Second of three parts
WILSON -- Jimmy Worrell knew how to play the game.
General contractors who hired him and his framing crew always demanded proof of workers’ compensation insurance. Without it, he’d have been shut out of work.
So Worrell turned to a scheme that has persisted for decades in the construction and insurance industries. He told his insurance agent that he had no employees and would exclude himself from the policy, his right as a sole proprietor. He declared that the crew of five he managed was made up of independent contractors instead of employees; the policy he bought covered a “ghost,” an unknown employee who might unexpectedly join him to work during the year.
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The bargain-basement workers’ comp coverage, known simply as a ghost policy, was his ticket to work. He paid $850 for the year, a far cry from the roughly $30,000 annual premium needed to fully cover him and his five-man crew. The certificate looked the same as the more expensive one, with no place to list the number of employees covered.
Now, Worrell’s decision is haunting dozens of people and costing hundreds of thousands in litigation as lawyers and the courts try to untangle the scheme and its implications for one of Worrell’s employees.
Clementé Hernandez Gonzalez, a longtime employee of Worrell Construction Co., severely injured his spinal cord in March 2009 after another employee fell asleep at the wheel and wrecked the company vehicle. Gonzalez feels nearly nothing from the chest down; experts predict a lifetime of care will cost nearly $8 million.
Gonzalez, 39, has yet to receive a single check. More than a quarter-million dollars in medical bills at Pitt Memorial Hospital in Greenville have not been paid. If the policies had been clear and complete, the insurer would have likely settled within months instead of litigating for years, and Gonzalez would have gotten needed care quickly.
North Carolina law requires businesses with three or more employees to buy insurance to cover workplace injuries; in the construction trade, even smaller firms are often required by general contractors to purchase insurance. Even so, a News & Observer investigation this spring showed that more than 30,000 businesses in North Carolina failed to have required coverage.
Others, such as Worrell, manipulate the law. They buy a ghost policy, a package designed only for one-person operations with no employees as a fail-safe in case they hire someone during the course of the year. The state Industrial Commission, which decides disputed workers’ compensation cases, sees these policies for how they’re more commonly used: a way to pretend coverage exists when it doesn’t.
In a 2009 decision, a deputy commissioner wrote that “this practice is common in the insurance industry” but found it “to be inequitable.”
‘It is mind-boggling’
It’s unclear how many of the roughly 140,000 policies sold to North Carolina businesses each year are these bare-bones policies. No one keeps official count, but the North Carolina Rate Bureau knows of about 16,000 of the ghost policies written for high-risk employers that couldn’t buy workers’ compensation insurance on the open market.
That’s more than half of the assigned-risk policies in the state. Some are legitimately used for one-person operations, but the Rate Bureau, which represents insurance companies to assess and monitor rates, has no way of knowing how many are used improperly.
A review of these types of claims shows that insurance companies often fight them. Injured workers are forced to engage in costly and time-consuming battles that sometimes drag to the state’s highest court with no promise of payout.
The ghost policy is one of several mechanisms that some business owners have been able to use to gain an edge in North Carolina’s struggling economy. By classifying laborers as contractors, some also avoid paying Social Security, unemployment and insurance on behalf of the workers, The N&O has found, and government has done little to detect and punish the lawbreakers.
Officials at the Industrial Commission have seen the ghost policies for years, but they have not asked the legislature to address the practice. And when they see insurance agents sell ghost policies in improper circumstances, they rarely, if ever, report the problems to the Department of Insurance, which regulates agent conduct.
Such failure to communicate among state agencies has enabled business owners who break the law to flourish, while those following the law say they are increasingly shut out of work because of the high costs of doing business legally.
State Insurance Commissioner Wayne Goodwin said he wishes someone at the Industrial Commission had flagged these problem cases for his fraud investigators. The two agencies share the same building on Salisbury Street in Raleigh.
“This is the first I’ve heard of this,” Goodwin said. “As a former legislator and an agency head, it is mind-boggling when you realize that there are many problems that can be resolved through enhanced communications.”
For years, Worrell rode the construction wave that washed across the Triangle to the coast.
Houses went up faster than anyone could count, let alone watch over the people building them.
Worrell, 48, first heard of a ghost policy 15 years ago when he opened his framing business. An insurance agent mentioned it as way to get around costly premiums.
“Everyone here (in the trades) uses these ghost policies,” Worrell said. “Insurance companies are very lax about letting you use them.”
But Worrell figured he needed full coverage. For years, he paid tens of thousands in annual premiums to cover his workers.
Then a fellow tradesman let him in on a secret: If Worrell treated his workers as subcontractors, he could save on workers’ comp.
When Worrell went to buy a ghost policy in 2006, he told the agent he had no employees.
He had decided to treat all his workers as contractors. Such misclassification is common in the construction industry, but it is illegal. If an employer has a certain amount of control of his workers, state and federal laws say they must be treated as direct employees.
To cover his bases and ensure his laborers’ claims did not come back on his policy, Worrell took them to buy a ghost policy. Worrell paid for the policies and insisted any paperwork associated with the policies should be sent to him. Gonzalez, a native of Mexico, signed the application but didn’t realize he and his crewmates were declaring themselves “sole proprietors” and agreeing to go without coverage.
Patrick Lamm wasn’t clued in, either. Lamm used Worrell and his crew to frame the custom homes he built on Lake Gaston.
Lamm was advised by attorneys not to speak for this report, but he testified before the Industrial Commission that he had no way of knowing Worrell’s policy was worthless. He didn’t know what the certificate really meant: No one helping frame the houses was covered by the policy.
“I know he directed them, and I hired him – Mr. Worrell – and the guys showed up and did the job,” Lamm testified. “Now, whether they are employees, I do not know – did not know.”
Who will pay?
When lawyer Albert Thomas Jr. first heard of Gonzalez’s predicament, he was sure someone involved in the construction project must have had valid coverage. But the web of policies was like nothing Thomas had ever encountered.
“The more we dug, the stranger it became,” said Thomas, a former Court of Appeals judge who practices in Wilson.
All the insurance certificates suggested each employer followed the law. Yet no one was accepting responsibility for the costly claim.
But Worrell’s case involved a few hiccups that enabled Thomas and fellow lawyer Paul Blake III to prevail upon the Industrial Commission to order payment.
For starters, Worrell had inappropriately treated Gonzalez and others as subcontractors instead of direct employees, the commission ruled. And though Cincinnati Insurance had tried to cancel coverage for Worrell for failing to comply with an audit, the insurance company couldn’t prove it had notified him of that cancellation.
A deputy commissioner ordered Cincinnati to pay and also required Lamm’s insurer, Builders Mutual, to bear some responsibility. The full commission later relieved Builders Mutual unless Cincinnati defaults. In June, the Court of Appeals upheld the decision.
Cincinnati Insurance has asked the state Supreme Court to reconsider its liability, but the court is not obligated to hear the case.
The $850 policy meant for a ghost could force a payout estimated at $7.8 million.
No safety net
For Gonzalez, each day is an endless blur of impossibilities.
He cannot clench his fist to hold a spoon. He urinates through a tube. Sometimes, when he slouches too much, he falls out of his wheelchair, rendered helpless.
Though he can’t feel anything when his wife touches his arms, they ache constantly.
“When I am by myself, I really know how bad I am,” Gonzalez said.
Gonzalez is stoic, rarely uttering a complaint as Cherry, his wife of 13 years, helps bathe him. She turns him over every two hours during the night to prevent bed sores.
When he was a young man, Gonzalez came to the U.S. illegally looking for work. The social safety network that typically catches poor people who are severely injured is unavailable to him. He cannot receive benefits such as Medicaid while he is pursuing permanent residency in the U.S.
His wife and web of extended family band together to provide the care that the government cannot. They meet in the mornings and in the evenings to get him in and out of bed. While they know that better beds and physical therapy might help Gonzalez’s condition, those luxuries are out of reach until his workers’ compensation claim is settled.
Stuart Powell, an executive with the Independent Insurers Association of North Carolina, is an expert in insurance errors and loopholes that get carriers and their customers in trouble.
Ghost policies are on the top of his watch list.
“It’s been a thorn in the side of insurance agents for a long time,” Powell said. “It puts them in the crossfire, because sometimes the employer is not honest with them.”
Powell would like to see ghost policies banned.
Mike Carpenter, general counsel of the N.C. Home Builders Association, also says ghost policies ought to be outlawed. He knows the move wouldn’t be popular with many of his members, but he says the risk these policies pose is simply too great.
“People ought not get advantages in the marketplace by not complying with the law,” Carpenter said. “That’s what is happening now. It’s very real.”
The N.C. Rate Bureau doesn’t track ghost policies, and even if it had the information, privacy concerns would keep it from sharing the information with general contractors or employees calling to check on the scope of a policy. Sometimes, a diligent contractor calls the agent who sold the policy to inquire further. But that’s rare, agents say.
Darrin Rankin owns an insurance company in Huntersville, near Charlotte. He said he writes about 45 ghost policies a year, but only about once a year will a general contractor call to verify that a policy is good. No one asks an obvious question: Whom does it cover?
Rankin said he tries to talk customers who ask for a ghost policy out of buying them. He prepares two quotes: one for the ghost policy and another for a fuller policy that would cover the owner. He says no one ever chooses the more expensive policy.
“It’s in plain sight, but people refuse to understand or comprehend,” Rankin said.
‘It wracks my nerves’
Worrell learned a stiff lesson.
He closed his business the day Gonzalez got hurt and says he hasn’t worked since. He said the Industrial Commission warned him that if he kept operating, it would charge him with criminal fraud.
“I took a risk that has ruined my life,” said Worrell, who now collects disability because of a heart condition.
He feels badly for Gonzalez and his new life of limitations.
“It tears me up to know he’s paralyzed from the neck down,” Worrell said. “It wracks my nerves.”
It’s hard for Gonzalez to accept a life bound to a wheelchair.
Four years ago, he remodeled his house and tended an orchard of fruit trees behind his home. He and his wife were on track to adopt a relative’s three children from foster care.
Gonzalez now talks about his former life as if it was a lifetime ago; he and Cherry lost their home as bills piled high. Social Services placed the children elsewhere after his accident.
When he thinks of those children and the life he meant to give them, he lifts his hand toward his face, unable to wipe away a tear.
Tomorrow: A failure to communicate
News researchers Brooke Cain, Peggy Neal and David Raynor contributed to this report.
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