The special bond between a giant Texas insurance company and the Travis County district attorney was forged amid crisis.
In the late 1980s, soaring premiums had brought the state’s workers’ compensation insurance system to the edge of collapse, and employers were in revolt.
“It was a runaway train is what it was,” recalled former Texas House Speaker Gib Lewis, D-Fort Worth. “The insurance had gotten so high that it was prohibitive for businesses to buy it.”
With employers facing the sky-high costs of covering worker injuries and private insurers skittish about entering the market, reformers settled on a public-private solution: the Texas Workers’ Compensation Insurance Fund, created by the Legislature in 1991.
The fund was set up to operate like an insurance company and act as the insurer of last resort, providing policies to companies that couldn’t get coverage on the open market.
Texas Mutual Insurance Company has authorized payments of $4.7 million to the Travis County DA’s office since 2001 to prosecute alleged crimes against the company.
The state created Texas Mutual in 1991; though it became a stand-alone mutual insurance company in 2001, it still isn’t subject to state transparency laws or audits.
The contract between Texas Mutual and the Travis County DA’s office calls for both parties to give “special emphasis” to major corporate and health care fraud, but the overwhelming majority of the cases are brought against workers.
There are no written guidelines in the privately funded unit to safeguard against conflicts of interest or prosecutorial abuse.
The Travis County DA’s office says it has never prosecuted a fraud case against Texas Mutual and instructs critics of the company to direct complaints to the Texas Department of Insurance.
The lead prosecutor of the unit has made repeated social media postings that some argue are inappropriate, behavior she defends.
But it didn’t resolve the problem of insurance fraud, which was raising premiums for all Texas employers, recalled Russell Oliver, a former state insurance official who helped draft the legislation that created the fund over which he later presided.
Part of the solution, added to the 1991 reforms, was a provision directing the insurer to vigorously investigate fraud with an internal investigations division.
The other part: a state law specifically authorizing the government-created insurer to pay prosecutors in any Texas county to pursue fraud against the company.
As early as 2000, the Travis County district attorney’s office formalized the relationship with an exclusive funding deal, records show — one that still exists today. Under the terms of the contract, the insurer pays the salaries and expenses of a four-person prosecutorial unit dedicated solely to handling its cases.
From a business perspective, the legislative overhaul — including the fraud-fighting component — has worked beautifully.
Within a few years after the 1991 reforms, the market stabilized and rates began trending downward. It was so successful that in 2001, the Legislature decided to turn the insurance fund into a stand-alone mutual insurance company, giving ownership to the policyholders who buy coverage from it. The new company was called Texas Mutual Insurance Company.
Today, Texas Mutual is the largest provider of workers’ compensation insurance in Texas by a long shot. It has seen its assets grow from $1.9 billion in 2002 to $6 billion at the end of 2014.
With $1.2 billion in premiums written in 2014, the company today controls 40 percent of the state’s workers’ compensation market. Its nearest competitor, Travelers Group, has just 7 percent of the market. Texas Mutual has been named one of the best employers in Austin for the last five years in a row.
It also has become enormously profitable. Over the past dozen years, net income skyrocketed, from $27 million in 2002 to $321 million at the end of last year.
The company returns its profits back to policyholders in the form of annual dividends, which this year will exceed $200 million. Since 1999, more than $1.5 billion in profits have been returned to policyholders as dividends.
The company’s size and bankroll make tangling with Texas Mutual in court — or in the halls of the Texas Capitol — a daunting prospect, said Brad McClellan, a workers’ compensation appellate lawyer and former chief of the workers’ compensation section of the Texas attorney general’s office.
“They’re the Goliath out there. They are the big kid on the block,” he said. “They’ve been successful in really limiting any control over them.”
One way Texas Mutual has wielded its clout is by distancing itself from once-robust state oversight.
Initially, the company — like the fund that preceded it — was subject to government audits and state transparency laws. But in ensuing years, thanks to legislation pushed by a team of lobbyists hired by the company, the links to the state grew more remote as lawmakers lifted oversight and control.
Now, according to state law, “the company is not a state agency or executive agency or a governmental entity for any purpose.”
It is no longer subject to state audits, the Texas Public Information Act or oversight by the state comptroller. Nor do its directors, who by law must avoid relationships that conflict with their company duties, have to file personal financial statements with the Texas Ethics Commission.
However, not all ties to the state were severed. Five of Texas Mutual’s nine board members, including its chairman, are appointed by the Texas governor. Policyholders elect the other four. Fees and expense reimbursements to board members totaled $711,000 in 2014, figures reported to the state indicate.
Under the Texas Insurance Code, Texas Mutual still must “develop and implement a program to identify and investigate acts of fraud” against the company. It also must continue to act as a “competitive force” in the workers’ compensation marketplace while serving as the “insurer of last resort” — offering policies to companies that get turned down elsewhere.
That obligation to insure otherwise uninsurable employers once represented around 80,000 policies when Texas Mutual launched, but today it doesn’t amount to much of a burden. Of the 62,000 or so Texas Mutual policies now in force, about 120 — or two-tenths of 1 percent of its policies — are held by employers who can’t get insurance on the open market. It’s an indication of how much the market for workers’ compensation insurance has improved since the crisis of the late 1980s.
Still, both the Travis County district attorney’s office and Texas Mutual cite that mandate and the other remaining ties to the state as the primary justification for continuing their financial and investigatory relationship.
“They still have those aspects of fighting fraud and being responsible for taking care of the industry here in Texas,” said Donna Crosby, the Travis County assistant district attorney who oversees the four-person unit created by the funding arrangement. “That’s why they are different from other insurance companies.”
The way Texas Mutual’s top fraud fighter sees it, the company would be foolish not to use all of the tools at its disposal to pursue injured workers, health care providers and employers suspected of stealing from the company.
“The Legislature told us to prosecute. They gave us a mechanism to do that all over the state,” said Tim Riley, head of special investigations at Texas Mutual. “A crime has been committed. It’s capable of being prosecuted. Why in the world would we turn a blind eye to it?”
A single successful fraud investigation against a major health care network demonstrates the financial logic of the arrangement for Texas Mutual.
In February, the company announced that its fraud investigators, working with the unit it funds inside the Travis County district attorney’s office, had found that Texas Mutual had been overbilled for physical therapy by one of its large health care providers, Nova Healthcare. As part of a plea deal, the insurer said that it received $6.5 million in restitution — far more than the $4.7 million Texas Mutual has authorized in payments to the DA’s office since 2001.
Nova, which also paid a $5,000 fine, declined to comment.
McClellan, the workers’ compensation attorney and former state official, said the deal might be an appropriate remedy for alleged fraud. But he contends the funding arrangement between Texas Mutual and the Travis County prosecutor cast a cloud of suspicion on any plea agreement.
“It’s like you or I being able to pay for our own special criminal prosecutor and go and get somebody indicted because we know they might have wronged us,” McClellan said. “It’s the perception that’s horrible.”
Because of recent budget cuts, the Workers’ Compensation Fraud Division that Texas Mutual funds is the only unit in the Travis County DA’s office solely dedicated to insurance fraud. Under the arrangement, the DA’s office can prosecute defendants no matter where they reside in Texas because Texas Mutual is headquartered in Travis County.
The deal sets Texas Mutual apart from other insurance companies.
As part of the arrangement, a team of 21 investigators employed by Texas Mutual — not sworn peace officers — conduct the investigations and gather the information for direct referral to the Travis DA’s office.
Most other large insurance companies have their own fraud investigators, too. However, most prosecutors direct those companies to refer their criminal complaints to the Texas Department of Insurance, whose investigators have law enforcement authority and subpoena power, said department spokeswoman Stephanie Goodman. The department then refers the cases to prosecutors when warranted.
Texas Mutual embraces its fraud-fighting apparatus as a major point of pride — something that distinguishes it from other companies. It routinely issues press releases when people or businesses are indicted or sentenced thanks to referrals to the governmental unit it funds. The focus on fraud is so ingrained in the company culture that Texas Mutual hands out custom-made coffee cups with a crime-fighting message emblazoned on the side: “We do a Latte ’bout fraud.”
Cases against rank-and-file workers make up the overwhelming majority of referrals and prosecutions. Although these claimant cases generate a relatively small amount of restitution when compared with health care and premium fraud cases, Crosby, the Travis County prosecutor in charge of the unit, says they still pay off in terms of marketing potential.
“It gives them press. It lets people know that if you come here and you commit fraud, we’re going to go after you, and it makes them look good to other insurance carriers,” she said.
Critics like McClellan and Dallas lawyer John Collins, who has experience in both workers’ compensation and criminal defense matters, say the benefit Texas Mutual derives from its relationship with the DA’s office goes beyond restitution and good press. They say it helps insulate the company from scrutiny by the district attorney.
“I don’t know of a single time they’ve ever been investigated by a district attorney,” said McClellan. “Where is the oversight?”
Collins, a former head of the Texas Trial Lawyers Association, said it’s “almost as if Texas Mutual has taken out an insurance policy that they won’t be prosecuted.”
The Travis County district attorney’s office could provide no record of a formal complaint filed against Texas Mutual and said it has never prosecuted the company.
“They’re the Goliath out there. They are the big kid on the block. They’ve been successful in really limiting any control over them.”
— Brad McClellan, a workers’ compensation appellate lawyer
Officials said if there were a valid complaint, the arrangement with Texas Mutual would not prevent them from investigating the company or any of its employees.
Crosby said she once brought a Texas Mutual employee before a grand jury over concerns the person had tampered with an investigation but wasn’t able to prove it. She said it wasn’t for lack of trying.
“I maintain my discretion as a prosecutor,” she said. “Texas Mutual does not tell me what to do.”
As for allegations leveled against the company, Crosby says she directs accusers not to her unit or another division in the DA’s office but to the Texas Department of Insurance (TDI), which investigates but cannot prosecute criminal violations of insurance laws.
“Every case I’ve tried, they complain about Texas Mutual,” Crosby said. “It’s like, ‘Why are you doing this? You know TMI is a slimy company. TMI is this. TMI is that.’ I say, ‘If you have a problem, well, TDI is your remedy.’”
Goodman, the insurance department spokeswoman, said records of criminal referrals to her agency are confidential. She knew of no prosecutions of Texas Mutual stemming from any department investigations.
While Texas Mutual has been successful in cutting most of its ties to state government, it hasn’t been able to persuade the Legislature to sever them altogether, despite spending almost $3 million to lobby state lawmakers since 2013.
A handful of influential legislators, including outgoing state Sen. Troy Fraser, R-Horseshoe Bay, and Rep. John Frullo, R-Lubbock, who chairs the House Insurance Committee, are opposed.
Frullo wants to go in the opposite direction. He had a bill in the 2015 legislative session that would have put Texas Mutual back under the Public Information Act, which would open up the company’s books and board meetings to public scrutiny.
Frullo said having one company guarantee coverage — to act as an insurer of last resort — has worked well. Texas Mutual “has been a great success story for Texas, and my goal is to keep it that way,” Frullo said.
Frullo’s bill did not get out of committee, and Texas Mutual’s bid to cut ties altogether stalled out, too.
There is one connection to government the company hopes to retain even if it does go fully private: the longstanding partnership with Travis County prosecutors.
“It is obviously something when we went down that road this session that we had to look at,” said Terry Frakes, Texas Mutual’s vice president for public affairs. “And I think the answer is that, yes, we’d like to keep it.”
Liz Crampton contributed to this report.
Disclosure: Texas Mutual Insurance and the Texas Trial Lawyers Association are corporate sponsors of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.
The head of Travis County’s Texas Mutual-funded insurance fraud unit has an independent streak — and a public personality.
The Texas Tribune and the Austin American-Statesman spent six months investigating a unique partnership between Texas Mutual Insurance and a special prosecution unit inside the Travis County district attorney’s office. This website was developed by Jolie McCullough and designed by Emily Albracht and Ben Hasson.