Stopgap Move Made to Rescue Insurance Fund

Insurance Commissioner John Garamendi has authorized an emergency bailout of an industry fund on the brink of running out of the cash needed to pay medical and disability claims for an estimated 40,000 injured California workers.

The California Insurance Guarantee Assn., which pays claims on workers’ compensation, auto, homeowners and liability policies when private insurers become insolvent, has been slammed by a wave of failures of companies that write workers’ compensation policies.

Obligated to pay $1.6 million a day in benefits to injured workers, CIGA was faced with the prospect of delaying or cutting off payments to thousands of them as early as this week.

But after a meeting Wednesday, CIGA received Garamendi’s permission to dip into funds earmarked to cover unpaid claims for auto and homeowners policies. The move is a stopgap measure that underscores the precarious health of California’s workers’ compensation system. Plans call for CIGA to ask the Legislature for permission to float about $500 million in revenue bonds to help shore up its financial situation.

“If they were a company, they would clearly be bankrupt,” Garamendi said of CIGA.

Funded by a surcharge placed on various types of insurance products sold in California, CIGA functions as a safety net protecting injured workers and other policyholders in the event their insurance company goes broke. But big problems in California’s workers’ compensation market have put CIGA in a financial crisis of its own.

Experts say deregulation of California’s workers’ compensation industry in the mid-1990s led to cutthroat competition between carriers, which slashed their prices aggressively in a bid to win market share. Employers benefited for a time as premiums dropped dramatically.

But escalating medical costs and a slowing economy eventually caught up with many insurers. Since 2000, at least 25 carriers that sold workers’ compensation policies in California have become insolvent, forcing CIGA to assume the financial responsibility for the medical costs and disability payments, temporary and permanent, for injured workers whose carriers went belly up.

With its liabilities fast outstripping its assets, CIGA two years ago persuaded the California Legislature to increase the surcharge on workers’ compensation premiums from 1% to 2%. But continued insolvencies and medical costs in the system have risen faster than surcharge revenue, said Larry Mulryan, CIGA’s executive director.

This year, for example, CIGA is projected to raise about $300 million through the surcharge, but it’s slated to pay out nearly three times that for medical, disability and other obligations. CIGA currently lists assets of $977 million and liabilities of $3 billion.

“It has just reached a point where it has gone beyond what our 2% can fund,” Mulryan said.

He said CIGA’s board of directors considered asking the Legislature to increase the surcharge again to raise more revenue.

But with workers’ compensation premiums skyrocketing for the state’s employers, he said, CIGA didn’t want to add to that burden.

Instead, Mulryan said CIGA will borrow $170 million from a separate pool of funds the agency uses to compensate the holders of auto and homeowners policies whose insurers become insolvent.

He stressed that the transfer is merely a short-term loan that would not imperil the safety net for those other lines of insurance.

But some questioned the wisdom of such a move in a state prone to natural disasters. “We could be hit with a major earthquake in California and then what?” said Mark Gerlach, a consultant for the California Applicants Attorneys Assn. “Clearly this is not a long-term solution.”

CIGA plans to seek legislative approval to issue $500 million in revenue bonds to help it weather its financial storm.

“It’s a major crisis that’s not going away,” said Robert Chick, vice chairman of Lawyers Mutual Insurance Co. and a member of CIGA’s board.