California's Workers' Compensation
Anti-Fraud Program

By Del Information Services, Inc.

October 2001

The following report uses information gathered from Public Fraud Unit Favors Those Who Privately Fund It, published by the Los Angeles Times on August 6, 2000, news accounts and reports by various sources, and the California Commission on Health and Safety and Workers’ Compensation report entitled, Report on the Workers' Compensation Anti-Fraud Program.


California's effort to root out fraud in the workers' compensation insurance system started with a modest $3-million annual law enforcement budget that has risen to $30 million annually. County District Attorney's receive funds by way of a mandatory employer assessment of premiums paid. The money is accumulated and released by insurers.

The Los Angeles County District Attorney's Office has never prosecuted an insurer for defrauding injured workers' by not paying them benefits. In fact, the D.A.'s office has never prosecuted an insurance company for any reason whatsoever.

In eight years the D.A.'s office has spent $38 million received through the private funds. Prosecutions number more than 250, mostly low-paid workers, fewer than 20 lawyers, doctors or other medical personnel and approximately two dozen employers, all of them small or medium-sized businesses. The practices occurring in Los Angeles County are the norm throughout California's district attorney offices.

Anti-Fraud Legislation Enacted

In 1991, State Senator Robert Presley (D-Riverside) sponsored legislation requiring employers to pay for workers' compensation investigations and prosecutions through a surcharge collected on their insurance premiums. Workers were never the target, said James Morris, an aide to Senator Presley. Morris stated, "Everyone realized that the workers in this context were kind of the sheep in this whole thing." There were two reasons the private money approach was taken according to the senator. The state was in the red and any general fund appropriation would not pass.

Conflict of Interest Issue

Injured worker attorney's have challenged the use of the private funds arguing that there is a potential for a conflict of interest stemming from the acceptance of private money to pay for public prosecutions of workers' compensation insurance fraud. Prosecutors have stated that their decisions on whom to investigate and prosecute have been made without bias. Appellate courts have agreed with prosecutors that there is no actual conflicts of interest. However, a review conducted by the Los Angeles Times and other evidence of prosecutors' performance shows that their decisions have consistently favored those who provide them with money and that the district attorney's office has downplayed employer fraud and repeatedly ignored evidence of possible crimes by insurance companies.

The California Fraud Assessment Commission Connection

The Los Angeles District Attorney's office did not investigate the finding of a civil jury in Los Angeles Superior Court. The jury concluded that the state's largest workers' compensation insurer, the quasi-public State Compensation Insurance Fund, defrauded an employer of hundreds of thousands of dollars. California Court of Appeal justices upheld the jury verdict of civil fraud and ordered the insurer to pay a $5-million punitive damage award, asserting: "There was substantial evidence that senior management personnel at SCIF .. intentionally misled prospective insureds."

Obviously, the district attorney's office would have been biting the hand that fed it had it prosecuted the State Compensation Insurance Fund.

California prosecutors apply for money annually to the insurance commissioner. Consent must be given by California's Fraud Assessment Commission, which consists of two insurers, two self-insured employers and one otherwise insured employer. California's workers have no representation on the commission. The Los Angeles County district attorney's office has historically gotten the lion's share of the funds. The state fund, prosecutors say, is also the most cooperative insurance company in providing information that leads to cases. The fund's president is a permanent member of the Fraud Assessment Commission of five.

Insurer Fraud Routine

Casey Young, the former head of the state Division of Workers' Compensation, has stated that random audits performed by the division have found that insurers on average shortchange one of six injured workers by $900 apiece. Young told a legislative panel in 1998 that this rate of shortchanging translates statewide to $84 million per year. "This is not money that's disputed, I want to underline," he said. It's money that insurers acknowledged that they owed but were caught keeping for themselves. Young's estimate did not include additional sums that insurers saved by not notifying workers when they were eligible for vocational rehabilitation benefits, as required by law.

The same audits showed that, year after year, insurers failed to inform nearly half of all injured workers who had been out of work for 90 days that they were eligible for job retraining. Cora Lee, in charge of the audits for Southern California, once testified in a deposition that up to 80% of the files checked at some insurance companies showed money owed. "We've had some really nasty companies," she said.

Specific Insurance Company Fraud Ignored

Los Angeles D.A. officials uncovered evidence that seven insurance company executives had perjured themselves in reports to state regulators by overstating the extent to which their companies were financing their own legally required efforts to discover fraud. The D.A.'s office was almost wholly dependent on these insurers as its source for fraud cases. The head of the D.A.'s anti-fraud effort routinely prosecuted workers for lying under oath. He has stated that it did not occur to him to apply the same standard to the insurance executives. A 1998 employment advertisement for that workers' compensation anti-fraud unit stated, "The suspects we investigate include workers, employers, doctors and lawyers." The ad, issued by Chief Deputy District Attorney Robert P. Heflin, ignored any suggestion of investigations of insurance companies.

Prosecutors have elected not to investigate complaints by doctors that dozens of insurers committed fraud against them. Doctors have charged in civil lawsuits that insurers illegally conspired to tar them as fraud mill operators and drive them out of business without bothering to assemble any evidence that they were in fact committing fraud. As proof of a conspiracy, the doctors cited an account by a former executive for Golden Eagle Insurance who said insurers decided to engage in a little vigilantism to control costs.

In a letter to lawyers for some of the doctors, the executive, Hy Bates, said he attended a secret meeting in 1991 with representatives from three dozen other insurers active in the Los Angeles area. "The gist of the strategy," he said, "was to target the [medical] facilities with the highest dollar volumes ... and then utilize any technical or legal argument available to them to deny or delay payment."

In another example of prosecutors ignoring insurer fraud, an employer, Lance Camper Manufacturing Corporation, filed suit against their workers' compensation insurer, Republic Indemnity Company of America. A jury awarded $6.3 million in compensatory and punitive damages in the insurance bad faith and breach of contract action. The verdict was later upheld on appeal.

The California Workers' Compensation Institute, funded by insurers', unsuccessfully argued that Lance was barred from seeking damages, invoking Charles J. Vacanti, M.D., Inc. v. State Comp. Ins. Fund (2001) 24 Cal.4th 800. That decision had upheld insurer tort liability to exceptional circumstances where intentional acts violate a fundamental policy of the state.

Other County District Attorney's Ignore Insurer Fraud

Auditors from the California Division of Workers' Compensation alleged that Fremont Compensation Insurance Group employees, spread among all three of its California claims-adjusting locations, Glendale, Fresno, and San Francisco, backdated about 10,000 documents between 1990 and 1996. They stated that that the backdating, which sometimes saved Fremont late-payment fees to workers and doctors, was sufficiently widespread as to constitute a general business practice. In an administrative case, Fremont agreed to pay $525,000 without admitting wrongdoing and promised to spend an additional $200,000 to train employees to follow the law.

Jacqueline Schauer, the lawyer for the auditors, ridiculed the extent of Fremont's housecleaning of reporting six of its employees to prosecutors. Schauer stated that apparently more than 150 Fremont employees in the San Francisco office alone were involved. None from that office were ever charged. Between the Glendale, Fresno, and San Francisco offices, only two Fresno employees were convicted of fraud-related charges.

D.A.'s Ignore Employer Fraud

Ralphs Grocery Company of Los Angeles paid a record audit penalty of $217,530 in 1998. Ralphs had shortchanged about half of 154 injured workers whose claim files were checked. Auditors also found that Ralphs failed to investigate some claims and denied benefits in others without saying why. District attorney officials never looked into these allegations to determine whether the short-changing was intentional.


Los Angeles County Deputy District Attorney Edward Feldman headed the workers' compensation fraud unit from its inception in 1992 until the end of 1996. His special assistant brought to his attention evidence that executives of some insurers providing cases had committed perjury. The executives had made "material misrepresentations" under oath, overstating the extent of their anti-fraud efforts in reports to state regulators. The assistant stated it would have had "nice symmetry" given the fraud unit's custom of charging alleged worker cheats with perjury. Feldman stated that it would have been counterproductive since the insurance carriers involved were among the few that were bringing any cases to the unit. If he had filed charges, Feldman said, they would have stopped. And if that happened, he added: "We'd have to close down our shop."

Unfortunately, it appears this view is shared throughout California by district attorneys. Until there is an effort to investigate and prosecute employer, insurer, and government fraud, employees who are injured on-the-job will continue to suffer immensely from abuses in California's Workers' Compensation System.

The campaign against workers' compensation fraud in California is part of a much broader national effort to save money for employers and insurers at the expense of workers, according to legal scholars and researchers who specialize in the field. Claimant fraud was one of the images used by employers and insurance companies to justify legislation narrowing eligibility, changing the way benefits are measured, and basically shifting the expense of injuries to other government programs and to workers themselves.