Workers' compensation insurance premium fraud is committed when an employer lies to purchase a workers' compensation policy, with the intention of paying less than the appropriate premium. In the past, our industry has certainly placed premium fraud low on the priority list, if not turned a blind eye to it altogether. This is because of the sentiment that it is better to receive part of what is owed than none at all.

However, most states have adopted Special Investigation Unit and Fraud code that requires insurers and self-insureds alike to — among other things — investigate and pursue prosecution of insurance fraud or face heavy fines. We have also come to acknowledge that the cost of claims related to under-reported payroll policies far outweighs what is collected in the partial premium due. Further, recent studies have demonstrated that tremendous amounts of unreported and under-reported payroll have affected workers' compensation insurance premiums in a significant way for those who do adhere to the rules.

In August 2007, Frank Neuhauser and Coleen Donovan, two University of California Berkley researchers, released the results of their study that examined payroll fraud related to workers' compensation insurance. Neuhauser and Donovan reported that payroll fraud in California peaked in 2002, with approximately $106 billion in unreported and under-reported payroll. At a 2002 rate of $6 premium per $100 of payroll, that equates to $63.6 million in premium dollars lost because of fraud. The researchers acknowledged that, with a three-year delay in calculating current premiums, they could not offer more current figures. However, they estimated that under-reported payroll has risen from 19 to 23 percent in 2002 to approximately six percent today, which equates to $6 billion.