How To Spot Fake Certificates of Insurance During a Workers Comp Audit: A Three-Step Process

Disclaimer: All views expressed in this article are my own and do not represent the opinions of any entity with which I have been, or am now, affiliated.

Consider this scenario: you are auditing a construction risk and the insured informs you that they paid a framing contractor $1m during the policy term. You are given a copy of the subcontractor’s certificate of insurance (COI) and you confirm via the state workers comp verification website that the contractor did indeed have a valid insurance policy in place. Job done, right?

Unfortunately, you and the insured are unaware that the subcontractor is a fraud, the COI is fake and although they do have a valid policy in place, it only covers a small number of CLERICAL workers.

This is a common scenario. A subcontractor takes out a cheap, deficient policy of insurance, successfully bids on a job and provides its new client with a COI, giving the impression they are adequately insured. The subcontractor must be mindful not to alert its agent to the fraud. It cannot request a COI for every client because the number of COIs being issued would be significantly disproportional to the size of the policy. Instead, it requests only one COI which it then modifies repeatedly, tailoring it to suit each of its clients' individual requirements.

It isn’t just contractors that fabricate COIs, it’s also a common problem with temp employment agencies and PEOs.

The following three-step process can be used by auditors to identify fake COIs and to verify the validity of legitimate ones.

Step One:

Check the state workers compensation verification website. If no coverage is found, the COI is likely fabricated. If coverage is found, although reassuring, it doesn’t necessarily mean the COI is not a fake….move to step two.

Step Two:

Scrutinize the COI closely for the following red flags:

1.      Inconsistent fonts and typeface size – COIs are computer generated documents so font and typeface size should be consistent throughout the entire document. If half of the COI uses Times New Roman font while the other half uses Arial, alarm bells should ring. Equally, if the text in certain sections of the COI appears excessively large or small compared to the text box it occupies, additional scrutiny may be necessary.

2.      Inconsistent text alignment – COIs should exhibit consistent text alignment. Whether it’s in the top left hand side of each text box or centered both vertically and laterally, the text should be aligned consistently throughout the document.

3.      Evidence of digital text overlays – by this I mean indications that the insured has scanned an original COI and then added a text box electronically to replace certain wording. For example, the contractor might use this method to replace the genuine certificate holder’s name with another client’s name. Look out for sections of a COI that appear starkly brighter, straighter and clearer than the original scanned parts of the COI. You may also find parts of the black dividing lines on the COI whited out or interrupted in some way, which can be an unintended consequence of the digital overlay.

4.      Policy dates – if the policy inception and expiration dates don’t make sense, questions should be asked. For example, if the policy term dates on the COI are 6/1/19 to 5/31/20 rather than 6/1/19 to 6/1/20.

5.      Policy number – the configurations of most policy numbers will include a combination of letters and numbers. Policy numbers comprised exclusively of numbers are a red flag.

6.      Certificate holder – the company being audited should be the named certificate holder on the COI. If it isn’t, the COI should not be accepted as proof of coverage.

7.      Omissions – omissions of crucial information such as producer and insurer names, certificate dates or certificate holder details should be treated as red flags.

Step Three

The third step is usually only necessary if red flags were identified during steps one and two.

Step three involves verifying the COI with the producer or, better yet, the insurer named on the COI. Call them, provide them with the contractor’s name, policy #, and policy dates. They should be able to confirm one way or another whether the COI is valid. If it is a valid COI, ask them to confirm which class codes are endorsed on the policy to ensure they are covered for the type of work they carried out for the insured.

Conclusion

I am not suggesting that auditors call the producer/insurer to verify every single COI they come across. A search of the state workers comp verification website will be sufficient in most cases.

If, however, red flags are identified when reviewing the COI, verification as to the validity of the document should be sought directly from the Producer/Insurer.

Accepting a COI at face value can sometimes be a costly mistake. Vigilance and scrutiny are key.

I hope this is helpful. Happy auditing. 

About Me: I am a fraud investigator who specializes in workers compensation premium fraud including payroll underreporting, employee misclassification, ex-mod evasion, shell companies and PEO fraud