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The Old Shell Game Gets a New Look

The classic shell game has seen a reincarnation in connection with workers’ compensation insurance premiums.

August 18, 2016 Photo

In the classic version of a shell game, a con artist or carnival barker asks for a coin or other object of value and uses slight-of-hand to place it under one of three cups, shells, or some other kind of container sitting on a smooth surface, such as a table. At a speed too fast for the eye to follow, the cups are moved about the table. When the person stops shuffling the cups, the observer rarely is able to pick which one is covering the coin (if the coin is still on the table at all). The observer has lost his coin, further proving what P.T. Barnum once said: “There’s a sucker born every minute.”

Today, the classic shell game has seen a reincarnation in connection with workers’ compensation insurance premiums—often the largest item in an enterprise’s insurance budget. Determined to gain a competitive edge or increase profits, today’s entrepreneurs have resorted to a contemporary version of the shell game.

Here is an example of how the new shell game works. Storage and logistics often go hand in hand with a full-service trucking business. Tom Trucker has a successful midsize operation. Since workers’ compensation premiums for truck drivers are the most expensive exposure in Tom’s operation, here is how he minimizes that cost.

Tom has several different companies—some are corporations, and others are limited liability companies. They are:

  1. T.T. Logistics. This company allegedly takes care of the warehousing and local delivery business. Tom’s W-2 drivers each get a small paycheck from this company every pay period. This company has no hard assets, but it does have workers’ compensation insurance.
  2. T.T. Realty. This company owns or leases the terminals from which Tom operates. It has no employees.
  3. T.T. Rolling Stock. This company owns or leases all trucks and vehicles. It has U.S. Department of Transportation (DOT) and Federal Motor Carrier Safety Administration (FMCSA) operating authority. It has no employees or workers’ compensation insurance.
  4. T.T. Leasing. Every pay period, Tom’s W-2 drivers receive an expense reimbursement check from this company. It has no workers’ compensation insurance, and there is no backup for these expenses.
  5. T.T. Over The Road. As volume ebbs and flows, Tom makes use of “owner-operators.” Some present Tom with certificates of insurance; some do not. This company does not carry workers’ compensation insurance, and it pays the owner-operators.
  6. T.T. Clearing. All revenue necessary to pay T.T. Leasing and T.T. Over The Road enough to cover their expenses is deposited into the operating account of this company. The sources of that revenue are T.T. Realty and T.T. Leasing. T.T. Clearing has no employees. Clerical workers from T.T. Logistics handle all bookkeeping, as they do for all T.T. companies.

On its application for workers’ compensation insurance, T.T. Logistics represented that it was engaged in storage, logistics, and local delivery. It also represented that it made no use of owner-operators. T.T. Logistics’ website describes it as offering “a full-service solution for all your logistics needs.”

When the workers’ compensation auditor for T.T. Logistics arrives, he is provided federal and state payroll tax returns. He is told the company makes no use of owner-operators. The general ledger does not reflect any disbursements to T.T. Leasing, T.T. Over The Road, or T.T. Clearing. It does show disbursements to T.T. Realty and T.T. Rolling Stock. Tom explains that T.T. Realty is the real estate arm of the business and T.T. Rolling Stock owns or leases the trucks. He refuses to provide any further information concerning either company.

 Over the course of a fiscal year, Tom’s insurance costs are about 10 percent less than most of his competitors. Through consolidated tax returns, Tom is able to claim the full extent of his labor-related expenses. The auditor thinks the remuneration paid by T.T. Logistics looks unreasonably small compared to the revenue, so he asks for tax returns.

Tom refuses to provide the tax returns for T.T. Logistics, stating that the auditor has everything he should need to complete his audit and that no workers’ compensation auditor has previously asked for tax returns. The auditor has discussed this impasse with his supervisor, and they are considering the following options:

  1. Estimate the payrolls at 10 percent higher than reflected in the available books and records of T.T. Logistics due to Tom’s lack of cooperation, then close out the audit on that estimated basis.
  2. Calculate the premium based solely on the payrolls reflected in the documents provided.
  3. Close out the audit as “uncooperative” and refer the matter to the company’s SIU.
  4. File suit to compel production of the tax returns, general ledger, and other books and records of T.T. Logistics.

Which of these options would you pursue? Please feel free to provide your comments or thoughts to the author at the email address shown below.

About The Authors
Jonathan M. Kuller

Jonathan M. Kuller is a partner at CLM Member Firm Goldberg Segalla LLP, and is a member of CLM’s Insurance Fraud and Extra-Contractual Committees. He can be reached at (609) 986-1315,  jkuller@goldbergsegalla.com

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CLM’s Insurance Fraud Committee identifies, analyzes, and offers education on emerging fraud schemes and tactics; monitors and reports on developments in case law, state fraud statutes and applicable regulations; collaborates with other anti-fraud industry organizations and associations; and seeks to provide amicus support in matters of importance in the fight against insurance fraud.

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