;/^^ j> . ^ ^ STXtE of new YORK EXECUTIVE CHAMBER Cornell University Library HD7816.U7N6812 Report of investigation by Jeremiah F. C "1 II 1 11 11 11 11 111 II ii II '! ! |i Ml M 1 1 ill ill 3 1924 002 407 728 BY IGATION Jeremiah F. Connor As Commissioner under section 8 of the Executive Law, known as the Moreland Act, in Relation to the Management and Affairs of the State Industrial Commission SUBMITTED TO THE GOVERNOR, NOV. 17, 1919 MILES M. DAWSON Counsel and Actuary rHD~ 7816 U7 N6812 1% c.1 ^M, ALBANY J. B. LYON COMPANY, PRINTERS 1919 THE MARTIN P. CATHERWOOD LIBRARY OF THE NEW YORK STATE SCHOOL OF INDUSTRIAL AND LABOR RELATIONS AT CORNELL UNIVERSITY Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924002407728 INVESTIGATION OF THE MANAGEMENT AND AFFAIRS OF THE STATE INDUSTRIAL COMMISSION Honorable Alfeed E. Smith, Governor of the State of New York, Executive Chamber, Albany, New Yorh: Deae iSie. — The following is a complete report of my investi- gation under Section 8 of the Executive Law of the management and affairs of the State Industrial Commission. The investiga- tion was commenced on February 21, 1919, pursuant to my des- ignation by you for such purpose. A preliminary report of my investigation of direct settlements under the Workmen's Compensation Law between the injured men and women of the State and insurance carriers, was made by me on March 26, 1919. A report was also made to you on May 27, 1919, in relation to the management of the State Insurance Fund. As to the latter report, the State Industrial Commission filed with your Excellency an answer under date of July 9, 1919. Subsequently, Miles M. Dawson, of No. 141 Broadway, New York City, was appointed Counsel and Actuary in connection with the whole investigation, and public hearings were held in New York City commencing September 17, 1919, and ending October 22, 1919. At these hearings 2,762 pages of testimony were taken and 290 exhibits placed in evidence. A complete copy of the testimony is submitted herewith The scope of the inves- tigation is indicated by the range of subjects dealt with in this report. DIRECT SETTLEMENTS UNDER THE WORKMEN'S COMPENSATION LAW In the report filed with you March 26, 1919, I called attention to grave injustices which had resulted from chapter 167 of the Laws of 1915, which amended the Compensation Law and per- mitted settlements of compensation between the employer and the employee. The conditions revealed by this report were such that when the report was transmitted by you to the legislature, not a voice was heard in the State of New York in support of the direct settlement plan. The legislature passed by unanimous vote and submitted for your approval an act requiring the Industrial Com- mission to hold a hearing in every compensation case. This act was signed by you and is now chapter 629 of the Laws of 1919. While direct settlements are still permitted under this statute, it is only for the purpose of expediting payments, with a hearing by the Industrial Commission on each case before the same is closed. My preliminary report was made as the result of a partial ex- amination of 1,000 agreements or direct settlements taken from the files of the State Industrial Commission in chronological order for the month of October, 1918. Since that time I have com- pleted an investigation of all of these 1,000 cases. Rehearings have been held by the State Industrial Commission in about 400 of the cases. Many of the claimants could not be located and many were found to have been fully compensated. Out of the 1,000 cases, however, there were 114 in which the State Indus- trial Commission made additional awards. In these 114 cases the amounts paid under direct settlements by the insurance carriers (which included stock companies, mutuals and self-insurers, but not the State Fund which made no use of direct settlements) amounted to $13,712.40. The Indus- trial Commission, as a result of the rehearings, awarded addi- tional compensation in these cases amounting to a total of $52,- 279.84. Attached hereto is an exhibit marked "A," giving a list of the 114 cases with the claim number, the names of the parties interested, the amount paid under direct settlement, and the addi- tional compensation awarded by the Commission in each case. The underpayment averaged about $450.00 per case. During the year ending June 30, 1918, the Commission ap- proved 34,659 direct settlement agreements for the payment of compensation, and William C. Archer, the Deputy Commissioner in charge of Workmen's Compensation, testified that, if the same percentage as in the 1,000 cases held good throughout the year, the total underpayments for one year alone would amount to $1,400,000'. Upon the same basis the underpayments since the agreement law became effective in 1915, covering approximately 140,000 cases, would reach a total of $5,700,000. The cases mentioned in the attached exhibit all arose in the Metropolitan District. I reviewed a large nnmher of cases in the up-state dis- tricts also and found conditions to be nearly as bad. Your investigation, therefore, establishes beyond question that the direct settlement law enacted by the- legislature in 1915, has been the means of defrauding injured working men and women of the State out of at least $5,000,000. Tlie complete in- vestigation of the 1,000 test cases and the magnitude of the injus- tice revealed thereby, fully justifies your criticism of the direct settlement law, and demonstrates the wisdom of the change in the statute made this year at your request. This change has now taken effect and the Indnstrial Commission is conducting hearings in all cases without the slightest trouble. The evil of the bargain- ing between the insurance company and the claimant has been completely abolished. In addition, as the result of a letter froni you, the Commission in endeavoring to investigate and rehear, when necessary, every direct settlement entered into since the law went into effect in 1915. ADMINISTRATION OF WORKMEN'S COMPENSATION LAW GENERALLY The outstanding circumstance established by my investigation and by the evidence produced at the public hearings, is the injus- tice and frauds practiced upon the injured employees of the state under a law enacted for their special benefit. Along almost every line of inquiry in addition to direct settlements, conditions have been found and practices have grown up, as a result of which the victim of the industrial accident, coming before the Industrial Commission for relief, has been the one to suffer. Final Adjustment Cases The Compensation Act does not contemplate anything like a " final " determination. On the contrary, the jurisdiction of the Commission is made continuing over every case, and the Com- mission is empowered to reopen and reconsider the same at any time upon the request of any party, or upon its own motion. It was also the intention of the Act to have compensation paid periodically in the same manner as wages. There is a provision for "lump sum" settlements by commuting periodical payments G of compensation into one sum " when in the interest of justice." Obviously it was the intention that unusual care was to be exer- cised before the claimant was to receive compensation in one lump sum. ISTotwithstanding t]xe plain intent of the statute, the Commis- sion established the practice of making awards in, one lump sum to cover all future reduced earnings. For this purpose the final adjustment calendar was established. This calendar is held one day each week and is usually presided over by Deputy Commis- sioner Thomas F. Curtis. Cases reach the calendar at the re- quest of claimants or by direction of the Commission itself. By an amendment to the Act which became effective July 1, 1917, the Commission was authorized to make specific awards for partial loss of use of hand, arm, foot, leg and eye. This to some extent legalized the final adjustment practice and increased the number of cases. The amendment, however, did not contemplate ' any departure from the original intent which was to make pay- ments of compensation periodically instead of in one lump sum. Soon after my investigation started, I was informed both from within and without the Commission, that many claimants were underpaid through the final adjustment of their cases. I there- upon examined all of the final adjustment cases for the months of November and December, 1918, and the month of January, 1919. Eighty cases were selected, in each of which the claimant was examined by Major John E. Conboy, M. D., United States Army. As a result of this examination and investigation, forty- five cases were placed upon calendars before the full commission for rehearing. Twenty-five of these cases were found to have been fully compensated, and twenty were found to have been underpaid. The total amount awarded on the final adjustment of the 20 cases before a deputy commissioner was $29,618.67. The total amount awarded on the rehearing of these cases, includ- ing the present value of an award for total disability in two cases which are still open, amounted to $52,086.97. The claimants in these cases were underpaid, therefore, in the sum of $22,468.30, an average of more than $1,100 per case. The following table is a complete statement giving the result of rehearings in these 20 cases : Statement Showing the Result of Behearmgs of Cases in Which There Had Been a Final Adjustment Before One of the Deputy Commissioners Case No. Amount Amount Claimant Employer Insurance carrier of final awarded on adjustment rehearing 29221 David O'Keefe Joseph A. Reid, Inc. . . Maryland Cas. Co. . $3,818 00 *tl0,232 04 300736 Peter Mora Peter SteinmuUer. . . American Ry. Express. National Sceptic Lbtry Self 215 41 2,397 00 315 41 72893 Maryland Casualty, 2,865 85 300761 James Lawler Republic Storage Co. . U. S. F. &G. Co... 213 32 513 32 275480 Henry C. Haviland. Atlantic Amusem't Co. U. S. F. &G. Co... 275 00 314 03 200659 George Antochi Zinser & Co U. S. F. & G. Co. . . 75 00 225 00 56817 Peter Koldozi L.H. Wood Const. Co. U. S. F. & G. Co. . . 2,874 51 *9.308 20 1 49677 Helen Doyle William H. Perry Aetna Life Ins. Co. . 292 26 1,199 64 ( 53636 Thomas P. Ennis . . . Richard Godfrey U. S. F. &G. Co... 1,500 00 2,334 89 105848 Thos. Parker Young & Metzner .... U. S. F. & G. Co. . . 1,925 00 2,481 85 1 43785 Joseph Alexander. , . Thos. J. Byrne Co Allied Mutual 397 50 800 00 (68426 William Nichols Charles D. Strong Maryland Cas. Co. . 1,970 05 3,123 26 105564 Millie Novelli Cimotti Unhairing Co. U. S. F. & G. Co. . . 958 53 1,182 18 105834 William Pasta William Garrison Co. . Royal Indem. Co. . . 1,739 53 2,252 61 5881 S William Kennedy. , . D. Auerbach & Sons. . Allied Mutual 1,180 82 1,689 46 101967 Joseph Lake E. Ehrlioh U. S. F. &G 1,488 38 2,111 09 275511 American Railway Ex. Mutual Ex. & Ref. Co. Self 2,755 00 3,599 86 101210 Louis Landau Allied Mutual 1,027 50 1,626 67 101374 Wm. Lasher Firneno Brothers Royal Indem. Co. . . 3,480 00 4,736 00 101013 John Lukod Waring Hat Co Allied Mutual 1,035 86 1,175 61 829,618 67 $52,086 97 Increased 29,618 67 $22,468 30 * Indicates the present value of an award for permanent total disability and does not represent the amount actually awarded on the rehearing, as these cases were merely repoened and no final determination made. In case No. 29221, the claimant, David O'Keefe, who resides at 916 East 214th street, New York City, was injured in Janu- ary, 1917, in such manner that both legs were fractured above the ankles. Up to December, 1918, this claimant had received $1,500, in bi-weekly instalments, and at that time his case was settled before Deputy Commissioner Curtis upon a final adjust- ment award of $2,300. The settlement was made upon the basis of 205 weeks, the amount fixed in the compensation law for loss of use of one foot. As a matter of fact, this claimant never recovered from his injuries, both ankles are stiffened and inflamed, and he is totally and .permanently disabled for the remainder of his life. When he had his day in court before the deputy com- missioner, he was paid for the loss of one foot only and notified that his case was closed. The fact that his other foot was per- manently disabled and that lie would never work again during tlie remainder of his life was entirely ignored. The amount he received in a lump sum covered bi-weekly payments to some time in the year 1921. If the case had not been reopened, Mr. O'Keefe,. after that time had expired, would have been left to starve or become an object of charity. There was no circumstance which called for the payment of a lump sum to this claimant and this. is true of most of the final adjustment cases. He should have continued to receive bi-weekly instalments of compensation as long as he remained disabled, which, in his case, would have been for the rest of his life. If a settlement was to have been made, however, he should have been awarded $lO,232.-04, the present value of an award, in his case, for total permanent disability,, instead of the sum of $2,300', awarded by the deputy commissioner. In the Peter SteiumuUer case, the claimant had part of the hand amputated, ankylosis of the elbow, and complete atrophy of all the muscles of the arm. There was nothing left but a bone. Even the muscles of the chest had wasted away because of the complete loss of use of the arm. In this case the award before the deputy commissioner amounted to about 80 per cent of the loss of the arm. When the case came before the full com- mission, the chairman, the late John Mitchell, promptly reopened the case and awarded for the full loss of the arm, a difference of $466.85. 1^0 one but the claimant himself will ever appreciate how much this difference meant to him. In the case of William Nichols there was an amputation of the right leg below the knee and serious injuries to the left leg, the left arm and head. In this, as in the following case, all the injuries were minimized by Dr. Henry B. Boyle, assistant i^edica] adviser of the Commission, and the claimant received an award of 205 weeks for the loss of one foot. The other injuries were forgotten on the final adjustment, except that the claimant was told that he might come back some time in the future if his head bothered him. There was no chance to minimize the injury to> the right foot, because it had been amputated. Even when the claimant came back a second time the injuries to the left leg and arm were again overlooked, but on the rehear- ing he was awarded $1,153.20 additional compensation for such injuries. Another aggravating case was No. 4967Y, in which the claim- ant was Helen Doyle, residing at 33 Madison street, Brooklyn, N. Y. This woman received an injury to the arm and shoulder on May 29, 1918. She was examined by Dr. Eaphael Lewy, chief medical adviser to the Commission, on July 16, 1918, who made a report fully describing the injuries. She was again exam- ined on September 16, 1919, by Dr. Boyle and he made a report in which the injuries were minimized. The case came before Deputy Commissioner Curtis for final adjustment on JSTovember 7, 1918. Up to that time she had been paid $142.26. He gave her $150.00 more without having another medical examination. When the case came before Commissioner Sayre for rehearing ■on June 17th of this year, an award was made for 50 per cent ■of the arm, amounting to $1,199.64. This working-woman had been underpaid by nearly $1,000. When the attention of Deputy Commissioner Curtis was called to the Helen Doyle case on the witness stand, his excuse was the fact that he did not have sufficient time to handle the cases prop- •erly. When his attention was called to the necessity of consider- ing the case from the standpoint of Helen Doyle, he testified that there were a great many Helen Doyles. I do not accept this explanation. Weeks, and sometimes months, are taken by the Claims Division of the Industrial Commission to get the claim- ant's ease in shape for a hearing before the Deputy Commissioner. It is inconceivable that the Deputy Commissioner cannot take a few minutes to properly examine the papers, properly examine the claimant and see that he or she gets full justice. In my opinion, one reason for the underpayment in the final adjustment cases is pure carelessness on the part of the Deputy Commissioner, and I believe it is also due to the fact that the Deputy Commissioner is either unable or unwilling to resist the persuasion of the representatives and physicians employed hy the insurance carriers. I made a further test of the final adjustment cases by a per- sonal examination of the papers in all cases which came before Deputy Commissioner Curtis during the month of February, 10 1919. Many of these cases also appeared to be grossly under- paid. Some action should be taken by the Commission to deter- mine how many other cases exist, in order that the claimants may be fully protected. I have also examined many cases in which the awards were plainly excessive. The administration of the final adjustment calendar has not only been contrary to the statute, but has been a travesty on justice. There appears to be no systematic relationship as between the medical advisers of the State Industrial Commission and the Deputy Commissioner. An exanainer employed by the State Industrial Commission has made an analysis of 345 final adjust- ment cases to determine the relation between the amount awarded and the amount recommended by the Medical Division. It was found that 19 of these eases were settled without any examina- tion by the Medical Division, whatever. In ITO cases, the phy- sician making the examination merely stated the nature and extent of the injury and made no recommendation as to the pro- portionate loss of use or amount of compensation, leaving the matter entirely to the discretion of the Deputy Commissioner. In 155 cases the Medical Division made a specific recommenda- tion. Out of these 155 cases the Deputy Commissioner awarded a smaller amount of compensation in 87 cases, and awarded more than the amount recommended by the Medical Division in 23. In about half of the cases in which less compensation was awarded the reduction was substantial; the reduction in the other cases was due to actuarial computations. In 45 cases the Deputy Com- missioner followed the exact recommendation of the Medical Division; in 17 cases the examiner reported that the claimant did not receive compensation for all of the injuries described in the papers. It also appeared that in 73 cases additional com- pensation should be awarded because of what is known as the " Phoneville decision," under which the Commission can award compensation for partial loss of use up to the rate of $20.00 per weeks, whereas in the 73 cases the award had been limited to $15.00 per week. There is no reason why the Medical Division should make a specific recommendation in part of the cases and leave the 11 others to the discretion of the Deputy Commissioner. Much criti- cism would be avoided if the same rule was followed in all cases. State Insurance Fund Cases In determining claims against the State Fund, the Commis- sion had adopted what is called a "Facts Agreed Calendar." Under this a representative of the State Fund and an examiner employed by the State Industrial Commission review the papers and determine what compensation the claimant should receive, after which the case goes on a calendar and an award is made without giving the claimant an opportunity to be heard. The State Fund has many special groups, some made up of individual employers, and others made up of small groups of employers, including the Wynkoop group, from which Mr. G. W. Wynkoop, an insurance broker, receives 50 per cent of all dividends. It is evident that the employer in these special groups, or his repre- sentative, is directly interested in keeping down the compensation. Several of these special groups are in the western part of the State. I personally examined the special group cases in the Buffalo office of the Commission for the month of December, 1918, and January, 1919. The conditions were such that I requested Commissioner James M. Lynch to rehear a large num- ber of these cases. These rehearings were held at Buffalo in September, 1919. In 11 cases, in which the claimants had been previously awarded a total of $2,742.14, Commissioner Lynch at this rehearing awarded a total of $9,579.91. The following is a statement showing the result of these cases in detail : Case No. Employee Employer Pre- viously awarded Subse- quently awarded B-12146 B-11963' B-12036 B-12313 B-12023 B-12603 B-11925 B-12579 B-11999 B-11965 Jacob Braun. . , . ' John Dworka . . . Hence Howard. . James J. Dunn. . J. Bannister. . . . G. Giallonbardo. W. E. Swanson. . Peter Molmar. .. Joe Katsinski . . . S. Kozlowski. . . . Pratt & Letchworth Co . . . U. S. Hame Co Atlas Steel Casting Co ... . International Railway Co . Wickwire Steel Co Wickwire Steel Co Art Metal Const. Co Wickwire Steel Co Lackawanna Steel Co Atlas Steel Cast. Co Amount of underpayment in the above cases. Average underpayment per case S27 50 17 50 192 50 135 00 150 00 200 82 787 76 113 56 237 50 120 00 $103 50 440 00 1,380 00 2,440 00 570 00 221 60 1,084 58 143 56 1,025 00 545 00 J2,742 14 $9,579 91 ,837 77 621 65 12 In the case of James Dunn, who was employed by the Inter- national Kailway Company, and who had received $135.00, the award was increased to the sum of $2,440.00. In addition to the 11 cases set forth in Exhibit " C," there were about an equal (number which are still under investigation. Underpayments of this sort would amount to at least $5,000.00 per month, or $60,000.00 per year, in cases confined entirely to the Buffalo office of the Commission. I have recommended, and the Commission has directed, that all cases against special groups in the State Fund since July 1, 1917, be investigated and reviewed. In these cases, the employer is usually represented personally, instead of allowing the case to be handled by the State Fund. Commissioner Lynch has directed that, in future, a State Fund representative be present at the hearing to protect the claimant. In view of the close relationship between State Fund representatives and the repre- sentatives of the special groups, I would go further and recom- mend a change in the representatives of the State Fund in the Buffalo office. I also recommend that claimants be given a hear- ing in every case where the employer is in a special group, and so directly interested in the result. Two of the cases mentioned in the foregoing tabulation were against employers in the Wynkoop group. Kehearings were held by Commissioner Henry D. Sayre at my request in a number of other Wynkoop cases arising in the New York office. The total underpayment in seven cases arising against the Wynkoop group amounted to $1,747.05. The following table gives the result of rehearings in the State Fund cases against employers having the Wynkoop service: Case No. Employee Employer Pre- viously awarded Addi- tional award B-11963 John Dworfca U S Hame Co S17 50 786 76 12 17 21 67 345 00 41 56 26 92 $422 50 B-11925 W. E. Swanson . . . Art Metal Construction Co Russell, Birdsell & Ward Bolt & Nut Co 297 82 F-36371 153 83 69100 Brooklyn Eastern District Term'l. Russell, Birdsell & Ward Bolt & Nut Co 8 33 201440 C. Blair Daniel Flemming Wasilowski 172 50 52643 67 53 375188 Brooklyn Eastern District Term'l. 624 54 Totals SI, 251 58 $1,747 05 The averase underpayment for the 7 cases ahoTe mentioned amounts to aDDroxl- mately $250.00 per case 13 Complaints came to my attention of delay in the handling of State Fund cases, and to determine this question I made a com- iputation showing the time taken to handle the cases which appeared on the calendar for May 16, 1919. There were 54 cases, of which 35 appeared on the regular calendar and 19 on the facts agreed calendar. The result was as follows : Regular Calendar — 35 cases Average time between the date of acci- dent and date the case first appeared on the calendar 77 days Average time between the date claim for compensation was filed and date case first appeared on calendar ...... 27^ days Pacts Agreed Calendar — 19 cases. Average time between date of accident and date case first appeared on calendar 57 days Average time between date claim for compensation was filed and date case first appeared on calendar 20|^ days Much of this delay has now been avoided by reforms insti- tuted in the Claims Department of the State Fund and the Claims Department of the Commission as a result of this investigation. One of the principal purposes of the State Insurance Fund was to assure full and prompt payment of compensation. Under the present management, particularly as to the special groups, the State Fund has been lax in carrying out this provision of the statute. State Insurance Fund Graft Cases While my investigation was in progress, Samuel Epstein, an interpreter employed by the State Industrial Commission, was indicted for attempting to obtain money from a claimant who had received an award by way of a final adjustment against the State Fund. My attention was also called to the case of Samuel Cavoli, of Brooklyn, a boy 18 years of age, whose mother had made a complaint that her son had been compelled to pay $2'00.0i0 out of the money received by him from the State Fund. Although this boy later retracted and the matter was dropped by the man- agement of the State Fund, the circumstances were very sus- picious. At the same time, I learned that Barney Wayneck, who had onco been employed by the State Industrial Commis- 14 sion, but now represents one of the insurance companies, waa constantly present at the office of the Commission, although he had little business there for his company, and was known to have large sums of money on his person at all times. These condi- tions, and rumors of graft apparently generally known, led me to make an investigation to determine whether a system had been established under which claimants were being defrauded and graft was being collected by employees of the Commission. This investigation was not confined to the State Fund alone, but extended to all insurance carriers. By taking a list of final adjustment cases, I soon discovered that certain employees of the State Fund had a well-defined wholesale system of graft under which the claimants were being defrauded of large sums of money. My investigation disclosed that arrange- ments were made with the claimants by Barney Wayneck and Samuel Epstein. After a few claimants had admitted payment of money and had identified Wayneck and Epstein, it was easy to trace the other cases by obtaining the cancelled checks from the office of the State Treasurer in Albany and examining the endorse- ments on the back. The following persons were found to be involved in this system of graft : William A. Herman Claim adjuster, State insurance fund. Harry Jacobson Claim adjuster, State insurance fund. Frank J. Elwood Underwriting clerk assigned to claims bureau, State insurance fund. Abranam Bernstein Chief accountant. State insurance fund. John B. Genovese Interpreter, State insurance fund. Samuel Epstein Interpreter, State Industrial Commission. Barney Wayneck Former employee. State Industrial Commission. Medical adviser (name withheld because now de- ceased), State insurance fund. Tito Pacelli Secretary and treasurer. International Tunnel Workers' Union. As soon as it became known that I had obtained evidence of this graft, William A. Herman made a complete confession. As a result of this confession and the evidence produced at the public hearings, Abraham Barnstein, Harry Jacobson, Frank J. Elwood and Barney Wayneck have been indicted, and Samuel Epstein has pleaded guilty to the indictment which had previously been obtained. 15 The system employed was to have Herman or Jacobson give a list of cases to Wayneck, Epstein, or Pacelli, who would call upon the claimants and induce them to give up part of the money which they were asking for, from the State Fund. In most of the cases representations were made that only through them could the claim- ant receive a sufficient award. In others, threats were made that the cases would be held up unless they agreed to split the money. In a few the claimants, working with the ring, actually per- petrated frauds on the State Insurance Fund. Neither Wayneck nor Epstein ever appeared with claimants, but Pacelli in most cases did appear before the deputy commissioner. After the arrangement had been made with the claimant, the case was brought for final adjustment before a deputy commis- sioner, in nearly every case, Thomas F. Curtis, to whom this calendar was assigned. After the award was made, the claimant would be directed to return on a certain day and obtain his check from the cashier of the State Industrial Commission. Upon that day, the claimant would be identified by either Herman or Jacobson, and would receive his check. In cases handled by Wayneck the claimant was usually met in the hall and Wayneck cashed the check then and there out of money carried in his pocket. The check, after being endorsed by the claimant, usually contained a number of fake endorsements and was finally deposited by one of Wayneck's friends. Most of them went through one Aaron Fertig, with the assistance of one Louis Landau, who endorsed Fertig's name and deposited the checks in a bank to Fertig's account. Fertig would then obtain the money and pay the entire amount over to Wayneck, who in turn would distribute the proceeds usually between himself, Her- man and Jacobson. In cases handled by Epstein most of the checks were cashed by Isidore Herz, a private banker, located at East 34th Street. It is important to note that, after Epstein was indicted and dismissed by the Commission, he obtained employment with this private banker and continued to operate as a part of the ring, in connec- tion with Herman and Jacobson. One case which occurred sub- sequent to his indictment was that of Benjamin Asserson, of S84 Flushing Avenue, Brooklyn, New York. The 'claimant was 16 awarded $3,000. Epstein cashed the check at the bank of Isidore Hers and took $1,000 from the claimant, which he divided with Herman and Jacobson. Elwood, Bernstein, Genovese and the medical adviser operated independently of Wayneck and Epstein, but all of them divided with Herman and Jacobson. This system of graft sprang up early in the year 1918. The grafting ring was so confident that the graft continued even while the State Fund and the State Industrial Commission were under investigation. About 150 claimants were held up in this manner for a total of probably about $50,000. In some cases the graft was petty, but in other cases it was as high as $1,000. ISTo lower or meaner form of graft has ever been disclosed. Some of the cases are particularly shocking. In Case ISTo. 100,304, the employee, Thomas C. Loe, was killed" on February 23, 1918, while in the employ of the Underpinning- & Foundation Co., leaving a mother, who claimed to be dependent on his earnings for support. The mother, Anna Loe, residing at 502 West 141st Street, New York City, made a claim for com- pensation, but was informed that she was not entitled to an award by reason of the fact that she did not live with her son and he had not contributed sufficiently to her support. Subsequently, Her- man arranged through a brother of the deceased to make up a case- of dependency, frame up an application for a lump sum, and obtain an award for death benefits. In consideration of this, Herman, Jacobson and an employee in the claims department of the State Industrial Commission were to receive one-third of the award. One investigator was sent out with instructions to make a favorable report on the question of dependency ; and another to make a favorable report upon a proposed purchase of real estate, which was to be the basis of the lump sum award. Both of these reports were made, the case was brought before Deputy Commis- siner Curtis, and, without any testimony being produced, an award was made to the mother and sent to the actuary to be computed into a lump sum. Under the law, there is no authority whatever for paying compensation to a mother in a lump sum, because the award only extends during such period as she remains a depend- ent For this reason the actuary was compelled to compute the 17 award as a life anmiity ; and before doing so, he insisted that the claimant should be medically examined. The medical examiner of the State Fund made this examination and reported the claimant to be in good health. The claimant eventually received $3,400, giving $650 to her son, which amount was divided between the' medical adviser of the State Fund, Herman, Jacobson and an employee in the claims bureau of the State Industrial Commission. The name of the latter employee is not disclosed because the pay- ment to him has not been corroborated. In the case of Leoniad Springstein, of Elmhurst, L. I., who was injured while in the employ of Johnson & Bemston, at Corona, Long Island, Elwood approached the claimant with the proposition that he woxdd get him an award in the sum of $3,500 if the claim- ant would pay Elwood $1,000. To assist in accomplishing this, result, Elwood went to the employer and obtained a new report of the accident, increasing the wages of the claimant from $3.25, as first reported, to $4.35 per day. When the case came before the deputy commissioner it was adjusted for the exact amount prom- ised by Elwood, $3,500. The claimant had lost most of his hand by amputation. His wounds had not entirely healed, because of which he was unable to sign his name to the check. The arrange- ments were therefore made through a woman friend of his, Eliza- beth Wat j en. She took the check to a bank in the presence of the claimant and Elwood, obtained $1,00'0, which she gave to Elwood, and which he in turn divided with Herman and Jacobson. In other cases, the claimants were trained as to what they should do and say when examined by the medical advisers of the Com- mission, and in this manner received awards in excess of the- amount provided by law. It seems almost impossible that this extensive system of graft should have existed since early in 1918 without having been detected by those charged with the administration of the Fund. The gift of a $3,400 automobile to the wife of the manager, the generally loose management, the fact that charges of graft had been repeatedly suppressed, encouraged the grafting ring to con- tinue and grow bolder. And the whole picture of mismanagement of the State Fund and the easy way in which explanation of alleged wrong-^doing were accepted, lead to the conclusion that 18 there was little desire to learn the exact truth and weed out the grafters. In making my examination of the final adjustment cases against stock companies, mutuals and self-insurers, I endeavored to find out whether any system of graft existed on the part of employees of such insurance carriers. Out of about 100 cases, one claimant testified that he had paid $5.00 or $10.00 to a clerk in the office of one of the insurance companies for the purpose of having his check cashed. One other case was brought to my attention by Samuel Epstein after the public hearings were closed, in which he stated that he had obtained money from a claimant and paid part of the same to the representative of an insurance company. Both myself and Mr. Dawson made dUigent inquiry on this sub- ject. There are doubtless isolated cases in which agents of insur- ance companies have received money from claimants. I am satis- fied, however, that no organized system of graft exists against other insurance carriers. Runners One evil intended to be obviated by the Workmen's Compen- sation Law was the ambulance-chasing lawyer and the contingent fee under which the injured employees received only a small part of the amounts recovered for personal injuries. Strange as it may seem, a system of " runners " has grown up under the administration of the compensation law, resulting in conditions as bad, if not worse, than under the previous system. A large number of persons in New York City, called " runners," are engaged in the business of hunting up claimants and appearing with them before the State Industrial Commission. This con- dition is especially prevalent among Italian claimants and others employed along the waterfronts in Greater IsTew York. In many cases, the claimant, acting in concert with the runner and a phy- sician, perpetrates a fraud upon the employer or insurance car- rier. Claims for minor injuries are withheld for several months, with the expectation, almost always realized, that, when the case comes on for hearing, an award of compensation will be made to the date of the hearing. This means a larger sum for the claim- ant, and that is all paid in one sum, resulting in more to divide 19 with the " runner." In some cases, claimants have been known to report accidents of this character against as many as three different employers. One of these runners, Alfred San Dominick, testified that his income from this source amounted to about $5,000 per year. It is generally believed, however, that not only he, but numerous other runners, receive much in excess of $5,000 per year. Another " ruimer " is Tito Pacelli, already referred to in connection with State Fund graft cases. Pacelli is the sec- retary-treasurer of the International Tunnel Workers' Union, of which Deputy Commissioner Thomas J. Curtis is president. He receives a salary, in return for which he is expected to repre- sent claimants who are members of his union before the State Industrial Commission. Notwithstanding the receipt of this salary, he testified that he also receives " presents " from mem- bers of his union for whom he appeared, and that he represented claimants who were not members of the union and usually expected to receive 10 per cent of the amount awarded. He admitted that he had appeared in a number of State Fund cases, furnished him by Herman, and that the fees obtained in these cases were divided with Herman and Jacobson. He also testi- fied, referring to Mr. Curtis, "I told him sometimes that I would get some money from the men." (p. 2401.) Administration of. Up-State Offices The Industrial Commission maintains branch offices at Albany, Syracuse, Eochester and Buffalo, each in charge of a Deputy Com- missioner. Most of the cases are disposed of in the up-State offices without reference to a member of the State Industrial Commis- sion, or to the Second Deputy Commissioner who is in charge of workmen's compensation. An examination of the cases in the Albany office, made by the Industrial Commission itself, revealed many instances in which the cases were wrongfully disallowed. This included a number of death cases. The various offices have different views as to the interpretation of the workmen's com- pensation law, and, while these are reconciled in some cases by conferences at which doubtful cases are discussed with a mem- ber of the 'State Industrial Commission present, there is need for further supervision of the up-State offices. I am of opinion 20 that every case disallowed by a Deputy Commissioner, whether in an up-State office or at the main office in ISTew York City, should he reviewed either by the Second Deputy or by a member of the State Industrial Commission. ISTo up-State office has ever received a sufficient appropriation to employ a medical adviser, and a practice has grown up, under which the medical adviser designated for some of the up-State offices receives his salary in the form of a fee paid directly by the insurance carrier in each case. In addition, in some of the offices, the medical adviser is employed by insurance companies as the attending physician for some of the claimants. I very strongly urge that the Commission be given sufficient appropria- tion to employ a medical adviser for each up-State office, who will be under no obligation to the insurance companies. Death Cases The Compensation Law became effective July 1, 1914, and for the first five years ending July 1, 1919, the Commission has received claims for compensation in 6,757 death cases. About 20 per cent, of these cases were disallowed. The average award in the remaining cases is $4,000, the total for the five years amounting to more than $21,000,000. These figures demonstrate the importance of this branch of the work. These cases involve difficult questions of law and close questions of fact. The cases in the New York office are heard at the present time by Deputy Commissioner Archer, who, in addition, has entire charge of the Compensation Bureau for the whole State. It is my conclusion that an additional Deputy Commissioner should be authorized by the legislature, whose entire time should be devoted to the handling of death cases, and who should supervise the up-State cases as well as the ones arising in the ISTew York district. Procedure Upon examining the files of the Commission in relation to individual claims, I found that much delay was entailed in get- ting the cases on the calendar because of the overformal insist- ence that all blanks provided by the Commission, both for the employer and employee, should be filed with the case before it 21 reached the calendar. I advised the Deputy Commissioner in charge of the workmen's compensation that much delay could be avoided if the claimant were given a hearing as soon as he filed a elaim for compensation. This practice has now been adopted and the Commission has even gone further and now places cases on the calendar where the report of accident indicates a com- pensatable case, though no claim has been filed. This has been found to avoid much delay and works to the general satisfaction of all parties. It also operates as a check on the employment of " runners," who have consistently delayed the filing of claims for compensation. I found many cases in which the claimant appeared to be dis- satisfied with the decision in his case and, in a great majority of these cases, his letter of complaint or his application for rehear ing was passed upon and denied by a claims examiner without, reference to a Deputy Commissioner or to a member of the Indus- trial Commission. A system should be adopted under which complaints of this character should have careful attention. Statute of Limitations iSection 28 of the Workmen's Compensation Law provides that the right to claim compensation shall be forever barred unless the claim is filed within one year after the date of the accident, or in case of death, within one year after the date of death. A great many cases have been called to my attention in which the -claim was barred because of this limitation. In numerous cases the reason for the delay was the fact that the claimant returned to work and was receiving his usual wages. Quite a number of cases were eye injuries in which total blindness developed more than a year after the accident. This provision of the statute has worked much injustice. I am of opinion that the limitation should commence to run from the date of the disability instead of tho date of accident, and that the time for filing a claim should be extended to a period of two years. Failure of Insurance Carriers One of the stock insurance companies licensed to do business in the State of ]^f ew York has been taken over for liquidation by 22 the Superintendent of Insurance. The failure of this company made the employers insured by the company directly liable for the payment of compensation. This caused much delay in the pay- ment of claims, and in several cases where the employer was irresponsible, made it impossible for the Commission to enforce payment of compensation to injured employees or the dependents of deceased employees. The delay has resulted in great hardships. In the case of a mutual insurance company, which withdrew from business, payments of compensation were made in full. The com- pany had ample assets because of its reserves, and the employers could have been assessed if necessary to cover any deficiency. Failure to Insure Compensation According to the testimony, more than 15,000 employers have failed to give security for the payment of compensation, although required to insure by the Compensation Act. Most of these are small employers, and many of them are financially irresponsible. Awards by the Commission arising from claims against these employers are often uncollectible. Treatment and Care of Injured Worhmen Section 13 of the Compensation Law requires the employer to furnish the necessary medical attention for injured employees. An injured workman cannot select his own physician, however, unless the employer fails to provide a physician after request. When a request is made, the employer, under the decisions, has a right to select the physician. As a matter of practice the phy- sician in most cases is selected by the insurance company. The claimant is thus left in this position, viz. : the physician who treats his injuries and restores him to a working condition, later appears as a witness against him upon his application for com- pensation. In one case brought to my attention, a claimant had been examined by 32 physicians, including the medical ofiicers of the Industrial Commission. None of these physicians regarded the relation with the employee as confidential, and in his struggle to obtain compensation, he could not rely upon any one of them to act as a witness on his side of the case. 23 The fact that the insurance carriers control the selection of attending physicians has worked to the disadvantage of the injured workman. Aside from this, the medical profession as a whole is greatly dissatisfied with the present system, which has developed into a " business " undertaking and has destroyed the confidential relationship and the human interest as between the physician and patient. On the other side it is argued in support of the present system that the organization of medical practice for the treatment of industrial injuries is desirable because the treatment is more prompt and adequate. It is also urged that the cost of treatment is much less than where there is free choice of physicians by the claimants. Whether a system which gives absolutely free choice of phy- sicians to the workman would be better is open to dispute. The testimony of the chairman of the State Industrial Commission of Ohio, the chairman of the Compensation Commission of British Columbia, the president of the American Medical Association and the chairman of the Committee on Social Insurance of the New York County Medical Society is to the effect that free choice of physicians has worked well after a thorough trial, and that it would make for better conditions in the medical profession. In the State of Massachusetts free choice of physicians has been tried and the Commission now recommends a return to the former system upon the ground that the insurance company which is required to pay the medical bills, should have the right to .select the physician to assure itself that the treatment is satisfactory. In the State of California the State Insurance Fund has at first tried free choice of physicians, but has now modified this plan by establishing panels of physicians in various localities and requiring the workman to choose from the list established by the Commission. This change was made because absolute free choice in some cases had revealed unsatisfactory treatment. It is my opinion that the medical profession generally can be trusted to treat industrial injuries. What appears to be needed in connection with the compensation law is a better organization 24: of the medical profession for the purpose of providing prompt and efficient service in cases of industrial injuries. The State medical societies and the county medical societies should be con- sulted as to how this organization can be secured and made effec- tive. The cooperation of the medical profession should result in a revision of the law, which would permit free choice of phy- .sicians at least to a limited extent. I believe that some change in the law in this respect is imperative. Through the various means above enumerated, large simis of money have been lost to claimants under the compensation law, amounting in the aggregate to many millions of dollars. Some of the evils found to exist are due to activities of insurance car- riers, some to defects in the statute, and others to a breakdown in administrative matters. All of the underpayments have inured to the financial benefit of insurance companies, self-insurers and others, such as employers having the Wynkoop service. A sum- mary of my recommendations to meet these conditions and to meet other conditions hereinafter mentioned will be found at the olose of this report. THE MEDICAL DIVISION OF THE COMPENSATIOK BUREAU The Commission maintains a medical division which is in charge of Dr. Raphael Lewy as chief medical adviser. There are four assistant medical examiners, two having been added during the present year because of the change from direct settle- ments. The employees of this division make physical examina- tions of claimants and advise the Commission as to the nature and extent of the injuries. They also give advice as to the cause of death where claims for compensation are made by dependents of deceased employees. It is apparent that very great powers are vested in the medical division. The Commission is guided to a large extent by the reports made by the physicians in this •department. A number of unfortunate conditions exist in rela- tion to this medical division. In many eases the Commission refers the claimant to a special- ist, such as an eye, nerve cr surgical expert. The purpose is to 25 obtain an impartial report upon which the Commisoion may base its decision. In all of these cases the expert is selected by the- chief medical adviser. Although the expense of making the exam^« ination is paid by the insurance carrier in each case, the chief medical adviser requires the physician to send the bill to him^ and he then forwards the bill to the insurance carrier with a request that the check be made payable to the physician and forwarded through the chief medical adviser instead of to iha. physician direct. The fact that the bills for these experts are sent through the- chief medical adviser and are paid through him, creates sus- picion. This suspicion is enhanced by the fact that the bills for these specialists are almost invariably higher than charged for the same service when the physician is employed by a patient or by an insurance carrier, directly. Dr. Meyer Wolff has charge of the treatment of injured work- men for a number of insurance companies and self-insurers. For this purpose he maintains a central ofBce at 61 Second avenue, 'New York City, and about 60 branch offices throughout Greater New York. Dr. Wolff constantly appears before the medical division when the workmen treated by his physicians are being examined, and also takes part in the adjustment of the cases. One of the assistant medical examiners, Charles Steinhauser, was formerly employed by Dr. Wolff, and in at least one instance the chief medical adviser requested an insurance company to send its claimants to Dr. Wolff for treatment. It goes without saying that no connection should exist between physicians employed by insur- ance companies and physicians employed by the State Industrial Commission. As pointed out in relation to the final adjustment cases, another assistant examiner. Dr. Boyle, has, to say the least, been extremely negligent in the examination of claimants. For the reasons above stated, and in order that the medical division of the Industrial Commission shall be free from everf suspicion, I recommend a complete reorganization of this division, COMPENSATION INSURANCE Under section 50 of the act every employer is required to give- security for the payment of compensation. This security may be- 26 given through either one of the following four methods: (1) By insuring with a stock insurance company; (2) By insuring witli a mutual insurance company; (3) by insuring with the State Insurance Fund ; (4) by furnishing proof to the Commission of financial ability to pay compensation, in which case the employer becomes what is known as a self-insurer. Some 358 industries of the State (mostly large corporations) have become self-insurers. Attached hereto is a report of my actuary reciting in detail the operations of insurance carriers under the Workmen's Compensa- tion Law from the time the law took effect on July 1, 1914, up to December 31, 1918, a period of four and one-half years. This report shows the total earned premiums, losses and expenses for all insurance carriers for this period of time to be as follows : Earned Premiums $87,784,907 Incurred Losses 50,915,555 Incurred Expenses 26,880,554 The expenses do not include the expenses of the State Insurance Eund by reason of the fact that such expenses were paid by the state up to July 1, 1916. The following table shows the premiums, losses and expenses as applied to each different class of insurance companies : Earned premiums Incurred Incurred expenses Stock Companies; Non-participating. . Participating Mutual companies . . . State Insurance Fund 864.761,869 1,502,967 9,521,616 11,998,455 $38,597,830 729,815 4,667,938 6,919,972 $24,573,976 269,448 2,038,120 In the statement of the actuary the earned premiums of the State Fund are increased from $10,030,666 to $11,998,455 to make them directly comparable with the premiums collected by other insurance carriers. The actuarial report and the evidence produced before me, shows that the total saving to the employers insured in the State Fund during this period of time, over and above what it would have cost had the same insurance been carried by stock companies, was approximately $4,000,000. 27 This also shows that|_nad the employers insured by stock com- panies placed their insurance with the State Fund, they would have saved during the same period, by reason of lower expenses and returns in the form of dividends, the sum of $18,000,000^} It is impossible to estimate the profits received by the- stock companies because the reserve for incurred losses is based upon an arbitrary percentage of the earned premiums and does not repre- sent the actual losses. This manner of setting up reserves is open to criticism. The loss liability may be higher than the percentage of premiums, and on the other side, where the losses are low, large profits may be concealed through this percentage method of setting up reserves. The State fund and mutual companies are required to set up a reserve to meet each individual claim. The actuary estimates that self-insurers have incurred liability by reason of awards in which the payments will extend over long periods in the future amounting to a total of between $20,000,000 and $25,000,000. The securities deposited with the Commission to discharge its obligations are entirely inadequate. The Com- mission has endeavored to require payment of the present value of the claims of these self-insurers into a trust fund, but difficulty has been encountered in ascertaining the amounts and the pro- vision of the law authorizing this action has been of little pro- tection up to the present time. Provision should be made in some way requiring reserves or payment into a trust fund in amount sufficient to meet all claims against insurance companies and self- insurers. Section 34 of the Act should be broadened so that claims for compensation and awards made by the Commission shall be pre- ferred over all other claims as against an employer and insurance carrier. COMPENSATION BENEFITS The rate of compensation fixed by the law in 1914 is limited to not more than $15.00 per week and not exceeding two-thirds of the average wages, except in the case of permanent injury to the hand, arm, foot, leg, and eye, where the limit is $20.00 per week. The compensation to dependents is limited to two-thirds of the wages, but wages in excess of $100.00 per month are not taken into consideration. 2S At the time the compensation law was enacted, the compensation benefits were considered fully high enough, and indeed at that time they were the highest benefits paid under any compensation law in the world. Since 1914, however, wages hare increased about 60 per cent. Compensation has not increased accordingly because of the limits provided by the statute. It is estimated that whereas the wages have increased by 60 per cent the compensation benefits have only increased by 25 per cent. A general increase should be made in the compensation schedules both to employees disabled from working and to dependents in case of death. THE STATE INSURANCE FUND A report has already been made by me criticising the manage- ment of the State Insurance Fund. In the reply to this report filed with you by the State Industrial Commission, it is shown that the following reforms have already been instituted as a result of this investigation : 1. Extra dividends have been declared to the employers in some of the six general groups. 2. A committee has been appointed to make a study and to report to the Commission as to a revision of insurance premiums^ 3. The Commission has adopted a resolution abolishing the dis- crimination in declaring dividends to special groups and providing^ that in the future all groups should be treated in the same manner, so far as possible, in the declaration of dividends. 4. Group 17, known as the Wynkoop group, has been thrown open to any employer in the same trade who can qualify as to size of payroll, medical and safety organization; the Commission has condemned the contingent character of the compensation paid Mr. Wynkoop, and has directed that periodical statements of dividends shall be sent directly to the employer in the future instead of to* M.T. Wynkoop. 5. The special experience rating plan has been made available to all employers having sufiicient payroll. Before replying to my report the Commission made little, if any, investigation except to call into conference the manager and the actuary of the Fund. ISTo examination of the records in rela- tion to individual policyholders or claims was made by the Com- 29 mission, and as testified before me, the reply of the Industrial 'Commission was based almost entirely upon a report made to the Commission by the manager of the State Insurance Fund, which was transmitted to you with the reply of the Commission. This report of the manager is full of misstatements and deception. A few instances are as follows : 1. Attached to the report of the manager is a letter written to me under date of March 4th, 1919, in relation to a comparison between insurance rates in Ohio and New York. Tliis letter, and .also the report of the manager, contains a statement to the effect that under the same operating conditions the net cost to policy- iolders of the l^ew York State Fund was slightly less than the net cost to policyholders of the Ohio State F'und. Upon receipt of this letter I addressed a communication to the manager, dated March lY, 1919, pointing out mistakes made by Mm, and thereupon received another communication under date of March 29, 1919, enclosing a computation made by Mr. Watson, actuary of the State Fund, showing the comparatiTe collected insurance rate as between New York and Ohio, as follows: Ohio State Fund, comparative collected rate 2.33 New York Stock Company, comparative collected rate. . 3.89 INew York State Fund, comparative collected rate 3.32 This comparison established that the rates collected in Ohio were very much lower than the rates «)lleeted in this state either by istock companies or by the State Fund. The correspondence above referred to was deliberately sup- pressed by the manager in making the report to the Industrial ■Commission. The letters above referred to, together with a statement pre- pared by E. E. Watson, Actuary of the Ohio Commission in con- ference with Deputy Commissioner Archer, dated July 19, 1919, .are attached hereto and marked Exhibit " B." 2. To justify employment of the Dr. Meyer Wolff service for the treatment of claimants in the Greater New York territory the manager reports that the average bill rendered by the Dr. Wolff Dressing Stations for the year ending December 31, 1918, was ^5.51 per case, and the average bill of all other physicians was the 30 um of $15.97 per case. This comparison was absolutely vitiated y reason of the fact that the other physicians included the special- 3ts employed by the State Fund who received as high as $25.00 or making a single examination, and whose fees for office treat- lents are much in excess of the fees for the ordinary medical ervice rendered by the Wolff Dressing Stations. 3. In justification for the establishment of a special group for mployers engaged in the business of window cleaning, the man- ger reported the deposit of a bond by the Window Cleaners' Pro- active Association to secure the State Fund in the event that the )sses and other charges against the group exceeded the installment f premiums. The manager well knew, and indeed it was known ) the Commission, that this bond had never been executed by the rincipal, and in any event, was defective in form and of doubtful alidity. 4. In justification of the Wynkoop Service experience was given f employers who had been insured in the State Fund both before tid after the Wynkoop Service. One of these employers was the irooklyn Eastern District Terminal, and the manager omitted to ;ate that employees of this company engaged in the operation of 3ssels and engaged in the operation of a terminal railroad were ot covered by the State Fund policy under the Wynkoop Service, hereas all of such employees were protected by the State Fund Qder the previous policy. The manager testified at the public sarings that the comparisons in his reply were all really without ly comparative value. tate Fund Mcmagemeni 1. Finances: In my preliminary report I referred to the fact lat the State Fund at the present time was sound financially, and iference is made to the report of my actuary attached hereto lowing the State Fund to be solvent and strong and to be pos- issed of unimpaired reserves. In the answer filed with you by the Industrial Commission it as asserted that the prosperous condition of the State Fund at the resent time was evidence of good management. This is not mied. But on the other hand, it appears from the evidence Iduced at the hearings that the financial condition of the Fund 31 is due almost entirely to a large increase in premium rates and to a large increase in premium income due to an increase of about 60 per cent in wages during the past two years. It also appears that the management had little to do in bringing about this result. If the management is to be judged by financial success alone, the converse would be true of the years 1916 and 191Y. During this period the general surplus of the Fund was first reduced to a mere pittance, the catastrophe fund was then trenched upon, and finally almost virtually disappeared. This was caused by a reduc- tion in premiums at the end of the first six months and to the fail- ure of the management to properly audit payrolls and make collec- tions of premiums. During this period, however, dividends were declared and allowed to employers in special groups. The Com- mission had to pay these special dividends because of the under- writing arrangement made between the employer and the manager of the State Fund. It was feared that the failure to allow the dividends, although the reserves were impaired, would result in a withdrawal of the special groups from the Fund, and in further justification for its action the Commission relied upon the prob- ability of collecting additional premiums in the general groups. 2. Payroll Auditors: A large sum of money, amounting to hundreds of thousands of dollars, has not been collected by the State Fund through failure to properly audit payrolls. Although 19 payroll auditors are provided by the budget, only five or six were performing this work during the year ending June 30, 1918, and these for only an average of about thirty weeks per year. Tht; manager testified that this condition was made necessary because the payroll auditors were required for other work. If this condi- tion exists, the legislature should be petitioned for a larger office force instead of additional payroll auditors. There is no question but what the present force of payroll auditors would be sufficient to perform the work if assigned to these duties. 3. Ccmcellation of Policies: To determine why so many poli- cies had been cancelled in the State Fund during the past year, I addressed a letter to 121 employers. Replies were received from 63. These replies established the following conditions : Fourteen employers cancelled policies because of complaints in relation to service. These complaints covered a large field, including delay 32 in the payment of claims, failure to answer correspondence and loose management. Fifteen employers reported that they were Able to obtain cheaper insurance elsewhere; 17 were cancelled be- cause the employer went out of business ; six were cancelled for husiness reasons, and two because the State Fund policy did not cover admiralty liability, and eight policyholders assigned no rea- son for cancellation, but expressed satisfaction with the service. The fact that so many policyholders withdrew from the State Fund because of complaint of the management and because of alleged cheaper insurance elsewhere establishes the necessity of a <;loser relationship between the management and its policyholders. In other states, particularly in Ohio and California, the payroll auditors have been kept constantly in the field and have been the means of establishing a close relationship: The State Fund ty reason of its low expense ratio, can furnish insurance cheaper than either stock or mutual companies, and if proper attention could be paid to each individual case, policyholders could not be induced to withdraw from the Fund because of alleged cheaper insurance. 4. Accounts: The general ledger of the State Fund was found to be in balance, but many individual ledger accounts were not written up. It was also found that the individual accounts had not been reconciled with the records in relation to each policy- holder. We found it impossible to reconcile the individual ac- counts with the records in each case because of lack of time. It was evident that the individual ledger in a great many cases did not show the exact condition of the account, and the Commission should immediately assign special employees to this work in order that all individual accounts may be checked up. This condition was due largely to the neglect of the chief accountant, who was interested in an outside accounting firm, and who also according to the evidence before me, was involved with the other employees who were obtaining money from claimants. 5. Favoritism in Computing Premium,s: Many irregularities were uncovered in relation to payroll audits and the computation of premiums of individual policies. This work was also in charge of the chief accountant. In one instance, that of the William Kennedy Company, the payroll auditor was offered a substantial bribe. 33 Upoa investigation of tke payroll in this case by the force of auditors employed by my counsel and actuary, it was found tbat some $60,000 was soug]b± to be deducted from the payroll audits on various grounds, some of wbich constituted an attempt to cover / up an offense committed by officials of this company. Although | the reduction of the payroll was not secured, the same result was i accomplished for the employer within a few days after the bribe i was offered by a reduction of the rate. In the case of the Empire Carting Company, which was engaged in the carting business, the computation of a large part of the pre- mium was made under a classification of saddlery and harness manufacturing. Further suspicion was given this transaction by reason of the fact that the folder containing all back papers in rela- tion to the Empire Carting Company had been lost or destroyed. Employees of my actuary and counsel, however, by putting together other records, have ascertained that this company is indebted to the State Fund in the neighborhood of $9,000 for premiums, nearly all of which had been apparently covered by either destroy- ing the records or through false classification in the payroll audit In the matter of employers engaged in the business of wrecking buildings, both in ISTew York City and up-state, wholly inadequate means for checking up the payrolls have been employed, and the barest and most shameless frauds have been committed upon the State Fund. In some cases no payroll is reported covering large j wrecking jobs, and in others, reports of the payroll are only made , after accidents had occurred and claims filed against the State Fund ', for considerable amounts. An employee of the State Fund at one time reported these conditions to the manager, advising him that the chief accountant must be cooperating with the employers in perpetrating these frauds, but this employee was not permitted to complete his investigation. 6. Special Groups: Out of the total premiums collected by the State Fund, 45 per cent is received from employers in special groups. These employers in reality are self-insurers. They operate under an accounting system with the iState Fund, through which they are charged actual losses, a 5 per cent contribution to the catastrophe Fund, and a proportionate share of the expenses. The remainder, if any, is returned as dividends. Should the 2 34 losses exceed the premmm upon the termination of a group, such loss would be paid by the State Fund generally. The matter of these special groups is covered in the report of my actuary, at- tached hereto, together with his recommendations concerning the same. As already pointed out, the Commission has modified the practice in relation to dividends. 7. Special Experience Rating: Several large employers in the general groups, comprising mostly employers having the Wyhkoop Service, are given the benefit of a special experience rating plan. These employers receive a dividend in the form of a rebate, in addition to the pro rata dividend declared in the group. This plan was concealed from the Industrial Commission by the manager for a long period of time. Even when the manager was requested to advise concerning the arrangements with the Brooklyn Eastern District Terminal he evaded the question and failed to inform the Commission that this company had been insured under this spe- cial plan. One requirement for special experience rating is a semi-annual premium of at least $1,000. The plan was extended to the Standard Yarnish Works under the Wynkoop Service, and when it was found that the premium did not reach $1,000 the insurance policy was changed to cover medical treatment. This treatment was at first assumed by Wynkoop, and the change was undoubtedly made to increase the premium to $1,000 so that Wynkoop would get the benefit of one-half the rebate. Although the Commission has directed that the plan be offered to all em- ployers who can qualify, it is, in my opinion, contrary to the re- quirements of the statute for pro rata dividends within the groups. 8. The Medical Service: In my examination of the claim folders I found a consistent effort to take claimants away from their own physicians and from the hospitals in ISTew York City in order that they might be treated by the dressing stations of Dr. Meyer Wolff. In addition to this the State Fund employs doctors to visit claimants and make an examination as soon as a report of the accident is received. It was testified before me that the sole result of these examinations was to get the claimant transferred to one of Dr. Wolff's dressing stations. In almost every report of these examinations the injured workman was directed to call at the office of the State Fund and was there exam- 35 ined again by the medical adviser, who referred him to one of Dr. Wolff's dressing stations. Dr. Wolff has a main office at 61 Second avenue, v^here injured workmen are given baking, massage and electrical treatment. In addition, he has about sixty dressing stations in the vicinity of Greater New York. These dressing stations are maintained by physicians who render the treatment. The bills are all rendered by Dr. Wolff, and the physician in charge of the dressing station receives 50 per cent of the fee. The income of Dr. Wolff from the State Insurance Fund is now approximately $75,000 per year. The medical adviser of the State Fund, Dr. Henry T. Radin, appointed about three months ago, was, at the time of his employment, general manager of Di. Wolff's dressing station service. Misconduct in the State Fund Reference has already been made in this report to the system of graft instituted by employees of the State Fund, under which claimants were defrauded of large sums of money. In connection with this evil of bribery and corruption, it transpires that charges had been brought to the attention of the manager of the fund in relation to the following matters, none of which were ever brought to the attention of the State Industrial Commission : 1. Charges were made against one of the claim examiners who, in fact, was involved in this bribery and corruption, to the effect that he collected large sums from employers engaged in the business of window cleaning, for alleged services in connection with workmen's compensation insurance. 2. As already appears in this report charges were brought to the attention of the manager that an employee of the State Fund had held up a claimant who was only 18 years of age for the sum of $200. These charges were readily dismissed by the manager upon an affidavit made by the claimant retracting the charges. It transpires from the evidence produced before me that these charges were in fact true and could have been discovered had a thorough investigation of the circumstances been made by the management. 3. Charges were brought before the manager that an employee of the State Fund, in combination with an employer insured in one of the special groups, had approached claimants, encouraging ■36 and uiging such claimants to make application for final adjnat- ment of their claims. 4. It also appears in the testimony that crap-shooting and gam- bling had taken place at the office of the Fund upon several occa- sions, and that employees holding responsible positions were ia- volved. These employees were permitted to go free with slight punishment. 5. It also appeared from the testimony that the manager of the State Fund, before the system of grafting on claimants originated, had himself been the recipient of important financial favors from one G.. W. Wynkoop, proprietor of the Wynkoop Service, which service had transactions with the State Fund, through which Wyn- koop received gross earnings in excess of $113,000. Among these favors were financial accommodations upon the purchase of an automobile, and the gift of another automobile to the wife of the manager at a cost of $3,400. 6'. It also appears in evidence that six automobile tires were pur- chased by the Window Cleaners' Protective Fund and turned over to the medical adviser of the State Fund. The medical adviser, now deceased, had purchased an automobile at the same time as the gift from Wynkoop. Both of these automobiles were kept in the same garage. The manager acknowledged that he received some of these tires from the medical adviser, but testified that he paid for them by meeting the entire expense of the garage until the pur- chase price of the tires was paid. The manager was unable to recall the price. 7. Testimony was produced before me to the effect that the manager had been warned of something wrong in relation to the collection of premiums from employers engaged in the business of house wrecking, notwithstanding which the manager did not per- mit the matter to be investigated. The Wynkoop Service In my preliminary report I called attention to the arrangements made by G. W. Wynkoop with certain employers in the State Fund under which Wynkoop, doing business under the firm name and style of the Wynkoop Service, received 50 per cent of the divi- dsids received by such employers. I see no reason for withdraw- 37 ing any criticism made of the Wynkoop Service in my original report. It was fully established from the testimony produced before me that the transactions with Mr. Wynkoop were brought about through the active cooperation of employees of the State Insurance Fund. Originally the policyholders having the Wynkoop Service were placed in general groups, and Group 17, known as the Wyn- koop Group, was not established until July 1, 1917. At this time employers in the general groups were receiving no dividends, but through the establishment of the special group it was possible for the State Fund to declare as a dividend the excess of premiiimB ' over the losses and a contribution for the catastrophe fund and ex- penses. This group was established by the manager without the knowledge of the Commission, and it was not until March of 1918 that any member of the Industrial Commission was advised of that fact. This in itself surrounds the transaction with suspicion. It was not learned at this time, except through the actuarial re- port showing the experience of the group for the first six months. Under the Wynkoop contract with the employer, he not only leceives one-half the dividends but also one-half of any reduction in the premium. The contract is so worded as to convey the im- pression to the employer that reductions because of improvements in the plant are due to the Wynkoop Service, whereas in many eases the inspection and recommendations for these improvements came from the Safety Engineer of the State Fund. On« of the principal condemnations of the Wynkoop Service arises from the fact that the employer is kept in the dark by the State Fund as to the dividends he would receive without the Wynkoop Service and the reductions he would receive in premium rates through inspec- tions made by the State Fund Safety Engineer. I stated in my first report that, in my opinion, the success of the Wynkoop Service and the resulting profit to the employer and Wynkoop was due to the ability of Wynkoop to keep down compensation, and I ex- pressed the belief that many of the Wynkoop cases were underpaid. Tests which I have since made, and the table of cases contained in another portion of this report fully justify these assertions on my part. I am clearly of the opinion that any group of employers having the same payroll exposure as those tmder the Wynkoop 38 Service would have obtained about the same dividends, if placed in a special group, without the intervention of the Wynkoop Serv- ice. This as a result of the large increase in wages and also from the fact that since July 1, 191Y, the State Fund has had the bene- fit of a considerable increase in insurance rates. In the report of the manager of the State Fund submitted to you with the answer of the State Industrial Commission, it is asserted that no favors had been shown the Wynkoop Service. This statement was made in connection with the explanation of the gift of the automobile. It appears from the foregoing that a sub- stantial favor was granted Wynkoop by permitting him to estab- lish a separate group without giving full information to the em- ployers as to dividends and reductions in premiums. In addition, it appears in the evidence that many other substantial favors were granted the Wynkoop Service. Some of these favors are as fol- lows: 1. Upon at least two occasions Wynkoop was permitted to take folders from the office of the State Fund. These folders contained full information concerning the experience and accounts of the policyholders. One of these folders related to the Cutler Desk Company. Wynkoop was permitted to take the folder to Buffalo, and subsequently the business of this employer was handled through the Wynkoop Service. All this was done notwithstanding the prohibition contained in Section 10.5 of the Compensation Law making the disclosure of such information a misdemeanor. 2. The State Insurance Fund sent all bills for premiums against employers having the Wynkoop Service to the ofRce of Mr. Wyn- koop. This permitted Wynkoop to make out a new bill which he rendered the employer, who was thus kept in the dark as to the amount paid by Wynkoop to the State Fund. 3. In almost every case Wynkoop was permitted to pay a small advance premium to the State Fund, whereas he collected and retained for long periods of time much larger amounts from his employers. 4. In the case of the Art Metal Construction Company, Wyn- koop requested the Safety Engineer to make an inspection, and asked that the man sent for this purpose be instructed not to dis- 39 cuss rates. This request was complied with, although it was with the obvious intention of keeping the employer in the dark as to the amount he should really pay and as to what reduction he would receive if he complied with the recommendations made by the Engineering Department. 5. It was established by the testimony that many employers requested the State Insurance Fund for information concerning insurance rates, expressing willingness to insure with the Fund, and that shortly thereafter these employers placed their insurance through the Wynkoop Service. These transactions were such as to indicate conclusively that Wynkoop was tipped off and thereby enabled to secure the business for himself. In one case he was furnished with the experience of an employer with the evident purpose of having information from which he could urge the advantage of the Wynkoop Service. In one case where the em- ployer had made application and furnished a statement from which the advance premium was computed at nearly $9,000, Wynkoop secured the risk and later was permitted to pay an advance premium in the sum of about $2,500. 6. In the case of the Metropolitan By-Products Company, it appeared that Wynkoop was extended a credit amounting to approximately $71,000, and that whereas he had collected $10,500 from the receiver of this company, he had only paid $1,100 into the State Fund. 7. In the case of the United States Ilame Company, Wynkoop requested that the State Fund write a letter to the employer stat- ing that everything due from this policyholder had been paid, including an advance premium. This request was complied with in the exact terms suggested by Wynkoop, whereas bills had not even been sent to Wynkoop for the amount, and though this letter was written in August, 1918, the account was not paid until December 30th of that year. 8. In the case of the Gould Coupler Company, it was shown by the testimony that Wynkoop was allowed a reduction of 20 per cent from the premium for taking care of the medical service, whereas the reduction should have been 17% per cent. The advantage to the Wynkoop Service for this one item alone was about $2,500. Wynkoop also received this same reduction of 40 20 per cent instead of 17% per cent in the case of other policyholders. 9. The testimony establishes that the charge brought by Wyn- koop under policies in the State Fund for medical service aggre- gated about $74,000; and that one-half of the dividends allowed to the Wynkoop policyholders aggregated $39,000, making the total received by the Wynkoop Service by reason of such policies the sum of $113,000. In addition, Wynkoop made other charges to certain policyholders. 10. Only a short time ago the State Fund declared an extra dividend to the Wynkoop policyholders amounting to 2 per cent, thereby reducing the surplus to such an extent that a deficiency would result from rehearing of the Wynkoop claims. The foregoing are only a few selected instances of what I found to have been very substantial favors granted to Wynkoop. These favors resulted in large financial value to him and seem to war- rant the gift of valuable presents and other financial assistance. It is impossible that these favors should have been granted Wyn- koop without the knowledge of the manager. As already stated, the bills prepared by the State Fund are not transmitted by Wynkoop to the policyholders. Instead, he makes out a bill, charging in some cases a percentage for medical service to employees, and allowing each policyholder a dividend according to his individual earnings instead of a pro rata dividend declared by the State Fund. This practically constitute an evasion of the Compensation Law requiring pro rata dividends to members in the group, and in addition it establishes the fact that Wynkoop is engaged in carrying on an insurance business in violation of law. Aside from the question as to whether or not the service per- formed by Wynkoop is of actual value to the employers, it is clear that the attachment of a profit-earning scheme like this to a publicly-administered State Fund is scandalous and reprehen- sible per se and should not be permitted. The Wynkoop Service should be eliminated, even under the modifications as laid down by the Commission. In this connection it is well to note that Wynkoop disputes the power of the Commission to eliminate his contingent fee. 41 The Window-Cleaners' Group In addition to the favors shown Wynkoop, I also find from tke esridence produced before me that special favors were extended by the manager of the State Fund to the Window Cleaners' Pro- tective Association. These favors consist of the establishment of a special group under which, in defiance of the statute, the rate of premium was not established in advance and the contribution to the catastrophe fund and the expenses based thereupon, but was left for determination from actual experience, and by the acceptance, in lieu of a full advance premium, of a bond prepared without advice of counsel of the Commission, which was never executed by the pricipal and which is so defective as to be of doubtful validity. It was this same association which furnished these automobile tires without charge to the medical adviser, some of which eventually reached the manager. Interference with Investigation During the entire investigation repeated efEorts were made by the manager and by persons receiving special favors from the State Fund to interfere with its progress and prevent the dis- closure of the irregularities revealed by this report. During the public hearings William A. Heady, private secretary to the man- ager, suddenly disappeared and was discovered in Portland, Oregon. Some of the employees implicated in graft temporarily disappeared, but all of them were eventually located. Another witness, Tito Pacelli, already referred to, avoided the service of subpoena until instructed to appear by Deputy Commissioner Curtis, president of the International Tunnel Workers' Union, of which Pacelli was the secretary and treasurer. Handicaps of Management The management of the State Fund has been greatly handi- capped through civil service requirements and by reason of the fact that the salaries of all employees are fixed long in advance. Under the budget system the salaries and expenses of the State Fund up to July 1, 1921, have already been estimated in detail. This budget system works well in relation to the ordinary admiu- istrative departments, but it is a severe handicap to a State insur- 42 ance fund in competition with other insurance carriers. No business institution can succeed when it has no leeway in the amount it can expend for salaries and expenses, and it seems impossible to make an accurate estimate at this time for the salaries and expenses of an insurance company for the month of June, 1921. For this reason I recommend that the State Fund be permitted to pay its expenses from the premium income under limitations to be laid down by the Legislature. There should also be co-operation between the management and the policyholders, and to bring this about I recommend an amend- ment to the statute authorizing the appointment of an advisory board taken from the policyholders in the Fund. POLITICAL ASSESSMENT OF EMPLOYEES OF THE COMMISSION The evidence produced at the public hearings establishes that a systematic attempt was made to cause civil service employees in the E^ew York and Brooklyn ofBces of the Commission to make contributions for the campaign fund of the Republican State Com- mittee for the election held in November of last year. Two civil service employees in the Brooklyn office testified that they were requested to make such contributions by Deputy Commissioner David M. Stone. Five employees in the State Fund testified that they were requested to make contributions by William A. Heady, private secretary, of the manager. Two women employed in the Department of Labor testified that they contributed. One of these gave her check to William Pettit and the other to John I-I. Price, both employees of the Labor Department of the Commission. THE INDUSTRIAL COUNCIL The Labor Law, section 40a, provides for an Industrial Council appointed by the Governor, made up of five representatives of industry and five representatives of labor. The secretary of the Industrial Commission is made the secretary of the Council, and any person not a member of the Council may be selected as chair- man. This Council advises the Industrial Commission only as to matters submitted by the Commission. It does not originate. I believe the Council would be more effective if entirely separate from the Commission as to its officers. If a secretary were con- 43 stantly employed to procure mformatioii and advise the members, tlie Council would be in shape to suggest constructive measures for consideration by the Commission. STATE INDUSTRIAL COMMISSION . Through the consolidation of the Labor Law and Workmen's Compensation Law, the Commission is charged with vast responsi- bilities. The administration of the Labor Law, the Compensa- tion Bureau and the State Insurance Fund in the largest State in the Union is a big undertaking. Like all commissions with more than one head, the responsibility is divided, and I attach little, if any, blame for the conditions disclosed herein to the members of the Industrial Commission individually. I have found them to be honest, efficient public servants, devoting much hard labor to the performance of their public duties. During the past two years the Commission was greatly handicapped because of the absence of the chairman, the late John Mitchell, who was called upon as chairman of the Foods and Markets Commission and in other ways to give his full time in the performance of other work for the State and the nation because of the World War. There is no question but that this work undermined his health and brought about his untimely death. I believe, however, that the Commission should depend less upon its subordinates, and that all the Commissioners individually should be more familiar with the various departments, even if not under their immediate supervision. The Commission also should exercise more courage in dealing with incompetence within the departments. In conclusion, I beg to add that I found the employees gen- erally, especially within the Compensation Bureau and the State Fund, to have been courteous and working in full sympathy with the beneficial purposes of the statute. SUMMARY OF RECOMMENDATIONS Amendments to Compensation Law 1. To curb the activities of " runners " I recommend an amend- ment to the Compensation Law making it a misdemeanor for any- one to receive a fee in connection with a claim for compensation except in an amount determined by the Commission. 44r 2. The creation of a Fourth Deputy Commissioner to be placed at the head of a division for the handling of claims when the injury results in death. 3. An amendment of section 28 extending the time for filing claims from one year to two years and providing that the time in disability cases shall commence to run from the date of dis- ability instead of from the date of the accident. 4. An amendment to section 13 requiring that a panel of physicians be designated by the Commission, utilizing the advice of recognized medical societies, among whom injured workmen may have free choice, with power conferred on the Commission to add to, or to remove from, such panel, at their discretion. 5. An amendment of section 34, making claims for compensa- tion and death benefits and awards made thereupon preferred over all other claims against, and debts of, insurance companies as well as employers. 6. Definite provision should be made permitting the Commis- sion to call and require to be paid into a trust fund the present valufi of awards against all insurance companies. I. A new section should be added to the law requiring stock companies to set up and maintain reserves to meet the actual liability upon each claim instead of setting up as reserves a per- centage of its premiums. 8. Self insurers should be required to set up and deposit reserves in the same manner and in the same amount as other insurance carriers. 9. An amendment making all employers failing to give security for compensation automatically insured in the State Fund, and establishing a summary method for the collection of premiums and penalties for the period during which the insurance attaches. 10. The benefits of compensation law have now been so thoroughly demonstrated that the law should be extended to cover all employees without regard to the character of the employment. II. The amount of compensation and death benefits should be geaerally increased, particularly as regards limits. 12. The State Fund should be authorized by law to pay ex- penses directly out of its premium income under such restrictions. as may be laid down by the Legislature. 45 13. Provision shoiald be made foi appointment by tke Governor of an advisory board selected from employers insured in the State Fund to take part in its management and to confer upon them extensive powers of review and regulation. 14. The provision for pro rata dividends in the State Eund should be amended to give the Commission power to declare and pay dividends according to the individual experience of each employer. Procedure and Reorganization is. iiules should be adopted by the State Industrial Commis- sion in relation to the final adjustment of claims and the payment of compensation in one lump sum. The payment of future installments in one sum should only be granted after careful investigation, and each ease of this character should be passed upon by a member of the State Industrial Commission. 16. In disposing of claims against the State Fund the employee should be given a hearing in every case in the same manner as regarding claims against other insurance carriers. 17. The Commission should investigate and rehear all claims against employers in special groups in the State Fund since July 1, 1917. The final adjustment cases against all insurance carriers shoidd also be reviewed. 18. All cases in which the claim has been disallowed by a deputy commissioner, should be reviewed either by a member of the Commission or by the second deputy in charge of the Bureau of Compensation. 19. Provision should be made in the budget for the employment of a medical adviser for each up-State office. 20. Complaints received from claimants and applications for rehearing should be passed upon either by the second deputy or by a member of the Industrial Commission. 21. The medical division of the Compensation Bureau should be reorganized. 22. The Commission should select the specialists employed by the medical division of the Com-pensation Bureau by the medical officer of the State Insurance Fund, and regulate the fees. 46 23. AH checks issued in payment of claims by the State Insur- ance Fund should be mailed to the claimants instead of delivered personally. 24. The records of the State Fund in relation to the accounts of individual policyholders should be immediately checked up and reconciled with the ledger accounts. 25. An audit of the State Fund should be made at least one each year by an outside accountant appointed by the advisory board. 26. All profit-making institutions, such as the Wynkoop Service and the Wolff Medical Service, should be eliminated from the State Fund. Industrial Council 2Y. Section 40a of the Labor Law should be amended to confer broader powers upon the Industrial Council. All of which is respectfully submitted. (Signed) JEEEMIAH F. CONNOR, Commissioner. Miles M. Dawson, Counsel and Actuary. Dated November 15, 1919. 47 "EXHIBIT A" ■Statement showing in detail the amount paid by direct settle- ment and the amount subsequently awarded after investigation by the Moreland Act Commissioner, in 114 out of 1,000 test cases. EXHIBIT " A " Statement of Direct Settlement Cases in Which Additional Awards Were Made bt the State Industrial Commission as a Result oe the Investigation OF 1,000 Test Cases Case No. Employee Employer Insurance carrier Paid by direct settle- ment Additional compen- sation awarded 200459 200481 200481 200485 200493 200518 200528 200552 200605 200608 200646 200672 200678 200689 200894 200733 225490 225516 225519 225527 225541 225544 225559 225561 225578 225590 22559S 225609 225632 225633 225714 225728 225767 225792 300543 300565 300591 300659 300670 300672 300677 300687 300699 300708 300783 300789 300801 300808 325441 325481 325490 325494 325496 325500 325553 325659 Herbert Behrens Michael Barrett Otto Bauer Henry Baum James Boylan John Bercik Antonio Bibbo Louis Alenky Robert H. Abrams. . . George Alhrecht William Anderson Morris Blinder T. Ayres John Acker Edward Bonnelli Louis Aaronow George Chaconas . . . . William Coyne George Casper Walter H. Dorrell. . . . Joseph Domidion . . . . Rocco Chopidelo Thomas Dinsen Frank Dibald Thomas Doherty . . . . Joseph Cochiaro Thomas Doyle Peter Deniczewicz . . . Jim Cross John Davies Alfred Doyle Michael Carroll David Grotty Frank Cuscuolo John McMahon Paial Liebman Michael Morris Charles E. Murray. . . Salvatore Musso Margaret Markstraler Robert McEwan William Mueller Olfa Matson John Murphy Joe Lambert John McCarthy Mary McLaughlin . . . Joseph Martin Nora Ryan Joseph Reilly Maurice Bosenfeld. . . Thomas Ross Abraham Rubin ...... Stephen P. Russo. . . . Gustav Nilson Joseph Rossano 325562 Patrick Naughton.. Samuel Shier & Bros Bklyn. Heights R.R. Co. Vulcan Rail & Constr Krakauer Bros John H. Duncan .... Levering & Garrigues Frank Morrel Co Mr. B. Altman W. H. Gahagan, Inc. , U. S. Electro-Galv. Co . . Interborough R. T. Co. . Samuel Shapse Astor L. & H. & P. Co. . Hotel Shelborne American Sugar Ref. Co Downey Shipbldg. Corp. Hy. Sonneborn & Co.,Inc, Otis Elevator Co Arbuckle Bros Edgar T. Ward's Sons. . . The N. Y. Edison Co . . . Metropohtan Eng. Co. . . Standard Shipbuilding.. . Kmckerbocker Ice Co. . . City of New York Estey Piano Co Rock Plaster Co James Mitchell, Inc L. & B. Waller & Potters The N. Y. Edison Co . . Lorenzo & Byrnes Verdon & Co Royal Garage T. F. Meehan & Son. . . Brooklyn R. T. Co . . . . Deliv. Auto T. & B. Co New York Dock Co Sackett & Wilhems Corp. Rockwood & Co Edmund Dwight Borden's Farm Prod. Co Empire State Dairy Co. . Johnson Shipyards Corp .E. & R. Realty Corp.... Court & Remsen Co., Inc. James Wilson & Co. . . Bloomindgale Bros ... Int. Rapid Transit Biltmore Hotel Amer. Concrete Stl. Co Union R. R. Co Lang Products Co Teigensen & Hanson. . . J. H. Williams & Co. . . A. Olsen P. H. Gill & Sons Forge & Mch. Wks Richard Furlong Co Cont. Cas Self Trav Trav Trav Aetna Emp. Liab U. S. F. &G.... Trav U.S. Cas Self Trav Self U. S. F. &G.... Self Maryland Cas.. . New Amsterdam Emp. Liab Trav Trav Self London Guar — Trav Self Self Zurich Emp. Liab New Amsterdam U. S. Cas Self Gen. Ace Emp. Mutual . . . Trav Maryland Cas . . Self Maryland Cas . . . Trav Trav Trav Empl. Liab Self Standard Liberty Mutual . . Emp. Liab Emp; Liab Trav Gen. Ace Self Emp. Liab Emp. Liab Self Emp. Liab Trav Travelers Olce^n Aetna. S19 22 138 48 152 50 47 23 136 00 15 00 15 00 175 00 360 00 32 50 252 50 137 50 237 63 14 39 294 35 15 00 250 70 60 00 364 72 16 16 322 52 106 00 42 48 22 50 149 00 13 46 148 06 281 20 138 48 12 27 142 38 36 89 257 62 135 00 21 12 200 00 415 44 24 02 180 67 147 04 690 00 87 62 52 60 369 28 92 32 17 50 74 97 50 18 139 66 100 00 150 00 53 84 135 00 36 33 60 00 '*$350 06 276 96 1,352 17 116 27 309 29 *120 00 625 00 350 00 1,006 67 87 60 3,963 89 125 00 2,000 00 67 00 600 00 105 00 54 SO 120 00 133 02 66 94 600 00 300 00 56 64 90 00 92 68 8 98 100 00 862 90 "•300 00 326 29 760 00 160 00 *504 82 300 00 623 04 150 00 1,950 26 91 30 150 00 *635 61 793 52 300 00 97 50 1,405 00 300 00 96 00 1,066 83 1,100 00 617 56 137 60 100 00 13 46 15 00 60 55 167 50 184 00 1^1,024 SO 120 00 37 50 48 Case N.O. Employee Employer Insurance carrier Paid by direct settle- ment Additional compen- sation awarded 325569 325605 325638 325679 325684 325697 325709 325725 325746 325752 250599 250634 250637 J. Ryan Edmund Pepper .... Herman Reichert , . . Delia O'Hara Henry Reskner Charles Nathan .... Luke O'Brien E. Perlberg Stephen Ryden Edward Rush Alexander Godofsky. Jos. Giarddni 250638 Jas 250664 2S0655 250470 250S02 2S0S01 3S05S8 250441 250.563 2S0550 250525 350497 350426 375542 375504 375502 275558 275604 275608 375337 375338 375464 350530 375682 375660 376600 275540 275479 275451 Samiuel Goldrich Grinaldi Margaret C Fisher.. . John Friend Michael Gough Thomas Golden WUliam Gnewasih. . . . Alex. J. gpielman. . . . Edward Garibaldi Saverio Guarascio. . . . Herman Feiler Sippo Green Forest R. Snider Margaret Smith Martin Yanowski. . . . Henry T. Wier John Thompson Thomas Kavannaugh, O. L. Humphreys. . . . Charles E. Jeroleman. Marcus Van Steenburg Abraham Wallach.. . Clara TuUman Henry S. Schissel . . . William Hannigan . . Nicholas Taliamonte Joe Whelan Frank Hajek John Harty Dennis Kennedy. . . . 2^0680 225567 200568 300609 325760 200802 250499 350493 325711 325769 275497 325669 250506 350652 300723 Lena FeEer John Camello Frank Baluko Edward McGahn . . . Mary O'Eourke . . . . Morris Blusten Frank Genovo Joseph Seute Cornelius O'Rourke. George Reiff Marion Ball Ignatz Pawlocitz. . . . Aaron Greenberg . . , Mary Sage Patsy Tapoh Knickerbocker Ice Co. . . Muralo Co Fosland Trucking Co . . . New York Railways Go . North Side Bilking Co. . . N. O'CoimeH ShefHeld Farms Oo., Inc. Hartford Lunch Co J. M. & P. Scanlan, Inc. City of New York SterjiBTOS Holbrook, Cabot & Rol- lins Int. Rapid Transit Co. . . Casella Bros Duplex Engimc Gov. Co.. Amer. Railway Ex. Co . . Morse D. D. & Rep. Co. Birdsall -Express Co Joseph Gaydica White Motor Co Standard Charcoal Co. . . Standard Shipbldg. Corp. Schwibisch Bros. , Tnc . . . Third Ave. Railway Co. . Nassau Electric R. R . . . Adams Realty Co Louis Greenberg Met. Life Ins. Co Jas. Shewan & Sons, Inc. Consumers Biscuit Co. . . Chevrolet Motor Co ... . Russell & StoU Co Borden's Farm P. Co . . . M. Kleiman & Sons Volunteer Holding Corp. Z. Dershowitz Bush Terminal Co William King Jas. Shewan & Sons, Inc. Knickerbocker Ice Co. . . Schaumann Talcott, Inc. Black & White Town Taxi Co Savoy Dress Co Sheridan & MUko S. Weisglass & Co., Inc. . Rogers, Peet & Co West Side Y. W. C. A. . . E. W. Bliss Co George A. Fuller Co ... . R. Rothchild Walther & Co Brooks Bros Modern Engraving Co . . American Sugar Ref. Co. Quality Sheet Metal Wks. American Dock Co Phenix Tube Co Self Travelers Self Self Standard Ace . 'Travelers Self Travelers Aetna Self Emp. Liab Self Self Emp. Liab Aetna Self Self London Guar . . . . Standard Aoci Aetna Maryland Cas Travelers New Amsterdam . Self Self Travelers S. Fid. & Guar, Zurich Emp. Mutual. . . . Maryland Cas.. . . Zurich Aetna Self Aetna General Aoc Maryland Cas, . . . Self Maryland Cas.. . . Emp. Mutual Self Hartford Ace . . . . Self Globe, Ind New Amsterdam . New Anjsterdam . AlUed Mutual... . Aetna JAetna Self JZurich Allied Mutual jAUied Mutual. . . Maryland Cas . . . Self New Amsterdam . Emp. Liab Travelers $17 31 270 00 55 00 184 29 358 08 67 50 178 48 38 13 285 00 298 12 60 55 30 00 225 28 85 33 134 54 100 95 379 08 147 07 135 00 65 00 105 GO 33 02 44 87 226 16 84 63 16 56 25 00 102 16 15 00 27 22 10 00 35 88 115 38 60 00 75 00 60 00 135 00 US 40 258 51 37 50 137 50 S3 44 9 60 60 00 98 10 30 00 75 00 32 31 23 50 37 83 405 00 36 33 14 02 $13,712 40 Average underpayment per case . S130 79 3,000 00 230 00 *423 21 3,282 40 260 00 1,064 84 *117 92 238 04 450 00 411 01 1,920 00 1,401 36 36 57 *317 13 500 00 'iT.,280 SO 66 8S 140 00 ISO QO 6 QO 14 15 396 57 1,773 84 30 77 461 76 150 GO 770 46 60 00 150 00 *464 34 65 05 68 46 4 92 100 00 *116 15 309 10 403 99 tl,514 13 *400 78 300 00 886 05 23 OS 150 00 32 70 30 00 25 00 20 GO 344 64 1 50 16 66 10 00 11 75 84 07 *420 00 *279 69 70 10 $52,279 84 $450 00 * Indicatefl cases continued andfui'ther payments will be made. t Ind.oates that case had not been closed by insurance carrier at the time of investigation. There were one or two other cases of this Jiind in the hst. -t Award for medical bill. I Award for expenses. 49 "EXHIBIT B" 1. Letter dated July 19, 1919, from Hon. E. E. Watson, actuary of the Ohio State Fund, prepared in connection with Hon. William C. Archer, deputy in charge of the ISTew York Compensation Bureau, in relation to a comparison between insur- ance rates in New York and Ohio as submitted to the Moreland Commissioner and the Grovernor by the manager of the State Fund. 2. Letter from the Moreland Act Commissioner to Mr. Bald- win and his reply, omitted from the report made by him to the Industrial Commission and transmitted to the Governor. The I^tdusteial Commission of Ohio coi-umbtts Eefer reply to file IST. Y. July 19, 1919. Mr. Jeeemiah CowiiroE, Counsellor at Law^ 80 Maiden Lane, New York: My Deae Mr. Con-'n-qe. — I have your letter of the I7th and note your further reference tO' the challenge Mr. F. Spencer Baldwin, manager of the Itew York State Fund, has made of the • validity of my computations of comparative costs as contained in our "July 1, 1918, Communication to The Subscribers to the Ohio State Insurance Fund." It has been my desire to avoid, if possible, an open conflict with Mr. Baldwin, simply for the reason that I did not want to get into a controversy with another State Fund. It has been my preference to do that which would contribute to rather than detract from the success of every State Fund in existence within the United States. But inasmuch as Mr. Baldwin is pressing his challenge against my computations, then, in defense of the Ohio plan and myself, I am compelled to handle this challenge as such. I am disappointed to note the arguments advanced by Manager Baldwin and Actuary Mowbray in support of their position, as contained in Mr. Baldwin's letter addressed to you under date of March 4, 1919, a copy of whieh you have provided me. 50 The foregoing letter sets forth the following with the thought of reducing the ^ew York State Fund rates to a point of direct comparability with the Ohio State Fund rates: I. Loading to be made to the Ohio rates. Per cent (a) Difference in the rating of office payroll 9 (b) Loading account merit-rating charges H Total increase ^^ II. Decreases to be made from New York Stock Company Manual rates to derive net New York State Fund rates, Per cent (a) General average reduction frOm Stock Company Manual rates 14.3 (b) JSTet reduction for effects of schedule rating 6.3 (c) Net reduction for effects of experience rating 6.6 (d) Expense of administration of New York Fund. ... 7.5 (e) Less catastrophe charge 5.0 25.4 Note. — This deduction is 14.3 per cent, then 25.4 per cent. I accept I-(a) as valid. I reject I-(b) for the simple reason that the net increase produced by the application of the Ohio merit-rating system is 3% per cent. There should be added to the Ohio rates the Ohio expense of administration, which is 3% per cent. I shall accept for the mere purpose of this particular analysis a further loading of 2.1 per cent on account of the con- tribution from self-insurers. Each of the latter three foregoing percentages are those developed by the March 1, 1919, actuarial analysis of the Ohio Fund. Therefore I should be corrected as follows : Per cent I- (a) Difference in rating of office payroll 9 I-(b) Loading account, merit-rating system 3.5 51 I-(c) Loading for Ohio expense ratio 3.5 I-(d) Loading for self-insurers' contribution to Ohio Fund 2.7 Total 18.7 With reference to the different items under 'No. II, item (a) is apparently a legitimate deduction. With reference to item (b), not all risks of the fund are schedule rated; rather, only about half. Therefore, this 6.3 per cent should be reduced to about 3.15 per cent. The same statement applies to item (c) that applies to (b). Therefore, item (c) should be reduced from 6.6 per cent to about 3.3 per cent. Item (d), of 7.5 per cent, should be entirely eliminated as a deduction. Mr. Baldwin says the factor of expense ratio should be entirely eliminated from the computation for the reason that the Ohio plan admits of a lower expense ratio than the ISTew York Fund. This is simply to beg the whole question. Has he not attempted specifically to prove that the Ohio Fund is costing more than the New York Fund? The Ohio Fund would, of course, cost more, if all items costing less than the JSTew York Fund are eliminated. Item (e), of 5 per cent, should be entirely eliminated as a deduction. The Ohio rates are loaded the full 5 per cent for the catastrophe load- ing. Therefore, No. II* should be corrected to read as follows: II- (a). General average deduction from limited exposure, in reality invalidates the entire computation. A similar criticism is to be made of their selection of the class- ification of malleable iron works. The New York stock com- pany rate for this classification is $3.03. The normal fund rate would be $3.03, lesss 14.3 per cent, or $2.60; yet Mr. Baldwin says the fund makes a special deductionf of this rate to $2.18 instead of $2.60. Another peculiar selection to take, when there were many hun- dreds from which to choose, were the two classifications of " Cotton spinning and weaving," and " Woolen spinning and weaving." * See appended Table II of Mr. Baldwin's letter to you under date of March 4th.. t See footnote Table I appended to Mr. Baldwin's letter to you under date of March 4th. 52 A fair selection, and one in whiah I am confident Mr. Baldwin and Mr. Mowbray will concur, would be to take the 129 classifica- tions as listed in the July 1, 1918, communication to the sub- scribers to the Ohio State Insurance Fuud. The average Ohio Manual rate of these 129 classifications is 4.35. This 4.35 rate should be decreased by 14.3 per cent, then by 6.45 per cent, thereby reducing the same to 3.49. This brings the JSTew York State Fund rates to the level for direct comparability with Ohio Stock Company Manual rates, 14.3 per cent Per cent II- (b) JSTet reduction for effects schedule rating 3.16 II- (c) ISTet reduction for effects experience rating 3.3 6.45 Note. — This reduction sliould be 14.3 per cent, then 6.45 per cent. Then the average rate of the 12 manual classifications selected by Mr. Baldwin and Mr. Mowbray should be the Ohio Manual rate, plus 18.7, and not 20 per cent, thereby reducing their com- puted average of 1.754 to 1.73.* Now deduct the 14,3 per cent from the New York Stock Com- pany rates, as applicable to the 12 foregoing selected classifica- tions, and this derives an average rate for the Xew York Fund for the same of 2.18. E'educe this 2.18 average rate by the above 6.45 per cent and the net reduced New York State Fund rate for direct comparison with the average Ohio rate of 1.73 becomes 2.04. But I fear Mr. Baldwin and Mr. Mowbray have made an tmf or- tunate selection in the choice of their 12 classifications. Their whole computation is violently disturbed by their selection of the single classification of blast furnaces. The stock company rate on this classification is $9.99. To derive the New York State Fund this $9.99 would normally be decreased by 14.3 per cent, making the same $8.56. But Mr. Baldwin says the State Fund rate in this pai'ticular classification is subject to special deductionf oi $4.99, instead * See second paragraph, page 4, of Mr. Baldwin's letter to you B- The tc^al savings are thus seen to be ^4,004,,,^Sj3.38 for the five years. The total premiums received by the State Fund during the five years, are $11,597,187.14, which were reduced by dividends, paid aud payable, to $9,847,560.65, net; and the premiums that would have been paid the stpck ^r^sprance companies, had the policyholders insured with them on the uonparticipating plan instead of in the State Fund, are $13,852,187.0^3 for the five years. The tO'tal savings, $4,p,04,62,3.38, amounted to an average sav- ing throughout the five years of 29 per cent upon the total pre- miums, computed at the insurance coiupguy rates, for the fye years. i\t tl^is same rate of saving — and t^ rate o| saving should have been greater, had all the employers been insured in tlie St^te Jfund, because, as experience shows, the expense rate wpiijlid have h^ejji Hiuch lower — the employers in the Sta^e of ISTew York who during the period of 4% years ending Djecenaber 31, 1918 (figures for the first six months of 1919 are not obtainable), paid to stock insurance companies the vast sum of $62,075,883, would have s_aved 29 per cent thereof, or no less than $18,002,006 during such period, by insuring in the State Fund. The Deputy Commissioner in charge of workmen's compensation testifies, also, that no less than $5,700,000 more would have been paid to injured workmen and their families — they having been underpaid no less than this vast sum by the insi^rance companies and self- insurers through manipulation of "direct settlements" alone. PQNDITION OF THE STATE FUND JUNE 30, 1919 The financial condition pf the State Fund at clpge pf bu^ine^s pn June 30, 1919, at the end pf its fifth year pf pperation, I find, as the result of an audit of its accounts and upon the certifica:te of the Stat^ Treasurer as to the cash and s.ecurities held for the State Fund, to be a« follows: FIlSTAlSrCIAL STATEMENT JUNE 30, 1918 Assets Investments $5,170,727 10 Cash in bank 484,237 35 70 Interest accrued $59,179 91 Due from policyholders 465,232 52 $6,179,376 88 Liabilities Reserves to provide for Payment of claims $3,924,765 26 Payment of claim expense 156,990 61 Unexpired risks (unearned premiums) 173,080 74 Expenses of Commission 229,495 22 Expenses of State Fund 384,934 50 Market values under par 109,630 61 Keadjustment of rates 30,000 00 Surpluses Dividends payable 386,370 40 Catastrophe surplus 623,510 80 General surplus 160,598 74 $6,179,376 88 The total surplus is $1,170,479.94, which is 23.4 per cent over and above all reserves and liabilities. In the foregoing, the following changes have been made by me from the statement as submitted by the State Fund to my auditors : The sum of $160,644.83 is added to " Due from policyholders," consisting of $89,639.56, entered in July and August, 1919, being items not included in the State Fund statement supplied me, and of $71,005.27 due under the Metropolitan By-Products policies, original and with the receiver. In consequence of these additions I have, however, increased the xmeamed premium re- serve by $46,111.78 and added the item $30,000 as reserve for readjustment of rates. The net increase of surplus, due to these changes, is $84,533.05. RESERVES SET ASIDE BY THE STATE FUND ARE AMPLE I have caused several special investigations to be made to determine the degree of conservation and safety evinced in setting 71 up the various values, reserves and surpluses and beg to advise the result as follows: 1. The net result of setting up a reserve to cover niarket values under par is to reduce the general surplus by $109,630.61; whereas, if the assets were valued by the standards applied by the Superintendent of Insurance in valuing, as of the same date, the same securities when held by insurance companies no less than $135,862 would be added to the general surplus as certified by the Superintendent. 2. I have investigated the method of computing the claim reserves and the factors used in such computations, and find the same sound and adequate. 3. I have also, for comparison only, caused the reserves for payment of claims to be computed in the manner prescribed for stock insurance companies by the Insurance Law of New York, basing the computations upon premiums equal to the premiums chargeable by such companies ; and I find that the reserves actually set up by the State Fund for payment of claims, to wit: $3,924,765.26, and for claim expenses, to wit: $156,990.61, are in the aggregate larger by $56,805 than the reserves for these pur- poses which the State Fund would be required to carry were it a stock insurance company. ASSETS OF THE STATE FUND UNDERSTATED No credit is taken in this statement for net additions that will be made to premiums as the result of pay-roll returns and audits to be received after the statement was closed ; a large sum amount- ing to some hundreds of thousands of dollars over and above divi- dends payable there against will be realized, which will increase the surplus by so much. THE STATE FUND SOLVENT AND STRONG The investments of the State Fund are all of a high class, amply secured and not in default as to principal or interest. The State Fund is solvent and possessed of unimpaired re- serves, at least equal in value to all liabilities, accrued or to accrue, and of surplus sufficient to warrant dividends to all policy- [holders at the rates provided and to provide for catastrophes with a margin over to cover against fluctuations in experience. 72 CHECKS AND BALANCES IN STATE FUND ADEQUATE The methods adopted by the State Industrial Commission with relation to the State Fund for covering all receipts into the State treasury and for protecting the funds against unauthorized dis- bursement have been earefuUy investigated and have been found to be adequate and effectual. The general books of the State Fund have been kept in balance ; posting into individual ledgers is considerably in arrears but no discrepancies, deemed important or significant, have been found upon audit. We have made a sufiicient audit to satisfy ourselves that all receipts are accounted for and all disbursements represented by vouchers. Closer co-operation between the State Fund and the repre- sentative of the State Treasurer in the Commission as to alloca- tion of disbursements, both as regards claim and expense pay- ments, to the end that these accounts in the State Fund may at all times be up to date, is most desirable. GROUPS AND CLASSES IN THE STATE FUND The law provides for groups and classes in the State Fund and authorizes the Commission to create and to readjust such groups and classes. Under this authority the State Fund now has six general groups, within which policyholders are classed with or without special experience rating, and twenty-five special groups, all of which, except nine, are of single employers. In round figures at this time 55 per cent of State Fund pre- miums are paid by the General G-roups and 4'5 per cent by the Special Groups. MODES OF DECLARING AND ALLOWING DIVIDENDS The mode of declaring dividends prescribed by the law is " pro rata " on premiums within the group, excluding, however, premiums of insured employers whose losses for the period ex- ceed their premiums for the same period. In the general groups this gives each insured employer, exclud- ing those whose losses exceed their premiums, the same rate of dividend; likewise, in eight of the special groups, composed of a number of insured employers. In Group E"o. 17, the so-called Wynkoop Group, it is nominally the case, but under Mr. Wyn- koop's method of doing business one-half the aggregate dividends go to him. for services and he is supposed to redistribute the re- maining one-half of this aggregate in proportion to the excess of premiums of each insured employer over the losses under his policy. To some extent this, in view of such an agreement being known and contemplated, seems an evasion of the provisions of the law for pro rata dividends. In the special individual groups " pro rata " means, since there is but one employer in the group, the return of his own premiums over and above losses, expenses, catastrophe percentage and a proper margin for errors in estimates of items that are not finally determined, provided the earnings and surplus of the State Fund, as a whole, enable so much to be paid. WHAT SPECIAL INDIVIDUAL GROUPS ARE AND HOW DEALT WITH Employers of at least 2,500 employees, with payrolls of at least $1,000,000 and semi-annual premiums of at least $7,500, are eligible, under the rules of the Commission, if otherwise accept- able, for a special group. The method of dealing with them, as reported to you, is, in brief, as follows: Advance premiums are collected upon admission; temporary adjustment is made, both of additional premium pay- able and dividend allowable, as well as new advance premium pay- able, as soon after the insurance period expires as payroll returns (and audit, if such can be made) are in and the loss experience worked up; final adjustmet is made at a later time, often much later, when both the premiums payable and the loss experiences are definite. UNDERWRITING HISTORY OF THE STATE FUND At the end of each successive six months' period the financial condition of the State Fund, as shown by its actuarial reports, has been as follows: Period Ending Assets Reserves Surplus De2 31 1Q14 $654,493 S3 1,025,014 46 1,353,039 07 1,727,869 91 2,514,762 51 2,941,819 74 3,754,261 65 4,333,743 76 5,453,212 08 6,179,376 88 $411,080 78 690.638 18 975.639 62 1,526,027 94 2,261,583 07 2,922,356 32 3,355,579 43 3,749,130 61 4,075,288 81 5,008,896 94 $243,412 75 3,34,376 28 Dec 31 ' 1Q15 377,399 45 201,841 97 Dec 31 1916 2(53,179 44 19,463 42 Dpc 31 1Q17 398,682 22 584,613 15 Typo ^1 1Q1R 1,377,923 27 1,170,479 94 74 The condition was at all times really better than as sho-wn, because, except in the statements June 30, 1917, to June 30, 1918, inclusive, no credit was taken for unrealized payroll addi- tions, and in those statements credit for a much smaller amount than could safely have been entered as assets. Up to the period ending June 30, 1916, dividends were earned and paid, in respect of each six months' operations, to the insured employers (omitting those whose losses exceeded their premiums) of most of the groups, both general and special. ' During each of the three six months' periods from December 31, 1915, to June 30, 1917, no surplus was earned, a net loss was realized and no dividends were paid, as respects these periods, to insured employers in the general groups; dividends were paid, however, as respects each special group which, under the method already set forth, was found to have incurred losses, less than its net premium, i. e., the full premium after deduction of expense charge and the 5 per cent for the catastrophe surplus. The apparent underwriting loss during this period was due to this: At the outset the rates of the State Fund were made 91% per cent of the rates of the insurance companies. At the end of the first six months' period, they were reduced to 80 per cent, and through the entire period of underwriting loss they were kept at this figure. Had they been 91% per cent, there would have been no such loss. On June 30, 1916, it was shown by the actuarial statement that there was but $14,127.43 clear general surplus over and, above the catastrophe surplus which stood at $187,714.54. Yet dividends of $95,637.79 were allowed special groupe, as respects the sis months' period then ending, because it was asserted that these insured employers would withdraw and ruin the prestige of the State Fund — this, notwithstanding that dividends can only be paid out of earnings and although their premiums in the State Fund already represented a reduction of 20 per cent. On the same ground, dividends were allowed special groups in respect of the six months ending December 31, 1916, of $64,168.85, although the catastrophe surplus was much reduced and there was no general surplus ; and again, on the sajne ground, as respects the six months ending June 30, 1917, in the amount T5 of $58,319.49, althougli only $19,463.42 remained of the catas- trophe surplus and there was no general surplus. The leeway of the unascertained payroll additions to premiums brought this out without serious consequences; but it was not good underwriting to create a condition which spelled ruin if dividends were not forthcoming (if such a condition in fact existed), nor to pay the dividends, though the State Fund earned no surplus (unless, as claimed, that condition made it impera- tively necessary).' Whichever it was, it could not be good underwriting. SOUND ACTUARIAL PRINCIPLES REGARDING DIVIDENDS The following principles are fundamental to sound mutual underwriting : Dividends may not be paid to a:ny group or class, if there be not clear surplus of the Fund from which the same may be paid, without impairing any of its necessary reserves or its provision for meeting catastrophes. Dividends, in general, should be free from current earnings, except as surplus which has been held back until the amount is definitely ascertained, is further distributed. The State Fund is one and indivisible and, although certain groups, taken by themselves, show savings, there are no earnings to divide, unless the Fund, as a whole, has earnings. DIVIDENDS AS A MEANS OF SPECIAL EXPERIENCE RATING Undoubtedly, it is more satisfactory to insured employers, in general, to have the earnings of the State Fund so distributed as to recognize the actual experience under individual policies ; and, undoubtedly also, such should contribute to encourage accident prevention and safety precautions. This has been utilized elsewhere to good advantage as in the State Fund of California; it is also the fundamental idea in both the special individual group plan and the special experience rating plan of the State Fund here. The fullest recognition of it is advisable and an amendment of the law which will permit the Commission to distribute sur- plus in this manner, instead of pro rata within the group, is recommended. 76 ADEQUATE ADVANCE PREMIUMS To avoid any possibility of such a situation arising again, as in the three six months' periods mentioned, the provision of the law, calling for the prompt payment of advance premiums, computed upon honestly-made estimates of payrolls, should be enforced in all cases ; so that, among other things, there will be no misunder- standing that payment of the full premium in advance is required and that a dividend is a return of premium and not a reduction, before payment of premium, in an accounting on a cost basis. The law now provides that dividends shall be applied upon, and toward the payment of, the next premium payable. Behind this provision and the delay in auditing payrolls and in ascertaining rates and amounts of dividends, the long delay in collecting pre- miums is screened and by these things excused. To hold the management more strictly accountable for failure to do the necessary things promptly, the provision for so applying dividends should be repealed and, instead, the provision be strengthened, requiring adequate premiums to be paid in advance to maintain the insurance in force, without regard to whether dividends are already declared or not. This would put the man- agement of the State Fund up against the necessity for prompt action, which it would not dare neglect. It might be found desirable, in such case, to declare a prelimi- nary dividend and supplement it later; but such would answer well here as it has, elsewhere. The rates of dividend in the State Fund of Pennsylvania, which I recently investigated for the State Insurance Board, are ready promptly at the close of the period, in respect of which they are declared. INSURANCE AND PAYROLL-AUDITS IN CERTAIN EMPLOYMENTS In several specially dangerous classes of employments, such as window-cleaning, house-wrecking, and trucking, very particular attention requires to be given to payroll-auditing, which should be frequent and thorough and should also be supplemented by other modes of investigation. Large sums in premiums have been lost in some cases, in con- sequence of neglect, or worse, and, in some instances, bare-faced fraud has been practiced. Y7 The Workmen's Compensation Law was enacted to make pro- vision for injured workmen and for the dependent families of workmen who die from their injuries. The State Fund has the duty to provide insurance of the payment of this compensation, most of all in employments where the hazard is great, and should devise, and carry out, means by which it may do so without invit- ing, or enduring, fraud or concealment. Failure to do this is, in my opinion, attributable both to gen- eral laxity as regards payroll auditing on the part of the manager and particularly to the retention of a general accountant who had interests in an outside accounting business and who also is shown by the evidence taken by you, to be a bribe-giver and bribe-taker. iStricter general management, with an honest and able general accountant, free from outside affiliations, will readily remedy these conditions. BROKERAGE AND MEDICAL EXPLOITATIONS Though the State Fund does not pay, or allow, commissions upon premiums to brokers or agents, a singly brokerage exploita- tion, the Wynkoop Service, has attached itself to the State Fund, deriving in all, as shown by the evidence before you, about $112,000, composed of about $74,000 diverted to it for guarantee- ing medical service and about $39,000 understood to have been withheld by it from dividends paid by the State Fund to policy- holders, having contracts with it, by remittance, or allowance, in care of the Wynkoop Service. This whole transaction, by reason of recognition by the State Fund of such arrangement, had created an atmosphere of favor and of attempts to obtain favor, which was most unfortunate. Obviously, the State Fund should deal only, and directly, with its insured employers in matters which interest them, in no way recognizing the right of an interested broker to act for them. In like manner, an exploitation of medical service, by Dr. Meyer Wolff, has been permitted to intervene between the physicians who actually perform the service and the State Fund, to such a degree that, during the first six months of 1919, compensation was pay- able to Dr. Wolff by the State Fund, at the rate of about $75,000 per annum — about 40 per cent of the fees for that period. 78 Both better service and cheaper serive are alleged ; but obviously the State Fund should deal directly with its physicians and such an exploitation cannot be tolerated. It is plainly the duty of the State Fund and of the medical societies of this state to find a work- able method by which the best service, at the lowest cost consistent with the best service being rendered, can be secured. The present conditions are offensive to the public's sense of what should obtain in a publicly conducted fund, and to the medical profession's ethical standards. It has also caused this exploiting physician to show, very natur- ally, great interest in the matter of who should be appointed medical adviser of the (State Fund — certainly a condition to be avoided, at all hazards. SELF-INSURERS BY PERMISSION OF THE COMMISSION In all 384 employers have deposited the securities required and received permission to carry their own insurance; of these 358 are still so licensed. Five withdrew to insure in stock companies, four to insure in mutual companies, five to insure in the State Fund and twelve because either withdrawing from business or merging with another business. The deposits required were equal to a six months' premitun in the State Fund, computed upon the pay-roll at the time applica- tion was made; under this requirement, $5,713,125 in securities are on deposit. Of this, $3,490,000 was deposited the first six months, and the average deposit has been about $4,600,000. The minimum and maximum deposit requirement, however, render it unlikely that this represents a close approximation to the correct amount of premiums ; but, assuming it notwithstanding to be such the insurance company premiums, which were then one-eleventh higher, would have been $3,800,000 in round numbers, the first six months, and the premiums in the year 1918 would also have been 60 per cent higher on account of increased wages, i. e., $9,900,000 in round numbers for six months, and $19,800,000 for the year 1918. This is doubtless too low, also, because of the great industrial increase and also because rates of premiums have been much 79 increased. Indeed, $25,000,000 may probably be more nearly the figure represented by the premiums that the self-insurers would have paid in 1918, had they been insured in the insurance com- panies. This in comparison with the total of $32,296,061 pre- miums for that year. That is, under a compulsory insurance law, no less than 45 per cent of the entire volume of workmen's compensation is, by reason of this privilege, not guaranteed by insurance at all. This is due to the very largest enterprises being self-insurers. Some of these self-insurers are now in receivers' hands. In my opinion the reserves which should be carried to provide for the compensation payable injured workmen (and the depend- ents of those who were killed) of these self-insurers, are consider- ably in excess of $25,000,000. Payments to disabled or dependent persons which may, and in some cases will, continue for very long periods, 50 years or even 75 years, are to be made by these self -insurers. That the claims are preferred debts does not insure the punctual, regular J unfailing payment, needed to prevent hitter distress. These self-insurers as a rule °.g\, up no reserves for losses and set aside no trustee securities to assure their payment. They have, as a class, fought to the last ditch even the requirement to deposits with the State Fimd, in trust, the commuted value of permanent disability, widows' and orphans' and long-term partial disability losses; and will, of course, also resist, in like maimer, the new effort of the Commission to bring the deposits up to what is neces- sary to assure the payment of compensation. iSome of them have introduced excellent means of prevention ; but what they do in this regard is neither extended to others by reason of the visit of safety engineers of the Fund to different plants, including theirs, nor by demonstration of the advantage in resultant lower rates or bigger dividends. By becoming employers in the State Fund they could benefit by their favorable experience, without avoiding taking their due part in this public matter of encouraging prevention and without asking to be excused from really providing for securing the payment of compensation. 80 SELF-INSURERS BY REASON OF HAVING VIOLATED THE LAW In addition to these self-insurers, licensed by the Commission under the provisions of the law, who are usually, when licensed, financially strong and are extensive employers of workmen, there are literally thousands of employers — one investigation indicated more than 15,000 — usually financially weak and often irrespon- sible and employing few workmen, who violate the law by failing to insure. They thus become under the law self-insurers, . directly liable, and are also, under the law, guilty of a disdemeanor. Until very recently, they were, however, rarely prosecuted ; and it is doubtful that prosecution will do much to obviate this evil. The Workmen's Compensation Law, it should be said again, was enacted to make provision, beyond a peradventure, for injured workmen and the dependents of workmen who die of their injuries. To leave the workmen employed by any of these employers who do not insure and who may not be financially responsible, without such provision is, by so much, a failure to accomplish this public purpose. Unquestionably, the law should be amended to make insurance in the State Fund attach automatically through the mere fact of an employer engaging in carrying on one of the specified employ- ments, to the end that provision for injured employees and dependents shall in no event fail. Provision for the collection of premiums by a summary process, like taxes, should also be made, and penalties be added for failure to pay premiums promptly. By this means, the public purpose can be served, i. e., provision be made, beyond a peradventure, for injured workmen and depend- ents of workmen who die of their injuries, in all cases, and with- out plunging small employers, often ignorant of the law and the duties imposed upon them, into financial ruin, which the award for a single injury or death now often does. PROVISIONS FOR COMPULSION TO PAY PREMIUMS The Workmen's Compensation Law now makes provision for collection of premiums, due the State Fund, by summary process in an action brought by the Attorney-General, upon premiums in default of being referred to him for collection. 81 This lias not, so far, amounted to mucli — in good part througli failure of the Commission to r^fer such matters promptly to the Attorney-^reneral. It is doubtful, however, whether^ that over- worked officer, busy with big matters, can readily function so as to collect expeditiously all sorts of sums, big and little. Ought not the local tax collectors and the summary means of collecting other taxes — for this certainly is a special excise tax in nature — to be utilized? That is the process in other countries and has proved most effectual of all the methods employed. GENERAL CONCLUSIONS The wastefulness of insurance in insurance companies of the payment of compensation is demonstrated by this investigation. In four and one-half years more than $18,000,0'00' has been paid the nonparticipating stock companies, alone, over and above wh^t it would have cost in the publicly conducted State Fund. nSTo less than 17% per cent of the $62,000,000 in premiums col- lected by these companies, being an aggregate of over $10,500,000, was paid in commissions, which, in view of the - pf i rpQ^e that insurance ^hall b^compulsory, is a waste of money except from the standpoint of the agent who gets the commission for inducing employers to "insure in my company" instead of "the other agent's company." ^^ Reserves of at least $40,000,000, held by insurance companies, both stock and mutual, to secure the payment of compensation to injured workmen and the dependents of those who have died of their injuries, ought to be in the custody of the State of New York, in trustee securities, as a sacred trust for this high pur- pose, rf he failure of one stock insurance company has already caused great, and to a considerable extent, irremediable distress. The assurance that such provision for the helpless will be surely and promptly forthcoming ought not to be entrusted to private corporations/^ This should be the more obvious in that the larger part of these reserves are maintained without the State by insurance com- panies which, if wound up, would be under the jurisdiction and control of the laws and the courts of the States in which they 82 were incorporated. There is good reason, indeed, even as regards a New York company, and better reason as regards all others. As regards insurance companies, compensation claims have no preference over those of other creditors. The insured employers, however, become personally liable. But that fact does not insure prompt and regular payment of the compensation nor, if the employer is not financially responsible, the payment of compensa- tion at all; and it is an unnecessary and undeserved hardship for the employers, thus compelled to respond after having once paid in full for the protection. The law should be made explicit that insurance companies and self-insurers be required to deposit the present value of compen- sation in permanent disability, widows' and children's and other long term awards. The grave undesirability of permitting self-insurance, either under the law or in violation of the law, is also demonstrated. As regards self-insurers by permission, whose average deposit, $4,600,000 in round numbers, is about six months' premiums for these employers at State Fund rates, at least $25,000,000 in reserves are needed to provide the compensation payable to their injured workmen and the dependents of their workmen who have died from their injuries. This, also, should be in the custody of the State of 'New York, in trustee securities, as a sacred trust for this high purpose. There are already failures among them and, while these claims are preferred, that does not assure the payment of compensation promptly and regularly. The usefulness of mutuality is demonstrated. There have been substantial savings to policyholders in both participating stock insurance companies, owned by employers, and in mutual insurance companies, the combined losses and expenses in 1918 being in the former only 61 per cent of the earned premiums and in the latter only 64 per cent. Yet the most conclusive demonstration of the benefits of mutuality was in the State Fund where the combined losses and expenses for 1918 were only 47 per cent of the premiums computed at insurance company rates. The solution of these difficulties which would remove all the causes of waste and under-payment is, in my opinion, to make insurance in the State Fund obligatory upon all employers, auto- 83 matically attaching, and provide for the assessment and collection of premiums from these employers by summary processes like other taxes. At the same time, the management of the State Fund should be made more representative of insured employers, more directly responsible to them and more responsive to their requirements; and provision should also be made for the fullest co-operation in the portions of the administration of the Work- men's Compensation Law in which they are interested of recog- nized organizations of employers, workmen, safety engineers, compensation insurance experts and physicians, in order to secure greater economy and efficiency, juster determination and prompter payment of compensation, better prevention and more effective medical care and rehabilitation. In case a complete solution is not possible at the coming session of the Legislature, these organizations should, in any case, be invited to help work out the best practicable means of coordina- tion and systematization of theSe important activities, under a revision of the present provisions of the law which should, at the very least, provide for automatic insurance in the State Fund unless insuring elsewhere, for summary collection of such pre- miums like other taxes, for more representative and responsive management of the State Fund and for the deposit by all insur- ance companies and self-insurers of the present value of all per- manent disability and widows' and orphans' losses to assure their regular punctual and full payment beyond a peradventure. Respectfully submitted, MILES M. DAWSON, F.A.S., F.I.A., Consulting Actuary.. C. I DATE DUE Cornell University Library HD7816.U7N6812 Report of investigation by Jeremiah F. C 3 1924 002 407 728