Tom Koval, senior vice president and general counsel at Sarasota-based FCCI Insurance Co. and a spokesman for the Florida Insurance Council, said the problem remains, despite tougher regulations enacted in 2003. “We don't believe it is as bad as it was, but we know the fraud continues,” he said.

Despite aggressive investigative programs, in fiscal 2008 the state was successful in getting convictions in only a handful of workers' compensation premium fraud cases, according to the department's annual report. The relatively low number of convictions is one indicator of how difficult premium fraudsters are to catch, Blank said.

Under the current economic climate, Blank and other officials fear more companies will see workers' compensation premium fraud as a way to give them an edge in competing for business or to save money.

A National Problem

The problem is by no means confined to Florida. A study by Cornell University researchers in 2004 concluded that more than 39,500 employers throughout New York State misclassify workers annually. In California, some employers in high-risk industries may hide as much as 75 percent of their payroll, costing insurers up to $3.8 billion a year in lost workers' compensation premiums, according to a 2007 study by University of California at Berkeley researchers. Nationally, there are estimates that workers' compensation premium fraud losses run into the billions annually.

The following are among the premium fraud schemes: Employers falsifying employment records to represent that their employees work safer jobs than they do; contractors falsely claiming that the subcontractors on their jobs are independent contractors when they are in fact not; and business owners skipping workers' compensation coverage altogether to gain a competitive cost advantage.

“Legitimate business owners are almost forced to cheat or go out of business to compete with those who commit premium fraud,” Blank said.

In Florida, the fight against premium fraud has spanned the decades. In the late 1990s, the construction industry, the state Workers' Compensation Oversight Board, and the House of Representatives Committee on Financial Services all lobbied for increased enforcement of premium fraud and stiffer penalties for employers. Eventually, a special strike force was mobilized solely to fight premium fraud, and the state prosecutor even impaneled a statewide grand jury to hear complex insurance fraud schemes such as premium fraud.

More recently, state officials uncovered ten construction companies that avoided paying more than $200 million in workers' compensation premiums, according to a presentation by the DFS' Division of Insurance Fraud and the Eighteenth Statewide Grand Jury report on money laundering by check cashers. All told, investigators found $409 million in lost workers' compensation premiums and state and federal employment taxes.

Millions in Revenue Lost

Col. Vicki Cutcliffe, director of the Division of Insurance Fraud, said that premium fraud is typically run by “organized rings” and the money often is funneled out of the country to be used in other types of crimes. She said millions of dollars in cash from premium fraud has been tracked headed to the Middle East.

How bad is it?

“Tens of millions of dollars a year,” Cutcliffe said. She noted that the state pays a price because if companies are avoiding workers' compensation premiums, they also are avoiding state payroll taxes.

DFS officials have a host of strategies to catch premium fraud, including showing up on worksites to see that everyone is accounted for on the policy.

Officials have noted a significant increase in the sale and brokering of illegal certificates of workers' compensation coverage in the past year, particularly in the construction industry. According to the Bureau of Workers' Compensation Fraud, the overall number of cases presented for prosecution increased by 17 percent and the number of arrests jumped by 29 percent.

The state has diverted some resources to target check-cashing stores that often are used to help contractors “hide” employees. These stores are used by fraudulent contractors to help pay workers they want to keep out of their real payroll. “There is an underground economy that uses check-cashing stores to hide payroll and avoid premiums,” Blank said.

The DFS works in conjunction with the Office of Financial Regulation, which audits the check-cashing stores to help catch employers hiding employees. With inter-agency cooperation, Blank said the state can be more proactive in going after fraud instead of waiting for hot-line tips.

“We have several check-cashing store investigations underway now,” Cutcliffe said. Blank emphasized that not every check-cashing store is facilitating a crime, but when the same employer's checks show up repeatedly at these outlets, it does raise a red flag.

A Never-Ending Fight

State and federal prosecutors go after premium fraud, Cutcliffe said, “and those who are convicted will go to jail.”

Florida is one of six states — California, Illinois, New Jersey, New York, and Texas are the others — that have made workers' compensation premium fraud a specific felony, according to the Coalition Against Insurance Fraud.

Blank said premium fraud is the biggest problem the workers' compensation fraud agency is seeing today. However, he added, “In Alex Sink we have a CFO who is very active and keeping on the forefront of it.”

In addition to leveling the playing field, successfully fighting premium fraud offers employers a financial benefit. State officials say their ability to better police fraud is a major factor for today's lower workers' compensation premiums.

Since the 2003 legislative reforms, the Florida workers' compensation marketplace has experienced an overall average rate decrease of more than 60 percent. Insurance Commissioner Kevin McCarty noted two primary reasons for the continued rate reductions: claim frequency for workers' compensation claims has been decreasing faster than medical costs have increased, and the continued crackdown on companies that fraudulently avoid payment for workers' compensation insurance has added millions of dollars to Florida's premium base while providing greater protection for employees.

Reports show that state enforcement actions caused employers in fiscal 2008 to add nearly 6,500 employees to their workers' compensation coverage, with an additional $8 million being paid to insurers. In the past three years, efforts by investigators have resulted in the addition of nearly 25,000 employees to policies.

According to the Division of Insurance Fraud, it received nearly 10,000 referrals during the 12 months ended June 30, 2008; investigations resulted in 873 arrests and 663 convictions.

Fraud — and the battle against it — is sure to intensify the longer the economic meltdown continues.