Cover-All’s Cover Up: Big Time Premium Fraud in California

November 8th, 2006 by

Cover-All, Inc, bills itself as the nation’s largest full service flooring installation and refinishing contractor. They have over 1,500 employees in 30 states. Here’s how they describe themselves: We’re the people who install floors for Home Depot in 17 states. The Home Depot utilizes Cover-All’s residential installation services for all trades exclusively in over 300 stores across the country. Our customers, like Carpet One, JPS Surface Solutions, the Home Depot and so many others understand the value of partnering with Cover-All. They realize the relationship can provide an opportunity to grow their business beyond the barriers of their previously limited labor capabilities.
Here’s how Deputy District Attorney Michael Gara describes them: they’re crooks. Three of the company’s owners have been indicted for felony fraud and conspiracy. The charges each bring a maximum sentence of five years in jail. The owners are currently under $100,000 bail.
The indictment claims that Cover-All Inc. underreported their payroll to the State Compensation Insurance Fund by nearly $32 million between September 2001 and April 2006, saving the company $10.98 million in premiums. That’s a lot of payroll and a lot of premium. If you do the math, here’s what you find:
: On average, they avoided comp premiums on over a hundred employees per year for five years
: They avoided about $2m per year in premiums
The scheme was uncovered when insurance fund auditors noticed the company’s reported payroll under its workers’ compensation insurance policy differed from what the company was reporting to the state’s Employment Development Department, which collects payroll taxes and administers unemployment benefits.
[Sidebar note: With millions in annual comp premium, Cover-All must have been audited each year. Did they have two sets of books, one for workers comp and one for unemployment insurance? How did they manage to get away with the fraud for five full years?]
Why take the chance?
Why would a reputable and growing company take this kind of risk? Keep in mind that this alleged fraud occurred during the period when California had the highest rates (by far) for workers comp insurance in the nation. Based on the above numbers, and assuming that the premium calculation involved the two basic class codes for carpet and tile installers (Scopes classes #5478 & 5348), we estimate the manual rate for installers in California at about $30 per $100 of payroll. That is three to four times higher than the rates you typically find in other states. Is it far fetched to imagine the frustration of Cover-All’s owners, paying so much more for workers’ comp in California than they were paying in all the other states where they operated? Did they, as a result, hatch a simplistic plan to under-report the payroll, thereby achieving a level of premium relief unavailable to other employers in the state?
If you review the Cover-All website, you see a number of good things. They appear to hire installers as employees (as opposed to calling them “independent contractors”). They have a robust benefit package, including health and dental, 401K and other goodies. They have forged a partnership with one of the country’s largest home improvement retailers. They appear to be well on their way to achieving their goal of becoming the nation’s largest flooring service.
So why risk it all in a rather primitive scheme to avoid insurance premiums? We may never know the answer. But I suspect that the sheer outrage of the cost of comp in California drove them over the edge. It’s ironic that the indictment comes at a time when California has finally achieved meaningful reform of their comp system. Insurance rates have come down dramatically and are likely to continue to do so. Unfortunately for Cover-All, the owners’s view of the emerging good times may soon be obscurred by some inconveniently placed iron bars.