                           RECOMMENDED FOR FULL-TEXT PUBLICATION
                                Pursuant to Sixth Circuit Rule 206
                                      File Name: 08a0297p.06

                    UNITED STATES COURT OF APPEALS
                                  FOR THE SIXTH CIRCUIT
                                    _________________


                                                          X
                                     Plaintiff-Appellee, -
 UNITED STATES OF AMERICA,
                                                           -
                                                           -
                                                           -
                                                               No. 07-5840
            v.
                                                           ,
                                                            >
 HAROLD SIMPSON,                                           -
                                 Defendant-Appellant. -
                                                          N
                          Appeal from the United States District Court
                        for the Eastern District of Kentucky at Lexington.
                         No. 07-00050—Joseph M. Hood, District Judge.
                                     Argued: April 22, 2008
                              Decided and Filed: August 18, 2008
                 Before: GILMAN, ROGERS, and McKEAGUE, Circuit Judges.
                                      _________________
                                           COUNSEL
ARGUED: Kent Wicker, REED WICKER, Louisville, Kentucky, for Appellant. Charles P.
Wisdom, Jr., ASSISTANT UNITED STATES ATTORNEY, Lexington, Kentucky, for Appellee.
ON BRIEF: Kent Wicker, Steven S. Reed, REED WICKER, Louisville, Kentucky, for Appellant.
Charles P. Wisdom, Jr., ASSISTANT UNITED STATES ATTORNEY, Lexington, Kentucky, for
Appellee.
                                      _________________
                                          OPINION
                                      _________________
         ROGERS, Circuit Judge. Defendant Harold Simpson appeals the sentence and order of
restitution imposed for his crime of mail fraud. For several years, Simpson underreported payroll
information for his businesses to his workers’ compensation insurance carriers. The district court
concluded that the “loss” caused by this conduct was the amount of additional premiums that the
insurance carriers would have charged had they been given accurate information. The court then
used those figures to calculate Simpson’s Sentencing Guidelines range and the amount of restitution
due to the carriers. On appeal, Simpson argues that the proper measure of loss was not the unpaid
premiums, but the amount of money that the carriers actually paid on claims. This argument fails,
however, because what Simpson took through his deceit was insurance coverage, and the fair market
value of that coverage was the amount of the unpaid premiums. We therefore affirm the judgment
of the district court.



                                                1
No. 07-5840                United States v. Simpson                                           Page 2


                                              I.
       During the periods relevant to this case, Simpson was involved in the operation of two
underground mining companies, Simpson Mining Company and Motivation Enterprise. Simpson
was the owner and operator of Simpson Mining, and the vice-president of Motivation Enterprise,
which was owned by his wife. Because the companies performed their mining operations in
Kentucky, Ky. Rev. Stat. § 342.340(1) required that Simpson maintain workers’ compensation
insurance for each.
         From December 20, 1995 until April 20, 2002, insurance for Simpson Mining was provided
by Kentucky Employers Mutual Insurance (KEMI). As with any workers’ compensation policy, the
size of the premiums due to KEMI depended on the payroll information provided by Simpson
Mining, including the number of workers that it employed. Simpson drastically underreported his
monthly payroll to KEMI. At one point, for example, Simpson Mining was reporting only fourteen
of its forty employees. In the last year of the policy alone, Simpson’s fraud enabled him to avoid
paying $121,005 in additional premiums.
       KEMI did not discover this scheme until September 2001, when one of Simpson Mining’s
employees attempted to file a workers’ compensation claim. Although this individual had been
working for the company for approximately nine months, his employment was never reported to
KEMI. KEMI consequently cancelled Simpson Mining’s policy. A subsequent on-site investigation
by the Kentucky Office of Mine Safety and Licensing confirmed that Simpson Mining had a larger
workforce and payroll than it had reported to KEMI in monthly payroll reports.
       Notwithstanding these developments, Simpson Mining was able to procure immediately a
one-year workers’ compensation policy from another insurance carrier, Employers Risk Services.
Once again, Simpson underreported his payroll information in order to obtain reduced premiums.
According to a conservative estimate by Employers Risk Services, Simpson underpaid it by at least
$373,326.
       When Motivation Enterprise was incorporated in 2004, it too misrepresented the size of its
workforce to achieve reduced insurance rates. Over the course of the two years in which it obtained
workers’ compensation coverage from AIG Global Energy, Motivation Enterprise avoided
$1,089,825 in premiums through its falsifications.
        In May of 2006, federal officials executing a search warrant for the offices of Simpson
Mining and Motivation Enterprise discovered that both companies kept two sets of payroll ledgers.
The first ledger for each contained handwritten notes reflecting the amount of cash needed to satisfy
its actual weekly payroll. The second contained falsified payroll information that the company sent
to its bookkeeping agency. This second ledger significantly underrepresented the size of each
company’s payroll. Further investigation showed that Simpson paid his employees primarily in cash
in order to conceal his fraudulent insurance reporting.
        The United States subsequently charged Simpson with mail fraud in violation of 18 U.S.C.
§ 1341. Simpson pled guilty to that charge and was sentenced by the district court on June 25, 2007.
At his sentencing hearing, Simpson objected to the dollar amount of loss that the Presentence Report
(PSR) used to calculate his Guidelines range and the size of his restitution order. The PSR figured
the amount of loss caused by Simpson’s fraud as the additional $1,584,156 in premiums that the
insurance carriers would have charged had they received accurate payroll information. Simpson
took issue with this methodology, arguing that the unpaid premiums were an improper measure of
loss. Because the insurance carriers allegedly received more in premiums than they paid out on
claims, Simpson contended that they had not suffered any losses. The district court, however,
agreed with the PSR and adopted the loss figures that the PSR recommended.
No. 07-5840                United States v. Simpson                                           Page 3


        This decision had a significant impact on the punishment that Simpson received. Because
the resulting loss was calculated to be greater than $1,000,000 but less than $2,500,000, the district
court applied a sixteen-level increase to Simpson’s base offense under the Sentencing Guidelines.
See U.S.S.G. § 2B1.1(b)(1)(I). The increase resulted in a Guidelines range of 33-41 months, and
the district court sentenced Simpson to 36 months of imprisonment. Simpson was also ordered to
pay a total of $1,584,156 in restitution to the three insurance carriers, pursuant to 18 U.S.C.
§ 3663A.
                                                 II.
        On appeal, Simpson argues that the value of the unpaid premiums was not the appropriate
measure of the loss, and that his Guidelines range and restitution obligations were thus not properly
calculated. However, because it was insurance coverage that Simpson stole through his fraud, both
calculations were correct.
A. Guidelines Calculation
         Because the additional amount of premiums that Simpson’s carriers would have received but
for his fraud represents the “loss” caused by that misconduct for Guidelines purposes, application
of a sixteen-level increase to Simpson’s base offense was proper. Simpson attempted to take
something of substantial value, insurance coverage, without compensating the carriers, thus causing
the requisite direct pecuniary loss.
        The unpaid premiums fall squarely within the definition of “loss” provided in U.S.S.G.
§ 2B1.1(b), the relevant Guidelines provision. Where, as here, a defendant commits an offense
involving fraud, § 2B1.1(b) requires that his offense level be increased in accordance with the size
of the resulting or intended loss. The commentary to § 2B1.1(b) broadly defines “loss” as “the
reasonably foreseeable pecuniary harm that resulted from the offense.” § 2B1.1 cmt. n.3(A). The
commentary then elaborates that “pecuniary harm” means “any harm that is monetary or that
otherwise is readily measurable in money.” Id. Here, Simpson intended to cause “harm that is
monetary,” that harm would directly “result[] from” Simpson’s fraud, and the extent of that harm
was “reasonably foreseeable.” By attempting to deprive the carriers of compensation for coverage
provided, Simpson sought to cause a monetary injury. Such harm is a foreseeable result of the crime
intended: the entire point of Simpson’s underreporting scheme was to avoid paying the additional
premiums.
        Moreover, the amount of the unpaid premiums represents the fair market value of the
coverage that Simpson sought to obtain. The commentary to § 2B1.1(b) provides that the “fair
market value” of the thing taken or destroyed shall be the ordinary determinant of the dollar amount
of loss. As this court has observed, fair market value is “the price a willing buyer would pay a
willing seller” at the time of the crime. United States v. Sosebee, 419 F.3d 451, 456 (6th Cir. 2005).
The market value of the insurance coverage is accordingly the amount of the premiums that would
have been charged, as that is the price that consumers paid for such protection.
        Simpson argues that loss can result from the type of fraudulent insurance reporting that
occurred here only to the extent that the amount paid out on claims by the carrier exceeds the
premiums that it received. Because the Government offered no evidence at sentencing as to whether
Simpson’s carriers paid out on any claims, Simpson contends that no loss occurred. Underlying this
argument is the idea that the mere provision of insurance coverage confers no value, and that value
is conferred only when a carrier actually pays on a claim. However, this contention ignores the fact
that, by agreeing to provide coverage, a carrier obligates itself to pay claims arising during the
period of coverage, even if those claims exceed the premiums paid. In doing so, the carrier certainly
No. 07-5840                 United States v. Simpson                                             Page 4


gives up something valuable. Insurance coverage, by its very nature, is forward-looking, and cannot
be valued using the type of after-the-fact analysis advocated by Simpson.
          Moreover, and contrary to Simpson’s contentions, it is not the case that no “loss” occurs in
a case like this if insurance coverage may be cancelled for fraud. At least for Guidelines purposes,
it is irrelevant whether, upon uncovering Simpson’s fraud and cancelling his policy, a carrier would
or would not have been required to pay on claims for injuries pre-dating that termination. Even
assuming that Simpson is correct that his carriers would not have been so bound, it appears obvious
that Simpson would have directed undeclared workers to his carriers in hopes of evading detection
and obtaining coverage. A resourceful employer such as Simpson will attempt to disguise the fact
that an employee for whom benefits are sought has not been reported. Where, for example, a policy
requires that the employer list the names of the specific individuals for whom coverage has been
purchased, an employer may wait to report an employee’s existence until the employee is injured,
and then explain the discrepancy by claiming, for instance, that the employee is a recent hire. See
United States v. Ratliff, 63 F. App’x 192, 193-94 (6th Cir. 2003). Indeed, the record suggests that
Simpson did direct injured, unreported employees to his carriers, this being the reason for the
cancellation of his policy with KEMI. Because Simpson clearly intended to obtain coverage for
which he had not paid, he caused “loss,” as that term is used in the Guidelines. Under § 2B1.1(b),
“intended” loss is adequate to justify an offense level increase even if, for instance, discovery of the
fraud precluded actual loss. As the commentary to that section makes clear, “loss is the greater of
actual loss or intended loss.” § 2B1.1 cmt. n.3(A).
        As a final ground for challenging the district court’s definition of loss, Simpson claims that
the avoided premiums represent consequential damages and thus cannot be used as the measure of
loss here. The term “loss” in § 2B1.1(b) does not encompass every harm resulting from a crime, no
matter how attenuated the causal link. In accordance with this principle, consequential damages
generally are not included in “loss.” United States v. Izydore, 167 F.3d 213, 223-24 (5th Cir. 1999).
However, as the Ninth Circuit concluded in an analogous case, “the loss of premium fees [is] a direct
result of fraud and thus [is] not consequential.” United States v. Sanders, No. 97-10056, 1999 WL
439415, at *1 (9th Cir. June 22, 1999). When an individual underreports his payroll, he is
attempting to take coverage directly and thereby to deprive a carrier of premiums directly. It is not
as though the district court in this case defined loss to include the additional monies that the carriers
could have made by, for example, investing the unpaid premiums. Such a loss would be
consequential, but that is not what we have here.
        The conclusion that the unpaid premiums represent the loss caused by Simpson’s
underreporting is further consistent with the purpose of § 2B1.1(b), which is to ensure that a
defendant’s offense level reflects his culpability. Subsection 2B1.1(b) sets out a table with sixteen
ranges of dollar amounts and accompanying base offense level increases. As the amount of money
involved in a crime rises, so does the corresponding base offense level. The purpose of these loss
gradations is to ensure that, the more harm the conduct at issue threatens, the more severely it is
punished. In essence, “[t]he Guidelines use loss as a proxy for the seriousness of the fraud.” United
States v. Austin, 479 F.3d 363, 369 (5th Cir. 2007); see also United States v. Triana, 468 F.3d 308,
320 n.8 (6th Cir. 2006) (“the base offense level in fraud cases often does not identify the seriousness
of the offense”). When the amount of premiums avoided is used to calculate loss, a defendant’s
offense level increase is tied to the harm risked. By contrast, there is no link between loss and
culpability under Simpson’s approach. If loss is determined using the amount of claims paid out,
offense level increases are based upon the fortuity of whether employees of a dishonest company
become injured. It cannot be, however, that a crime spanning several years and through which $1.5
million was purposefully avoided is not very serious merely because none of the employer’s workers
happened to get hurt.
No. 07-5840                United States v. Simpson                                             Page 5


        Tying offense level increases to the defendant’s culpability, in turn, prevents arbitrary
disparities in Guidelines ranges. Using unpaid premiums as the measure of loss helps ensure that
otherwise similarly situated defendants who intend to, and actually do, fraudulently avoid the same
amount of premiums will receive similar Guidelines ranges.
         While our court has not previously addressed this issue, our holding is consistent with United
States v. Garavaglia, Nos. 98-1512, 98-1674, 1999 WL 220125, at *7 (6th Cir. April 6, 1999). In
that case we affirmed a district court decision holding that loss should, at least for purposes of
restitution, be the amount of avoided premiums. The main issue on appeal there regarding the award
of restitution, however, was whether the district court had erred in estimating the dollar amount of
the unpaid premiums, and not whether, for purposes of § 2B1.1(b), the measure of loss in a situation
such as this should be the value of the unpaid premiums or the amount that was eventually paid out
on claims. In an appeal involving the calculation of restitution for a workers’ compensation fraud
case though, the Seventh Circuit relied on our Garavaglia case to support the very reasoning that
we adopt here:
       Leahy argues that the Insurance Council does not merit restitution because it
       received more in premiums than it paid out in claims, so it sustained no loss for
       restitution purposes. We disagree. The insurance companies were entitled to the
       benefit of their bargains-the amount of money they would have charged to insure the
       actual risk that Windy Labor presented. See United States v. Garavaglia, 5 F.Supp.2d
       511, 520, 522 (E.D.Mich.1998), aff’d, 178 F.3d 1297 (6th Cir.1999). Otherwise,
       Windy Labor would obtain a windfall through its fraud, receiving coverage for
       greater risks than the amount of premiums merited.”
United States v. Leahy, 464 F.3d 773, 799-800 (7th Cir. 2006).
        The Second and Eighth Circuits have also explicitly upheld base level increases under
§ 2B1.1(b) (or its predecessor § 2F1.1) calculated using the amount of avoided workers’
compensation insurance premiums, although it is not clear that calculation based on claims paid was
even advocated in those cases. In United States v. Stevens, Nos. 97-1260, 97-1586, 98-1348, 2000
WL 419938, at *4 (2d Cir. April 17, 2000), the carrier’s “actual loss” was “measured by the
difference between the amount of premiums that the [employer] should have paid but for the fraud
and the amount that it actually paid.” United States v. Radtke, 415 F.3d 826, 843-44 (8th Cir. 2005),
is similar. The Ninth Circuit has upheld a similar calculation in a case involving fraudulently
obtained vehicle insurance. Sanders, 1999 WL 439415, at *1.
        Finally, although Simpson’s challenge to his Guidelines range is primarily based on the
district court’s definition of loss, he argues in the alternative that the district court erred in
calculating the amount of avoided premiums. Given his poor financial status during the relevant
periods, Simpson contends that it is improper to assume that he would have remained in business
after 2002, and thus continued to underreport his employees, had he been required to pay the full
amount of premiums from the start. It is further speculative to assume, he argues, that the carriers
would have continued under the insurance contracts had they known the true state of affairs. These
arguments are without merit. The fact of the matter is that Simpson did stay in business, that his
carriers did not discover his fraud initially, and that he did continue to cause “loss” to the carriers.
It was hardly error for the district court to base its calculations upon what actually occurred, as
opposed to what could have happened.
B. Restitution
       Parallel reasoning supports calculating the restitution awards in this case based on the
additional premiums that should have been paid. Pursuant to the Mandatory Victims Restitution Act
No. 07-5840                      United States v. Simpson                                                         Page 6


(“MVRA”), defendants such as Simpson who commit certain crimes involving fraud must make
restitution to their victims. 18 U.S.C. § 3663A. Where an award is appropriate, the statute requires
“restitution to each victim in the full amount of each victim’s loss[].” § 3664(f)(1)(A). It is true that
the MVRA refers only to “actual” loss, and unlike § 2B1.1 of the Guidelines does not include
“intended loss.” United States v. Younes, 194 F. App’x 302, 317 (6th Cir. 2006); United States v.
Finkley, 324 F.3d 401, 404 (6th Cir. 2003). But apart from the arguments rejected above, Simpson
does not really argue that there has been no actual loss.
        Instead, his remaining argument with respect to restitution is that this loss was suffered not
by the carriers to whom restitution was awarded, but by the Commonwealth of Kentucky. This is
because, he claims, the carriers would have discovered his fraud and simply rescinded the insurance
contracts had any undeclared employees filed claims. Upon such a rescission, asserts Simpson,
responsibility for the undeclared employees’ medical expenses would then have fallen on the
Uninsured Employers Fund (“UEF”) created by the Commonwealth. In Kentucky, “when there has
been default in the payment of compensation due to the failure of an employer to [provide insurance
or security]” as required by statute, money from the UEF is used to pay for the care of an ill or
injured employee. Ky. Rev. Stat. § 342.760. Because coverage would ultimately be provided by
the UEF in the case of an actual claim, Simpson argues that the carriers bore no actual additional
risk and thus suffered no actual loss. Effectively, he contends that the carriers provided him with
nothing other than a piece of paper that made it appear that he was in compliance with state law,
thereby permitting him to stay in business.
        Under our reading of Kentucky insurance law, however, it appears that the insurance
companies would have to pay on claims submitted by employees of Simpson who were injured on
the job even if Simpson had fraudulently misrepresented the number of employees covered. While
we have not been directed to Kentucky precedent precisely on point, several considerations lead to
this conclusion.
         First, Kentucky statutory provisions, while not directly so providing, at least suggest that this
is the law. Three provisions, Ky. Rev. Stat. §§ 342.310, 342.335, and 342.990, deal specifically
with payroll underreporting and the consequences of such underreporting. Section 342.335 makes
it illegal for an employer to “knowingly . . . make[] any false representation, including
misrepresentations of hazards, classifications, payrolls or other facts . . . that are designed to cause
a reduction in the employer’s premium.” Section 342.990 then provides for civil fines as well as
criminal fines or imprisonment for violation of § 342.335. Nowhere in their treatment of fraudulent
reporting do these provisions state that a carrier will not be bound to pay on claims for undeclared
workers, something that one would expect had the state legislature intended a departure from the
common law principles governing worker’s compensation insurance, see infra. Indeed, to the
contrary, § 342.310(2) strongly suggests that a carrier would be bound in a situation such as this.
That section provides that an employer “may1be ordered to make restitution for any compensation
paid as a result of” such a misrepresentation. § 342.310(2).
         Other statutory provisions provide additional support. Under Ky. Rev. Stat. § 342.375,
“[e]very policy or contract of workers’ compensation insurance . . . shall cover the entire liability
of the employer for compensation to each employee subject to this chapter” (emphasis added).
Then, § 342.365 provides that an insurance policy constitutes a “direct promise” from the insurance
carrier to the employee. Courts in other states have concluded that such provisions give employees
a right to rely on a policy and thus prevent workers’ compensation insurance carriers from denying
claims for pre-cancellation injuries because of an employer’s fraud. E.g., Am. Millenium Ins. Co.


         1
           The potential for restitution to carriers under § 342.310(2) does not necessarily mean that a carrier suffers no
actual loss in a case such as this. There is no guarantee that the violating employer will be solvent.
No. 07-5840                United States v. Simpson                                              Page 7


v. Berganza, 902 A.2d 266, 269-71 (N.J. Super Ct. App. Div. 2006) (applying New Jersey law and
relying on New York, Iowa, and Pennsylvania cases). Moreover, nowhere in its treatment of policy
cancellations does the statutory scheme governing workers’ compensation insurance permit a carrier
to deny pre-cancellation claims for employer fraud. See § 342.340(2).
         Statutory provision for the UEF, moreover, does not suggest that the carriers would not be
liable for workers’ compensation claims based on fraudulently obtained coverage. The UEF is a
limited resource and is not “a guarantor that all benefits will be paid for work-related injuries
suffered in the Commonwealth.” Whitehead v. Davis, 692 S.W.2d 801, 802 (Ky. 1985). By statute,
the UEF “is applicable only to uninsured situations.” Id. It is not available “when an employer has
. . . provid[ed] a workers’ compensation insurance policy or [is] certified . . . as a qualified, self-
insured employer.” Id. at 803. As the Supreme Court of Kentucky has explained, “[t]here is simply
no indication of any legislative intent to require the state, through the fund, to guarantee payment
of worker compensation benefits from defaulting employers, insolvent insurance companies, and
underinsured employers.” Id. (emphasis added). Simpson points to no cases where a carrier has
been absolved of responsibility for an injury suffered while an employee was working within the
scope of an employer’s business simply because the UEF could theoretically pick up the tab.
        Second, Kentucky workers’ compensation cases involving different types of employer
misrepresentations suggest that the carriers in this case bore the risk of insuring the unreported
workers. Kentucky courts have, for instance, required workers’ compensation carriers to provide
coverage where the risk insured was greater than that represented by the employer. For example,
a carrier must pay out on claims where an employee is injured performing a task not disclosed to the
insurer as long as the employee was engaged in the business operation for which the policy was
procured and issued. Globe Indem. Co. v. Doyle, 426 S.W.2d 425, 429 (Ky. 1968). In Globe
Indemnity, the Supreme Court of Kentucky held that a carrier was obligated to pay benefits after an
employee was killed while piloting an airplane, even though the employee was listed only as a
tractor-trailer driver, because the flight was in connection with the employer’s beverage distribution
business. Id. at 425. This was the case even though the employer knew in reporting the employee
as a driver that he intended to use the employee as a pilot, even though the carrier could not have
anticipated employees performing such an activity, and even though the price of coverage for
aircraft operation was nearly twice that paid by the employer. Id. at 426-27. Although Globe
Indemnity involved a slightly different type of fraud than that involved in the instant action, it was
similarly a situation where an insurance company was purposefully tricked into insuring a risk that
was much greater than it realized.
         The cases that Simpson relies upon to contend that the carriers would not be bound to pay
on claims for undeclared workers are not to the contrary. Davis v. Turner, 519 S.W.2d 820, 821
(Ky. 1975), for instance, is distinguishable in many ways, not the least of which is the fact that it
involved an employer who had procured no coverage whatsoever, so that there was no basis for a
carrier to be bound in the first place. Old Republic Insurance Co. v. Begley, 314 S.W.2d 552, 554
(Ky. 1958), did hold a workers’ compensation carrier not liable, but that case involved an employee
who was injured while performing a task entirely unrelated to the employer’s business. Old
Republic was distinguished in Globe Indemnity. Section 342.375 requires a workers’ compensation
policy to cover the entire liability “of the employer.” Kentucky courts have interpreted the term “the
employer” to mean “the business.” Centertown Garage v. Riger, No. 2003-CA-001094-WC, 2003
WL 22417237, at *1 (Ky. Ct. App. Oct. 24, 2003). Thus, if an employee is injured while performing
a task that is outside the scope of the business named on the policy, § 342.375 plainly would not
obligate the carrier to pay out on a claim. As the Globe Indemnity court explained in distinguishing
cases such as Old Republic:
       We do not believe . . . that the legislative intent was to permit a coverage that would
       extend to certain workmen and not to others . . . who are employed in the same
No. 07-5840                 United States v. Simpson                                               Page 8


        business. Our cases have gone only so far as to reject the argument that if the
        employe[e] is covered at all by the policy . . . , he is covered regardless of what he
        is doing for the employer, and have held, . . . that he is covered only if he is engaged
        in the business operation for which the policy was procured and issued.
                 It is our opinion that when there has been an election to operate under the
        provisions of the workmen’s compensation act[,] the law intends for all eligible
        employe[e]s to be covered by insurance or employer’s self-insurance. It is the
        responsibility of the employer and his insurer to see to it that the classifications set
        forth in the policy are sufficiently comprehensive to include all eligible employees.
        If they do not, one of them may have a remedy against the other, but the employe[e]
        is covered by the insurance.
426 S.W.2d at 429 (emphasis added).
        Third, Kentucky cases involving a different statutory scheme for mandatory insurance
suggest that the carriers bore the risk in this case. Kentucky courts have refused to allow carriers
of compulsory automobile liability insurance to deny third-party claims because of policy-holder
fraud. A provider of automobile liability insurance in Kentucky is obligated to provide coverage
to an innocent third party who is injured by the covered automobile even where the policy holder
procured coverage through fraudulent misrepresentations. Nat’l Ins. Ass’n v. Peach, 926 S.W.2d
859, 861-63 (Ky. Ct. App. 1996). This is the law in Kentucky notwithstanding the fact that, at least
with respect to non-mandatory types of insurance, a carrier may rescind a policy for fraud or
misrepresentation. Id. at 861.
        In Peach, the insured allegedly reported to his automobile liability insurer that he would be
the only driver of a vehicle even though he knew that his brother, who had helped purchase the
vehicle, would also be using it on a regular basis. After the insured’s brother hit and killed a
pedestrian while driving drunk, the carrier brought a declaratory action, seeking to have the policy
declared void. Id. at 860. While the court was sympathetic to the argument that the carrier would
have charged higher premiums but for the insured’s fraudulent underreporting, it held that the carrier
could not rescind the policy as to the deceased third party. Such a rescission, the court explained,
would frustrate the public policy goal underlying the compulsory liability insurance statute, which
is “to protect the victims” of automobile accidents. Id. at 861. In light of that objective and the
comprehensive statutory regime for liability insurance, the court found it “difficult . . . to reconcile
the existence of an absolute right to rescind an insurance policy so as to avoid liability to an
innocent third party.” Id. at 862. “Once liability coverage is issued . . . the public is entitled to rely
upon it until it is prospectively cancelled . . . .” Id.
        The parallels between the statutory schemes regulating automobile liability insurance and
workers’ compensation insurance suggest that Kentucky courts would treat workers’ compensation
the same way. Both schemes require the regulated party to procure coverage for the benefit of a
third-party that the policy-holder might injure, and each makes such coverage compulsory and
continuous.
         Fourth, the law of other jurisdictions appears generally to be that a workers’ compensation
carrier is bound to pay on claims filed by fraudulently unreported employees. See Liberty Mut. Ins.
Co. v. Borsari Tank Corp. of Am., 139 F. Supp. 641, 644 (S.D.N.Y. 1956), rev’d on other grounds,
248 F.2d 277 (2d Cir. 1957); Nev. Rev. Stat. § 616B.033(2); Am. Millennium Ins., 902 A.2d at 270;
State Ins. Fund v. Brooks, 755 P.2d 653, 657 (Okl. 1988); 9 A. Larson & L. Larson, Larson’s
Workers’ Compensation Law § 152.01, pp. 152-2 to 152-3 (2008); 100 C.J.S. Workers’
Compensation § 691 (2008).
No. 07-5840                 United States v. Simpson                                              Page 9


        Fifth and finally, it is not unfair as a policy matter to hold carriers responsible in a situation
where an employer has engaged in deception, because carriers can take several steps to protect their
interests. Before an injury occurs and a claim is filed, a carrier may prevent any future liability by
exercising its right to audit insured employers. See United States v. Slater, 258 F. App’x 810, 812
(6th Cir. 2007). Through such investigations, the carrier can ensure that an employer’s actual
workforce matches the figures that it has reported. Indeed, in this case, such a measure may have
uncovered Simpson’s fraud much earlier. If fraud is detected, the carrier can prospectively cancel
the policy. The carrier could also seek an award of restitution for claims paid on a fraudulently
obtained policy, Ky. Rev. Stat. § 342.310(2), or attempt to obtain the payment of the unpaid
premiums, cf. Slater, 258 F. App’x at 812.
       For all of these reasons, it appears that the carriers bore the risk of workers’ compensation
coverage for the unreported workers in this case, and that the underpayment of premiums thus
caused actual loss to the carriers. The district court’s restitution order was therefore proper.
                                                  III.
         For the foregoing reasons, we affirm the sentence and order of restitution imposed by the
district court.
