Opinion ID: 2999735
Heading Depth: 2
Heading Rank: 2

Heading: Insurance Scheme

Text: We now shift our attention to Duff’s endeavors to cheat his insurers, a fraud of even longer duration. This scheme introduces yet another company controlled by Duff: Windy City Labor Service (“Windy Labor”). Windy Labor provided temporary employees to various liquor warehouses and other clients. Before detailing the scheme, a working knowledge of the mechanics of the Illinois workers compensation system is necessary. Illinois generally requires employers to have workers compensation insurance. Because some employers with high risk histories would be unable to obtain Nos. 05-2639, 05-2652, 05-2692 & 06-1485 9 insurance in the open, voluntary market, Illinois created an assigned risk pool to provide insurance to these businesses. While all insurance companies providing workers compensation insurance contribute to the assigned risk pool, a small subset actually administer the insurance policies in the assigned risk pool, charging higher premiums (because of higher risks) and obtaining reimbursements for their costs. A business can apply for assigned risk insurance only after receiving two rejections on the voluntary market. When a business applies, Illinois itself actually does not decide upon the carrier but farms this task out to the National Council on Compensation Insurance (the “Insurance Council”). The Insurance Council assigns applicants to participating insurance companies and sets advisory rates for the calculation of premiums. Premiums for workers compensation insurance are calculated using three independent factors. First, the insurance company must determine the correct classifications for the various jobs performed by the insured’s employees. Each type of job has an advisory rate set by the Insurance Council, which reflects the relative riskiness of that position. The second factor is the amount of payroll in each job classification. The premium’s final element is the experience modifier, a number determined by the Insurance Council that compares an employer’s past claim history to the past claim history of the average employer in that job classification. If a company has a claims history that is average in its field, the experience modifier will be one. As the number of claims increases, so does the modifier (and by extension, the premium). However, an extremely high modifier, for example one reflecting double or triple the average amount of claims, might instead indicate improper classification of employees. The insurance company calcu10 Nos. 05-2639, 05-2652, 05-2692 & 06-1485 lates the premium by multiplying the job classification rate by the payroll and that amount by the experience modifier. With this background, we now examine Duff’s insurance fraud. Windy Labor first applied for placement in the assigned risk market through its insurance broker, John Leahy of Leahy & Associates, in 1982. In the initial application, Leahy described Windy Labor as a company that “will provide various labor type jobs as they arise. The work will vary, will include janitorial work, truck helpers, warehousing, bottling. It is a temporary service for labor-type work.” The initial classification codes submitted—warehousing, bottling, janitorial, and truck helper employees—were consistent with this information. A report from later in the year was even more blunt in its assessment of the Windy Labor work force: “As mentioned, these are usually people out of work or skid row bums working for drinking money.” The Insurance Council assigned Windy Labor to Casualty Insurance (“Casualty”) as its workers compensation insurance provider. Casualty provided Windy Labor with insurance from the assigned risk pool until 1995. During this time, Windy Labor applied annually for renewal of this insurance, sending updated payroll and classification numbers. These renewals were largely automatic between Windy Labor and the insurance provider, but Casualty continued to send Leahy & Associates copies of policies and applications. For the first few years, the classifications remained constant, but in 1985, a drastic shift occurred. The application introduced a clerical workers category and, from the start, this new classification included the largest portion of payroll, dwarfing other more established categories such as warehousing and janitorial. Again, Leahy & Associates received a copy of the policy reflecting this change from Casualty. Nos. 05-2639, 05-2652, 05-2692 & 06-1485 11 Throughout the remainder of Windy Labor’s relationship with Casualty, the clerical category continued to dominate the other classifications, ending with over $1.7 million out of a total payroll of approximately $2.1 million in that category. While the categories had changed on paper, Windy Labor had not actually shifted its operations from labor to clerical work. Duff had decided to keep the premiums down by making what would turn out to be massive and long-term misrepresentations. To effectuate this scheme, Duff wove an intricate web of lies using employees and business associates. Duff met with auditors, giving fake figures regarding the business, and initiated his office manager in the ways of falsely representing the employees as clerical. Windy Labor provided client lists with false designation and engaged in delay and suppression of payroll records. Red flags flew. Casualty obtained loss runs, which are summaries of the injury claims, and showed nearly all Windy Labor injuries coming from the warehousing class, even though clerical was dominant. Casualty also sent multiple notices of cancellation during the period of coverage because of Casualty’s inability to complete audits. While the policy was never cancelled, Casualty transmitted these notices to Leahy & Associates. Casualty did not catch on to the fraud before it left the assigned risk pool in 1995. When Casualty left the assigned risk pool in 1995, Windy Labor had to apply for a new assigned risk carrier. This became a familiar refrain, as Windy Labor was left searching for carriers in 1998, 1999, and 2000.1 The person at Leahy 1 For purposes of completeness, the relevant carriers were (continued...) 12 Nos. 05-2639, 05-2652, 05-2692 & 06-1485 & Associates responsible for the account was Edward Wisniewski, who assumed this duty in 1989. Wisniewski’s primary role was completing insurance applications and contracts, though he also interfaced between Windy Labor and the relevant insurer, passing along any concerns or questions from one to the other. Despite the frequent turnover in insurance companies, the scheme continued. Duff remained resolute in his belief that the premiums were too high and continued to have his office employees overstate the clerical portion of the workforce. Complicating matters for Windy Labor, the insurance companies expected to conduct routine audits to verify the information on the policies. Rather than giving the information, which would reveal the plot, Windy Labor employees stonewalled auditors, submitted false worker information and client lists, and even forged a letter supposedly from an outside accountant that confirmed the lies. Windy Labor’s actions did not go completely unno- ticed. Both USF&G and Kemper threatened to cancel their policies for failure to submit to audits. Wisniewski was informed and often worked with Windy Labor employees to avert this possibility by revealing some information that would satisfy the insurer without endangering the scheme. This worked to some extent. For example, USF&G left the assigned risk pool in 1998 without ever completing its final audit. For its part, the Insurance Council tried to untangle the disconnect between the small number of warehouse workers and the huge number of claims emanating from 1 (...continued) USF&G (1995-1998), Kemper (1998-1999), Amcorp (1999-2000), and Travelers (2000-present). We will discuss each as necessary to illuminate the fraud. Nos. 05-2639, 05-2652, 05-2692 & 06-1485 13 this class. In response, Wisniewski and Windy Labor offered a compelling mix of rationalizations and false information, including doctored client lists, to defuse the inquiry. Circumstances surrounding Kemper’s response to its unsatisfying audit cast some additional light on the fraud. Receiving a cancellation notice in 1999, Duff instructed his office manager, Cathy Martinez, to call Leahy to sort out the problem. Martinez and another Windy Labor employee, Heather Placek, had a conference call with Leahy and Wisniewski shortly thereafter. Without going into the details of the situation, Martinez told Leahy that Duff asked her to talk to him. According to Martinez, Leahy’s response was “you know, you got to do whatever you got to do to get this done or you’re not going to have insurance.” At this point, Placek, who had limited exposure to the insurance scheme, pointedly stated, “Has this occurred to anyone that this is insurance fraud?” According to Martinez, after a pause, Leahy again responded that Windy Labor had to do whatever it took to get this done, or they would not have insurance. Eventually, the plotting was rendered irrelevant when Illinois would not let Kemper terminate the insurance contract for procedural reasons. Still, Windy Labor’s actions had significant repercussions. As Kemper had not been able to complete its audit, Windy Labor was barred from placement in the assigned risk pool. Moreover, Kemper referred Windy Labor to the Insurance Council, alerting that organization to its belief that Windy Labor was engaging in premium misrepresentation. The failure to complete audits, however, was not the only red flag. Windy Labor had an extremely high experience modifier during this time because of its rampant misclassification of its work force. At one point, the experience modifier reached 3.23, which meant that Windy Labor 14 Nos. 05-2639, 05-2652, 05-2692 & 06-1485 had more than three times as many accidents as the average employer in its category. As one USF&G employee testified at trial, “this mod actually is extremely high, considering that . . . most of the employees were clerical . . . [b]ecause clerical positions normally don’t generate a high percentage of loss or injury on the job.” Later, when Windy Labor was barred from the assigned risk pool in 1999, Leahy & Associates turned to another broker, Vincent Braband, to help with obtaining insurance in the voluntary market. While reviewing the file, Braband immediately noticed the extremely high experience modification factor (2.78), which was the highest he had seen and which he took as a signal of misclassification. This notion was confirmed when he sent the numbers to Amcorp Insurance, whose agent also noted the modification factor and felt that it was a clear sign of misclassification. Leahy & Associates, uniformly in the person of Wisniewski, repeatedly learned of these red flags. At one point, USF&G contacted a Windy Labor client who actually spoke candidly (and truthfully) about what Windy Labor workers did at his company. Upon learning of this conversation, Wisniewski responded that the information was wrong and relayed the issue to Duff, who pressured the client into retracting. A few years later when Braband was attempting to find a voluntary carrier for Windy Labor, he inspected the file and spotted the small labor classification with an extremely high number of manual accidents. Together with the experience modification issue, Braband felt the clerical was grossly overestimated and told Wisniewski as much, explaining that he needed correct classifications for any possibility of placement. Faced with these objections, Wisniewski immediately submitted new numbers to Braband, flipping the clerical payroll from $1.2 million to $600,000, the warehousing amounts from $75,000 Nos. 05-2639, 05-2652, 05-2692 & 06-1485 15 to $1.2 million, and the janitorial amounts from $91,000 to $800,000. Eventually, Amcorp agreed to insure Windy Labor, but the premium was more than three times what Windy Labor had been paying. In 2000, after Amcorp declined to renew Windy Labor’s voluntary policy because of the high rate of claims, Duff decided to combine Windy Labor with a different Duff company that had a good insurance track record, Remedial. Hoping to avoid revealing Windy Labor’s experience modifier (and take advantage of Remedial’s low modification factor), this transaction was styled as a purchase and not disclosed as required. Despite repeated requests by insurance providers for information about the combination, Wisniewski and Windy Labor/Remedial employees (including Stratton) stonewalled and responded that no such information was needed. On account of this tactic, Remedial had problems obtaining insurance for the Windy Labor portion of the business. Eventually, however, it contracted with Travelers, which forced Remedial/ Windy Labor to send, in 2001, a form acknowledging the merger after Travelers threatened cancellation of its policy. Travelers continues to provide workers compensation insurance to Remedial, though the Insurance Council adjusted the experience modifier based on the completed form. Through this extensive scheme to hide the true nature of Windy Labor’s business, the company paid approximately $1.09 million less in premiums than it should have.