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Workers’ Compensation Anti-Fraud Program. Department of Industrial Relations Division of Workers’ Compensation 12 th Annual Educational Conference. William Zachry Donna Gallagher Dale Banda

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workers compensation anti fraud program
Workers’ CompensationAnti-Fraud Program

Department of Industrial RelationsDivision of Workers’ Compensation12th Annual Educational Conference

William Zachry Donna Gallagher Dale Banda

FAC Commissioner SIU Manager, SCIF Chief, Fraud Division

FAC Commissioner

February 2005

fraud assessment commission
Fraud Assessment Commission
  • Fraud Assessment Commission established by Insurance Code Section 1872.83.
    • Seven members
      • Organized labor - 2 representatives
      • Self-insured employers - 2 representatives
      • Insured employers - 1 representative
      • Workers' compensation insurers - 1 representative
      • The President of the State Compensation Insurance Fund
  • Determines the aggregate amount of the annual assessment.
  • Advises the Insurance Commissioner as to the most effective distribution of moneys for purposes of investigating and prosecuting workers' compensation fraud cases and cases relating to the willful failure to secure the payment of workers‘ compensation.
  • Holds public workshops and other hearings to gather information and solicit recommendations and other input from stakeholders on workers’ compensation fraud issues and the effective use of funds for use in the decision-making process.
fraud assessment fund
Fraud Assessment Fund
  • Applied as a surcharge to all employers
    • “State Fraud Investigation and Prosecution Surcharge” (WCF)
  • Funds are divided between
    • California Department of Insurance, Fraud Division
    • County District Attorneys
  • Cost of Workers’ Compensation Program - $28 billion
  • Annual Employer Surcharge - Fraud Assessment Fund
    • 2004/2005 - $35.8 million
    • 2005/2006 - $37.6 million
  • $32 million Assessed and Collected In Fiscal Year 2003-04*
    • 68 cents per $1,000 Premium paid

by insured employers, or 0.000685 per $1

    • $4.70 per $1,000 Indemnity paid by

self-insured employers, or 0.0047 per $1

*Aggregate of $34.8 million minus $2.8 million in fines and penalties

siu and claims coordination issues
SIU and Claims Coordination Issues…..
  • Training
  • Identification and follow-thru
  • Acting responsibly
  • SIU and team work
  • Timely reporting and responses
  • Maximizing the results
  • Be prepared
california department of insurance
California Department of Insurance
  • Commissioner’s Vision:
    • To be the best consumer protection agency in the nation!
  • Department’s Mission:
    • Protect consumers;
    • Foster a vibrant, stable marketplace;
    • Maintain an open, equitable regulatory process; and
    • Fairly and impartially enforce the law.
  • Fraud Division’s Mission:

To protect the public from economic loss and distress by investigating and arresting those who commit insurance fraud and to reduce the overall incidence of insurance fraud through anti-fraud outreach to the public, private and governmental sectors.

cdi enforcement branch
CDI Enforcement Branch






Premium Theft

Senior Citizen Insurance Abuse

Viatical Settlement Fraud

Bogus Insurers

Anti-Consumer Practices

Title Insurance Kickbacks

Insurance Company

Insider Fraud


Workers’ Compensation, Auto, Property/Casualty

Medical/Legal Provider Fraud

Organized Automobile Fraud

Employer Fraud

Claimant Fraud

Health Insurance Fraud

Insurance Company

Insider Fraud






cdi fraud investigators statewide authority
CDI Fraud Investigators(Statewide Authority)
  • Sworn Peace Officers
  • Interviews - witnesses, victims, suspects
  • Interrogations
  • Under Cover Work
  • Search Warrants
  • Arrest Warrants
  • Proposition 115
  • Court Testimony
fraud division anti fraud program fy 2003 04
Fraud Division Anti-Fraud Program FY 2003/04
  • Nine Regional Offices Statewide
    • Serve all 58 counties
    • 38 counties participated in the Workers’ Compensation Grant Program
    • 35 counties participated in the Automobile Grant Program
    • 8 counties participated in the Organized Auto Fraud Interdiction Task Force (AB 1050)
    • Disability/HealthCare Program – New for 2005
  • Suspected Fraudulent Claim (SFC) referrals for the entire fraud program totaled 24,027. Of these, the following potential losses were reported by insurance carriers:
    • $2 B - Potential Loss
    • $1.3 B - Suspected Fraud
    • $754.5 M - Actual Paid
    • $10.1 M - Premium Fraud
  • There were 810 arrests and 1,560 convictions in all programs.
  • 114 cases involved undercover operations.
  • 202 search warrants were executed by the Fraud Division.
state operations for fy 2003 04 workers compensation fraud program
State Operations For FY 2003/04Workers’ Compensation Fraud Program
  • 5,122 workers’ compensation fraud SFC referrals were received in FY 2003/04 and potential losses associated with these referrals reported by insurance carriers were:
    • $845 M - Potential Loss
    • $304 M - Suspected Fraud
    • $430 M - Actual Paid
    • $10.1 M - Approximate Initial Report of Premium Fraud
  • On July 1, 2003, the Fraud Division had 955 workers’ compensation cases under investigation.
  • 868 new cases were assigned in FY 2003/04. Of these, 837 were from SFCs received during FY 2003/04.
  • 36 cases included undercover operations.
  • 68 search warrants were executed by Fraud Division investigators.
state operations for fy 2003 04 workers compensation fraud program10
State Operations For FY 2003/04Workers’ Compensation Fraud Program
  • 934 workers’ compensation cases were in court for prosecution during

FY 2003-04.

    • 504 claimant fraud
    • 191 uninsured employer
    • 122 premium fraud
    • 7 embezzlement
    • 21 medical provider
    • 25 insider fraud
    • 69 recorded under the category “other”
  • 480 suspects were arrested.*
  • 467 defendants were convicted.*

*Fraud Division and DAs combined statistics.

insurance fraud crime
Insurance Fraud Crime
  • Fraudulent Crime is Complete When:
    • An act is completed.
    • Suspect had intent to defraud.
    • The act and mental state or intent must come together. One without the other is not a crime.
    • Actual Loss is not needed so long as the suspect has committed an act and had the intent to commit the crime.
components required for a criminal fraud filing
Components Required for a Criminal Fraud Filing
  • Case Summary
    • introduction to the case
  • Suspect Information
    • identification, background, etc.
  • Requested Charges
  • Witness List
    • interviews (testify on observations or verify evidence)
  • Details of Investigation
    • describe investigation
    • elements of crime covered
    • written in a factual manner and not in a conclusionary manner
  • Document List or Inventory of Evidence
    • attachments or exhibits proving crime
reference material
Reference Material





  • Fraud
  • Red Flag
  • SIU
  • CA Insurance Code 1877.3
  • Authorized Governmental Agency
  • FD 1 / SFC

What is Workers’ Comp Claim Fraud?

The Claims Fraud Statute:

    • Insurance Code 1871.4

Simply stated:

When someone knowingly lies to obtain some benefit or advantage, or to cause some benefit that is due to be denied.

workers compensation fraud
Workers’ Compensation Fraud

What is Workers’ Compensation Premium Fraud?

  • The Premium Fraud Statutes:
    • Insurance Code 11760
    • Insurance Code 11880

Simply stated:

When someone knowingly lies to obtain a W/C policy of insurance at less

than the proper rate, cost, or premium.

What is Workers’ Compensation Fraud?

In Simple Terms, when someone knowingly lies to do any of the following:

  • obtain some W/C benefit that is not due
  • cause denial of some W/C benefit that is due
  • obtain a W/C policy of insurance at less than the proper rate, cost, or premium
workers compensation fraud16
Workers’ Compensation Fraud

Penal Code 550(b)(3)

Concealing or knowingly failing to disclose the occurrence of an event that affects a person’s benefits – whether that be entitlement, amount or duration -- may constitute workers’ compensation fraud.

    • difference to the determination of benefits.

Who Can Commit W/C Fraud?

  • Employees
  • Employers
  • Providers (i.e. Doctors, Chiropractors, V.R. Counselors, Copy Services, Pharmacy’s, Interpreters, etc.)
  • Attorneys
  • Insurance Company Employees
  • Brokers and Agents


who touches the workers’ compensation system!!!!

types of workers compensation fraud
Types of Workers’ Compensation Fraud
  • Premium / Policy
  • Employer Claims Fraud
  • Broker / Agent
  • Claimant Fraud
  • Provider fraud
  • Attorney Fraud
  • Insurance Company Employee Fraud
red flags
Red Flags
  • What triggers a suspicion of Worker’s Compensation Fraud?


    • Warning sign: Fraud might be present!
    • Additional investigation needed
    • Most important Red Flag ??

Special Investigation Unit

  • Every admitted insurer is required to have a unit or division to investigate possible fraud as of July 1, 1992.

(Special Investigation Unit -- ‘SIU’)

suspected fraud reporting legally mandated
Suspected Fraud Reporting…Legally Mandated
  • Required by Insurance Code 1877.3
  • Who has the duty to report:
    • Insurers admitted to transact workers’ compensation insurance in California
    • State Compensation Insurance Fund
    • Self-insured employers
    • Third-party administrators
    • Licensed rating organization
  • Required reports to Authorized Governmental Agencies (AGA’s):
    • District Attorney of any county
    • Dept. of Insurance (Fraud Division)
    • State Attorney General
    • Dept. of Industrial Relations
    • Licensing Agencies governed by B & P Code
    • EDD
    • Any city attorney whose duties include criminal prosecutions (7/2004)
    • Any law enforcement agency investigating workers’ compensation fraud 7/2004)
    • Department of Corrections (9/2004)    
suspected fraud reporting
Suspected Fraud Reporting…
  • Must report when you know or reasonably believe you know the identify of a person or entity who you have reason to belief committed a fraudulent act relating to workers’ compensation insurance
  • Must use prescribed forms (FD1)
    • Called: Suspected Fraudulent Claims Report (“SFC”)
  • Must state on the notice the basis of the suspected fraud.
  • Report filing date not to exceed 30 days from day on which the duty to report arose
requests for information
Requests for Information
  • Insurance Code 1877.3 requires release of information without a subpoena within 30 days when:
    • Authorized Government Agency (AGA)
    • Written request
    • For specific workers’ comp fraud investigation
    • Any and all relevant information deemed important to AGA

Confidential Information

  • Insurance Code 1877.4 and Suspected Fraud Reports
    • Not part of the public record.
    • Shall not be released to non-authorized person (misdemeanor).
    • Information is privileged and not subject to subpoena.
limited civil immunity for reporting
Limited Civil Immunity For Reporting

Insurance Code 1877.5

  • Insurer reports to Authorized Governmental Agencies
  • In Good Faith
  • Without Malice
  • Have Reasonable Belief
  • Warranted by known facts
  • Obtained by reasonable Efforts
important new legislation
Important New Legislation
  • AB 2866 (Frommer - Chaptered 08/23/04, effective 01/01/05) CDI will post names of those convicted of fraud on their website.
  • AB 2835 (Plescia - Chaptered 08/30/04) “Capping” law would empower department to revoke license of health care professionals involved in fraud.
  • AB 1867 (Vargas - Chaptered 09/25/04, effective 01/01/05) Infuses over $5.2 million more in funds to the California DAs to prosecute fraud.
  • AB 2316 (Chan - Chaptered 09/28/04) Creates special insurance fund for the purposes of protecting consumers against life and health insurance abuse and fraud.

(continued on next page)

important new legislation24
Important New Legislation
  • SB 1344 (Margett - Chaptered 09/13/04) Provides for the California Department of Corrections to be considered an authorized governmental agency.
  • SBX 42 (Speier - Chaptered 09/13/04, effective 01/01/05)
    • Revises fraud notice on checks, in English and Spanish.
    • Revises penalties of failure to pay workers’ compensation, includes separate penalties for 2nd and subsequent offenses, authorizes misdemeanor search warrants.
    • Authorizes CDI and District Attorney investigators to require proof of insurance from employers.
    • Requires court ordered restitution and charges the cost of investigation to convicted parties.
  • SB 1273 (Scott - Chaptered 09/24/04) Increases jail time to one year and penalties to $50,000 for “twisting” or “churning” of annuities.

(continued on next page)

important new legislation25
Important New Legislation
  • ABX 413 (Firebaugh - Chaptered 07/06/04) Provides for city attorneys to be considered authorized governmental agencies.
  • AB 1728 (Vargas - Chaptered 09/20/04) Provides a 50/50 split of $0.10 per insured assessment of disability and health insurers for the investigation and prosecution of disability/health fraud.
  • AB 1227-(McCarthy - Chaptered 09/20/04, effective 01/01/05)
    • $ 5,000 fine per act of non-compliance
    • $10,000 fine per act, if willful
    • $10,000 fine per day for failure to comply with adjudicated order