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CDI: Waiver Backdating Illegal

Last year’s AB 2883 turned one kind of premium fraud into another. The inability of one or more carriers to perform basic underwriting tasks has become a nightmare for brokers, not only from a process perspective but, too from an E&O standpoint.

Now, comes the California Department of Insurance (through the Workers’ Compensation Insurance Rating Bureau) to warn insurers and brokers that backdating waivers to exempt company “executives” from the workers' comp policy is an unlawful business practice and a violation of Labor Code Section 3352.

The waivers are part of the new exemption process implemented by AB 2883 last year that applied to all in-force policies as of Jan. 1, 2017.

“[U]nless a duly executed waiver was received and accepted by the insurer on or before January 1, 2017, any employee that may have otherwise been eligible for an exemption was required to be added to the coverage provided by the insurer,” says CDI attorney Patricia Hein in a letter to the Bureau.

The industry scrambled to come into compliance with the regulations and CDI’s Hein says the Department is concerned that some insurers are operating in violation of the new law. The legislation changed the definition of employee and also the definition of those exempt from the definition of employee. “It has come to the Department’s attention that some insurers may be ‘backdating’ waivers, which would constitute an unlawful business practice and a violation of Labor Code section 3352,” she maintains.

Neither the Department nor the Bureau identified carriers that are suspected of backdating waivers.

Pain in the Butt

As of Jan. 1, 2017, the exemption for workers' comp purposes only applies if the officer or board member owns at least 15% of the issued and outstanding company stock, or is a general partner of a partnership or a managing member of a Limited Liability Company. These exempt executives must also file a waiver under penalty of perjury with the carrier to claim the exemption. The waiver only takes effect once it is received and accepted by the carrier. Backdating is prohibited.

The letter orders the Bureau to notify carriers that backdating is unlawful and that carriers must comply with the law. The Bureau is a private, non-governmental organization financially supported by insurance carriers.

Legislative efforts are underway to redo the exemption provision, but the AB 2883 requirements are still the law of the land. But the effort is not looking positive from a reality standpoint. Senate Labor and Industrial Relations Committee chairman Sen. Steve Bradford (D-Gardena) is leading the rewrite effort embodied in SB 189.


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