How to Avoid Premium Fraud

Misrepresenting information on your workers’ compensation policy is a crime, potentially a felony punishable by lofty fines and even jail time.

In previous articles we’ve gone over the importance of accurately classifying your employees for your workers’ comp coverage. Employees who are misclassified may have cause to sue their employers. But on top of civil litigation, premium fraud carries legal consequences as well.

Your workers’ comp premium is largely determined by risk of injury and rate of pay. You may be tempted to cut costs by misrepresenting payroll figures or misclassifying employees to gain a cheaper premium payment, but this is a short-sighted business practice that can result in major damage in the future. On top of that: It’s illegal.

There are three important steps in avoiding criminal activity on your insurance policy.

Step 1 is easy: Don’t lie. While it can be tempting to misrepresent your company’s numbers, especially payroll, to gain a more affordable workers’ comp premium, you’re not doing yourself any favors in the long run. On top of the insurance companies themselves, state and federal governments are highly incentivized to crack down on premium fraud. If you’re audited—and there’s a good chance that you will be—you will be caught, and the penalties will affect your company much more significantly than accurate premium payments ever would.

Step 2: Make sure you accurately classify your employees. To do this, you should consult your insurance provider directly or, better still, rely on your PEO to handle your insurance classifications. Chances are, HR/payroll/employee law are not your areas of expertise; you are an expert in your own industry. Whereas your PEO specializes in these matters and has a stake in your company’s accurate, lawful representation in its insurance coverage.

Step 3: Cooperate. Even if your intentions are true, mistakes happen, and even insurance companies understand this. Audits are a natural course of operations. If you are indeed making every effort to be above-board on your insurance policy—and we cannot stress enough how important it is that you are—irregularities in your information can be easily resolved. At the auditor’s notification, your insurance company may simply reassess your premium and business can continue from there.

However, if you appear to hinder an audit, you may trigger a criminal investigation. Premium fraud is not reliant on civil litigation; the state can investigate, prosecute, impose and enforce a judgement on you that may include fines, restitution, interest and probation or jail time.

Once your company has been involved in premium fraud, things only get exponentially harder from there. It’s best to avoid the mess entirely, but if your company has run into these issues, you cannot try to sweep them under the rug. While past investigations can affect your current premiums, not reporting your company’s history will only make matters worse.

There are a number of red flags that can trigger an investigation. Insurance companies, auditors, and investigators operate in this arena on a daily basis; don’t let yourself believe you can outfox them, especially not simply to shave a little off your premiums for short-term gain.

The ultimate takeaway? Keep your company’s operations, including insurance policies, above board. This is what your PEO is for; let them apply their expertise on behalf of your company.

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