After a long wait, whistle-blowers persuaded the Minnesota Commerce Department to investigate fraud allegations in a workers compensation rating system.
Stu Thompson, The Builders Group fund manager. The Builders Group is the state’s largest self-insured workers compensation fund. The fund is accused of falsifying some contractors’ safety-related insurance scores to improve their chances of getting work.
After more than a year of prodding, first by a legislator and later by a legislative watchdog, Minnesota insurance regulators are investigating allegations of fraud in the state's largest self-insured workers compensation fund.
The regulators' initial reluctance to investigate has prompted questions from Sen. Gen Olson, R-Minnetrista, and Legislative Auditor James Nobles about whether the Commerce Department was doing its job. Commerce Commissioner Glenn Wilson is in the unusual position of defending the handling of a case still under investigation. He said the department now has additional information to support further investigation.
The key allegation, described in letters obtained by the Star Tribune, is that The Builders Group, a self-insurance fund for the construction industry, falsified the safety-related insurance scores of some companies so they could qualify for contracting work that required a better-than-average score. The companies had scored worse than average, but the changes made it appear the companies had better ratings.
The Builders Group fund manager and board chairwoman admitted the fund changed three companies' scores in 2006 and 2007 but insisted the practice wasn't illegal and that the fund has stopped doing it. In a new twist, The Builders Group (TBG) recently complained to regulators that its competitors are doing the same thing -- offering "washed" or improved workers comp scores to contractors, creating a financial inducement for them to switch insurance carriers.
Making artificial changes to worker's comp experience scores offers an unusual, but potentially lucrative, benefit to contractors.
Obscure but important score
Some big industries, such as refineries, screen contractors' work safety records before they are hired and take into account this score, known as the claims experience modification factor or "mod." If a construction firm has a worse-than-average mod rating, it could have trouble getting or keeping a contracting job.
Firms with better-than-average mod scores usually are rewarded with reduced workers compensation premiums. Yet the three companies whose scores were changed didn't get lower premiums. That's because the changes were made strictly to put the firms in a better position to compete for business.
The Builders Group fund manager, Stu Thompson, said two of the adjustments were small and had seemed reasonable, but one was "totally out of line" even under the practices of the time.
"The whole point now is moot," said Carol Nelson, a Burnsville remodeling contractor and The Builders Group board chairwoman. "We had changed those three mods. Yes, we admit that. We were told by the Department of Commerce [in 2007] that it was not illegal. They suggested that it probably was not a good business practice, and they suggested we not do it again. No mod has been changed since then."
The three companies whose scores were changed by The Builders Group are United Refractories, a Hibbing, Minn., firm that services industrial furnaces, Vic's Cranes & Heavy Haul of Rosemount and Northwest Sheetmetal Co. of St. Paul, fund officials said. Executives of United Refractories and Vic's Cranes said they didn't know of the change. At Northwest Sheetmetal, a woman who answered the phone and wouldn't identify herself said the company had no comment.
Under Minnesota law, insurance fraud includes presenting "false or misleading information" about insurance matters, but it's unclear whether the law has been applied to this area of workers compensation. If insurance firms or agents violated the law, it could result in fines or other penalties, a department spokesman said.
Yet, the Commerce Department didn't initially view the situation as a potential enforcement matter.
Olson, an eight-term legislator, said she contacted the department in late 2007 after one of her constituents approached her and described the alleged fraud.
She eventually contacted Commissioner Wilson, who agreed to set up a later meeting. When the meeting was scheduled in November 2007, Olson said she "was astounded" to learn that a lobbyist and board member for The Builders Group had been invited by the department to attend.
Trying to track the leak
At that point, Olson said, she just wanted to give information to the department so it could determine if an investigation was warranted and whether the fund's actions put it in jeopardy. To complicate matters, she said, she had promised to protect the identity of the constituent who had contacted her.
Instead, Olson found herself talking to Commerce staff members and fund representatives who defended their actions. "They weren't dealing with the behavior," Olson said of The Builders Group officials. "They were trying to figure out who leaked."
Nelson, the chairwoman of The Builders Group board, said she attended the meeting. She denied lobbying against an investigation or trying to discern the whistle-blower.
A month after the meeting, The Builders Group board voted to end the practice of artificially changing mod rates. At the time, a Commerce Department accountant reviewed the matter during an audit and later declared The Builders Group "responsive to the concerns expressed by Senator Gen Olson." The department's fraud or market conduct units were not assigned to investigate.
That changed after an unusual exchange between the Commerce Department and Nobles, the Legislative Auditor. The whistle-blowers who were trying to expose the alleged fraud contacted Nobles in 2008. Nobles said his office didn't have jurisdiction to investigate a self-insurance fund. The Legislative Auditor does have authority to review agencies' performance, so Nobles asked the Commerce Commissioner to describe what that agency was doing about the allegations.
The department's reply -- that the fund had dealt with the problem -- didn't satisfy Nobles or the whistle-blowers with whom he stayed in contact. The whistle-blowers wrote another detailed letter in December to Nobles and the department that said: "We would like to know if there are any regulators at the Commerce Department and could we confidentially speak to one?"
Wilson responded by assigning a top investigator to the case in January. The investigation still is underway.
In an interview, Wilson would not discuss details of the case but said the department only recently got additional information needed for an investigation. That includes access to confidential informants whose letter sent in December was signed only as "TBG current and former employees."
"We have hundreds of open files in different areas of the department all the time," he said. "And they come [in] a wide variety of ways and circumstances. Lots of them take one or two, sometimes three pieces of information before it looks like a case we can pursue."
David Shaffer • 612-673-7090