Introduction: Settlement as a New Battleground

In the life cycle of a workers' compensation claim, the settlement phase is often viewed as the final act, the moment when all parties agree to a resolution and the file can finally be closed. However, for the vigilant fraud defense professional, this perspective is dangerously shortsighted. The settlement is not the end of the war; it is a new and often more subtle battleground. It is the stage where months or years of investigative work can be either leveraged into a favorable outcome or squandered through a hasty agreement. It is also the point where sophisticated fraud, particularly in the form of permanent disability rating manipulation, comes to fruition, and where the seeds of post-award fraud are sown. A poorly structured settlement can inadvertently reward fraudulent behavior, while a strategically crafted one can neutralize it, protect against future liabilities, and preserve the right to act on later-discovered deceit.

This chapter provides an advanced guide to navigating the treacherous waters of settlement negotiations, rating manipulation, and post-award monitoring. We will conduct a deep-dive analysis of the primary settlement options in California—the “compromise and release” versus the “stipulated award”—and detail the strategic considerations for each in the context of a suspected fraud case. We will expose the common red flags that arise during negotiations and provide a comprehensive breakdown of the methods used to manipulate permanent disability ratings.

Crucially, this chapter will offer a tactical playbook for structuring settlements to deter fraud, including specific clauses and addendum language that can be incorporated into settlement documents to protect the defense's rights. Finally, we will explore the often-neglected but critically important field of post-award fraud monitoring, providing strategies for using surveillance and medical utilization audits to combat ongoing fraud in high-exposure life pension and future medical cases. Through detailed case law and practical examples, we will demonstrate that true claim closure requires vigilance not just up to the point of settlement, but often long after the ink has dried.

Settlement Options in California Workers’ Compensation

In California, there are two primary methods for settling a workers' compensation claim, each with distinct characteristics and strategic implications, especially in cases where fraud is suspected.

Compromise & Release (C&R): The Full and Final Closure

• Definition: A compromise and release (C&R) is a lump-sum settlement that resolves all aspects of a workers' compensation claim. In exchange for a single payment, the injured worker gives up all rights to any future benefits for that injury, including future medical care, permanent disability payments, and vocational rehabilitation vouchers.

• Characteristics:

• Finality: It provides complete and final closure of the claim. Once the C&R is approved by a WCAB judge, the file is closed forever, barring extraordinary circumstances like proven fraud in the inducement of the settlement.

• Lump-Sum Payment: The claimant receives their entire settlement amount in one payment (less attorney's fees and other deductions).

• Includes Future Medical: A critical component of a C&R is the "buyout" of the claimant's right to future medical care for the industrial injury. A portion of the settlement amount is allocated to cover these anticipated future costs, often formalized in a Medicare Set-Aside (MSA) arrangement if the claimant is a Medicare beneficiary or is likely to become one.

• Strategic Use in Fraud Defense:

• Best Used When: A C&R is often the preferred settlement vehicle for the defense in a suspected fraud case. If the defense has gathered strong evidence of misrepresentation but may not have enough for a guaranteed "take nothing" win at trial, a C&R allows for a "walk-away" resolution. The defense can negotiate a "nuisance value" settlement, paying a small amount to make the claim go away and, most importantly, to close out the immense potential liability of lifetime future medical care, which is often a primary driver of fraudulent claims.

• Risk Mitigation: By closing out future medical, a C&R prevents a claimant from continuing to exploit the system for years to come through unnecessary treatments, medications, and provider visits.

Stipulated Findings and Award (Stips): The Open-Ended Resolution

• Definition: A stipulated findings and award (often called "stips") is a settlement where the parties agree (stipulate) to certain facts, such as the level of permanent disability and the body parts injured. Based on these stipulations, the WCAB judge issues an award.

• Characteristics:

• Periodic Payments: The permanent disability award is typically paid out in periodic installments (e.g., weekly or bi-weekly) at the statutory rate until the total award is paid.

• Future Medical Remains Open: This is the most significant difference from a C&R. Under a stipulated award, the claimant retains the right to future medical care for their industrial injury for the rest of their life, provided the treatment is reasonable and necessary.

• Strategic Use in Fraud Defense:

• Generally Avoided in Fraud Cases: For the defense, a stipulated award is usually undesirable in a suspected fraud case. Leaving future medical care open provides the claimant with an ongoing incentive and opportunity to continue committing fraud through unnecessary medical treatment, prescription abuse, and doctor shopping.

• When It Might Be Used: In a case with a legitimate injury component but also suspected exaggeration, the parties might stipulate to a low permanent disability rating, but the defense would still face the ongoing liability of the open medical award. This is generally a less favorable outcome than a C&R.

Red Flags in Settlement Negotiations

The behavior of a claimant and their attorney during settlement negotiations can be highly revealing. Certain tactics are strong indicators that fraud or misrepresentation may be at play.

• Push for a Quick C&R Before Full Discovery: The applicant's attorney aggressively pushes for a quick C&R settlement early in the claim before the defense has had the opportunity to conduct a full investigation, take the claimant's deposition, or obtain a QME/AME report. This is often a tactic to "cash out" quickly before contradictory evidence can be uncovered.

• Withholding Medical Records or Information: The claimant or their attorney repeatedly fails to produce or authorize the release of prior medical records, especially those from before the alleged injury. This strongly suggests they are attempting to conceal a pre-existing condition to avoid apportionment.

• Refusal to Participate in a Deposition: The claimant is consistently "unavailable" for a deposition or outright refuses to participate. This is a massive red flag indicating they are afraid of being questioned under oath and having their story challenged.

• "Too Perfect" Medical Reports: The medical reports from the claimant's chosen doctor seem almost too perfect, with subjective complaints and objective findings aligning perfectly to produce a high disability rating, often using boilerplate language seen in other reports from the same doctor. This suggests coaching and potential provider collusion.

• Sudden Willingness to Settle After Surveillance is Suspected: A claimant who has been difficult and demanding suddenly becomes very eager to settle for a lower amount after they suspect they have been placed under surveillance. This indicates they are aware that their true activities have been documented.

• Case Example: A claimant with an alleged back injury was demanding a $250,000 C&R. His attorney was stonewalling the production of prior medical records and delaying the deposition. The defense, suspicious of the high demand and lack of cooperation, authorized surveillance. The surveillance captured the claimant competing in a "Tough Mudder" style obstacle course race. When the claimant's attorney was informed that surveillance existed, the $250,000 demand was immediately withdrawn, and the case settled for a nuisance value of $15,000, with an FD-1 fraud referral filed concurrently.

Understanding Rating Manipulation

A significant portion of workers' compensation fraud occurs not through outright fabrication of an injury, but through the subtle and systematic manipulation of the permanent disability (PD) rating process to inflate the value of a legitimate claim.

How Permanent Disability Ratings Are Calculated

A PD rating is a numerical representation (a percentage from 0% to 100%) of an employee's loss of future earning capacity due to a work-related injury. It is calculated through a complex formula that considers:

1. Whole Person Impairment (WPI): This is the starting point. The evaluating physician (PTP, QME, or AME) determines the level of medical impairment based on the criteria in the AMA Guides to the Evaluation of Permanent Impairment, 5th Edition.

2. Occupational Adjustment: The WPI is adjusted based on the physical demands of the claimant's specific occupation.

3. Age Adjustment: The rating is adjusted based on the claimant's age at the time of injury.

4. Diminished Future Earning Capacity (DFEC) Adjustment: A final multiplier is applied to account for the injury's anticipated impact on future earnings.

Common Methods of Rating Manipulation

Fraudulent parties can manipulate this process at the WPI stage to artificially inflate the final rating.

• Inflated Subjective Complaints: The most common method. The claimant consistently reports extreme levels of pain (e.g., "10/10 pain all the time") to the evaluating physician. Certain sections of the AMA Guides allow for an increase in the WPI based on the severity of subjective pain, so exaggerating these complaints can directly lead to a higher rating.

• Feigning Poor Effort on Examinations: During the physical examination, the claimant may intentionally give poor effort on range of motion tests, grip strength tests, or other objective measures to create the appearance of a greater deficit than actually exists.

• "Cherry-Picking" Diagnostic Language: A complicit physician may selectively use specific "magic words" or phrases in their report that are known to trigger higher impairment ratings under the AMA Guides, even if the overall clinical picture doesn't fully support them.

• Unjustified Add-Ons: The physician may add extra impairment percentages for factors like sleep disturbance, sexual dysfunction, or psychological distress without sufficient objective evidence or a proper diagnosis to increase the overall rating.

• Using a "Friendly" Evaluator: The applicant's attorney steers the case to a QME or AME known for providing generous impairment ratings, regardless of the objective facts of the case.

Defense Strategy: The key to combating rating manipulation is to provide the medical evaluator with objective evidence (surveillance, deposition testimony, prior records) that contradicts the claimant's subjective complaints and demonstrates their true functional capacity.

Structuring Settlements to Deter Fraud

A settlement agreement is a legal contract. Its language can be strategically crafted to protect the defense and deter future fraud.

Strategic Clauses to Include in a C&R

When settling a suspicious claim via a C&R, defense counsel should insist on including specific protective clauses in the settlement documents.

• Fraud Disclaimer and Reservation of Rights: This is the most critical clause. It should state that the settlement is being entered into based on the facts and representations made by the claimant as of the date of the settlement. It should explicitly state that if it is later discovered that the claimant engaged in material misrepresentation or criminal fraud to obtain the settlement, the employer/insurer reserves all rights to pursue rescission of the settlement, seek restitution of all monies paid, and refer the matter for criminal prosecution.

• Sample Language: “This compromise and release is based upon the representations made by the applicant in his/her deposition, medical examinations, and other discovery. The parties agree that in the event it is discovered that this settlement was procured by the applicant's fraudulent conduct, including but not limited to, material misrepresentation or concealment of fact, the defendant reserves the right to seek all available legal and equitable remedies, including but not limited to, setting aside this agreement, seeking restitution for all sums paid hereunder, and referring this matter to the appropriate law enforcement and/or administrative agencies for investigation and prosecution.”

• Medicare Set-Aside (MSA) Attestation: If the settlement includes a Medicare Set-Aside, the claimant must attest that they have disclosed all relevant information to the MSA vendor and that the MSA calculation is based on an accurate medical history.

• Full Disclosure Acknowledgment: A clause where the claimant acknowledges that they have fully and truthfully disclosed all prior injuries, claims, and sources of income.

Defense Tools Pre-Settlement

• Pre-C&R Surveillance: If a high-value settlement is on the table in a suspicious case, conducting one final round of surveillance just before the C&R is signed can be a wise investment.

• Post-QME Deposition: After a QME report is issued, deposing the claimant again to ask questions specifically about the findings in the report can lock down their testimony and expose inconsistencies.

Post-Award Fraud Monitoring

For high-exposure claims that are not closed out by a C&R, such as cases with a stipulated award for lifetime medical care or a 100% permanent disability life pension award, the fraud defense does not end at settlement. Ongoing monitoring is essential.

Surveillance After Award

In cases with a life pension or open future medical, the claimant is still obligated to be truthful about their condition. If there is a good faith belief that the claimant's condition has miraculously improved or that they are engaging in activities inconsistent with their permanent disability rating, periodic surveillance may be warranted.

• Legal Basis: A significant improvement in the claimant's condition could be grounds to petition the WCAB to reopen the case and reduce the award. Compelling surveillance is often the only way to prove such an improvement.

• News Example (2023): A former firefighter in northern California was receiving a 100% permanent disability life pension for a claimed back injury that left him "wheelchair-bound." An anonymous tip led the employer to conduct post-award surveillance, which captured the "wheelchair-bound" claimant building a two-story deck on his house, including lifting heavy lumber and using power tools. The evidence was used to successfully petition to terminate his life pension and led to felony fraud charges.

Fraud Referrals After Settlement

The discovery of fraud after a settlement has been approved does not preclude a criminal referral.

Insurance Code §1871.4 applies to fraud committed to obtain benefits, which includes benefits paid via a settlement. The statute of limitations for felony fraud in California is generally four years from the discovery of the fraud.

Medical Utilization Audits

For cases with open future medical, the defense should conduct regular audits of the medical billing. Look for patterns of excessive treatment, unnecessary prescription refills (especially opioids), or treatment for non-industrial body parts being billed to the industrial claim. These can be challenged through the UR/IMR process and may be evidence of ongoing fraud.

Conclusion: Vigilance Until Final Closure

The settlement phase of a workers' compensation claim is a critical juncture where the financial outcome of a case is crystalized. It is a moment fraught with risk and opportunity. A passive or rushed approach can lead to the rewarding of fraudulent behavior and the acceptance of inflated liabilities that will have financial repercussions for years. However, a strategic, vigilant, and legally sophisticated approach can transform the settlement process into the final act of a successful fraud defense.

By deeply understanding the nuances of C&Rs and stipulated awards, by recognizing the subtle red flags that emerge during negotiations, and by actively combating the manipulation of disability ratings, defense professionals can ensure that settlements are fair and based on fact, not fiction. The inclusion of protective clauses in settlement documents is not an act of cynicism but one of prudent risk management, preserving the right to act should fraud be discovered later. Furthermore, the commitment to post-award monitoring in high-exposure cases demonstrates an understanding that the fight against fraud does not end when a judge approves an award.

Through ongoing vigilance, medical audits, and the courage to act on new evidence, the defense can protect against continuing abuse of the system. Ultimately, the principles outlined in this chapter empower the defense to remain in control of the narrative, to structure resolutions that are just, and to maintain an unwavering commitment to integrity until a claim is truly, and finally, closed.