The Dangerous Truth About Ghost Insurance Policies

Just because a tree service provides a certificate of insurance showing proof of coverage does not mean it actually has real protection for its employees.

Many companies purchase what is known as a Ghost Policy by claiming either they have no employees (and pay them off the books) or that their employees are sub-contractors, which is illegal given Federal and State definitions of who may be considered a sub-contractor. By obtaining a Ghost Policy, a tree service is able to produce a certificate of insurance while saving anywhere from $30,000 to well over $300,000 per year depending on the size of the company.

This allows that service to offer much lower prices than it would be able to offer if it had a legitimate insurance policy. In the process of doing so, that service exploits its employees and puts you the client at great risk. If one of its employees is injured on your property, you could be held responsible for medical and related costs. Luckily, there are ways you can minimize the chance of hiring such a company.

In all likelihood, you are a savvy consumer and you requested a certificate of insurance (COI) from each tree service as proof of proper insurance coverage.

But what you might not know is that there is a dangerous secret about workers compensation insurance called the Ghost Policy. If you hire a tree service that operates using a Ghost Policy, and an employee is injured on your property, you could be held responsible for all medical costs.

In order to understand the Ghost Policy, it is important to first understand some background information: The tree service industry is a very dangerous industry.

As a matter of fact, we have a fatal accident rate that is approximately ten times the average for all industries. Insurance companies determine workers compensation insurance (workers comp) rates for a trade based on the incidence of accidents, fatalities, etc. Needless to say, our rates are very high. Typically, a tree service will pay anywhere from $25 to $50 per $100 of wages for workers comp. To put that in perspective, workers comp for a clerical position is about $0.33 (that is 33 cents) per $100 in wages. Now let us do the math: a small tree service with two to three employees will pay around $120,00 in annual wages, which translates to $30,000 to $60,000 in annual insurance premiums.

A mid-size tree service with seven to sixteen employees will typically pay $250,000 to $600,000 per year in wages, which is $62,500 to $300,000 for workers comp per year.

In comparison, the Ghost Policy costs around $750 to $1000 per year. But it is designed to provide workers compensation insurance for a contractor or sub-contractor who has no employees. The benefit is that an individual can exclude himself from the policy, thus assuming all risks in the event of an accident. Why would he want to do this? Because many job and contracts require proof of workers comp. As such, this policy is simply a cheap way for an individual to obtain a COI demonstrating proof of workers compensation insurance. In reality, it is an insurance policy that does not provide actual benefits. Rather, it allows a company to pretend coverage exists when it really does not.

A company is able to apply for a Ghost Policy and hide the fact that it has employees, either by paying them under the table, thereby keeping all payroll off the books, or by claiming that all employees are sub-contractors.

State and Federal law clearly outline under what circumstances a worker may be considered a sub-contractor. This assessment is largely based on how much control a company has over its workers. For example, one of the common law questions officials ask is “Does the company control or have the right to control what the worker does and how the worker does his or her job?” To be more specific, “do employees report to jobs that the company arranges, use equipment owned by the company, and take breaks when the company allows?” For your typical tree worker, the answer is “yes”, which makes him or her an employee, not a sub-contractor.

By using a Ghost Policy, a company is able to save anywhere from $30,000 to $300,000 per year – and more for a larger company.

Moreover, if a company is paying its employees under the table or illegally treating them as sub-contractors, it avoids yet another major expense: 10% employer taxes, which includes the employer side of Social Security, Medicare, unemployment taxes, etc. That’s an additional savings of $1200 to $30,000 and above per year. Savings of this magnitude allow for plenty of extra profit, investment in new capital, and most importantly, hugely decreased job pricing, which allows a company to win more bids.

For dishonest company owners, the allure of more profit is irresistible.

But even honest business owners are often forced into choosing a Ghost Policy. Times of economic hardship and rising costs (fuel, supplies, equipment), such as those experienced from 2008 until now, often force traditionally honest owners to make troublesome decisions or face impending financial doom.

Regardless of how an owner arrives at this decision, whether by dishonesty or desperation, he puts employees and clients at risk. If anything happens to an employee who is working on your property and who is not properly insured, you may be held liable.

These are just a few of the many common ways that tree workers are hurt on the job on a regular basis.

Because of the accident, he is paralyzed for life. The medical costs for such an injury are well over $3 million for a worker injured at the age of 25 – and that does not include lost future earnings. In a case publicized by the News & Observer (see the links below), the medical costs for a paralyzed worker were in excess of $8 million.

If an injury occurs on your property and the tree service is adequately insured, you do not have anything to worry about because the company’s insurance provider will pay the necessary costs.

But if that service is operating under a Ghost Policy, the injured employee, his family, and/or his lawyer will bring a lawsuit against you and the liability section of your homeowners policy (or commercial property policy). If you lose, which often happens, your policy must pay damages to the injured party. To make matters even more frightening, most policies only have several hundred thousand dollars worth of insurance coverage. That is a drop in the bucket compared to what many medical expenses costs, particularly when it comes to accidents in the tree service industry, which are usually severe. Moreover, if the court finds that you knowingly hired a tree service that was not properly insured, you may actually face criminal prosecution.

So what can you do to protect yourself?

Unfortunately the COI for a Ghost Policy looks exactly the same as it would for any legitimate insurance policy. But there are some precautions you can take to help avoid this issue:

1. MOST IMPORTANTLY: Ask the company for a statement in writing (email is fine) verifying that all personnel working on your jobsite (whether employees or otherwise) are fully covered by workers compensation insurance. This will afford you some small level of protection in writing to present in court if anything does end up going wrong.
2. Never accept an insurance certificate directly from the company in question. The certificate could be a forged document, a copy of another document, or a copy of a lapsed/cancelled policy certificate. The certificate should come directly from an insurance agency.
3. Make sure the policy is recently issued and up-to-date. There is a date at the top right corner of the certificate that will show when the certificate was issued, and there is a column called “POLICY EXP” that shows the date of the policy expiration.
4. Always call the agency to verify coverage if you have any suspicion about where the certificate came from. The agency’s contact information should be printed on the COI.
5. Call the agency to ask how many people are covered on this policy. There is certain information that an agency cannot tell you, but by law the agency CAN tell you how many people are covered by the insurance policy. If the agency says that are no employees listed on the policy, but then a crew shows up at your property to complete the work, rest assured the company is operating under a Ghost Policy and you are at risk.
6. It may be annoying to perform these extra steps, but this could save you massive expenses and heartache in the future. Remember, the tree service industry has a fatal accident rate that is approximately TEN TIMES the average for all industries. If something happens on your property and the tree service is not properly insured, you could face financial ruin. It may sound extreme, but this happens on a regular basis.

Another important point to keep in mind is the old adage that if something seems too good to be true, it probably is.

If you receive several price quotes and one is vastly lower than the other, you may want to take a moment to learn a bit more information before accepting the lowest quote. We often see competitors that are able to offer rates that are 25% to 35% lower than what we are able to offer, simply because that company is using a Ghost Policy. Use commons sense and ask questions when something seems too good to be true.

We choose to play by the rules because we believe in fair practices and honest treatment for our employees and for our clients.

Expoitation of employees and clients for extra profit is not acceptable under any circumstance. We hope this article helps shed some light on the price differences within our market and provides you with valuable information. Our goal is to educate and empower consumers on this matter and spread the word about the dishonest and dangerous misuse of Ghost Policies within the tree service industry

Please feel free to contact us via phone or email if you would like to learn more, discuss this issue further, or ask questions.

To learn more about this issue and about real-life case studies, be sure to read the numerous articles written by Mandy Locke with the News & Observer, including:

• The Ghost Worker, Part 1,
• The Ghost Worker, Part 2, and
• The Ghost Worker, Part 3.