Menu Close

Category: Daily News

Epic Failure of $370M Fraud Detection Tech System in California & 7 States

Deloitte is the largest professional services network by revenue and number of professionals in the world and is considered one of the Big Four accounting firms along with EY (Ernest & Young), KPMG and PricewaterhouseCoopers (PWC). The company secured multi-million dollar deals in California and seven other states, based on promises of powerful anti-fraud technology and secure, scalable telecoms infrastructure.

In a presentation to the Kansas Department of Labor, in which it claimed to have prevented $100 billion in pandemic unemployment fraud, Deloitte touted “advanced AI-driven fraud detection,” as well as “identity proofing” to help “prevent unauthorized activity,” technologies that had been deployed across U.S. states for over a decade.

With its claims of being able to modernize and secure unemployment systems, according to the follow up report by Forbes, Deloitte was seen as the obvious choice to help states with the incoming tidal wave of Covid benefits applications for the $650 billion pot of pandemic welfare funds. “Deloitte was the only company that had a production-ready PUA system available,” said Kimberly Hall, director of the Ohio Department of Job and Family Services, in written testimony in May 2020.

For contracts in California, Colorado, Illinois, New Mexico, New York, Ohio,Virginia and Wisconsin, Deloitte either deployed tailored uFACTS systems or upgraded legacy infrastructure, and built up attached teleservices centers.

Those deals – worth at least a combined $370 million – contributed to Deloitte’s record $50 billion and $60 billion yearly revenues in 2021 and 2022. According to local government data, in states where Deloitte was either asked to help prevent fraud or ran the benefits system, there was as much as $21.2 billion in fraud. uFACTS systems alone saw up to $3.2 billion.

But in Ohio, as the price of the Deloitte contract spiraled, according to Forbes, so did the cost of the fraud. Starting at an initial $10 million in 2020, the Deloitte deal jumped to $122 million as of October 2022. Meanwhile, at least $166 million in fraudulent applications was paid out through the Deloitte system in the state fiscal year between July 2020 and June 2021, according to figures the state auditor provided to Forbes. But this data is incomplete: It does not take into account figures from the 2022 fiscal year, which are still being tallied, nor the $1.2 billion in benefits payments that have been flagged as potentially fraudulent and are still being adjudicated.

Despite Deloitte’s claims of advanced anti-fraud detection, the breach of the uFACTS system in Ohio was rudimentary and brazen, according to the search warrant reviewed by Forbes. One of the accused’s customers, in an interview with a Labor Department investigator, said the suspect was advertising her ability to remove fraud flags on Instagram, the warrant said. The suspect also successfully claimed unemployment under her own name, even though she was working for both the Ohio Department of Job and Family Services and the U.S. Postal Service at the time. Deloitte and its subcontractor Randstad, which was the direct employer of the suspect, did not detect her alleged crimes, which were first reported by an anonymous tipster.

In October last year, Brandi Hawkins, a teleservices representative with access to the Michigan unemployment system, was convicted of approving hundreds of fraudulent claims that led to the loss of $3.8 million in government funds. Deloitte noted in its report that Hawkins was able to remove fraud flags on the Michigan benefits database for weeks after her termination.

Unlike Hawkins, an unnamed suspect in an Ohio case also claimed to be able to get fraudulent applications approved in other states where she didn’t have direct access to the system, investigators said. According to the government, she was particularly successful in California, where Deloitte had deals worth a total of $88 million with the Employment Development Department (EDD) for Covid-19 benefits. In late 2020, the suspect’s customers had fraudulent applications approved in California, totalling over $50,000 in payouts from the West Coast state, Labor Department officers claimed. The same customers had already had fraud flags on applications in Ohio removed and been given a payout, according to the warrant, showing it was possible to file claims in multiple states under the same name and receive insurance checks.

Along with complaints that millions of calls to Deloitte-supported centers in California were going unanswered, assemblyman David Chiu told local media in March 2021, “Deloitte has continued to underperform.” The call centers, he added, were a “mess.”  In January 2021, in an assessment of the EDD’s work on Covid-19 benefits, the state auditor slammed the agency for failing to act promptly to prevent as much as $10.4 billion in potentially fraudulent unemployment payments. It highlighted an estimated $810 million paid out to incarcerated individuals who were ineligible for payouts. By October last year, the EDD’s own estimate for total lost to fraud stood at $20 billion.

Other states weren’t even able to put a figure on the amount of fraud perpetrated through their systems. In a similar deployment to Ohio, Illinois spent $14.3 million for a uFACTS setup and another $42.7 million to prop up attached call centers, according to government contract records. But the deployment was “inadequate” as it didn’t collect accurate data on PUA claims, according to state auditor Frank Mautino. He told Forbes, “We know that there was a large amount of fraud,” but it will have to wait until next year’s audit to get the requisite data to put a dollar amount on the criminal activity.

Deloitte’s woes with its Covid benefits contracts go right back to the early days of the pandemic. In May 2020, a mistake by Deloitte led to personal information of as many as 240,000 unemployment insurance applicants in Colorado, Illinois and Ohio leaking on government benefits websites. The company settled a class action suit over the breach for $4.95 million in 2021.

L.C. 432.6 Nullifies Employer’s Postlitigation Proposed Arbitration Agreement

This is an unpublished decision, and therefore not controlling on any lower court. And there is no new or novel case law discussed by the court. The case is however valuable as an illustration of how difficult it might be to create and implement a binding arbitration agreement with employees, and in this case how missteps in the implementation can badly effect the outcome of litigation.

In this case John Schwenk began working for Bristol Farms in 2009. In September 2020, he filed a class action complaint based on wage and hour claims.

Seven months after he filed his case in the trial court, Bristol Farms distributed to its employees an arbitration agreement to include a broad range of claims, including those involved in this litigation. The agreement contained an opt-out procedure for employees to follow if they did not want to be bound by the agreement.

It was undisputed that one day after Schwenk signed and submitted the acknowledgment page of the arbitration agreement, he asked for it back, and shredded it. He crossed out his signature on the receipt tracking list in the presence of a Bristol Farms administrator who then initialed and confirmed the change on the form.

Seventy days after Schwenk shredded the arbitration agreement and crossed out his signature on Bristol Farms’s receipt tracking list, counsel for both Bristol Farms and Schwenk met and discussed the agreement. Meanwhile, between the shredding of the agreement, and the discussion between counsel, Schwenk’s lawsuit had moved forward with Schwenk’s counsel propounding two sets of initial discovery requests to Bristol Farms, and the parties filing a second joint case management statement with the trial court without mentioning the arbitration agreement or that either party would seek arbitration.

Thirty days after the respective parties’ counsel discussed the arbitration agreement, Bristol Farms filed a motion to compel arbitration. Bristol Farms contended that Schwenk impliedly assented to the proposed agreement to arbitrate. The trial court rejected the contention because it found Schwenk did not assent to the agreement, and denied the motion. The court of appeal agreed and affirmed the trial court in the unpublished case of Schwenk v Bristol Farms – G060731 (October 2022).

Bristol Farms argues it is entitled to a reversal as a matter of law based on a two-part argument: (1) Schwenk agreed to Bristol Farms’s arbitration agreement by continuing employment; and so (2) Schwenk’s failure to comply with the “opt out” procedure in the arbitration agreement constituted his consent to be bound by the arbitration agreement’s terms.

In response, Schwenk notes the Legislature’s enactment of Labor Code section 432.6. in 2019. The statute provides in relevant part that no person may require an “employee to waive any right, forum, or procedure for a violation of [the Labor Code], including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court.”

Labor Code section 432.6, subdivision (c), includes in its definition of prohibited dealings any “agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights.”

Thus the court of appeal wrote “Applied facially, Labor Code section 432.6, subdivisions (a) and (c), are fatal to Bristol Farms’s argument that its opt out procedure shows Schwenk consented to the arbitration agreement.”

And the court of appeal concluded that the “trial court correctly decided Bristol Farms had not shown mutual consent in this case based on undisputed facts. Substantial evidence supports the court’s finding that Schwenk ‘never agreed to arbitrate his claims against Bristol Farms’ because Schwenk’s undisputed outward manifestations of conduct would lead a reasonable person to believe his consent did not exist.”

Science May Support Apportionment of Musculoskeletal Disability to Smoking

RxInformer just published an article “The Triple Threat of Tobacco Use on Employer, Clinical, and Medication Complexity which shows the effects tobacco use has on skeletal injuries, and thus may potentially be an avenue to explore apportionment of permanent disability, since California Labor Code section 4663 mandates that apportionment of permanent disability shall be based on causation. The report is well documented with references to academic and scientific literature.

Recognized as a patient risk factor within workers’ compensation healthcare, tobacco use, including cigarette smoking, has specific impacts on employee and injured worker patient populations.

– – Smoking has detrimental impacts to worker productivity, including both absenteeism and presenteeism factors.
– – Rates of tobacco use are higher among blue collar occupations, with the highest prevalence of cigarette smoking in construction, mining and manufacturing.
– – The average additional cost associated with employing a smoker are estimated at more than $7000 annually.
– – Tobacco use increases fracture risk, slows healing, and is linked to increased risk for post-surgical complications that increase morbidity, mortality, and healthcare interventions.
– – Tobacco smoke can negatively interact with a number of medications prescribed in workers’ compensation.

Tobacco use deteriorates the health and function of all major body systems and is linked to multiple clinical detriments relevant to injury and recovery. Cigarette smoking is known to delay wound healing due to the damage it inflicts on blood vessels, blood flowing to wounds, and decreased oxygen levels in blood.

Smoking also erodes the entire musculoskeletal system, degrading bone density and leaving individuals at higher risk for fractures, slower healing, and nonunion. The authors cite Hernigou J & Schuind F. Tobacco and bone fractures. Bone Joint Res. 2019;8:255-65 as authority for this claim.

Notable is the established connection between tobacco use and post-surgical complications. The trauma of surgical intervention triggers a natural inflammatory response in the body that enables tissue recovery and helps to fight infection. The negative impacts of tobacco on cardiovascular function, pulmonary function and tissue healing are shown to interfere with this process, lending itself to higher rates of significant postsurgical complications. Here the authors cite Sorensen LT. Wound healing and infection in surgery. The clinical impact of smoking and smoking cessation: a systematic review and meta-analysis. Arch Surg. 2012;147(4):373-83 and Turan A, Mascha EJ, Roberman D, et al. Smoking and perioperative outcomes. Anesthesiology. 2011;114(4):837-46 as medical literature on this issue.

Tobacco smoke can negatively interact with certain medications by impacting how the body absorbs, metabolizes, distributes and excretes them. This can mean reducing or, in rare cases, enhancing the effectiveness of the medication. It can also mean increasing the risk of adverse effects.

Some of the potentially impacted prescribed within workers’ compensation include, but are not limited to Benzodiazepines, Opioids, Tricyclic antidepressants, Alprazolam, Cyclobenzaprine, Naproxen and others. See the publication by the American Academy of Family Physicians. Drug interactions with tobacco smoke for a more complete list.

EEOC Releases Updated “Know Your Rights” Mandated Poster

The U.S. Equal Employment Opportunity Commission (EEOC) released theKnow Your Rightsposter, which updates and replaces the previous “EEO is the Law” poster. The new poster was released on Oct. 19, 2022, and indicates that it is “(Revised 10/20/2022),”

These posters should be placed in a conspicuous location in the workplace where notices to applicants and employees are customarily posted. In addition to physically posting, covered employers are encouraged to post the notice digitally on their web sites in a conspicuous location. In most cases, electronic posting supplements the physical posting requirement. In some situations (for example, for employers without a physical location or for employees who telework or work remotely and do not visit the employer’s workplace on a regular basis), it may be the only posting.

The poster also includes a QR code for applicants or employees to link directly to instructions forhow to file a charge of workplace discrimination with the EEOC.

The poster includes these changes:

– – Uses straightforward language and formatting;
– – Notes that harassment is a prohibited form of discrimination;
– – Clarifies that sex discrimination includes discrimination based on pregnancy and related conditions, sexual orientation, or gender identity;
– – Adds a QR code for fast digital access to the how to file a charge webpage;
– – Provides information about equal pay discrimination for federal contractors.

The poster is available in English and Spanish and will be available in additional languages at a later date.

Printed notices should also be made available in an accessible format, as needed, to persons with disabilities that limit the ability to see or read. Notices can be recorded on an audio file, provided in an electronic format that can be utilized by screen-reading technology or read to applicants or employees with disabilities that limit seeing or reading ability.

San Jose Father and Son Arrested for $12M Premium Fraud

Edgardo Cabrales Sr., 61, and his son, Edgar Cabrales Jr., 36, both of San Jose, are charged with five felony counts each of insurance fraud after a Department of Insurance investigation found they allegedly underreported $12 million in employee wages and payroll to save on workers’ compensation insurance premiums.

The Cabrales own two commercial cleaning companies in San Jose: Pine Building Maintenance (PBM) and Network Facility Management (NFM).

An investigation by the Department began after the State Compensation Insurance Fraud (SCIF) suspected the businesses of fraud.

The investigation discovered that since 2016 the Cabrales had only secured insurance coverage for a fraction of their PBM employees and they had never secured a workers’ compensation insurance policy to insure their NFM employees, even though the majority of their business was operated through NFM.

The father and son accomplices failed to report approximately $12 million in wages to SCIF in order to save money on insurance, resulting in $4.2 million in lost premiums.

In this case, Cabrales’ underreporting significantly lowered the premiums owed. Businesses that fraudulently lower their premiums benefit from an unfair market advantage, giving them the ability to charge less in labor costs, and thereby underbid businesses who pay the appropriate premiums.

Cabrales Jr. self-surrendered yesterday and his father, Cabrales Sr., was arrested on October 23, 2022, at the San Francisco International Airport. The Santa Clara County District Attorney’s Office is prosecuting this case.

Employers are required to maintain workers’ compensation insurance to cover their employees in the event of an accidental on-the-job injury. To ensure proper coverage, employers are required to accurately report the number of employees, job classifications, and the amount of payroll expended. One of the common ways in which employers avoid paying insurance premiums is to underreport a business’s payroll by providing false payroll reports to their insurance company.

U.S. DOL Recovers $202K From SoCal Car Wash for Wage Theft

A federal investigation has recovered $202,192 in back wages and liquidated damages for 13 workers at a Southern California car wash, whose employer shortchanged them, tried to conceal their wrongdoing, and committed other violations of federal law.

Investigators with the U.S. Department of Labor’s Wage and Hour Division found that MG Petroleum Inc., operator of Rancho Carwash – a gas station, mini market and car wash – in Rancho Cucamonga, attempted to hide its illegal actions giving workers two paychecks: one for the first 40 hours worked, and a second for overtime hours paid at straight-time rates, without legally required overtime premium.

The division also determined MG Petroleum required workers to take lunch breaks as customer demand dictated. While this practice left employees unable to take uninterrupted one-hour lunch breaks, the employer still deducted an average of 4 hours per week for lunch breaks. The employer’s led to violations of the Fair Labor Standards Act.

The investigation led to the recovery of $101,096 in back wages and an equal amount of $101,096 in liquidated damages for the affected workers.

“Federal law requires that employers pay workers all their hard-earned wages, including overtime pay for hours employees work over 40 in a workweek,” said Wage and Hour Division Assistant District Director Gayane Aleksanian in West Covina, California.

“Rancho Carwash’s operator denied workers their overtime pay and then attempted to hide their illegal pay practices. The costly consequences for their violations and their attempt to evade the law are now clear.”

In fiscal year 2021, the Wage and Hour Division recovered more than $138 million in unpaid overtime wages for more than 145,000 workers.

“As employers continue to struggle to find the people they need to operate their businesses, those who respect workers’ rights to be paid their full wages and avoid violations are more likely to succeed in retaining and  recruiting employees,” Aleksanian added.

WCAB Rules on Procedure for County to Recover L.C 4850.4 Advances

Rebecca Gage sustained injury to the lumbar spine through September 14, 2011 while employed as a deputy sheriff by the County of Sacramento. She requested advanced disability pension payments pursuant to Labor Code section 4850.4.

The employer made payments, but the payments were unreasonably delayed and she was awarded LC. 5814 penalties. The WCAB granted reconsideration and reversed the penalty order. It found that because advance disability retirement payments were not equivalent to regular workers’ compensation benefits, and that these benefits were not subject to a section 5814 penalty. The Court of Appeal reversed in the 2016 published case of Gage v WCAB. ( 6 Cal.App.5th 1128 [81 Cal.Comp.Cases 1127].) and concluded that the WCAB does indeed have jurisdiction to impose penalties under Labor Code section 5814. Subsequently the parties resolved all penalties.

Gage received advanced disability pension payments from May 8, 2015 through October 17, 2018 for a total of $120,144.03. Her disability retirement application was denied on October 17, 2018. The employer designated mediation as its independent level of resolution to recover these payments and scheduled a mediation with a retired judge for April 27, 2020. Gage did not attend. The matter proceeded to a status conference to compel her to attend. The WCJ denied the request finding no jurisdiction to do so, despite the Court of Appeal decision.

The WCAB again granted reconsideration on August 9, 2021, finding that the order was issued without creation of a record, and the case was remanded for further proceedings which occurred on December 13, 2021. The sole issue at trial was “[j]urisdiction to enforce Labor Code, section 4850.4.”

The WCJ concluded that initial jurisdiction over a plan to repay advanced disability retirement benefits vests solely with the local agency who issued payment. And that the Appeals Board has non-exclusive jurisdiction over litigation of any repayment plan or applicant may seek a writ of mandate with the Superior Court, but jurisdiction with the Appeals Board only exists after the parties have completed the first two steps outlined in the statute. And the WCJ found that the parties are expected to meet and confer to reach an agreement on a repayment plan per Labor Code section 4850.4(f). Both parties filed a petition for reconsideration which was granted in the newest WCAB panel decision of Gage v County of Sacramento ADJ8010054 (September 2022).

The employer contends that the Appeals Board has jurisdiction over repayment of applicant’s advanced disability pension payments since the Court of Appeal held that the Appeals Board has jurisdiction to “enforce payment” of advances. The panel responded by saying this “construction of the Court’s holding improperly conflates jurisdiction over section 5814 penalties with jurisdiction over section 4850.4 payments” because these payments are “compensation: under section 3207.

The last sentence of section 4850.4(f) permits the local agency to “take reasonable steps, including litigation” to recover the advanced payments “[i]f repayment is not made according to the repayment plan.” At this juncture, there is no repayment plan in place. Defendant may not pursue litigation to recover the advanced payments it made until applicant has failed to make payments per a repayment plan adopted either by an agreement between the parties or following submission of the issue to defendant’s administrative appeals remedy. It is thus premature to address whether “litigation” as that term is used in the statute entails proceedings before the Appeals Board or in civil court, or both.

The Order was rescinded, and the case taken off calendar with the WCAB concluding that “The Appeals Board does not have jurisdiction to force applicant’s participation to agree on a repayment plan or in the local agency’s administrative appeals remedy.”

FLSA Mandates Call Center Employees be Paid for Booting Up Computer

Connexx, a wholly owned subsidiary of JanOne Inc., operates a call center in Las Vegas, Nevada that provides customer service and scheduling for an appliance recycling business.

Cariene Cadena and similarly situated employees work in-person at the call center in a variety of hourly-paid, non-exempt positions, including as call center agents whose primary responsibilities are to provide customer service and scheduling functions over a “soft phone,” operated only through their employer-provided computers.

Employees clock in and out using a computer based timekeeping program, which they must do before accessing other job relevant programs. To reach the timekeeping program, employees must awaken or turn on their computers, log in using a username and password, and open up the timekeeping system.

Depending on the age of the computer and whether the computer was off or in sleep mode, it would take anywhere from a minute to twenty minutes for the computer to boot-up so they could clock in. Once clocked in, employees load various programs and scripts and confirm that their phone is connected and ready to accept calls.

At the end of their shift, employees wrap up any calls they are on, close out of job-relevant programs, clock out, and then log off or shut down their computers. Connexx employees gave varied accounts of how long it took to log off of their computers, ranging from less than a minute to fifteen minutes, and Connexx estimate it took an average of 4.75 to 7.75 minutes to log off and boot down the computers.

The plaintiffs filed suit in Nevada state court alleging violations of the overtime provisions of the FLSA and Nevada law. They contend that they were not paid for the time spent booting up their computers prior to clocking in to the electronic timekeeping system or closing down their computers after clocking out of the timekeeping program. Connexx removed the case to federal court.

The district court granted summary judgment to Defendants, holding that “[s]tarting and turning off computers and clocking in and out of a timekeeping system are not principal activities” because Connexx did not hire employees for that purpose, but “to answer customer phone calls and perform scheduling tasks.” The trial court compared booting up to “the electronic equivalent of waiting in line to clock in or out of a physical timeclock, which is non-compensable.”

Plaintiffs appeal. The United States Department of Labor (DOL) filed an amicus brief in support of Appellants. The 9th Circuit Court of Appeals reversed and remanded in the published case of Cadena v Connexx LLC – 21-16522 (October 2022).

Appellants have raised a single issue for review: Whether Appellants’ time spent booting up and shutting down their computers, through which they access their phone and customer service programs, is an integral and indispensable part of their duties and thus compensable under the Fair Labor Standards Act .

The Fair Labor Standards Act of 1938 29 U.S.C. § 203 (FLSA) is a United States labor law that creates the right to a minimum wage, and “time-and-a-half” overtime pay when people work over forty hours a week.

Clocking in may not be integral to the tasks for which the employees were hired and could be accomplished by other means, such as the traditional time clock or a time sheet. But the court went on to say that we “think the correct inquiry is whether engaging the computer, which contains the phone program, scripts, customer information, and email programs, is integral to the employees’ duties. That is, we should evaluate the importance of booting up the computer to the employees’ primary duties of answering calls and scheduling rather than to their need to clock in using the electronic timekeeping system. When the employees’ duties are understood in this way, the electronic timekeeping system becomes a red herring.”

“When framed correctly, the answer to the question ‘whether booting up the computers is integral and indispensable to the employees’ customer service duties’ is clear. All of the employees’ principal duties require the use of a functional computer, so turning on or waking up their computers at the beginning of their shifts is integral and indispensable to their principal activities. Because clocking in to the timekeeping program occurs after booting up the computer ‘the first principal activity of the day’ it is compensable.”

The Tenth Circuit recently reached the same conclusion when faced with a similar claim from call center representatives. In Peterson v. Nelnet Diversified Solutions, LLC, 15 F.4th 1033 (10th Cir. 2021), the employees’ principal responsibilities were to “service student loans and interact with debtors over the phone and through email.” Before clocking in to an electronic timekeeping system, each employee had to wake up her work computer, enter her credentials, and load the desktop and the company’s intranet system, which contained the link to clock in.

The case was remanded to the district court for consideration of whether time spent shutting down computers was compensable, and whether the time spent booting up and down the computers was not compensable under the de minimis doctrine.

Applicant Attorney Jon Woods to Serve 4 Years for Comp Fraud

A workers’ compensation applicant attorney was sentenced to four years in state prison and ordered to pay over $700,000 in restitution to seventeen different insurance carriers for participating in two separate insurance fraud referral schemes.

Jon Woods, 61, of Cypress, was convicted in August of 37 felony counts of insurance fraud along with an aggravated white-collar crime sentencing enhancement. Woods was one of ten workers’ compensation applicant attorneys charged by the Orange County District Attorney’s Office in June 2017 as a result of a complex insurance fraud investigation.  

Charges were also filed against Carlos Arguello, Fermin Iglesias, and Edgar Gonzalez, along with four chiropractors, and several employees working for Carlos Arguello.  Carlos Arguello, his employees, and Fermin Iglesias have all pleaded guilty in their Orange County Superior Court cases.  Arguello and Iglesias were also charged in federal court for violating federal laws related to their scheme with medical providers, resulting in a four-year federal sentence for Arguello and a five-year federal prison sentence for Iglesias.

Woods was found guilty of participating in two different insurance fraud schemes – one with a “marketer” named Carlos Arguello, and the other with a subpoena company owner named Edgar Gonzalez.  From 2011 to 2016, Woods paid Carlos Arguello for workers’ compensation clients procured through Arguello’s attorney marketing business, Centro Legal International, and later Tu Justicia Legal, as well as Centro de Abogados.

Targeting mainly Hispanic neighborhoods across the State, Arguello’s business handed out more than four million business-card-sized flyers per month to attract prospective workers’ compensation clients for Arguello’s “marketing” scheme.  The flyers contained different toll-free numbers that all rang to a call center located in Tijuana, Mexico.  The call center operators served as a sales force, responsible for securing clients for Arguello’s attorneys by conferring with staff of various law firms about the callers’ cases, and then dispatching a “sign-up” representative from Arguello’s network to the caller’s home within 24-48 hours to sign legal paperwork to hire the law firm and start the injury claim.  Arguello distributed clients to law firms based on the amount each law firm paid Arguello for clients that month.

In addition to paying a monthly fee for obtaining clients, Woods also sent records subpoena work to companies controlled and operated by Carlos Arguello, in an amount equal to the number of clients he received from Arguello.  These companies billed the workers’ compensation insurance policy of the injured worker’s employer for all the records subpoena services they provided for Woods, because the law requires that cost of an injured worker proving his/her workers’ compensation claim must be paid by the employer’s workers’ compensation insurance.  This includes expense for obtaining records through subpoenas ordered by the injured worker’s lawyer.

Arguello’s scheme required that all clients procured through Arguello’s “marketing” would be sent to clinics chosen by Arguello’s organization.  Like the lawyers participating in his scheme, a group of doctors or chiropractors were also paying Arguello for workers’ compensation patients.  Fermin Iglesias, an associate of Carlos Arguello, oversaw the medical side of the scheme, in which medical service providers issued prescriptions for medical products to businesses owned by Iglesias in exchange for referral of patients to their clinics.

California’s workers’ compensation laws prohibit any person from paying for referral of business that would be billed through workers’ compensation insurance, and prohibit acceptance of such business in exchange for any kind of payment, benefit or compensation.  At trial, representatives of seventeen different workers’ compensation insurance companies testified that their companies would not have paid any of the bills received from a records subpoena company if they knew that the services rendered were a result of an unlawful referral scheme.

Woods was also found guilty of participating in a second fraud scheme in which he referred additional records subpoena work to USA Photocopy, a subpoena company owned by Edgar Gonzalez. Gonzalez paid various business expenses for Woods’ law firm as a bribe to receive the firm’s records subpoena work, including paying salaries for several entry-level employees who worked at Woods’ law firm, and paying bills for shredding costs, copier maintenance, new scanners, as well as an overseas back-office assistant.

Arguello and Gonzalez’s records subpoena companies had offshore offices in El Salvador, where employees reviewed subpoenaed records to identify more businesses that they can serve with more records subpoenas on Woods’ behalf. These companies billed workers’ compensation insurance companies for each individual subpoena.

Senior Deputy District Attorney Noor Hasan of Insurance Fraud prosecuted this case.

AM Best Reports WC Profitability “Unmatched” by Other P/C Lines

Annual underwriting profit in the U.S. workers’ compensation line of business has averaged $4.8 billion in the last five years and totaled almost $24 billion during the period – a level of profitability unmatched by any of the other major property/casualty lines of business, according to a new AM Best report.

In its Best’s Market Segment Report, “Workers Compensation Generates Solid Profits but the Future Remains Uncertain,” AM Best states that direct premium volume also rebounded in 2021 to $52.2 billion, following a sharp drop in 2020. Reflecting the benefits of workplace safety and legislative changes that have reined in workers’ compensation claims costs as the frequency of claims continues to decline, the segment’s net loss ratio has ranged from 45.4 to 49.0 in the most recent five-year period.

The combined ratio remained within the range of 86.2 and 92.2 during the period, and was 87.9 in 2021. Strong favorable loss reserve development for workers’ compensation drove the positive calendar-year results and was the primary reason for the entire property/casualty industry’s favorable reserve development. According to the report, what appears to be redundant reserves sets the stage for more favorable development in 2022. In addition, unemployment was at 3.5% in September 2022, down significantly from 5.4% for 2021, and these indicators suggest a continued rise in workers’ compensation premiums through the end of 2022, but that will depend on other economic factors.

“Inflation could disrupt this stable environment. If inflation causes loss costs to increase, particularly on the medical side, without a commensurate increase in employee wages, rate increases may be necessary to cover the gap,” said Christopher Graham., senior industry analyst, AM Best. “Inflation could also necessitate companies further sharpening their risk management and loss control efforts to limit claims frequency.”

AM Best also analyzes the overall health of the workers’ compensation line of business through its Workers’ Compensation Composite, which is composed of U.S. companies, including state funds, whose workers’ compensation and excess workers’ compensation net premiums constitute 50% or more of their total net premiums. As of the end of 2021, these specialists accounted for almost 35% of overall industry’s workers’ compensation net premium volume, up notably from just under 30% in 2011. Net income for this population has been consistently solid, at more than $3 billion each the past six years.

“Although net income remains strong, it has not been growing, even as policyholders’ surplus has,” said David Blades, associate director, AM Best. “This has led to a drop in after-tax return on equity the past two years. Calendar-year 2022 will provide more guidance on the ROE: Will the current, lower return level persist or will the composite’s ROE strengthen and meet or exceed pre-pandemic levels?”

AM Best is hosting a briefing on the workers’ compensation market on Monday, Nov. 7, 2022, at 1:00 p.m.( EST). Senior AM Best analytical staff and leading industry experts will the state of the workers’ compensation market and emerging trends in underwriting, reserving and claims. To register, please visit AM Best’s Briefing – The Workers’ Comp Market: What to Expect in the Year Ahead.