By the time the cat was out of the bag, more than 22,000 customers of Employers Mutual LLC had racked up an estimated $4.5 million in unpaid health insurance claims. While the unsuspecting customers visited their doctors, the principals of the unlicensed health insurer and its affiliated associations diverted more than $6 million of the health plan's assets into their own personal bank accounts.

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"The scam seeks to collect a large amount of premium as rapidly as possible," says Nevada Insurance Commissioner Alice A. Molasky-Arman. "While claims may be paid initially, the scam will soon begin to delay payment and offer excuses for failure to pay. Unsuspecting customers who thought they were covered for their medical needs are left responsible for huge medical bills."

Nearly 1,800 Nevadans fell prey to Employers Mutual's scheme before it was over, says Molasky-Arman. The majority of the company's customers live in California, Colorado, Florida, Georgia, Nevada, Ohio, Oklahoma, and Texas.

The United States Department of Labor (DOL) filed a lawsuit in December 2001 in the U.S. District Court of Nevada against the officers of Employers Mutual, alleging that they sold health insurance without a license, violating the Employee Income Retirement Security Act (ERISA).

While legitimate ERISA plans allow individual employers to establish self-funded health insurance plans that are exempt from state licensing regulations, plans that provide coverage to more than one unrelated employer do not meet this federal exemption requirement. "Multiple- employer welfare arrangements," or MEWAs, must be licensed by the states in which they do business.

Employers Mutual and the bogus associations it created allegedly collected $14 million in health plan premiums nationwide and paid out only $3 million in claims, according to the DOL. The government's lawsuit seeks a court order restoring all losses and illegal profits received by Employers Mutual and its associations.