February 2012
Workers' compensation insurance is designed to protect employees from workplace injuries. If an employee gets injured on the job, the workers' compensation insurer will cover medical treatment and lost wages. Insurance fraud is present in all economic environments. Boom or bust, there are always people who are looking to scam the system.
In slow economic times, the economy contracts and the inevitable attrition and layoffs cause employment rolls to shrink. This may lead to fewer claims as there are fewer employees working and therefore fewer employees becoming injured. This decrease in claims may correspond to a decrease in Special Investigation Unit referrals or fraud investigations. However, insurers should be careful not to overreact to these changes in volume. The fraud problem may be worse than these numbers suggest. Here's why.
Unemployment Plays A Big Part
Unemployment is a scary thing. Employees facing layoffs risk losing their paycheck and their other employer-sponsored benefits like health insurance, all at once. When faced with the prospect of a layoff, some employees may be incented to fake a workplace injury to file a workers compensation claim. This accomplishes two things simultaneously: it provides a continuous income stream of wage replacement benefits as well as coverage for medical treatment for the employee. This may become an attractive option for desperate individuals who might not otherwise turn to insurance fraud.
Furthermore, employees who have an active workers' compensation claim may be more likely to malinger if there are limited job prospects in the market. Regardless of whether these claims were legitimate or not at the onset, the insurer faces an increased risk of fraud in this area.
It's Not Just The Employees
In tough economic times, businesses need to trim expenses any way they can. Unfortunately, some business owners believe that misrepresenting their business to obtain lower workers compensation premiums is an option for reducing costs. This leaves the insurer over-exposed to risk while failing to collect adequate premium. And as insurers try to minimize their own expenses, it becomes less and less common to conduct onsite audits which can help mitigate this type of exposure.
Insurers also need to be on the lookout for vendors like medical providers who may be "enhancing" their billing practices in an attempt to increase their own revenue. Padding medical bills or billing for services not rendered are common ways that unscrupulous medical providers try to scam workers' compensation insurers.
This is the second article in a six-part series based on the material from the book, The Accountable Executive, expected to be released in the Spring of 2012. In this series, Hal Johnson and Ed Street of LeadershipOne, address what they observe as major contributors to low accountability cultures — which they have observed as a meaningful area of struggle in many mid-market companies — and the antidote. Additional articles in the series can be found here: Part 1, Part 3, Part 4, Part 5, and Part 6.
Establishing The Vision And Aligning Activities
When we think of effective direction in a business setting, our thoughts tend to run to strategic planning. That makes sense, since one of the most fundamental responsibilities of an accountable executive is to assure the enterprise has good direction and related activities are in alignment with that direction. The well established processes found in the strategic planning cycle are sound — when fully embraced. Following the sequence of vision --> goals --> strategies --> projects --> implementation is a proven formula for creating effective direction. However, according to research at the Harvard Business School, only about 10% of companies do well with the implementation part. And, mostly, this is attributable to lack of accountability.
Building an organization committed to the highest performance standards demands more than just good intentions: it also requires fostering practices that create an environment of clarity, commitment, and accountability. Without healthy accountability, an enterprise loses one of the key elements of management — predictability.
What Is Accountability?
We are glad you asked, because there seems to be a lack of uniform clarity.
- It's a commitment — a statement of personal promise, both to yourself and the people around you, to deliver specific defined results. It reflects a winning attitude of "you can count on me."
- Producing results — results are important so mere activity is not enough.
- It is meaningless without consequences. Both positive and negative. Not responding to unaccountable behavior is the first step in a downhill slide of performance.
- At the top level, it assumes a proactive and conscious commitment to the purpose of the organization, manifested by clarity, transparency and participation, which enable contribution.
The adjuster's call was exactly the kind of call that excites all defense attorneys who enjoy defeating fraud. With the excellent teamwork of the adjuster, carrier, Special Investigations Unit department, investigators, District Attorney and our office, another "bad guy" got his comeuppance.
An accepted claim filed by a long-term employee, the matter was initially suspicious solely because of the timing. The claim was filed shortly prior to the employer, a car dealership, going out of business. As such, the adjuster kept her eyes and ears open for any other evidence of foul play ... and that awareness soon proved invaluable. Research uncovered more red flags, including reports the applicant was a long-time motorcycle racer. Investigations confirmed he was continuing to race and we caught our first major break with film at the track.
Time for popcorn and celebration?
No — as we viewed the film for the first time, we learned — to our collective dismay — the sub rosa failed to actually show applicant's face.
Had we been checkmated?
As Dr. Jason Hwang, co-author of the Innovator's Prescription, has stated, one of the core tenets of disruptive innovation is to use technology to transfer services from costly, expertise-intensive settings into more affordable, convenient, and accessible venues. Doctors from Seattle to South Carolina are demonstrating exactly that by removing the 40% "insurance bureaucracy tax" from healthcare. You might think of it as "two parts Marcus Welby and one part Steve Jobs." The results have been staggering with a 40-80% reduction in the most expensive facets of healthcare (surgeries, scans, specialist and ER visits).
Primary care physicians consistently state that 2/3 of patient office visits could be done remotely via phone or email, but they are disincented from doing this with the convoluted reimbursement models of present day health insurance. If doctors don't see the whites of your eyes, they won't get reimbursed so the result is people taking half their day to get to/from their doctor's office, sit in a waiting room, wait in the exam room and then get 7 minutes with their physician not to mention dealing with all the billing hassles.
Instead, modern day Marcus Welbys are available via electronic means. For example, one physician operating in this new model shared how he hasn't seen a patient with Shingles in five years. His patients simply take a picture of their symptoms with their smartphone and email it to him to verify that they have Shingles. In a few minutes, he can order a prescription and everyone has saved time and money rather than waiting days to get into their doctor. After all, what location is more convenient than one's home?
Some Direct Primary Care providers such as WhiteGlove Health and Organic Medicine Now take it a step further and make house calls that harken back to the days of your family doctor stopping by your house just a few decades ago. Beyond that, they provide simple, yet sophisticated, technology tools for further patient convenience and savings that allow them to cut administrative overhead by 80% compared to a typical medical practice. Rather than patients filling out mountains of paperwork for what seems like the hundredth time, all patient-provider interactions can be done at the patients' convenience whether it's filling out forms, scheduling appointments or requesting medication refills.
Marcus Welby wouldn't recognize mainstream medicine today. In Welby's time, we didn't insure the equivalent of a car tune-up but we do that in most health plans today. Nor did we have insurance middlemen who add no value sitting in between you and your family doctor. Two related items should be done to save individuals, businesses and government a huge sum of money on healthcare.
This is the first article in a six-part series based on the material from the book, The Accountable Executive, expected to be released in the Spring of 2012. In this series, Hal Johnson and Ed Street of LeadershipOne, address what they observe as major contributors to low accountability cultures - which they have observed as a meaningful area of struggle in many mid-market companies - and the antidote. Subsequent articles in the series can be found here: Part 2, Part 3, Part 4, Part 5, and Part 6.
In the mid-market business arena (under $1 billion) there are countless senior executives who have come to their jobs through high performance in their "industrial specialties." They have been very good engineers, architects, sales and marketing execs, attorneys, and even general business practitioners. Along the way they have been elevated to more increasingly responsible managerial positions. Often it is the "momentum of institutional management" that has progressed their careers. By that we mean they:
- Perpetuated what had gone on before.
- Followed what their predecessors did and were supported by their peers.
- Followed their intuition.
Yet, they received no formal executive level development or coaching for the senior, or even chief, executive position.
Okay, let's examine briefly what the upper echelon of most mid-market companies looks like. The board of directors is usually comprised of family members and/or close friends. It exists to meet legal requirements, not assist in corporate governance. Therefore, the board seldom establishes clarity of performance expectations with strong accountability.
This is not always the case. We are aware of a few mid-market companies that have established small advisory boards (not an official board of directors in order to avoid liability issues) comprised of outside, experienced business practitioners that do try to guide and support accountable executive performance. But for the sake of this siers, let's assume many, if not most, do not have boards that establish clarity of the executive leadership function with accountability.
We believe every senior executive in mid-market companies could benefit from some systematic application of accountability from an outside review process and the development of a system of management. We start with a framework that identifies the core function of the chief executive, and then we fill it in with what we believe to be the fundamental business practices that will successfully perpetuate the business. In effect, this material is an accountability job description for the chief executive as well as members of the executive team.
The Risk
A significant problem faced by organizations offering services to youth, elderly, and the developmentally disabled is that individuals who sexually abuse are not easily identified. The majority of perpetrators involved in these incidents at nonprofit organizations have no prior abuse convictions. Also, they are often highly regarded by their peers and the families of those they are secretly abusing.
Data collected from 227 closed claims files over the past 22 years by the Nonprofits Insurance Alliance Group in Santa Cruz, California (a group with 11,000 members nationwide) reveals some interesting insights: 47% of sexual abuse claims involve agency staff members who have abused clients — mostly children, but also the elderly and mentally disabled; 22% of claims arise from client vs. client contacts — virtually all minors; foster home abuse claims account for another 11%; and claims against agency volunteers account for 4%.
The data indicates that most claims are without merit, but can be expensive to defend and costly when there has been actual abuse. Almost 75% of the claims closed with no indemnity paid and at an average defense cost of $4,000. The remaining 25% averaged almost $130,000 in paid indemnity and $40,000 in defense expenses. Those costs can put a serious dent in the budget of a nonprofit agency not insured for this special exposure.
Insurance Considerations
The standard commercial general liability policy excludes coverage for an intentional act, a central requirement for conviction of sexual abuse. In most states, that exclusion extends to the agency responsible for supervision of the perpetrator. In recent years, many carriers have added specific exclusions for any claim of sexual misconduct, and also added those exclusions to Directors and Officers policies. That leaves agencies and their boards without protection for claims that they negligently hired, trained or supervised their staff or volunteers, negligently certified foster homes, or provided inadequate oversight to the activities of clients in their care.
This is the third article in a three-part series on suspended corporations. Part One in the series can be found here and Part Two can be found here.
The Right Of The Insurer To Intervene And New Issues Created By The Presence Of The Insurer
As noted, the Kaufman & Broad Communities, Inc. decision indicates that an insurer may intervene in a lawsuit against its insured where its insured is a suspended corporation. The right to intervene arises from California Insurance Code Section 11580,29 which permits a party securing a judgment against a suspended corporation to proceed directly against the suspended corporation's insurance carrier to enforce the default judgment.30 In order to prevent an entry of default judgment, an insurer may intervene in a lawsuit to contest its insured's (the suspended corporation) liability and damages.31
The intervening insurer, however, may not expand the scope of issues in the lawsuit to include coverage issues,32 despite the fact that the insurer, as an intervenor, is a party to the lawsuit.33 Instead, the intervening insurer must wait until a subsequent action is filed to litigate insurance coverage issues, but even then can only litigate coverage "to the extent that the issues relevant to coverage were not actually litigated in the first lawsuit."34
The law is still developing with respect to which coverage issues are properly reserved for a subsequent direct action. For instance, is the subsequent suit limited to the ultimate issues of coverage, such as whether an exclusion applies, or can facts that support liability and may impact coverage also be litigated? Without a clear answer to these questions, a practitioner representing an intervening insurer must develop a strategy with respect to the adjudication of issues in the initial lawsuit.
How Is An Intervening Insurer To Be Referred To During The Course Of The Litigation?
When an insurance company intervenes in a lawsuit to which its insured, a suspended corporation, is a party, the insurer becomes an actual party to the suit,35 as opposed to the suspended corporation in a representative capacity.36 This makes sense, as the purpose of intervention is to afford the insurer an opportunity to protect its interests by contesting the liability and damages claims against its named insured, the suspended corporation.37 This, however, also creates some uncertainty with respect to how the insurance carrier is to be referred to during the litigation.
Evidence of liability insurance is inadmissible to prove negligence or other wrongdoing.38 Further, evidence of liability insurance is generally "regarded as both irrelevant and prejudicial to the defendant."39 With respect to an intervening insurer, then, any reference to the insurer in front of a jury would likely prejudice its insured, the suspended corporation. So how should the intervening insurer be referred to during the course of the litigation?
During the pretrial process, referring to the intervening insurer as a party would likely pose little threat of prejudice to the suspended corporation. The same, however, is not true of the trial itself, where reference to the intervening insurer in front of the jury would likely result in substantial prejudice to the insured. With this in mind, a court will likely identify the intervening insurer as a party during the pretrial process only. Should the case proceed to jury trial, and the client of the attorney representing the intervening insurer need to be identified, either by the court, or the attorney stating an appearance, the court will likely identify the suspended corporation as the attorney's client, and direct the attorney to do the same. Another possibility would be to not identify a client, but instead indicate that the attorney is representing the interests of the suspended corporation. Regardless of how it is done, the court and parties to the suit must refrain from referring to the intervening insurer in front of the jury.
This is the second article in a three-part series on suspended corporations. Part one in the series can be found here, and Part Three can be found here.
Default Judgment
An entry of default judgment conclusively establishes the facts as to liability.19 Consequently, the entry of default judgment against a suspended corporation greatly limits the coverage defenses available to its insurer in the event the plaintiff seeks to enforce the default judgment against the insurer. In addition, the available coverage defenses may be further limited insofar as the failure to intervene is somewhat analogous to the failure to defend, and an insurer that has an opportunity to defend, but does not, is bound by the issues adjudicated as to its insured.20
When faced with liability for a default judgment entered against its insured, one option available to the carrier is to argue that its policy's cooperation clause21 bars coverage. This argument would apply in instances where the insured, by virtue of its suspension, is unable to cooperate with the carrier in the underlying action, and, as a result, has a default judgment entered against it. This argument, however, is unlikely to succeed, as the burden will be on the carrier in the subsequent action to establish that had the cooperation clause not been breached, there is a substantial likelihood the trier of fact in the underlying action would have ruled in favor of the insured.22
Instead of contesting coverage after a default judgment has been entered, a more effective strategy may be for the carrier to intervene in the lawsuit to which its insured, the suspended corporation, is a party, in order to prevent the entry of default judgment in the first place. A carrier is permitted to intervene where preventing an entry of default judgment against its insured is necessary to protect its own interests.23 Moreover, in Kaufman & Broad Communities, Inc. v. Performance Plastering, the California Appellate Court observed the following:
Some cases, however, have sanctioned intervention as an appropriate approach. For example, in Reliance Ins. Co. v. Superior Court (2000) 84 Cal. App. 4th 383, 388, the appellate court concluded the trial court abused its discretion in refusing to allow the insurance company (Reliance Insurance Company) to intervene in a lawsuit against the insured suspended corporation ... The Sixth District Court of Appeal concluded the insurance company had a direct interest in the litigation. (Id. at pp. 386–387.) Under Insurance Code section 11580, a judgment creditor can sue the insurance carrier for the defendant against whom a judgment is obtained. (Reliance Ins. Co. v. Superior Court, supra,atp. 386.) As a result, where there is a danger that a judgment will be entered by default, the insurance carrier is entitled to intervene in the underlying case to contest its insured's fault or the available damages. (Id. at p. 387) O'Hearn v. Hillcrest Gym & Fitness Center, Inc. (2004) 115 Cal. App. 4th 491, 494, footnote 1, comes to this same conclusion.24
Under California law, an insurance company is permitted to intervene in a lawsuit where its insured is a suspended corporation and a party to the lawsuit. Failure to intervene may ultimately result in the insurance company being found liable for a default judgment entered against its insured, unless, of course, there was no coverage for the claim to begin with. Intervention, and the issues associated therewith, will be discussed in more detail in the third article in this series.
This is the first article in a three-part series on suspended corporations. Part Two in the series can be found here, and Part Three can be found here.
Introduction
Corporations that do not pay their state taxes may be suspended in California.1 Once suspended, a corporation effectively finds itself in a legal coma from which it can neither defend nor prosecute civil actions during the pendency of its suspension. In the context of a complex civil lawsuit, the limitations placed on a suspended corporation that is a party to the suit present unique circumstances for all concerned. For example:
- As to the suspended corporation, it is still a party to the lawsuit, but can neither prosecute its claims, nor defend itself from others;
- As to the attorney representing the now suspended corporation in the litigation, he or she risks criminal penalty and possible disbarment by continuing to defend or prosecute claims on behalf of the suspended corporation;
- As to the other parties to the lawsuit,the suspended corporation is still a party, but legally incapacitated; the situation creates strategic risks and opportunities for those other parties;
- As to insurance carriers for suspended corporations, they face the dificult choice of intervening and becoming parties to the action, or not intervening and possibly being held liable for any judgment entered against the insured; and
- As to the court, it must be aware that an insurer intervening on behalf of a suspended corporation can alter the character of the lawsuit with respect to how the case is tried under the circumstances.
The purpose of this series is to discuss some of the issues that arise when a suspended corporation is a party to a lawsuit. First, this series will explain what a suspended corporation is, and how suspended status differs from bankruptcy and dissolution. Second, it will discuss the implications of and options for dealing with an entry of default judgment against a suspended corporation. Third, it will address the risks and issues involved in representing a suspended corporation. Fourth, it will address the issues and problems that can arise when a suspended corporation's insurance carrier intervenes in a lawsuit to which the suspended corporation is a party.
What Is A Suspended Corporation?
Suspended Corporation Defined
Pursuant to California Revenue and Taxation Code Section 23301, the exercise of corporate powers, rights and privileges may be suspended for the failure to pay taxes. A suspended corporation, then, is a corporation that has failed to pay its state taxes and, as a result, can no longer exercise corporate powers, rights and privileges, including the right to defend against and prosecute legal claims.2 California, while somewhat unique, is not alone in its treatment of corporations that fail to pay their state taxes.3
The Human Resources notional view of health care benefits needs to change and do so quickly.
At one time the view of health benefits was one of satisfying/motivating employees, closely coupled with a notion that health benefits were a great way to attract and retain top talent. Truthfully, that was never really the correct notion of health care reimbursement models.
Early in my benefit career, I was moved into a HR generalist role in a division of British Petroleum. In that job I interviewed candidates for managerial and executive positions. In a short time something became very clear. Triple "A" candidates rarely asked questions about the health plan. They just wanted to know that there was one. Rather, they asked questions to ensure they would be a good fit, also questions about growth opportunities, and so on. When we hired people like that they tended to be successful.
Insurance Thought Leadership aggregates best practices from highly respected experts in their field. Insurance Thought Leadership provides knowledge and experience at a time when its needed most, times of sweeping change and market uncertainty.
Whether it’s Healthcare, Worker’s Compensation, Property & Casualty, Auto, Sophisticated Life Insurance designs, Directors & Officer’s, Safety, Risk Control or other Claims Management, Insurance Thought Leadership promises to deliver the most relevant mind share the industry has to offer.
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Dave Dias
David Axene
Jeff Pettegrew
Jennifer Weathersbee
Mark Webb