HR Management & Compliance

Workers’ Comp Fraud: Why Employer Was Ordered to Pay Insurer $3 Million

When you hear about workers’ compensation fraud, it’s usually by employees. But there are cases where employers are charged with cheating the workers’ comp system. In one of the biggest verdicts of this kind, State Compen- sation Insurance Fund-the state’s largest workers’ compensation insurer-recently won a $3.2 million judgment against a network of Southern California temporary employment agencies over their efforts to cut their premiums.

Insurer Claims Employer Committed Fraud

State Fund sued Santa Monica-based WPS, Inc., formerly known as Western Personnel Services, a staffing agency that provides temporary workers for warehousing and other light industrial businesses. State Fund claimed the company used a sophisticated “shell game” to conceal and falsify information on workers’ comp classifications of employees and on experience modification ratings of its interconnected companies.

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The lawsuit grew out of an end-of-the-year payroll audit, Charles Savage, Assistant Chief Counsel for the State Compensation Insurance Fund, told CEA. WPS disputed the amount of premiums State Fund claimed were owed and refused to pay.

State Fund’s investigation re- portedly revealed that WPS would close down companies that had a high number of injury claims in order to avoid paying proper workers’ comp premiums. WPS then allegedly transferred the workers and payroll to a new subsidiary firm-one with more favorable workers’ comp ratings, and thus cheaper insurance rates.

State Fund also said WPS failed to disclose the true identity of its temporary and permanent employees and of the subsidiary companies’ real owners.

Rating Bureau Investigates Fraud

One reason WPS got into trouble was the statewide workers’ comp computer database maintained by the California Workers’ Compensation Insurance Rating Bureau, a nonprofit insurance industry-sponsored organization. The Bureau used its database to investigate the case and concluded WPS had illegally reorganized its businesses to conceal its true workers’ comp claims experience. The Bureau said that because WPS and various subsidiaries were under joint ownership, they should have been rated together for workers’ comp purposes.

Although it’s not widely known, the Bureau’s database includes the workers’ comp experience of all California employers. Much like the Medical Information Bureau’s national database on the health and insurance history of individuals, the workers’ comp rating bureau tracks claims, job classifications and insurance policies, and is commonly used by workers’ comp insurers to check out employers.

Employer Charges Insurer Mishandled Claims

At the trial, WPS denied any wrongdoing, arguing that State Fund drove up premium prices and lowered dividends by routinely mismanaging claims and over-reserving, i.e., allocating too much money for future claims. WPS relied on a case currently on appeal involving a Southern California grocer who made the same accusations against State Fund and won $20 million. 

But the Los Angeles jury rejected WPS’s contentions and found instead that it had committed fraud. WPS was ordered to pay $229,000 for unpaid premiums plus $3 million in punitive damages.

WPS attorney Adam Telanoff, whose family controls the company, told CEA the award will be appealed.

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