do not elect to be insured. Remember that direction and control, not ownership, determine risk exposure.

Practice the three Ds: document, document, document
Documentation is to premium fraud what location is to real estate. It is everything. If a premium fraud case goes to trial, your files will be closely scrutinized. If you repeatedly ask the client whether the class codes on the application are correct or the subcontractors on the job are truly independent, write it down.

Red flags for premium fraud
Premium fraud is the knowing or intentional misrepresentation of information necessary to determine a business’s actual risk exposure. If you see two or more of these red flags, notify your workers’ comp provider immediately:

  1. Inconsistencies with prior policies. Past insurance policies indicate significantly more payroll or premium than the insured is currently reporting.
  2. Hidden ownership. The insured lists common owners on applications for other carriers or lines of insurance. The officers, shareholders or control people are different from those listed on the workers’ comp application.
  3. New business. The insured is a new business with significant payroll or multiple-state exposure.
  4. Certificates of insurance. The number of certificates of insurance you are asked to issue exceeds the number usually anticipated for a business of that size and type.
  5. Misinformation. Incorrect information is shown on the application about the number of employees, their duties, location of operations or the number of entities included for coverage.
  6. Business location. Multiple businesses are shown at the same address, the location visited is the same as previously visited for a different risk, or the business logo is not present at the location.
  7. Non-cooperation. The insured refuses or delays access to appropriate personnel. The insured refuses to provide records, documents or files for audits or claim adjusting. Records are located somewhere other than the principal place of business.
  8. Business operations. Requested coverages are inconsistent with the type of work being performed. Marketing materials or business name are inconsistent with operation. Company letterhead allows author to choose employer. Certificates or licenses for operations reflect a name other than that of the insured.
  9. Safety. Employer is not concerned with employee safety, even though there is a high rate of loss.
  10. Claim reporting. Insured fails to report claims, or number and type of claims reported are inconsistent with payroll and classification information.

For more information about workers’ comp fraud, visit www.texasmutual.com/fraud/fightfraud.shtm.

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