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FRAUD – THOSE ARE BILLIONS . . . WITH A “B”

In California, workers’ compensation insurance is a no-fault system. Injured employees need not prove an injury was someone else’s fault in order to receive workers’ compensation benefits for an on-the-job injury. In addition to medical expenses being covered for injured employees, some injured workers are entitled to recover a portion of lost wages resulting from injury.

With that in mind, fraudulent workers’ compensation claims can be an enticing target for criminals.

Workers’ compensation insurance fraud can occur in both simple and complex schemes. A common allegation is where an employee exaggerates or fabricate injuries or alleges the injury they sustained occurred at work when it actually occurred in a nonindustrial situation.

At the other end of the spectrum, there are the “white-collar” criminals, which includes doctors, chiropractors and health care workers, who defraud the system by creating false or exaggerated claims, over treating, and over prescribing drugs. Some doctors are involved in schemes of commercial bribery and/or kickbacks, and will refer applicants to specific treaters for treatments, such as MRI’s or CT scans, that were not necessary, in order to incur additional medical bills.

Insurance companies are then liable for paying for these fraudulent injuries and/or treatments, whilst passing the cost onto policyholders, taxpayers and the general public. According to the National Insurance Crime Bureau, workers’ compensation insurance fraud costs businesses $30 billion annually. In California, it is estimated that workers’ compensation fraud costs the state between $1 billion to $3 billion per year.

Those are Billions… with a “B”.

The Workers’ Compensation Fraud Program was established in 1991. The legislature made workers’ compensation fraud a felony, required insurers to report suspected fraud, and established a mechanism for funding enforcement and prosecution activities. The legislation established the Fraud Assessment Commission to determine the level of assessments to fund investigation and prosecution of workers’ compensation insurance fraud.

A person being charged with committing workers’ compensation fraud can be charged under the Insurance Code, Labor Code or Penal Code, with varying consequences depending on the severity of the fraud and the individual’s criminal history. Most forms of workers’ compensation fraud in California are “wobblers”, a term of art used in criminal court which means a person can be charged with either a misdemeanor or a felony, depending on how the prosecutor exercises their discretion.

The potential felony prison sentence for most forms of workers’ compensation fraud is two (2), three (3) or five (5) years. Felony fines can go up to one hundred fifty thousand dollars ($150,000), or twice the amount of the fraud (whichever is greater). In most cases, workers’ compensation fraud is a misdemeanor and carries a potential county jail sentence of up to one (1) year.

Whether one is charged under the Penal Code or Insurance Code can affect the person’s ability to collect benefits. For example, a conviction of fraud under the Penal Code bars all workers’ compensation benefits, whereas, a conviction pursuant to Insurance Code section 1871.4 bars only those benefits received as a result of the specific fraud.

There is even a section in the California Insurance Code (section 11880) that pertains specifically to defrauding State Compensation Insurance Fund. The language of the code states, in pertinent part:

It is unlawful to make or cause to be made any knowingly false or fraudulent statement, whether made orally or in writing, of any fact material to the determination of the premium, rate, or cost of any policy of workers’ compensation insurance issued or administered by the State Compensation Insurance Fund for the purpose of reducing the premium, rate, or cost of the insurance.” 

In 2004, Assembly Bill 2866 (Chapter 281) was signed into law by the Governor of California. This new legislation added Section 1871.9 to the California Insurance Code.

Section 1871.9 mandates the posting to the Department of Insurance’s public web site those defendants that are convicted of Worker’s Compensation Insurance Fraud in a court of law. Specifically, the Department of Insurance shall post all of the following information on its Internet website for each person, as defined in Section 19, convicted of a violation of this article (1871.4), Section 11760 or 11880, Section 3700.5 of the Labor Code, or Section 487 or 550 of the Penal Code, if the violation involved workers’ compensation insurance, services or benefits:

• The name, case number, county or court and other identifying information with respect to the case.
• The full name of the defendant.
• The city and county of the defendant’s last known residence or business address.
• The date of conviction.
• A description of the offense.
• The amount of money alleged to have been defrauded.
• A description of the punishment imposed, including the length of any sentence of imprisonment and the amount of any fine imposed.

The information required to be posted under this section shall be maintained on the Department’s website for a period of five years from the date of conviction or until the Department is notified in writing by the person that the conviction has been reversed or expunged.

As such, one can go onto the website and look up the monthly number of convictions for workers’ compensation fraud, as well as some of the details related to fraudulent activity. For example, according to the website, in April 2019, a man was convicted of defrauding SCIF of $148,484.45, and ordered to reimburse them. Despite the substantial amount of money involved, he was only convicted of a misdemeanor and put on probation for one year.

A prosecutor’s discretion in filing fraud as a misdemeanor or a felony is important when you compare the above situation with another individual who was convicted of a felony in July 2019, under Insurance Code Section 1871.4(a)(1), and was charged with defrauding Zenith Insurance Company in the amount of $7,582.76. He was put on probation for three years and ordered to pay restitution.

In addition to criminal charges, fraud can also have an effect on workers compensation settlements. A Compromise and Release may be set aside on the grounds of intrinsic fraud if the petition to reopen is filed within five years from the date of injury. Johnson v. WCAB(1970) 35 CCC 362, 369. Intrinsic fraud is a deception that pertains to the original action and includes perjury. Home Insurance Co. v. Zürich Insurance Co. (2002) 96 Cal.App. 4th 17, 26.

In Plass v. WCAB (1997) 62 CCC 705 (writ denied), The Appeals Board set aside a Compromise and Release on the grounds of fraud, when a deputy sheriff resolved his psyche and back claims. After the settlement, the employer learned that the applicant had been working during the period he claimed temporary disability and had concealed his employment. The employer filed a petition to reopen under Labor Code § 5803 and sought to have the entire Compromise and Release set aside on the grounds of fraud.

The workers’ compensation judge (“WCJ”) granted the petition to reopen: the judge found that the applicant made fraudulent statements at his deposition and also concealed the fact that he was earning money with his own business while also receiving temporary disability benefits. The WCJ then ordered the Compromise and Release to be set aside and the applicant “take nothing” for his workers’ compensation claims. The Appeals Board upheld the decision because the applicant engaged in deception to obtain workers’ compensation benefits. Furthermore, the Appeals Board noted that the WCJ’s order that the applicant take nothing was insufficient and awarded restitution to the employer in the sum of $14,400.

Unfortunately, fraud is a common occurrence and costs employers and insurance companies untold time and expenses. As a result, we should remain mindful that fraud exists. We all need to pay close attention to the timing of an applicant’s claim (i.e., did the injury suspiciously occur late Friday and was not reported until Monday?), whether there are inconsistencies with the applicant’s statements to the employer and to the healthcare providers, and whether any surveillance video exists to refute the allegations.

Just recently, a cook at an IHOP fractured his clavicle and filed a claim stating his injury was sustained when he slipped and fell in the kitchen while cleaning grill grates. Surveillance video showed that the injury did occur at work; however, the injury was the result of play wrestling with a coworker and not from performing his normal job duties as claimed. The insurance company referred the incident to the CA Department of Insurance, and the man was arrested and is facing prosecution in San Diego.

If you suspect fraud, you may contact a Fraud Division Regional Office in your respective county; report your suspicions online, even anonymously, at the California Department of Insurance website; or contact your local District Attorney’s Office. Another viable option is to consult with an attorney at Mullen & Filippi; we will assist you with investigating the fraud and seeking justice.

By Stacey R. Madsen, Esq., Associate Attorney, Chico Office June 2020