Garamendi Cuts Rate Hike in Workers’ Comp : * Insurance: The regulator calls a proposed 11.9% increase unjustified despite industry claims that costs are far outpacing the premiums employers now pay.

Insurance Commissioner John Garamendi, citing pressures on California businesses during the current economic slump, Thursday slashed a workers’ compensation insurance rate increase to 1.2% from a proposed 11.9%.

Garamendi’s decision to approve only a minimal increase, which takes effect Jan. 1, prompted accusations from the insurance industry that the commissioner had made a political decision at the expense of the system’s financial viability.

Although Garamendi said he believed that the Workers’ Compensation Insurance Rating Bureau, the industry association that proposed the 11.9% increase, had not adequately justified it, he put his prime emphasis on the economic climate and the negative effect an increase would have.

“These are tough times for businesses and an increase of 11.9% could be the straw that breaks many of their backs,” he said. “Government should be the caretaker for the people, not the undertaker.”

Robert Mike, president of the rating bureau, said his organization was aware that a more than 10% increase in workers’ compensation rates would place a greater burden on businesses when they can least afford it.

“But the requested rate level increase accurately reflects the escalating costs associated with providing workers’ compensation benefits to injured workers,” he said. “It is unlikely that (the costs) will abate anytime soon.”

Garamendi’s announcement also was felt on Wall Street, sending the stocks of companies that write workers’ compensation insurance in California down sharply. CII Financial, Inc., a Burbank insurer, plunged $2.125 to $9.75 on the American Stock Exchange, and Fremont General Corp., a Santa Monica underwriter, lost $2 to $21.25 on the national over-the-counter market.

The political debate on workers’ compensation has heated up in the past year, although legislative reform efforts have not made much headway. The system has been criticized for being costly to business and providing low benefits to claimants. California companies pay more than $10 billion in workers’ compensation premiums annually.

In his announcement Thursday, Garamendi suggested that instead of seeking huge rate hikes, the industry should reform itself and crack down on fraud. He also vowed to make greater anti-fraud and reform efforts himself, hoping to stem rising costs of claims.

With one out of every seven workers’ compensation claims now being litigated, Garamendi said he believes that there is a great deal of fraud, perhaps as much as in auto insurance. Yet, he said, companies report few fraud cases to the Insurance Department.

With a new state fraud law about to go into effect giving the Insurance Department and county district attorneys more resources to combat the problem, Garamendi said his plan is to “go after the professionals--the doctors, attorneys and other medical care workers--who are involved in fraud and put them out of business.”

The commissioner’s arguments did not impress the industry.

Richard Wiebe, speaking for the American Insurance Assn., which represents a third of private workers’ compensation sellers in the state, accused Garamendi of “ignoring overwhelming evidence” on the rise of workers’ compensation claims in finding documentation for the full increase to be inadequate.

“The costs of workers’ comp claims are far outpacing the premiums employers now pay,” Wiebe said. “Granted, the costs of premiums are a burden to business owners, but the root causes of high costs, lawsuits, medical costs and fraud, must be addressed if premiums are to be brought under control.”

Garamendi’s decision, he added, “was a political one on a highly volatile issue.”

Bob Gore, a spokesman for the Assn. of California Insurance Cos., the industry’s leading lobbying arm in Sacramento, said his group would welcome an opportunity to sit down with Garamendi and show him the documentation he says he needs for a higher rate increase.

“We can show him that litigation has increased 100% in the last 10 years, stress claims are up 700% and vocational rehabilitation claims are up 300%,” he said. “In the case of both stress and vocational rehabilitations, more than 90% of those claims are litigated. Our profit level has declined to just 3%.”

A Garamendi aide, however, released 1990 figures showing that many big workers’ compensation sellers were paying handsome dividends to shareholders. The four biggest sellers, according to a chart provided, paid dividends amounting to 18%, 28%, 15% and 16%, respectively, of premiums written.