A not-for-attribution conversation with The Man Who Saw Everything.
Employer insurance fraud is a topic we will visit often: the toxic cocktail made by mixing strong employer incentives to cheat on workers compensation insurance with a vulnerable workforce, such as undocumented workers. An employer with a vulnerable workforce has a much greater incentive to cheat on insurance because it can expect its undocumented workers not to protest.
Here we learn from a California insurance professional, my Man Who Saw Everything. He has observed employer behavior close up for several decades from the insurer’s perspective. He knows how employers cheat.
He says that to understand the dynamics of cheating you need to know a little about cycles in the California workers compensation insurance market.
Insurance costs fell drastically in the second half other 1990s due to price-discounting competition among insurers. This left some insurers pricing their policies below any rational expectation of breaking even. Eventually some insurers failed. Insurance rates began to rise in the 2000s, to the point where workers compensation premiums in that state were over twice as high as the next costliest state in the nation. This Man Who Saw Everything believes that this huge cycle of high, low, and return to high contributed to the problem of cheating employers.
He told me:
In general, employers in high-risk occupations benefit the most when premiums fall and suffer the most when premiums rise. Roofers are among the hardest hit. While I was working for an insurance company we actually had a recent claim of a Latino worker falling from the tines of a forklift while placing shingles on a roof. This particular employer was covered but I have a roofer friend who has operated his business without WC for the past four years.
The problem is that when insurance rates fell, no employer said to itself, ”Hey, I had better bank some of these savings for tomorrow when rates rise”. Instead, they built their businesses around the lower cost factor for WC. When rates rose, they could choose to buy insurance, charge more and thereby become less competitive, or drop WC and hire workers less likely to file claims.
As to who is looking for the uninsured employers the answer is really no one. They are exposed when they draw a four after expecting an ace. One of the reliable undocumented workers falls off a roof, gets an attorney and files a claim. OSHA inspectors who cite him visit the employer, then the DOI gets involved and eventually the employer just folds his tent. You can bet they re-surface later so any enforcement agency spends considerable time chasing the same individuals.
I think this whole scenario is much more frequent in construction type industries that don’t rely on a brick and mortar location. I don’t know of any light manufacturers that exist without WC. However, I have known many who move employees on and off the books (premium fraud) and many never get caught.
The basic idea is to have two work sites. Insure one of the sites fully and correctly with a carrier but never advise of the other site. If anyone gets injured you list their work site as the one that is insured and put the worker on that payroll.
This usually gets exposed one of two ways. The carrier investigates the claim and learns of the other site when the worker provides the secondary site as the actual place of injury. It also is exposed when the employer repeatedly has workers injured on their first or second day of work. That is the day they moved the employee from one location to the other to assure the worker is covered by the WC.