Employer cheating most often is said to involve reporting the wrong worker job classification number or amount of employees in their workplace in an effort to reduce their premiums.

“When times get tough, it is not surprising,” Mr. Jay said. “It is done by both large and small companies; Im surprised there isnt more.”

From the claimants viewpoint, workers comp fraud is much easier to commit than many other forms of insurance fraud because the employee has the benefit of the doubt, Mr. Jay observed. But he stressed that his observations were anecdotal in nature.

“We do not have a good handle on the rate of workers comp fraud,” said Mr. Jay, adding that it varies by state and the type of business involved.

“In an industry that has a lot of claims, fraud is not going to stick out as much. Construction is a classic example where there is a lot of back strain and soft tissue injury. There it is easy to commit fraud, said Mr. Jay. Also, when people are in situations where they work alone and there is no one to witness an injury, fraud is a lot more difficult to prove.

“Another red flag is a situation where workers are very athletic and suffer Monday morning injuries,” added Mr. Jay.

The economy comes into play when there are a lot of layoffs. There may be some legitimate cases, said Mr. Jay, but there are others who look to take advantage of benefits as they see their jobs disappear.

Adding to the workers comp fraud climate are health care professionals who extend a patients period of care beyond what is needed, he said.

As companies clamp down on costs by capping health care payments, some providers might look to increase their income through extending the amount of time a patient is under the providers care. And the patient may not even know it is happening, according to Mr. Jay.

“Workers comp is a mysterious Bermuda Triangle,” said Tim Fargo, president of Omega Insurance Services, which does fraud investigation for insurers. “I think when things get tough [in the economy], there is an increase in the number of people who file workers comp claims and it makes companies a little more skeptical.”

In February, the consulting firm Accenture released a report that said 25 percent of the adult public thought it was acceptable to overstate an insurance claim. (See NU Online News Service, Feb. 19.) It also found that two-thirds of the 1,030 surveyed said people are more likely to commit insurance fraud during an economic downturn.

In response to the survey, Mr. Fargo noted that his firm investigated more than 15,000 cases of workers comp fraud last year, a 45 percent increase over last years numbers.

“Right now, our first quarter is up 40 percent, and it appears the numbers will continue to trend up,” said Mr. Fargo. “Part of that is going out and chasing market share. But part of that is a greater number of people taking a chance on workers comp fraud while trying to find the next job–and carriers being more diligent than in the past.”

“Typically, when you see things going bad, these things begin to happen,” added Mr. Fargo. “In general, crime of all sorts bumps up because people get desperate.”

One area seeing dramatic increases in fraud is professional employer organizations. These organizations contract employees to companies looking for employees, but not wanting to hire them on a permanent basis.

A favorite form of fraud in these programs is the creation of phony workers comp insurance programs that are sold to the PEO in connection with the employees work program, said Jim Quiggle, director of communications for the Coalition Against Insurance Fraud.

Often these programs are not discovered until an injured employee files a claim. The claim goes unpaid, hurting the employee, the professional employer organization and health care provider. It is largely happening to smaller PEOs that are desperate to find coverage and grab anything they can find.

A hard market, coupled with an increasing number of carriers leaving the underwriting, is also contributing to the workers comp fraud related to these organizations, said Phyllis Stockfisch, vice president for Cedar Hill Insurance Agency, a managing general agency for Zurich dealing in professional employer organization underwriting.

Some of these organizations lose their workers comp coverage and fail to inform the employers they contract with while they are looking for new coverage. Again, no one becomes aware of the situation, she said, until a claim is filed.

Bill Bradbury, deputy commissioner and director of investigations for the North Carolina Department of Insurance, said many of the PEOs have good intentions in the beginning, but fail to follow up with notification to their clients and finding coverage.

“It may not be out-and-out fraud, but at some point there comes a time when they have to say to folks that they cant offer this coverage,” said Mr. Bradbury. “And there is a point in time when the intent [to cover up] becomes clear.”

Another fraud scheme activity takes place when one PEO that lost coverage “piggy backs” with another PEO that has coverage and “purchases” the other at a nominal fee.

The carrier is never informed of the transaction and suddenly finds itself getting claims for more employees and in classifications that it never underwrote for. This is a particularly big problem in Florida, she noted.

“It can be a mess,” added Ms. Stockfisch. “Some are doing the right thing, but there is a lot of cash flow in this business and there are a lot of small [PEO] companies starting up, looking to cut corners. It is the poor worker looking for coverage and benefits that dont exist who gets hurt.”

She predicted that the fraud crackdown by regulators would ultimately produce a shakeout in the industry, resulting in “a major reduction in PEO players who are not truly professional.” Once that happens, she said, insurers would once again begin underwriting the business.

Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.