Outside collection agencies hired by State Compensation Insurance Fund (SCIF) are going under the microscope following revelations about a scandal involving one of its contracted collection agents. SCIF found that one of its former agents allegedly pocketed millions of dollars in past-due workers’ comp premium it had collected on behalf of, and never remitted to, SCIF. A civil fraud lawsuit is pending against that collection agency, and now seven other collectors still under contract will have their books examined by an independent auditor.
State Fund’s internal audit department did not pick up problems with the first one. It has not chosen to audit further.
SCIF’s board of directors recently approved hiring KPMG to conduct audits of the seven remaining collection agencies under contract to State Fund. The audits are due to be completed by the end of the year.
Collection agencies work on a commission basis. According to one agency contract, the rate is 15% for collections under $50,000 and 10% for collections of that amount or more. If the agency has to go to Superior Court to collect, then the commission rate increases to 20% and 15%, respectively.
Total premium dollars and fees at stake are not insignificant. State Fund took an $80 million charge-off for uncollectible premiums in its latest annual report after taking write-offs of $46 million and $88 million in the prior two years, respectively. Those numbers could change pending the outcome of the audits and the civil case.
“The LAPD at some point was estimating somewhere in the neighborhood of $5 million to $10 million, but I can’t tell you exactly what that was based on.”
—Jennifer Vargen, SCIF
State Fund began looking at its collection agency practices after it uncovered potential discrepancies in what a former policyholder said it paid to one collection agency — F.D. De Leon & Associates in Woodland Hills — and what State Fund actually received on the delinquent account. The collection agency also operated as FDDA Incorporated. Both companies performed collection services for State Fund for several years, FDDA since 2008 and De Leon & Associates for more than a decade, according to the carrier.
“In early 2010, a dispute arose with a former policyholder over how much money was currently past due for its workers’ compensation premium,” State Fund maintains in its civil complaint for breach of contract and fraud against the company. “In the course of resolving the dispute, the policyholder produced an email from FDDA which was sent by [FDDA’s general manager Daryl] Maxwell on February 4, 2009 confirming receipt of two separate checks.”
State Fund says it never received that $5,000 payment until April 29, 2010 after it investigated the issue. The carrier’s contract requires agencies to remit the money to State Fund on the first week of the month after the check clears.
In the case of another policyholder, State Fund alleges that a $220,000 payment is missing. It says De Leon’s records show the check was remitted to State Fund on New Year’s Eve 2007, but the carrier says it has no record of it. Requests for either a copy of the cashed check or a replacement have gone unanswered, according to the lawsuit.
“State Fund has since done a random audit and determined that at least 10 other former policyholders have paid an amount exceeding $15,000 and to date, no payments have been received by State Fund,” the lawsuit alleges.
The case may yet evolve into a criminal matter. The Los Angeles Police Department is looking into the matter, but the District Attorney’s office tells Workers’ Comp Executive no charges have been filed.
“The LAPD at some point was estimating somewhere in the neighborhood of $5 million to $10 million, but I can’t tell you exactly what that was based on,” State Fund spokeswoman Jennifer Vargen tells Workers’ Comp Executive. State Fund’s civil complaint states only that it is seeking in excess of $25,000.
Workers’ Comp Executive attempted to contact the company for comment but was unsuccessful. The company’s telephone number listed in its State Fund contract is disconnected and an attorney representing the company declined to comment.
Audits ordered by State Fund’s board will be the first the carrier has ever conducted of the contracted collection agencies’ books. It also admits that it never audited De Leon’s books either during its decade-long relationship.
“Our contract with each and every one of [the collection agencies] does contain a base audit clause, and we will be exercising that audit ability, but we don’t necessarily anticipate anything,” says Vargen, noting that SCIF did a preliminary performance review of each agency after the De Leon matter was discovered. “This [audit] will be more of a standard operating procedure.”
(Filed by Brad Cain in San Francisco)