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To dodge high premiums, some businesses stretch the truth

Crawford Frazer

Spurred by the economic downturn, some businesses are being dishonest. When applying for business insurance or workers' compensation coverage, businesses are required to provide detailed information (number of employees, jobs being performed, location) so that the insurer can accurately assess the risks -- and determine premiums. But insurance is expensive -- and some businesses try to lower their premiums by not giving insurers the full story. This is known as premium fraud.

Types of premium fraud

It's during the application process that businesses might take the opportunity to provide false or misleading information, according to insurance industry publication ISO Review. There are several common types of premium fraud:

  • Underreporting payroll: This is the most common scheme, according to ISO Review. Essentially, a business won't divulge its full number of employees to the insurer. The company might pay some workers in cash so that some of the payroll is off the books, or falsely classify employees as independent contractors.
  • Misclassification of employees: This usually means that a high-risk employee, like a construction worker, is listed as a lower-risk one, like an office worker, according to ISO Review. The lower the risk, the less a company will pay for workers' compensation insurance.
  • Evasion tactics: After an employee is seriously injured, a company might identify itself as a new business entirely to wipe its record clean, according to ISO Review. Or, in the case of minor injuries, an employer may pay the injured employee cash instead of reporting the incident to the insurer.

Catching premium fraud

ISO Review notes that determining fraud involves a two-tier evaluation. A reviewer must decide that the business knew the information provided was not true and knew that the information would affect the insurance contract and premiums. Some common red flags include:

  • The company refusing to let the insurer access its records.
  • The company storing its records away from its normal base of operations.
  • The company using a lot of independent contractors for high-risk work.

The consequences of premium fraud

Some states have made workers' compensation fraud a felony, according to WorkCompCentral.com. In an effort to crack down on premium fraud, Florida issued more $75 million in fines in 2006 and 2007.

By saving themselves money on business insurance, some companies are making things expensive for everyone else. According to WorkCompCentral, roughly one in four New York City construction workers were paid off the books in 2005, costing the state and insurers $489 million in workers' compensation premiums, taxes and other expenses. Honest companies bear some of the costs as well, in the form of higher premiums to subsidize insurers' losses.

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