Workers’ Comp Fund Wins Lawsuit

The state’s workers’ compensation carrier of last resort has fended off a $2-billion class- action lawsuit brought by California employers that claimed the insurer had systematically overcharged them.

The ruling was a victory for the troubled State Compensation Insurance Fund, which faced paying damages at a time when its financial condition has been weakened by turmoil in California’s workers’ compensation industry.

Plaintiffs in the 7-year-old suit, led by Los Angeles-based A&J; Liquor Co., claimed that the insurer, known as State Fund, had artificially inflated its premiums between 1987 and 1994 to amass a “war chest” that would allow the fund to undercut competitors after California’s workers’ comp industry was deregulated in 1995. The suit, filed on behalf of nearly 164,000 policyholders, alleged that State Fund had engaged in a variety of illegal business practices, including fraud, deceit and breach of contract.

In a ruling last week, San Francisco Superior Court Judge John Munter rejected the plaintiffs’ allegations that State Fund set aside too much in surplus and reserves in the short run to position itself to grab more market share later.

“At all relevant times and in all material respects, State Fund’s management acted in good faith toward its policyholders with respect to the matters of reserving, dividends and premiums,” Munter wrote in his 117-page final decision.

Fred Puglisi, an attorney for State Fund, called the judge’s decision a vindication of the insurer and its business practices. He said State Fund would seek to recoup from the plaintiffs its legal costs of about $500,000.

Drew Pomerance, a lawyer for the plaintiffs, said his clients were considering an appeal.

“We are obviously disappointed” with the ruling, Pomerance said. “We believe [the judge] made erroneous factual findings, he misconstrued the evidence, and he made significant errors of law.”

The fund’s legal victory comes while it is embroiled in another court battle over its reserve practice -- this one over regulators’ concerns that the carrier’s reserves may be too low.

State Fund last month sued the Department of Insurance and Commissioner John Garamendi, who are trying to force the nonprofit insurer to adopt the risk-based capital requirements demanded of private- sector carriers. State Fund argues that it should be exempt from the requirements because of its role as the state’s insurer of last resort.

The suit comes before the release of a much-anticipated audit that some believe will show that State Fund’s capital condition has deteriorated to the point that the Insurance Department would be justified in stepping in to run the operation.

The State Fund has found itself at the center of a crisis in California’s $15-billion workers’ compensation industry, which has seen premiums soar as dozens of for-profit carriers have gone bankrupt or stopped writing coverage in the state. Because State Fund is one of the few insurers still willing to write policies, employers have flocked to the nonprofit for coverage, tripling its premium volume in just two years to $5.4 billion. But the fund’s capital has not kept pace with its rapid growth.

Fund spokesman Jim Zelinski said it was “ironic” that the insurer was fighting a suit claiming its reserves were too high while battling the Insurance Department, which is claiming its reserves are too low.

Either way, Zelinski said, “State Fund stands by its reserving practices and the adequacy of its reserves.”