State Fund Loses Bid for Injunction

California’s state-owned workers’ compensation insurer Tuesday lost a round in its legal battle with Insurance Commissioner John Garamendi. A Superior Court judge in San Francisco denied a preliminary injunction that would have muzzled the state’s head insurance watchdog and required him to keep his hands off the troubled carrier.

The State Compensation Insurance Fund, which insures about half of the employers in California, had sought the injunction to prevent Garamendi and the Department of Insurance from disparaging State Fund and from taking any steps to seize control of the insurer, which has seen its financial condition weaken because of turmoil in the state’s workers’ compensation market.

Judge James Warren ruled, however, that State Fund’s lawsuit against state insurance officials could proceed.

In May, State Fund sued Garamendi and the Department of Insurance, alleging that the commissioner had “exceeded his authority” by making misleading public remarks about the carrier’s financial condition, by unlawfully interfering with its management and by holding it to capital requirements that State Fund officials claim don’t apply to them. The suit seeks to clarify whether State Fund is subject to those requirements, which allow the Department of Insurance to take control of any carrier that falls below certain minimum standards.

Garamendi has said State Fund’s financial condition has deteriorated to the point where his agency would be justified in taking control of the operation, although he has said no such move is imminent.

Charles Savage, assistant chief counsel for State Fund, said the carrier would appeal Tuesday’s decision and continue to seek a preliminary injunction.

“The possibility of regulatory control ... leaves this cloud of uncertainty that is disrupting the market,” Savage said. “That uncertainty is what we want the court to deal with.”