Rising Premiums Driving Many Firms Off Insurance Rolls
By LAURENCE DARMIENTO and HOWARD FINE
Unable to afford skyrocketing premium costs, thousands of businesses in Los Angeles are believed to be going without workers’ compensation insurance, as required by law.
State regulators and law enforcement officials expect the problem to get worse as premiums continue to increase and violators risk breaking the law just to keep their establishments afloat.
“It’s going on every day,” said Fritz Mutter, president of Golden Pacific Insurance Services, a Monrovia insurance brokerage. “I know of many people who are doing this. They feel they’ve got no choice.”
A 2001 study by the California Department of Industrial Relations and Employment Development Department estimated that 25 percent of the state’s million-plus employers might not carry any insurance.
And the state Uninsured Employers Fund, which pays benefits to injured workers whose employers are uninsured, handled 1,669 cases in 2001, up from 1,575 cases in the prior year.
Although it might not be as well known as employee fraud such as when a worker fakes or exaggerates an injury employers have committed workers’ compensation fraud for years. Regulators hope that new enforcement powers given to them under the 2002 law that hiked employee benefits will help clamp down on at least part of the problem.
Although state officials say that business of all sizes commit workers’ comp fraud, the problem is believed to be particularly prevalent among smaller businesses, many of which simply opt out of the system.
“There are thousands and thousands of employers in Los Angeles County who are totally uninsured,” said Lawrence McGral, assistant head deputy of the workers’ compensation fraud division of the Los Angeles County District Attorney’s Office. “Go to your local corner store or restaurant.”
Of the 1,201 civil citations issued to businesses by the state for violating workers’ compensation regulations in 2001, 276 were against restaurants, according to state Department of Industrial Relations.
Other small businesses, such as contractors who must prove they have insurance to get a license, may engage in more sophisticated schemes simply to lower premiums, such as paying employees partly in cash or classifying workers who engage in dangerous jobs as low-risk clerks.
That’s because an employer’s workers’ compensation premium is largely governed by total payroll size, the likelihood of injury given the nature of a job and an employer’ specific history of losses.
The state began cracking down on workers compensation fraud in the early 1990s when a change in the law made the fraud a felony. But attention mainly focused on employees who fabricated bogus claims with the help of unscrupulous doctors and attorneys.
That crackdown led to some quick results, with 202 arrests for fraud in the 1995-1996 fiscal year and nearly 300 two years later. But now that some of the most aggressive fraud mills have been put of business, state investigators are shifting their focus to employer fraud.
Over the last few years, officials with the Division of Workers’ Compensation, which manages the Uninsured Employers Fund, has been sharing that data with Department of Insurance investigators in an effort to help them better target businesses without any coverage, said Richard Stevens, the division’s spokesman.
Fatal flaw fixed
However, a flaw in the law has hampered prosecutions against businesses that opt out of the system.
Although not having any workers’ compensation coverage is arguably a greater offense that engaging in a fraudulent scheme to lower premiums, state law did not allow such business owners to be charged with criminal fraud. Instead, employers were only subject to civil sanctions: an order to get insurance and pay a fine of $1,000 per employee.
But AB 749, which mandated benefit increases and was signed into law last year, handed prosecutors something they had been demanding for years: the ability to charge such employers with criminal fraud, which can land them a year in jail.
“It should be a significant deterrent if we can get the word out we are doing it (prosecuting businesses),” said Aaron McKenzie, a supervisor in the Criminal Investigations Branch-Fraud Division of the insurance department.
The new law gives the government broad discretion, allowing it to go after business owners that “because of his or her knowledge or experience should be reasonably expected to have known” they needed coverage.
McKenzie said state investigators plan to use their discretion, leaving small mom and pops, often run by immigrants who may not understand the law, to civil prosecutions. “What we are looking for is that employer who has been notified and is intentionally failing to secure workers compensation,” he said.
Each county, on the other hand, will be establishing its own set of criteria for prosecuting the cases. Either way, pursuing the cases should not be that hard to do.
The Uninsured Employers Fund contains a database of employers who failed to have insurance for their injured workers, and county district attorneys have been in talks with the state to get access to that data. Moreover, the change in state law will allow county prosecutors to pay for such prosecutions through a state fund that pays for their overall workers’ compensation fraud operations.