..•..•.-
~:<'.~.~•
•••.•
:.;.,4
r:
Report: Up to One Fifth of Calif. Payroll Not Reported: Top [04/30/01J
OAl<LAND, Calif. -- California elJIployers'failed to report 6% to 23% of payroll to
workers' compensation insurers from 1991 to 2002, costing· carriers billions in lost
premiums and raising costs for honest bus Lnes see , according to a report de Li.ve'r ed to the
state's labor-business advisory panel on Friday.
Frank Neuhauser, a researcher for the Commission on Health and Safety and Workers'
Compensation, said the'"empirical estimation" suggested that businesses that employ
workers in high-risk classifications are paying two to five times more in premium than
they would if all payroll were reported.
Neuhauser quoted an old NASCAR adage: "If you ain't cheatin', you ain't tryin'." He said
the number of cheaters might have dropped as workers' comp costs dropped 60% in the past
thIee years, but there is little doubt that premium fraud remains widespread.
That's especially true in industries
steel construction, he said .
with high worker's
comp costs,
such as roofing
and
••It' s hard to imagine that an employer in the very h'igh class codes can be competi ti ve
against an employer who is reporting 20% of his payroll," Neuhauser said.
~he estimate is similar to the results of a study in New York done by the Fiscal
~stitute, which found that IS% of payroll had not been reported to insurers.
Policy
(
'. ~uhauser and fellow University of California, Berkeley researcher Colleen Donovan
developed the estimate by comparing U.S. Census Bureau occupation and industry payroll
statistics with payroll reported to California's rating agency, the Workers' Compensation
Insurance Rating Bureau. The researchers deducted from the Census data to account for
payz o.Ll. that is not subject to premiwns, .such as overtime and shift pay differentials
to
determine "true payroll" over the five-y~ar period. The resulting estimate, he said is not
perfect, but also not trivial.
The data comparison suggests that from 6% to 10% of payro~l was not reported to workers'
comp insurers in 1991, when premiums were relatively low. In 2002, a year before workers'
comp rates peaked at more than $6 per $100 of wages, the underreported payroll ranged from
19% to 23%.
.
The Value of underreported
the period.
payroll
ranged
from $31 billion
to $106 billion
annually
during
Neuhauser did not provide an estimate on how much premium was lost. But with an average
'cost of 6% of payroll, insurers might missed out on more than $6 billion in premiums if
the estimates are correct.
Census data is not available for recent years, so Neuhaoser did not provide a current
fraud estimat~. He said it is likely lower, but the incentives to cheat remain and
insurers have little incentive to do thorough audits that might catch more of the fraud.
Because insurers base rates on all losses suffered by a classification
code, whether the
employers reported that payroll or not, the effect is that rates are artificially inflated
and the cost is borne by employers who report fully. Neuhauser said the data shows rates
for the highest risk classifications
could be cut at least in half if all payroll were
'ported, and possibly by 80%.
Although
untested,
Neuhauser's
fraud estimate
rang true for prosecutor
Dominic
Dugo,
a
..-:;~--." ....••,
deputy district
County.
attorney who heads up the workers'
compensation
fraud program
in San Diego
juga said investigators are finding no shortage of cases since launching a premium fraud
/ task force in 1996. In fact, he said some employers who underreport payroll to their
{
~surers have lately added a new type of fraud to avoid detection: they pay for injured
\ ..mp Loyee s ' medical bills out of their own pockets to avoid detection.
Dugo said his office also continues to prosecute a large number of tax evasion cases
against employers, indicating that workers' camp fraud is likely ~o also be in the mix.
"If someone is not afraid to cheat the government,
insurance company," he said.
they certainly
are going to cheat
an
A separate report submitted to the commission on Friday suggested that another type of
premium fraud is likely rampant in the construction industry for occupations that have
split classification codes.
In split class codes used for construction occupations, rates for high-risk workers are
lower than rates for low-wage workers because risk is associated more with hours of
exposure than pay rates, and because high-wage workers are thought to be more experienced
and better trained in safety procedures.
But the system only works if employers honestly report their payroll. An estimate
submitted by CHSWC consultant Lachlan Taylor suggests that many employers are not
accurately reporting.
Taylor compared Census data with payroll reported to the rating bureau and found that
payroll reported to insurers was only 65% of what the Census data suggested it should be.
But payroll reported to insurers for high-wage workers was 20% more than expected when
compared to Census data.
(
pe numbers suggest that employers are reporting low-wage workers as high-wage workers to
.nsurers to lower their rates. The result is increased premium rates for honest employers
to report their wages fully and pay their workers well.
--By Jim Sams, WorkCompCentral
Senior
Editor [email protected]
2
Page 1 of4
Study Says Many Firms Cheat New York Workers' Comp System - New York Times
~-H·OM·E·-PAGEi MY TIMES : TODAY-SPAPERTViDEOT-MOSTPOPULAR
,._
.
'. __-
x.
~
__
! (!l}r ~t\lf ~)orkeimtS
!
1 WORLD
us.
N.Y. / REGION
I
'rb
r
•
N.Y. I Region
-
I
! TIMES TOPICS
BUSINESS
TECHNOLOGY
SCIENCE
HEALTH
SPORTS
OPINION
ARTS
AUTOS
THE CITY
IN THE REGION
N.Y.lREGION OPINIONS
. Study Says Many Firms Cheat New York Workers' Comp
I System
i
l
i
By STEVEN GREENHOUSE
Published: January 25, 2007
SIGN IN TO E·MAIL
OR SAVE THIS
A new study estimates that employers cheat New York State's workers'
,
PRINT
compensation system by not paying $500 million to $1 billion a year in
! required insurance
!
SINGLE PAGE
premiums, forcing other employers to pay higher
•
REPRINTS
i premiums.
SHARE
i
I The study by the Fiscal Policy Institute,
'1'
Ii
a liberal research group, found
that these illegal underpayments represent 15 percent to 20 percent of
all the workers' comp premiums that are supposed to be paid each year.
statewiide.
~!'(TI:.lE 100LS
·"PlI1S~RE.I: BY
===S"J~~
''::':'!f'OAW:01:m:;',-k
!
I! Some companies pay no premiums
while others underpay by underreporting
the size of
! their work force to qualify for lower premiums, the study said.
I
!
i
!
I
Government, business and labor leaders say the noncompliance hurts the state's business
climate by forcing law-abiding companies to pay higher workers' comp premiums when
many corporations are already complaining that their premiums are too high.
I "We were surprised to find this magnitude of noncompliance," said James Parrott, the
I chief economist for the Fiscal Policy Institute. "This noncompliance has helped cause at
!
least two things: very low benefits for injured workers in New York, which are among the
, lowest in the country, and second, despite these low benefits, workers' comp premiums
!
that are considered very high."
i
I Mr. Parrott
!
I!
said inadequate data made it hard to pinpoint the exact amount of cheating.
The report asserts that if more companies paid their full premiums, the extra money
!! would enable the state to cut workers' comp premiums over all and increase benefits for
More Art
Get Ur
.u
Page 2 of 4
Study Says Many Firms CheatNew York Workers' Comp System - New York Times
injured workers. The report maintains that a lack of enforcement has emboldened
employers to cheat.
"Not being honest on payroll has become almost an accepted practice in New York State,"
said Art Wilcox, a workers' comp expert with the New York State AF.L.-C.I.O. "It hurts the
competitiveness of a business that does the right thing. It hurts the competitiveness of an
insurance broker who refuses to play games with payroll. And it certainly hurts any
insurance carrier who won't bend the rules because they're competing against people who
will."
Michael Moran, a spokesman for the American Insurance Association, said he found it
difficult to believe the level of noncompliance found by the study. "It is very important for
insurance companies to be paid correctly for all the people they cover," he said. "They
work at it very hard. They try to audit to make sure that things are right."
The Fiscal Policy Institute based its calculations on financial numbers filed with state
agencies. It bolsters the finding of a report last year by the state's association of insurance
agents, which estimated, based on inside knowledge of industry practices, that up to
20
percent of New York's employers did not pay all their required premiums.
"New York's honest businesses who are playing by the rules have had to subsidize those
who don't even cover their employees or those who seriously underpay for the coverage
they do have," said David Dickson, president of the association, Professional Insurance
Agents of New York State. "It approaches plain fraud."
Gov. Eliot Spitzer has pledged to make major changes in the workers' comp system,
hoping to hold down premiums and increase benefits. The maximum benefit an injured
worker can now obtain is $400 a week.
"Although we do not know the magnitude of the underreporting
of workers' comp
obligations, we recognize that it is a serious problem," said Christine Anderson, a
spokeswoman for the governor.
Insurance experts say that a company with, say, 100 employees might tell its insurer that it
has only 70 workers and then pay premiums for only 70.
But if any of the company's 100 employees are injured on the job, they would be likely to
qualify for worker's camp benefits - either medical coverage and weekly benefits in lieu of
wages - when they are out of work. This means that the amount collected in premiums
Study Says Many Firms Cheat New York Workers' Comp System - New York Times
Page 3 of 4
might fall short of the amount spent on benefits .•A.E a result of such a shortfall statewide,
insurers often pressure New York officials t~ increase premiums for all employers in an
effort to balance total premiums paid in ~th total benefits paid out.
MOST POI
E·MAILEC
1.
In
2.
St
"The lack of aggressive enforcement forces everybody in the process to bend the rules,"
3 .. Of
said Mr. Wilcox of the A.F.L.-C.I.O. "If insurance company A enforces the law but all the
4.
Sc
rest don't, then the client will end up with insurance company B or C or D."
5.
Ca
<,
.,.
> \
I
State: New York
N.Y. Rating Board Takes Aim at Fraud Report: Top [02/05107]
,
TIle New York Compensation Insurance Rating Board (NYCIRB) rebuked a fraud report
from the Fiscal Policy Institute, saying the findings provide a livery distorted view of both
the workers' compensation system and the insurance industry."
Friday's five-page response attacks the Jan. 25 report's contention that gaps and
fragmentation in the state workers' compensation system have left it ripe for fraud by
employers who either don't buy the insurance or misclassify their workers as independent
contractors.
WorkCompCentral reported Friday that the report, titled "New York State Workers'
Compensation: How Big is the Coverage Shortfall?" has slowed compromise efforts Gov.
Eliot Spitzer launched to develop a 2007 package oflegislative reforms.
A spokesman for the governor's office declined to comment on negotiations
labor and business but said Spitzer's office was reviewing the institute's report.
between
Monte Almer, president of the NYCIRB, said he chose to release the response on Friday
partly in response to the WorkCompCentral article. "Hopefully, it will do something
about the damage that report may have caused," Almer said.
NYCIRB, an unincorporated association of private insurers, recommends rates to the
New York Insurance Department and is the collections point for payroll and loss costs
filed in the state system.
The response focused first at contentions by FPI that the workers' compensation system
may be plagued by a $25 billion- to $50 billion-a-year payroll shortfall based on a
comparison with payrolls reported for calculation of unemployment insurance.
NYCIRB said FPI's comparison of payroll reports through 2003 failed to account for time
differences in when the data is received. The rating house also said that although FPI did
note some jobs for which employers are required to pay unemployment and not workers'
compensation premiums, it ignored major job sectors that help explain the difference.
Those jobs range from part-time domestic workers, who are exempt from workers'
compensation coverage, to corporate executive officers, whose payroll is limited to four
times the average weekly wage for workers' compensation reporting.
"The paper fails to take into consideration that the payroll for employment classifications
such as athletic teams, radio and television broadcasting, racing stables, theatrical
productions, executive officers, sole proprietors and partners are also substantially
reduced prior to their inclusion for reporting to the Rating Board," the response said.
The response concluded that the number of part-time domestic workers in New York
"can be quite substantial."
'"}.•
',~
"All you have to do is go down to Wall Street and take a look at some of these brokerage
firms," Almer said. "We collect payroll information for a different reason than the payroll
collected for unemployment insurance." Almer said that while unemployment payroll
information collected in 2003 covers that year, payroll data collected for the purpose of
calculating workers' compensations is gathered at the beginning of the year and reflects
numbers generated earlier.
"In one way or the other, every eligible worker receives coverage for workers'
compensation, NYCIRB said.
fI
Workers' compensation policies cover all of the employer's workforce regardless of
whether the employees were reported to the carrier when the policy was issued, the
response said.
'
"Second, it is believed that, throughout history, only a small percentage of employers
have failed to provide coverage for their workers, NYCIRB said. Finally, the response
said, an injured worker who files a claim 'is covered by the state Uninsured Employers'
Fund if coverage is found lacking. The Fund then recoups the benefits from errant
employers, who also face fines and other sanctions.
fI
In response to NYCIRB's statements, Institute Deputy Director and Chief Economist
James Parrott said late Friday the rating agency hasn't provided proof that most workers
are covered.
"They make some interesting points. But they're missing the big picture," Parrott said.
"Nowhere do they say any certainly that there are no companies in New York without
coverage."
Parrott said the estimate that workers' compensation payrolls may include a $50 billion
shortfall was a conservative estimate.
For all the classes of workers who must be covered for unemployment but not workers'
compensation, he said, the total payroll is about $500 million. "1 stand by my report
completely. I wasn't claiming ultra-precision in my statements, n Parrott said. "I was just
claiming there is a substantial question about whether nor not all of the firms are being
covered for workers' comp.
II
NYCIRB acknowledged that workers are misclassified as independent contractors but
said the FP1report fails to demonstrate the problem is widespread in New York. The rate
maker said misclassification of workers as independent contractors is a national problem.
In 2006, NYCIRB said, it performed morethan 10,000 inspections and changed more
than 1,500 classifications to correct the level of risk. In some cases, NYCIRB said,
workers were found in higher-risk classifications than necessary.
-\~\
),;
NYCIRB said the New York Insurance Department examines the organization's audit
procedures every three years and has found the procedures for establishing premiums
acceptable.
NYCIRB said the FPI report "reveals a number of false, inaccurate, unsubstantiated or
misleading statements.
"We believe that the report's findings have no validity, especially as an indicator of
employer payroll fraud within the workers' compensation industry," the response
concluded,
--By Michael Whiteley
01 (
nsurance
fraud costs consumers more than $80 billion
per year, according to the Washington D.C.based
Coalition Against Insurance Fraud. This amounts to a
hidden tax of approximately $950 per family each year on
the cost of goods and services. Insurance fraud, according
I
,.*,~
I,~
to the Coalition, is the second largest economic crime in
America, exceeded only by tax evasion.
Insurance defrauders often also evade taxes by
.~
~
_.'"
paying employees in cash. This is known as the
"underground economy."ln California, the underground
economy is estimated at $60 billion, with an annual tax
loss of $3 billion.
It was data like this that led Deputy District
Attorney John Massucco, then Chief of San Diego's
The
Insurance
It's morethan
By DominicDugo
Insurance Fraud Division and now Chief Deputy, to
originate the idea of a new task force to investigate
Workers' Compensation rvvC)premium fraud and tax
evasion. In the summer of 1996,I put this idea into action
and formed San Diego's Premium Fraud Task Force.This
was the first task force of its kind in the nation.
Members include the California Department of
Insurance, Employment Development Department (EDD),
the Franchise Tax Board (FTB),the California Department
of Industrial Relations, Labor Standards Enforcement,
the San Diego County District Attorney's Office, the State
Contractor's licensing Board, the Bureau of Automotive
Repair and Alcoholic Beverage Control. The largest WC
carrier in California, State Compensation Insurance Fund
(SCIF),actively assists the task force.
Dishonest employers illegallyreduce costs by committingWC premium fraud and payroll tax evasion. These
unscrupulous practices allow them to underbid competitors
and steal jobs away from honest employers. This unfair
'iusiness practice ultimately drives honest companies
out of business.
Peter Barbara, a SO-year veteran of the insurance
Voh;me 33 Number I
I
Fall 2004
industry and Chairman of McGriff,Seibels & Williams of
Texas, the sixth largest insurance brokerage firm in the
USA,believes the insurance industry suffers substantial
fraud losses from businesses that underreport premiums
resulting in higher costs for all honest insureds.
"Insurance fraud costs every citizen and every
business. We should not ignore any aspect of these crimes;'
Barbara added. "While perpetrators are few in number,
their impact is substantial."
There are no national statistics on the extent of
premium fraud, but some experts believe that more than
half of all WC fraud comes from premium fraud. Insurance
fraud expert Donna Gallagher is a 33-year employee of
SCIFand has been their statewide anti-fraud manager
since 1991.She says that although SClF has made the
fight against premium fraud a front-burner issue in its
anti-fraud program, premium fraud has not received the
attention it should from California's WC insurers.
"Ifwe could get every employer to report and classify
payrolls accurately, we would undoubtedly see a drop in
the overall rvvC)rates," Gallagher said.
Premium fraud involves lying to an insurance
13
Insurance
Fraud
company in order to purchase WC insurance at less than
the proper premium. TIlls is a felony in California, punishable up to five years in prison and a fine of $50,000 or
double the value of the fraud (Insurance Code Sections
11760 and 11880). Premium fraud suspects are usually
employers, bookkeepers, managers, and office personnel.
WC rates can be a significant cost of doing business.
Roofers' WC premiums, for example, may be 70% of their
payroll. A company with a payroll of $1,000,000could pay
one or more employees and payroll in excess of $100 per
calendar quarter must register and file payroll tax returns
with the mo. Employers are required to withhold Personal
IncomeJDisability Taxes from employees' paychecks.
$700,000just for WC insurance.
Employers then must pay, out of their own pocket,
Unemployment/Training Taxes for their employees. The
Three fraudulent
employer holds all these taxes in trust until the payroll
tax return is filed with EDDevery three months.
schemes are used
to commit premium
fraud:
FIRST:Businesses underreport payroll to insurance
carriers in order to cut costs. For example, a company with
$500,000 of payroll fraudulently reports only $250,000 to
the carrier. Insurance premiums are thus reduced because
only half of the payroll is reported. The employer may hide
the payroll by paying employees in cash or falsely claiming
Employers seeking to illegally gain an advantage
over their business competitors may pay employees in
cash, thereby avoiding the employer's payment of
Unemployment and Training Taxes. This intentional
deception to evade payroll taxes is a felony in California,
they do or employees' hourly rates to carriers. A company
punishable up to three years in prison and a fine of
$20,000 (Unemployment Insurance Code Section 2117.5).
At times, unscrupulous employers may even go to the
point of collecting Personal IncomelDisabilityTaxes from
may falsely classify roofers as janitors because insurance
rates are lower. Roofers are more likely to be injured than
This method of tax evasion in California is a felony
janitors. Similarly, higher paid employees are less likely
to be injured than lower paid and less skilled employees.
punishable up to three years in prison and a $20,000
fine (Unemployment Insurance Code Section 2118.5).
For example. we rates for carpenters making $221hr
are less than carpenters earning $101hr.Dishonest
employers seeking to slash costs will falsely report to
carriers that an of their carpenters earn $221hr.
Premium fraud and tax evasion prosecutions often
involve large-dollar thefts. The potential prison terms
employees are independent contractors.
SECOND:Businesses may misdassify the type of work
THIRD:Premium fraud is committed by experience
modification (x-mod) evasion. WC rates, similar to auto
insurance rates, increase after many accidents and injuries.
Employers are given a surcharge or high x-rnod as a result.
To avoid this x-mod on premiums, a dishonest employer
will change the company name and purchase insurance
for a "new" company without an x-mod.
In realty, nothing has changed other than the
company's name. This is analogous
to a driver who, after many
traffic accidents, has
experienced an
increase in auto
insurance rates.
Therefore,
the
14
driver takes on a "new" name and obtains auto
insurance at a lower rate because under this "new" name
the driver has no accidents.
Employers are required to carry WC insurance for their
employees and also file payroll tax returns. A business with
employees' paychecks and then pocketing the money.
for these crimes may be supplemented with great taking
enhancements. Penal Code Section 12022.6 provides an
additional one-year penalty for thefts over $50,000, two
years for thefts over $150,000, and three years for thefts
over $1,000,000.
Under Penal Code Section 186.11, the white-collar
crime enhancement, individuals that commit two or more
related felonies involving fraud over $500,000 receive, in
addition to the penalty contained in PC 12022.6, a twothree or five-year prison term. This white-collar crime
statute also allows prosecutors to seize a defendant's assets.
It is difficult to detect and investigate
premium fraud and tax evasion. TIlls is partly due
to the fact that law enforcement agencies
(i.e., EDD,ITB, Labor Commissioner)
do not ordinarily share their
records with each other
million.The investigation produced discovery consisting
nor are insurance company files voluntarily given to
$4
law enforcement agencies.
In addition, a WC insurance file is usually disbursed
among separate departments within one company. Often,
no one person within the insurance company ever knows
the contents of the entire file.Although evidence of fraud
exists within the WC "me" and/or tax records, the fraud
may escape detection because no one joins all the available
of approximately 25,000 pages.
Our task force, along with SClF,uncovered a sophisticated scam that involvedcontractors paying a middleman
their payroll plus 20"10. The middleman would pay the
fraud indicators together.
San Diego's Premium Fraud Task force has effectively
tom down the walls separating these agencies. Byjoining
several law enforcement agencies together in one task
force and receiving outstanding cooperation from SCIF
and the insurance industry, San Diego has aggressively
and successfully attacked premium fraud and tax evasion.
Our prosecutors join the interests possessed by each
agency into prosecutable cases that benefit all the agencies
involved and the public.
Fraud Manager Gallagher believes that SClF's antifraud efforts have been enhanced by the appearance of
a premier "fraud squad" in San Diego.
"Having achieved success year after year, the San
Diego District Attorney's Office is recognized as an expert
in premium fraud,"Gallagher said. "San Diego's experience
and efficient method for attacking this problem has
established a record to be proud of and enhanced the
statewide recognition of premium fraud as an issue of
importance to the health of California's Workers'
Compensation system."
Sam King is senior vice-president of North Carolina
based M}MInvestigations, the largest insurance fraud
investigative firm in the country. He said, "The San Diego
Premium Fraud Task Force has been a national pioneer in
proactively attacking and training other agencies on how
to prosecute Worker's Compensation Premium Fraud."
"The success of this program has been crucial in
raising the level of public awareness to this serious and
growing regional and national problem," King said.
Once premium fraud is uncovered, cases are very
complex. They often involve multiple defendants, thousands of documents, and could take years to prosecute.
Forexample, we concluded a two-year investigation in June
2002 with grand jury indictments against 21 defendants
from six construction companies for WC premium fraud
and tax evasion.
1Welvesearch warrants were served in San Diegoand
Riverside counties. The loss was estimated at more than
Volume 33 Number 1
I
Fall 2004
Insurance
Fraud
contractors' employees in cash and withhold 10%to 15%
of the money. The WC premium and taxes were never
properly reported or paid by the contractors or middleman.
This same investigation led to the indictment in 2003
of 18 defendants from three other construction companies
for premium fraud and tax evasion. The task force served
17 additional warrants in three counties. The loss in these
cases is estimated at $1.5 million. Another 18,000pages of
discovery and numerous boxes of evidence were produced.
Of these 39 defendants indicted, 33 have been
convicted and four are awaiting
trial. More than $2 million has
been collected in restitution
for victims.
Since 1997, San Diego's
Premium Fraud Task Force has
obtained more than 150
convictions for premium fraud
Deputy DA Dominic
and/or related tax evasion.
Restitution orders of more than
$20 million have been obtained
and approximately $6 million
Dugo is chief of the San
Diego County District
Attorney's Insurance
Fraud Division.
has been collected in restitution.
These results are made possible because our task force
has combined resources and worked closely and
effectively together.
McGriffs Chairman, Peter Barbara, said San Diego's
task force serves as a model for the insurance industry
and law enforcement throughout the country.
"Insurance carriers should be more supportive
through funding and other assistance in order to form
task forces such as the one in San Diego,"Barbara said.
'111is coordinated anti-fraud effort will provide substantial
benefits to the industry and the public at large."
Investigating and prosecuting premium fraud and
tax evasion promotes a competitive and fair business
environment The public sector, working with insurance
carriers, honest employers and others can assure a level
playing field for law-abiding employers to compete for
business. This ultimately leads to lowerWC rates for
employers and a reduction in the cost of goods and
services for consumers.
lBJ
15
Insurance Agent Convicted
of Premium Fraud?
By Dominic Dugo & Bernadine Spivey
In a case believed to be the first of
its kind in California, Insurance Agent
James Sdrales pled guilty to felony insurance premium fraud and forgery. Sdrales
stole commissions away from honest
agents by obtaining insurance policies for
clients at illegally low rates based upon
bogus "loss histories."
In California,
employers
are
required to have workers' compensation
heremafter WC) insurance to cover
employees hurt at work. Insurance premiums are determined, in part, upon a company's prior "loss run" history.
An
employer with many prior work-related
injuries will generally be charged a higher WC premium than an employer with no
prior employee injuries.
Lying to an insurance company to
purchase WC at less than the proper rate
is a felony in California punishable by up
to five years in prison and a fine of
$50,000, or double the value of the fraud
(Insurance Code Sections 11760 and
11880). Premium fraud suspects usually
are employers, bookkeepers, and office
personnel.
The unique nature of the
Sdrales case is that the defendant was an
insurance agent.
Sdrales sold insurance pol icies
through S.LA. Insurance Agency located
in Orange County. Generally, Sdrales
would send client information/applications to an insurance brokerage firm.
From there, the brokerage firm would forward the applications to insurance companies in order to obtain policies for
Sdrales' clients.
In February 2001, after receiving
information from insurance agents both in
northern and southern California, Special
Investigations Unit Manager, Mickaela
Erath of Republic Indemnity Insurance
Company (hereinafter Republic) uncovered that Republic was a victim of fraud.
The initial referral indicated that S.r.A.
had submitted seven fraudulent loss run
letters bearing Highlands Insurance
Company letterhead to Republic through
an insurance brokerage firm in San
Diego. Based upon this information,
Prosecutor Dominic Dugo put together a
team of investigators from the San Diego
District Attorney's
Office and the
California Department
of Insurance
(CDl), Investigations Bureau (San Diego
and Orange County Branches).
"Partners in the Care of Injured Workers
for the Past 15 Years.
II
* Immediate
* Lifetime
Consultation * One Bill *
Warranty * Early Return to Work *
Our Centers of Excellence For Hernia Repair
Fullerton Corporate
Burbank
Camarillo
Downtown, Los Angeles
Fullerton
Inglewood
Marina Del Rey
Murrieta
Orange
Riverside
San Diego
Ventura
Whittier
The National Ambulatory Hernia Institute
"Center of Excellence for Hernia Repeir"
1-800-962-3766
Please visit our web site at: www.hernia.com
10 CWCE MAGAZINE
OCTOBER 2002
At the outset, the investigation
revealed that Sdrales had fraudulently
obtained WC policies for 25 different
insureds at discounted premium rates.
Sdrales reported that all 25 insureds were
IT-yingto an insurance
company to purchase WCat
less than the proper rate is
a felony in California
punishable by up to five
years in prison and afine
of $50,000, or double the
value of the fraud
(Insurance Code Sections
sented evidence to the San Diego County
Grand Jury. After hearing testimony from
law enforcement, insurance company representatives and the Workers' Compensation Insurance Rating Bureau, Sdrales
was indicted on 25 felony counts of insurance premium fraud and 50 felony counts
of forgery.
Thereafter, investigators continued
going through Sdrales' voluminous paper
files and analyzing computer data. It was
discovered that 199 insurance policies had
been fraudulently obtained from 13 insurance carriers.
five years of felony probation. Sdrales'
insurance license was revoked by the
CD!.
Investigating and prosecuting premium fraud promotes a competitive and
fair business environment and protects
insurance carriers from being ripped off.
With new schemes being created every
day, honest insurance agents are losing
commissions and business owners are
denied fair market competition. Premium
fraud is costly and is ultimately passed on
to other insureds and consumers.
By
working together, law enforcement and
the private sector can successfully reduce
premium fraud. (9
II
entitled to "low" premiums because all
had three years of prior continuous WC
coverage with no losses (i.e., no employees had been injured). In order to substantiate this false information, Sdrales
created seven fraudulent loss runs on
Highlands Insurance Company letterhead-with a forged signature-and
18
fraudulent loss runs on ZNAT Insurance
Company letterhead. Sdrales submitted
these applications to an insurance brokerage firm who then placed 24 of the policies with Republic and one with
Highlands Insurance.
In May 200 I, investigators served
search warrants and confiscated hundreds
of insurance files and computers from
Sdrales' home and business in Orange
County. During
interview, Sdrales
admitted to creating 10 false loss run letters, all on Highlands Insurance letterhead. According to Sdrales, all 10 loss
run letters were placed with Fremont
Insurance Company. When asked again,
Sdrales stated there were "not more than
25" bogus loss run letters. Up to this
point in time, investigators were only
aware of 25 fraudulent loss run letters
provided to Republic and Highlands.
Nothing was known about loss runs presented to Fremont.
A CDI computer forensic team
from San Francisco headed by Dave
Fortman, analyzed computers and storage
devices seized from Sdrales. In Fortman's
initial forensic analysis, he located 71
fraudulent ZNAT and Highland Insurance
loss runs on three computers and a
diskette found in Sdrales' office.
In June 200 I, prosecutor Dugo pre-
an
OCTOBER 2002
In September 200 I, Sdrales pled
guilty to four felonies-two counts each of
premium fraud and forgery-and stipulated to pay $115,518 in restitution to 13
insurance carriers-including
$10,000
payable to the CD! statewide Fraud Fund.
Even though restitution was paid in full
prior to sentencing, Sdrales was ordered
to serve one year of work furlough and
County and Assistant Chief, Insurance
Fraud Division; Mr. Dugo has held these
positions from 9/86 to the present. Mr.
Dugo has served as Premium Fraud Task
Force (Members:
Dept. of Insurance,
Franchise Tax Board, Employment
Development Dept., Labor Commissioner,
and Contractor's
Licensing
Board
Coordinator) from 1996 to 2000. He can
be reached at (619) 685-6534; Ddugox
@sdcda.org.
Bernadine Spivey is an insurance investigator for the California Department of
Insurance, Investigations Bureau and has
held this position for the last 19 months.
Ms. Spivey formerly worked for the San
Diego County District Attorney's Office
for 13 years; the last 7 years as a supervising investigative specialist, Insurance
Fraud Division.
. IT'S HERE !!!
In 1976, .Ne Introduced the VHS TAPE
recorder to the US•...•
ln 2001, SUBROSA TV
: brings you
Your subrosa video evidence
via streaming video on the
.Internet
Just click your mouse and have the
. .~ ability to sit at your desk to view your
} subrosa video. Our program allows
:$:"
you to fast forward, pause and rewind
the streaming video.
TAKE A FREE TEST DRIVE AND
SEE THE FUTURE:
WWW.SUBROSA.TV
EXCLUSIVELY BROUGHT TO YOU BY
R.J.N.INVESTIGATIONS,INC
1-888-323-3832
SPECIAUZING IN INSURANCE DEFENSE INVESTIGATIONS
THROUGHOUTCAlIFORNIA SINCE 1987 - LICENSE" 12054
CWCE MAGAZINE 11
PO•••
JOlctS'
'\
'!'S,U
,""
, 1 IlASI11<O'
'~.IA.t
',:
'::,
I ~
~.
i
<12.28 \,;~~ ••• 10-l'[AII T~ASUf!\'
J3USINESS
• iillE1i1WlHlJlIIHiI;I:Ja,\,.
I C!lUDi'
• 'O,OZ ",~"
OU.'
'$1.14;<,',:
OOUAR
,·:l:t:!'t.:':.;.;·!.
I COlt/,N.Y.)
.
.. .... ".H,
YEN
• '''0.34 I,io:"
/li(
-0,063
fliRO ,
fllI/I,; h
G
'OOOSO ., •
INSIDe': ... ~.
I.
'$' 30 " ".'
~'!{II)'\'
:.,'
PlSO.
I
(;.. ': '.1'.
li
, ..
I, ••.
'
Roofing company owners ordered to pay for workers comp fraud
By Nlc:Il•••kID'",an
liUl) I" (hI: SttH: "'UlnP<!!lSatiun Jn!lUrdJl('(' Fund a/kr Iht>ypb!~".l
In. "01l1O'1I1 1& MUll)'
tilllll.'t'!'
lIt
CIlJ)~1';r.!I'Y aJlI'I wnri!t'f'~' rnl'llJ"'lI
STAFr WIUHR
an E~t'ullr1id"
ruoling ('OlnlnlllY "'Cr~ ordered :latW1I (mild.
}'('st.:rdil)' 10 pay S:i rnilliOlI in rt'sli
Mn~'l'r.1i2,itl1c1Al. h."" 6'l, ""'!t,
IUOur! f<'., undt'rpayipg
W(ll ku s'
,'ad, !.f·nlellcr.d III Ihff' )'('''~!lr
rnrnpensaliUII
IlTrmium;: (mOl prObllli()/L
n/t' 11\\'111.1 S
\
I
I
/If
:WOllo2QU3
Sail lJiega SlI)I<:rilll
(
William H. I\kAd"m
VITI!.'f"d
"url Judge
I"t:
"Will'!'!; ••f MaYt'/, RoofmJ: --- I'aul
I-il'tlt'ridc M:I\'('/, lIlJd [};r.·id (;or'
dUll ArdU'J -,,' II) ~. rIll' .'slilu
Ml"AtllIlIl
all'"
fIId'1<!d 11)"11) In
P;ll' an additional S1!I.(WI in ill""!>
ligalinn ('(Istll
Tl •• "'"I1/nn~ "Oi('bll~ """f(' ill'
dlc:l<'[] in f~r.II'}' an." a rtltlliill'
'IIIrlll hy S('IFflltlllff IIml UIf'~' \\,.'Tt.
uudetp;\).mg
jnsur.JII<~·pn:lllitulll:'
TIle oflidals wr.1't' 3(','tI!'('d ut "I'('al
iug (a~(: payl'CllI "·"I.rds Ilial
d1lhned Im'y W('n' pa)'ill!! less ill
salarlt:s. thus TO'ducillj! ill",UJ au. "
f11'ellliuRl s,
"TIIe!'P. unfair PI'lll.~lk~~
.'uaW"
tJI~lulous
f!/II/1Iu)'ers \••under
bid hune!;f (,Ilm~tilors:s.,id San
fJiegl) (,'ounly tlistric! AlIlIrJ)(!),
Bonnie {)wlJ<jnis "This 'f-sulls ill
honest emplovl:'f'S I<lsing jubs ilnd
ullimald)' driv(·~Ihlm' (llll ••( hu<i
IU'!!!<,"
Moy.:r H••
"nlll! '"IIII.hl)'1; '''';11 I~'
4r.o ant! l!11<'<inli7,'~ ill rtl,,(~ f,"
hornr-s.
1'1l·\'"iultsl~.
III W
t"1'; 01
< lillIe sl
~"'fl
utll:'. 'ml'll1)
lIu, \ "II1II11I1Y
1>f,.:tIIc~1 ""
h. IClisdr'lIl< 'al«'l
fn)nu
('harlK~ in ~'tlIU1"'1~1II will! IIII'
l'tlSl',
I aura ""'113 (':lh;tJl" •.••.311,
''''0 .hllh' Ka) TI'k-dn, So. "":1'
lx'llt S('ulI"K"'11 III Ill"", H'a,,& u(
/Irnbali ••"
'
Mlcflad 1IfIIsnr8ll: (6191293 '1370:
mlrhael klns,,"m(l'unIDnh1b com
"I: 1;':.
.. , ".. - ••.I ••
•yv·."'.l~L
.
•
•
"\
/
~ Fraud Roundu[i
Calif. State Fund.reCeives $3 million-pltlt
San Uiegn Superior COUrt Judge WilWn.
H. McAdam has ordered the 0'NTlerS of 3 )all
I)iego area roofing company to pay $:' millioll
in restitUlion w CaliG,mia's Stille Compensaricm ln~l/anQ: Fund, $81,649 in invcsti{!..l.
tion com and sentena:cI
company owner:
to three years of supun&ry probation for ,,~rl.
t:r$ compensation insurance fraud.
•
me
Paul mdcrldc Ma~ ;nd David Gordon
AIcher. ownczs of Ma)'Cl Roofing, originally
were iodiaed by Ii grand jury in Feb. 2006.
From 2001 to 2003. company ofti~ created
compensa-
tion iDswance prmUlIIn$ by $3 million. They
aemd false payroll recoJd, dws understating
che c:otopany'& wodcen' cosnpcruation premi.
Wll. aamdiag [0
Along with ~
scm
52, and Archer, 62, two
other o8icWs of the Q)mpan)' ~
pn:viously
sentenced in INS case. Laura Elena OdIQ/Jem.
36. and Judy Kay~,
50~pIeaded nocon~ to a misdemeanor chugc of wodcm' compensatiou insurana: liaud and were both sea-
tcna:d to thn:e ~
sultltllar}'
The fraud was ~
Swe Fund in\'tStigaron
prohmon.
by a routine audit.
w
infOrmed
San
Diego County District Attorney's Offu:e of
thc.ir suspic:ioru aOOm dle company's payroU
and premium practices. In Dec. 2004, the San
Oiego County Oisttia Attorney's Offict and
the UlilOmia Oepanm.ent oFlnsurante sem:d
a seardl warrant at six locations induding
Mayer Roofing Offic:es in San Diego.
Riverside and Los Angdcs Counties.
MaY!:1 Rooling was licensed in 1993. and
duo business throughour Southern Calirrmlia
and Fresno. Il empl()~ neany 450 cmpJoy~.cs
and i~ engaged primarily in new home ('011
srrucrion, The: rompany is headquartered in
[~~col)did!l~lIIl has office~ in Rivmide, Sail
~c:mandoand Balu:rsfitjd
""lwnrvs.u
-wes I kf-BIUN