Blog

Workers’ Comp: The Fine Line Between Abuse and Fraud

Claims

Debbie Hammer

Aug 08, 2024

8 minutes

Workers’ compensation (WC) insurance is designed to protect employees who suffer work-related injuries or illnesses and offer crucial support during times of need. However, there is a darker side to this coverage—the insidious issue of WC fraud and abuse.

WC fraud occurs when an individual lies and makes a material misrepresentation to obtain a benefit that they would not have otherwise been entitled to. WC abuse is no less egregious but different. Abuse is excessive or improper use of a benefit. Both fraud and abuse cause harm and can take various forms, including but not limited to:

Faking injuries. Some individuals may exaggerate or completely fabricate injuries to claim compensation benefits.
Malingering. Malingering involves exaggerating the nature and extent of an injury or prolonging recovery to continue receiving disability unjustly.

These deceptive behaviors not only drain employers’ financial resources but also may increase their experience modification rating (ex-mod)—which affects a company’s WC insurance premiums—and undermine the integrity of the WC system as a whole.

Injury, compensation and man hands with insurance documents

The Toll of Workers’ Comp Fraud and Abuse on Employers

The consequences of WC fraud and abuse extend beyond financial losses. Here are three of the far-reaching impacts:

Fraud and abuse claims may result in increased premiums for employers, ultimately affecting their bottom line. This financial strain can hinder growth, job creation, and investment in safety measures.
Fraud and abuse claims consume valuable human resources due to the time needed to investigate suspicious claims and litigate fraudulent claims. These resources could otherwise be allocated to legitimate claimants.
WC fraud and abuse erode trust within the workplace and mutual respect between employers and employees. Sincere claimants may face skepticism and suspicion, while employers may become cynical about the validity of claims. This breakdown of trust can lead to an increase in injured workers seeking attorneys, increasing litigation costs for legitimate injuries.

Understanding the Differences Between Fraud and Abuse

According to the California Department of Insurance Fraud Division, 2,846 suspected fraud cases were reported and 164 arrests were made in fiscal year 2022–2023. District attorneys assigned 597 new cases and referred 257 cases to prosecuting authorities. However, these cases represent only a small portion of actual fraud.

Why? Misconceptions about what constitutes injured worker fraud in WC are commonplace. For example, an unwitnessed injury doesn’t mean an employee is lying about when and how it happened. Trees fall in the forest when no one sees or hears them. Additionally, employers may unfairly assume that an employee who is a poor performer has committed fraud. Negative work behavior or character traits do not in and of themselves indicate fraud. Also, some questionable injured worker actions are more appropriately classified as abuse or malingering than fraud.

Employers need to understand the distinction between WC fraud and abuse. It is possible to have abuse without fraud. In fact, most cases suspected of fraud end up being ruled as abuse.

Fraud is deliberate deception or misrepresentation for personal economic benefit. On the other hand, abuse can be intentional or unintentional and involves misuse of benefits without receiving a direct economic benefit.

The term “malingering” is often used to describe claimant behavior. Symptom exaggeration is abuse. It is fraudulent when someone intentionally exaggerates or feigns symptoms for financial gain. However, not all malingering is fraud. Underlying mental disorders, including factitious disorder, sometimes coexist in WC claims.

An employee with a factitious disorder, also known as Munchausen syndrome, may falsify or embellish injuries for sympathy and emotional validation. Malingering behavior secondary to this mental disorder that is diagnosed by a mental health professional is not fraud. These types of claims can be challenging to administer, but, fortunately, they are rare.

Look for Warning Signs

Below are some potential warning signs of WC fraud and abuse.

The employee took extensive time off prior to reporting injury.

The employee was disciplined or terminated prior to reporting injury.

The employee sought a change of treating physician after being released to work.

The employee has a history of past claims.

Coworkers provide information that the injury claims may be fraudulent.

The employee statement about injury is vague or inconsistent.

The first report of the injury and initial medical report are inconsistent.

The employee’s subjective complaints are unmatched by objective findings.

A soft tissue injury is taking an inordinate amount of time to heal.

The employee is known to engage in aggravating non-occupational activities such as sports.

The employee has worked side jobs.

Got MILK? The Litmus Test for Workers’ Comp Fraud

MILK is a useful acronym for a litmus test to determine if fraud exists. The letters represent materiality, intentionality, lie, and knowledge. Legal proof of fraud requires each of these four components to be present.

MILK = Materiality, Intentionality, Lie, and Knowledge

An injured worker must knowingly lie with the intention of receiving increased benefits. To be considered a “lie” in the legal context of fraud, an injured worker must lie under oath in a deposition. It is not enough for an employee to lie to their doctor, employer, or claims adjuster. The lie must also be material. Intentionality is the most difficult to prove as in the difference between malingering for economic gain and malingering for internal gain as discussed above.

Here are some examples of what fraud may be and what it might not be, using the MILK test.

If an injured worker lies about working for a new employer but is not receiving disability, the lie is immaterial to the claim and unlikely a fraudulent act.

If surveillance video shows an injured worker who is collecting temporary disability driving, but the doctor didn’t specifically preclude driving, the video won’t be relevant in a fraud investigation. A defense attorney would consider this abuse, not fraud. Alternatively, if an employee tells their doctor they can’t lift a gallon of milk but is seen weightlifting, this evidence could signify a material misrepresentation, or fraud.

If an injured worker denies a prior injury, yet evidence of a prior injury is documented in subpoenaed records, this evidence is only material if the prior injury overlaps with the industrial injury. For example, a prior foot injury won’t have any relevance or fraud implications to a later industrial injury to the shoulder.

If an injured worker with cognitive impairment, for example Alzheimer’s, denies a prior injury that is mentioned in prior medical records, it will be challenging to prove the employee “knowingly” lied, which will make it difficult to prove fraud.

Combatting Workers’ Comp Fraud and Abuse

State legislatures require insurers to report suspected fraud. Effectively addressing fraud requires a multi-faceted approach involving collaboration between employers, insurers, law enforcement agencies, and regulatory bodies. The fraud investigation process includes the following key strategies:

Prevention: Employers can provide their workforce with education and training to raise awareness about WC fraud and its consequences and employee rights and responsibilities. This training can help promote a culture of transparency, accountability, and integrity.

Detection: Employers can communicate concerns about possible fraudulent behavior of claimants to their claims adjuster for further investigation. Likewise, insurers can leverage data analytics, surveillance techniques, and fraud detection algorithms to identify suspicious patterns and flag potentially fraudulent claims.

Investigation: Claims adjuster and insurer special investigation unit strategies include reviewing statements or testimonies of witnesses, depositions of injured workers, and medical records and then comparing these findings with the allegations and history. Some employers use video surveillance of their work sites. Insurers should work together with law enforcement agencies and district attorney offices who play a crucial role in investigating suspected cases of WC fraud. Timely and thorough investigations can uncover evidence and hold perpetrators accountable.

Settlement and Medical Opinions: Fraud investigations can sometimes take several years to resolve. Until there is an actual criminal conviction, injured employees are legally entitled to ongoing benefits. Fortunately, suspicious injured worker activity may still be useful as leverage to persuade medical evaluators to find no disability, such as in cases where the employee is surveilled engaging in activities inconsistent with medical restrictions. It can also be used to negotiate a lower settlement amount in a claim while still preserving the right to continue the fraud investigation if the investigation is ultimately successful. Since most fraud investigations do not result in a fraud finding, choosing to cut losses and settle early makes good business sense. It does not mean an employer is giving up the pursuit of fraud.

WC fraud and abuse is a complex matter that goes beyond ordinary claim issues. A good insurance broker can assist with identifying red flags and strategies as well as coordinate and persistently monitor investigation activities to improve outcomes and mitigate risk.

Workers’ Comp Fraud and Abuse Outcomes

Workers committing WC fraud face severe legal consequences, including fines, restitution orders, and imprisonment. Moreover, the reputational damage resulting from fraud allegations can have long-lasting repercussions on their career and personal life.

When a fraud conviction is successful, employers may be eligible to have their ex-mod revised downward if the claim affected it. This revision could result in a credit to their insurance premium.

Fraud poses a significant threat to the WC system. By understanding the various forms and signs of fraud and abuse, recognizing their far-reaching impacts, and implementing proactive measures to prevent, detect, and address suspicious behavior, we can safeguard the security of genuine claimants, protect the interests of employers, and preserve the stability of the WC system.