Insurer Sues to Block Potential State Takeover

The infighting over the fast-deteriorating workers’ compensation system in California took a new turn Wednesday when officials of the workers’ comp insurer of last resort announced that they have sued the state Insurance Department to thwart a potential takeover.

The lawsuit, filed by the State Compensation Insurance Fund, is the latest salvo in an intensifying battle between Insurance Commissioner John Garamendi and the operators of the public, nonprofit fund that controls more than half of the California workers’ comp insurance market.

Businesses have flocked to the so-called State Fund over the last two years because so many for-profit workers’ comp carriers have gone belly up or pulled out of the California market as their losses have mounted. That influx of business has left State Fund struggling with financial problems of its own.

Filed late Tuesday in San Francisco County Superior Court, the suit comes just before the release of an audit that some believe will show that State Fund’s capital condition has reached the point that the Insurance Department would be justified in stepping in to run the operation.

Garamendi has been highly critical of State Fund management in recent months, warning repeatedly of a looming financial meltdown at the insurer. State Fund officials insist that their institution is fundamentally sound and that meddling by the Insurance Department would only add to the turmoil roiling the California workers’ comp market.

“We have not taken this action lightly, but we must protect the interests of our 262,000 policyholders, their employees and California’s economy,” said State Fund President Dianne C. Oki. “A takeover of State Fund would create further chaos in California’s workers’ compensation marketplace and ultimately be disastrous for California’s economy.”

Despite efforts to fix California’s $15-billion workers’ comp industry, the system has unraveled under pressure from soaring medical costs and big premium increases. Many say California’s system is fraught with abuse and administrative waste: Research shows that California employers pay the highest premiums for workers’ comp coverage but that its workers received some of the skimpiest benefits.

“This feud emphasizes the need for comprehensive workers’ compensation reform,” said Assemblyman Keith Richman, a Northridge Republican who has introduced several pieces of reform legislation. “It’s another symptom of the underlying instability of the system.”

The lawsuit alleges that Garamendi has “exceeded his authority” and “unlawfully interfered with the management” of State Fund by demanding that the insurer refuse to cover certain segments of employers, fire its president and legislative advocate and charge premium rates set by Garamendi.

The suit claims that Garamendi’s public comments have undermined the State Fund board. It seeks to stop him and the Insurance Department from continuing with these and other moves that State Fund officials allege amount to attempts to take control. The suit also asks the court to find that certain capital requirements demanded by the state Insurance Code do not apply to the State Fund.

These capital requirements are at the heart of the dispute. By law, all California insurers are required to set aside reserves to cover anticipated claims losses, as well as surplus funds as an extra financial cushion. The rule of thumb is that for every $3 a carrier writes in insurance premiums, it must have $1 in capital.

The trouble is that State Fund’s so-called risk-based capital ratios have been thrown out of whack by its rapid growth. Over the last two years, its premiums have more than tripled, from $1.7 billion in 2000 to $5.4 billion in 2002, as it has been forced to pick up business shed by other carriers that became insolvent or stopped writing coverage in California.

State Fund’s surplus of $1.8 billion in 2002 was only about half of what it should have been under state law, said spokesman Jim Zelinksi. But he added that it doesn’t mean the State Fund is insolvent. The insurer’s cash flow is so strong, he noted, that it posted a net profit of $26 million last year and boasts nearly $12 billion in assets to pay claims.

“We want to assure all of our policyholders and their injured workers that we have the financial wherewithal to pay claims and meet our obligations to them,” Zelinski said.

The audit and financial statements that State Fund is expected to release as early as this week may show a further deterioration in the insurer’s capital position, industry insiders suspect. That could prompt the Insurance Department to assert greater control over the carrier.

Garamendi denied the allegations made in the lawsuit.

“We have made every attempt to work cooperatively with State Fund to resolve the financial problems that threaten its viability,” Garamendi said. “While we will deal with this issue ... my principal focus is to reduce the escalating costs that are plaguing the workers’ compensation system....State Fund’s lawsuit does nothing to move these reforms forward.”