The California Department of Industrial Relations is making premium fraud a priority this year as part of the department’s overall fight against workers compensation insurance scams.

Christine Baker, Oakland, California-based director of the California Department of Industrial Relations, estimated the cost of fraudulent employers underreporting payroll, misclassifying employees or misreporting the number of workers in high-risk occupations costs insurers and ethical businesses can cost up to $15 billion a year.

“Those who are complying are paying for those who aren’t complying,” said Ms. Baker, citing as an example a construction company that tells its insurers that it has three roofers on the payroll, but really has 10.  

She called fraud "big business" in California and said that the industrial department’s new focus will include an in-depth look at insurance filings and more investigations. 

Ms. Baker’s office released a report on Jan. 18 on anti-fraud efforts since the 2013 enactment of Senate Bill 863, which aimed to rein in fraud in the state’s workers comp system, among other objectives. The report focused on provider fraud but teased the next frontier for tackling workers comp fraud in California: premium fraud.

Don Houser, Dallas-based national director of AmTrust North America’s special investigator’s unit, said California’s push is in line with a national trend of targeting premium fraud.

“It’s becoming more and more recognized (when) eight to 10 years ago premium fraud was more of a low-level issue (because) everybody was focused on claim fraud,” he said.

Mr. Houser said the reason most insurers put the issue on the back burner was that some were happy enough to collect premiums regardless of companies misrepresenting their workforces — but not anymore.

Underreporting or misclassifying workers can lead to upward of a 30% reduction in labor costs, said a spokesman for the Washington-based Coalition Against Insurance Fraud. With lower labor costs, companies can often “low-ball” project bids and gain business over ethical companies that are fronting the full cost of their labor force, he said.

“States are making it a priority (because) misclassifying workers is prevalent … (it) has the attention of states because of the distortion of market dynamics it causes,” the coalition spokesman said. “Honest firms have had to lay off workers, move out of state and other draconian measures if the market is skewed by widespread premium scams.”

As awareness has grown, so has the sophistication of investigations into premium fraud, according to Mr. Houser. “The only thing that would identify premium fraud in the past would be a claim (that was) far outside the classification of the employee,” he said.

Today, social media is just one method for investigating fraud before a claim is filed, said Mr. Houser. He described this “common” scenario: A landscaping company wrote on its workers comp policy application that it did not provide tree-trimming service, work that involves employees scaling 15-foot ladders to prune trees and requires higher comp premiums to cover the potential costs of an injury.

However, Mr. Houser’s team looked on the company’s Facebook page and found that it does provide tree trimming. From there, the team took a closer look and found that the company had a number of tree-trimming ladder trucks in its fleet of landscaping vehicles.

“Underwriters will reach out to us to do a background on the potential insurer to make sure the information on the application is what we find in our investigation,” Mr. Houser said.

And while insurance fraud can hurt insurers and businesses who are acting ethically, workers are the ones who can suffer the most, according to the spokesman for the Coalition Against Insurance Fraud.

“Let’s say someone falls off (construction) scaffolding,” the spokesman said. “The worker may not have coverage if the employer has misclassified him as a desk clerk … this forces the worker to sue for benefits all the while he is having to struggle to obtain medical care for lifelong injuries. It doesn’t get much uglier than that.”