Second Quarter — 2016

In this issue:

* Can joining forces tip the balance on anti-fraud legislation?

* Alliance chasing after storm-chasing N.Y. contractors

* Allying with carpenters against workers-comp premium cheaters

* Just in case: latest court rulings

* 4 Questions for Matthew Capece

Can joining forces tip the balances on anti-fraud legislation?

Insurer fraud plans, airbags and storm-chasing contractors formed a prime focus of anti-fraud action in statehouses as the sun rose on the 2016 legislative year.

Joint action with allies — traditional and unexpected — is proving a valuable commodity that allows fraud fighters to advance bills farther and faster than by acting alone.

Planning for fraud plans. Utah became the 21st state requiring insurers to have plans detailing how they’d combat fraud. Utah adds a new wrinkle — it’s the first state that requires insurers to prepare for data breeches. Most laws requiring insurer plans took effect before hacking and data theft emerged as major threats to insurers.

Fraud plans help insurers and regulators understand how the industry looks to deter fraud. Utah’s requiring a plan for data breaches could easily become a model for other states to adopt.

Popping airbag cons. At least three states are debating clamping down on phony airbags used for vehicle repairs. California, Pennsylvania and South Carolina have bills making it a crime to sell or install knockoffs in vehicle repairs.

Outlook promising. Similar bills have cleanly slid into law in 12 states over the last few years. Washington and Maryland already have enacted laws this year. Measures that so roundly protect drivers and passengers from being maimed or killed in wrecks tend to be well-received in statehouses.

The Coalition has partnered with Honda America to push for enactment in many of these states. We’re jointly active in California, Pennsylvania and South Carolina this year.

The Coalition supports airbag bills mainly because ...

Consumers threatened. Knockoffs don’t deploy properly. They’re cheap and poorly made. Motorists have been killed and grievously injured in crashes after sleazy body shops installed knockoffs. Body shops also have filled airbag cavities with beer cans, sneakers and other refuse.

Insurers bilked. Body shops buy cheap knockoffs on the black market, or openly on sites such as eBay and Craigslist. Counterfeits often are cleverly made to mimic legitimate manufacturer models. Knockoffs typically cost a few dollars. Yet dishonest body shops charge auto insurers $1,000 or more for a new manufacturer original. Insurers often unknowingly pay up because scams can be hard to detect — a trained technician is needed to open the airbag lid to avoid causing an explosion.

Assignment of benefits: Florida’s statehouse closed for the year. Left on the table were bills cracking down on contractors and auto-glass repair shops that illicitly lure policyholders into signing over control of their insurance benefits.

Thusly armed, contractors and glass shops sue insurers for inflated bills in the policyholder’s name. The insureds typically know nothing about the suits. Until they end up with large and possibly false claims against their policies. Assigning benefits is a widespread abuse in Florida, especially in South Florida. Consumers need stronger protections in the Sunshine State.

Alliance chasing after storm-chasing N.Y. contractors

Speaking of joint action, the Coalition has joined a broad alliance pushing New York to boost consumer protections against storm-chasing contractors.

A bill caps repair deposits at 50 percent of the contract … forbids contractors to act as public adjusters unless licensed … forbids contractors to offer rebates or inducements to lure consumers into hiring them … and lets homeowners cancel contracts if the insurer decides repairs are unneeded. These provisions are part of a model bill that’s law in 20 states.

The alliance members are planning an energetic legislative and public-outreach campaign for passage. The Coalition will call on fraud fighters to write their legislatures to vote “yes.” The Alliance includes insurer groups along with the state’s business council, NFIB and the roofing contractors association.

Allying with carpenters against workers-comp premium cheaters

Workers-comp premium scams by employers may steal more money than bogus work injury claims. At least that’s what many experts say. And the problem could be growing. This is especially true in urban centers with deep underground economies.

Firms in the dangerous construction trades are among the largest offenders. The Coalition met recently with a new and unexpected anti-fraud ally: the United Brotherhood of Carpenters. It’s the voice of organized labor in the building trades. Premium-avoidance schemes leave workers exposed without state-required benefits. Federal, state and local governments also lose untold millions in unpaid taxes.

Shady businesses lowball their workforce and payroll size — two important factors in setting comp premiums. The firms misclassify workers as subcontractors, then pay them in cash under the table. A dishonest employer illegally can duck hundreds of thousands of dollars in workers-comp premiums and taxes in a year.

Workers also are cheated out of workers-comp benefits, wages, overtime, unemployment benefits and Social Security. Honest employers lose business because cheaters use the illicit savings to underbid them for contracts. And, workers comp insurers lose premiums.

The Coalition’s recent meeting with the carpenters union revealed disturbing examples of premium-avoidance schemes: A building at the University of Connecticut ... Florida hospital ... construction at the Atlanta airport ... and a building at the Walter Reed military hospital complex in suburban Washington, D.C.

The carpenters’ proposals for comp insurers show how partnerships can help move anti-fraud efforts forward more decisively:

  • Work together on best practices for conducting audits and investigations into premium-avoidance schemes;
  • Adopt procedures to red-flag suspected premium fraud; and
  • Cooperate with stakeholders on investigations.

Workers-comp insurers already do much of this, yet premium cons remain virulent. What’s needed is stepped-up alertness and action by all parties. This becomes a force-multiplier that identifies more schemes, and boosts the entire anti-fraud effort.

Fraud fighters and their allies must team up to educate state policymakers about stopping costly comp scams — premium avoidance and false injury claims. Fraud fighters can speed up progress by enlisting non-traditional allies such as the carpenters union. The more influential allies that join anti-fraud efforts, the stronger our efforts against comp scams will become.

Just in case: latest court rulings

Texas. Allstate has sued Texas medical providers to recoup $400,000 in personal injury claims the insurer paid over a three-year period. The insurer kept its suit going strong after nearly being derailed.

Allstate discovered the suspected fraud after paying more than $400,000 in false invoices by the healthcare providers. The trial court dismissed the insurer’s suit, asserting no evidence of fraud. An appellate court affirmed.

Allstate went to the Texas Supreme Court. The insurer argued that numerous lower-court decisions in Texas allow Allstate to recover losses paid in reliance on false invoices. The lower court’s dismissal thus was invalid and the case should be retried, Allstate contended. The state’s highest court granted Allstate a rehearing to decide whether the case should be sent back to the lower court,

So the suit remains open. Still, allowing outright dismissal would chill insurer efforts to recoup stolen medical claims in Texas and possibly empower fraudsters. The precedent also could bleed across state lines and influence other court decisions. [Allstate v. Rehab Alliance (Texas Supreme Court 15-0426)]

New York. A federal court gave insurers a key victory against no-fault schemes. Liberty Mutual launched a federal civil RICO action against chiros and other medical providers who treat no-fault crash injuries. The insurer alleged false injury claims and illegal straw owners of medical clinics.

The defendants fought back. Among other things, they said the doctrine of “primary jurisdiction” should block Liberty’s court action. The state Department of Financial Services should investigate before courts can be involved, they contended.

The federal District Court quashed the argument. An earlier appeals decision clearly permits insurers to sue when they believe fraudsters violate New York’s no-fault laws, the court said.

State fraud investigations “have never restrained courts from examining allegations, on behalf of insurers, that they were entitled to damages because medical providers had been fraudulently incorporated and received reimbursements to which they were not entitled.” [Liberty Mutual et al. v. Shapson, et al. New York Eastern District 13-cv-5046 (ENV) (PK)]

Iowa. Three suspects from Wisconsin or Illinois can be charged in Iowa with running a crash ring despite never setting foot in the state, Iowa’s Supreme Court ruled.

The suspects allegedly staged wrecks in Chicago then filed bogus claims with several insurers. They were charged in Iowa after Sentry Insurance investigators in Davenport allegedly uncovered about $50,000 that insurers had paid for repeated claims involving the same damage.

Demetrius Rimmer (Milwaukee) plus Chicago-area residents Rona Murphy and Melonicka Thomas were busted and extradited to Iowa for trial.

“We conclude that persons engaged in multistate insurance fraud assume the risk of prosecution wherever those they deceive are located. A contrary holding would impede the state’s ability to prosecute and deter multistate insurance fraud schemes perpetrated on persons in Iowa,” the court said.

Four Questions Interview with Matthew Capece

America is rife with complex plots by businesses to illegally dodge workers-comp premiums. The flourishing underground economy that exists in many urban centers adds more kindling to the fraud fire, especially in construction. FraudWire reached out to Matthew Capece, senior executive with the United Brotherhood of Carpenters, for his thoughts. He’s been a specialist in employer payroll fraud in construction since 1989.

Workers compensation insurers have long dealt with premium-avoidance schemes. Among the ploys are lowballing workforce size and payroll, and misclassifying employees as independent contractors. How prevalent are premium scams in construction trades, and are any variations unique to construction?

Workers-compensation premium scams involving construction projects are alarmingly commonplace. They regularly occur on residential projects. We even find them on large commercial sites, schools, hospitals, high-rise condos and government jobs like military bases. Fraud has become standard operating procedure in a number of states, including Colorado, Florida, Georgia and Tennessee. But it is happening all across the country.

The schemes vary in sophistication, but the growing practice is using subcontract labor brokers. For instance, interior-systems specialty subcontractors install metal studs, sheetrock and ceilings. They also provide supervision and, maybe, some hands-on labor.

The bulk of their labor comes from brokers. Yet the specialty subcontractor supervises and treats the labor brokers’ workers like their own employees. Labor brokers aren’t staffing companies; they are individuals who can muster a handful to hundreds of construction workers. They may have a business office, but much of the time they operate out of a residence. They can either be incorporated or be dba’s.

Labor brokers will misclassify employees as 1099 subcontractors, but most pay employees under the table in cash or with a check. Some labor brokers are uninsured and use fake certificates of insurance, but many have policies. The problem is they pay premiums on a fraction of their true payrolls. There is a case in Florida where an insurance broker issued 450 insurance certificates to a labor broker, claiming $43,000 in payroll for four workers. Sophisticated schemes like those in Florida involve insurance brokers, accountants, upper-tier contractors, shell companies and check-cashing stores.

These schemes work well for specialty subcontractors. They use the lower labor costs from the brokers to underbid law-abiding competitors, while brandishing the subcontract relationship with brokers and insurance certificate to shield against liability. That is how they drive full-premium-paying contractors out of business and take control of markets.

I am not as familiar with other industries as I am with construction. I do know that the labor-broker system grew from the agricultural industry. In general, the practice of subcontracting labor has been growing. Still, the various studies of fraudulent employment practices universally list construction as a leading abuser.

We know it’s hard to measure workers compensation fraud nationally. Still, do you have any sense of how big premium scheming is (including lost revenues), and how it compares to bogus work injury claims in overall size?

I haven’t found a national study on the degree of workers-compensation premium fraud in the construction industry, but there are state studies. In Tennessee, carriers lost $91.6 million in 2006 and in California they lost $264 million in 2011. We think those estimates are low. Consider the 2008 West Palm Beach, Florida Grand Jury report on illicit use of check-cashing stores. The report described how just 10 contractors moved $1 billion in cash pay through check cashers in less than three years. You can find these studies and reports on our informational website.

Claimant fraud is less costly than employer premium fraud. A California report, though, shows premium fraud losses to carriers are much greater than claimant fraud. Total fraud losses from cases with the Department of Insurance amounted to $8 million in the first six months of 2013. Of that, $6.7 million came from premium fraud and $1.3 million from false claims. Those numbers were not broken down by industry. It’s noteworthy that claimant fraudsters were more likely to get jailed than employers.

Carriers are losing a shocking amount of premiums. Still, despite the significant dollars lost, premium fraud doesn’t get the attention it should. If we could double the premium-fraud losses caught by California it would mean a yearly number of $13.4 million. That’s just 5 percent of the $264 million lost in the construction industry alone.

How are key states identifying premium schemes and strengthening laws or other enforcement tools to combat them?

A number of states are taking innovative actions against premium fraud. The California insurance department gives grants to county district attorneys to fund insurance fraud prosecutions.

Washington is a monopolistic state. It uses fraud-detection software that compares information in various databases to identify likely abusers for premium-fraud audits. Tennessee is a private-market state. It has just installed a similar system. The legislature funded the system and additional compliance investigators. They also added a law creating civil penalties for premium avoidance.

Florida has dedicated workers-compensation compliance prosecutors in select counties. They also have a new database that gets real-time information about checks cashed at check-cashing stores that they compare to proof-of-coverage information. Both Florida and Connecticut also have demonstrated that they aren’t afraid to use their stop-work-order authority.

States need robust tools for both civil and criminal enforcement. But they can’t just be used against labor brokers. Enforcement must reach all parties involved, including the specialty subcontractors and other upper-tier contractors involved in schemes. Labor brokers are abundant and easily replaced.

How can the anti-fraud community partner with your union to combat workers-comp premium scams?

Because we are a construction union, we know how the industry operates, and specific job-site conditions and cheating employers. We can share that information with carriers and enforcement agencies willing to act. We also welcome others to work with us to strengthen state and federal law- enforcement capabilities. They include union and non-union employers, carriers and community organizations.

But it can’t stop there. We each must examine our own practices that encourage, enable or fail to detect fraud. The construction industry must change course and stop awarding work to scofflaws. Insurance certificates need to be modified so insurers can track the number being issued, and insurance certificates should indicate the amount of payroll and work classifications. Also, insurers should re-evaluate their auditing procedures, and whether premiums truly capture the risk posed by contractors and subcontractors using the labor-broker system.

Also, educating stakeholders is a large part of what we do. For more information, follow us on Twitter @nixpayrollfraud and visit

We are prepared to engage with fellow stakeholders. Action is needed. Contractors who pay their full premiums are being marginalized in significant markets. They face increasing pressure to join in illegal schemes or go out of business. Moreover, insurance carriers are losing millions in premiums daily.

Online resources
Links to legislative and regulatory resources at

* Current legislation
* Fraud bills enacted this year
* Latest legislative news
* Model insurance fraud act
* State anti-fraud requirements
* State insurance fraud laws

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© 2016, The Coalition Against Insurance Fraud, Inc. Published quarterly. Coalition Against Insurance Fraud, Inc., 1012 14th St., N.W., Suite 200, Washington, D.C. 20005.

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