Tribal Insurer in State Probe

The battle over Indian tribal sovereignty has entered a hot new arena in California: workers’ compensation insurance.

State regulators are questioning the legality of tribes’ setting up unlicensed, unregulated workers’ comp insurance operations on reservations and selling cut-rate coverage to businesses hundreds of miles away.

The California Department of Insurance investigation focuses on the 74-member Fort Independence Indian tribe in Inyo County and its Sonoma County consulting firm, which the department suspects of marketing bogus workers’ comp coverage to employers desperate for relief from skyrocketing premiums. Investigators are seeking to determine whether the insurance offered is “an unacceptable substitute for workers’ compensation coverage,” said Jerry Whitfield, a state enforcement attorney in San Francisco.

The investigation puts the tribe in the middle of one of California’s highest-profile political crusades: Gov. Arnold Schwarzenegger’s effort to reform the state’s costly workers’ compensation system.

Tribal executives, anxious to protect a lucrative new business, are battling on legal, legislative and regulatory fronts. They’ve hired lawyers, lobbyists and public relations experts to try to convince the governor’s office and lawmakers that they have come up with a practical alternative to a $29-billion-a-year workers’ comp system that is widely criticized as broken.

The Fort Independence Indians say their approach can save employers money on insurance premiums while providing workers with first-class benefits by reducing fraud, cutting down on paperwork and removing lawyers from the claims-appeal process.

“Frankly, we think we can provide a viable model,” said John Peebles, the tribe’s lawyer in Sacramento.

The tribe, through a reservation-based company called Independent Staffing Solutions, “leases” workers to small businesses. That enables the businesses to save money by having a third party take care of many worker-related tasks, such as processing payroll checks, paying taxes and handling claims from injured workers.

And the premiums for the workers’ comp insurance that Independent Staffing provides for the leased workers are 20% to 50% below those charged by traditional insurers or the state-run insurance pool. Those savings are a powerful lure to small businesses whose workers’ comp premiums have doubled or tripled over the last four years.

Independent Staffing says it has 125 clients that employ 3,000 to 4,000 workers around the state in high-risk, hard-to-insure businesses, mainly in construction-related trades.

Buying workers’ comp coverage as part of the tribal employee-leasing program has helped Mission Steel Inc. keep its doors open, said Donna Bradford, an executive at the Fontana metal fabricator.

The small company had a hard time getting coverage from a state-licensed company before its insurance broker suggested a tribal policy eight months ago.

“We’ve been very happy with the results,” she said of the policy from Independent Staffing Solutions. “They provide the same benefits as workers’ comp.” Bradford said she wasn’t aware that state labor inspectors might consider the coverage illegal.

State officials contend that Indian-provided coverage clearly violates laws requiring employers to provide proof of coverage from a state-licensed insurance company or, alternatively, to present a certificate that they meet state financial requirements to be self-insured.

Tribal providers are careful not to describe their products as actual workers’ compensation insurance, given that they lack the backing of state-licensed insurance companies. They refer to their coverage as “occupational indemnity, medical benefits through a tribal staffing model.” The distinction is lost on most potential customers, regulators contend.

What’s more, regulators note, Indian programs do not participate in a state-backed pool that ensures sufficient funds are available to pay benefits to injured workers if their employer’s insurance company becomes insolvent. Tribally covered workers also do not enjoy the same rights to legal representation or to take appeals for denied claims to the state Workers’ Compensation Appeals Board, state labor regulators point out.

The Indian tribes and their business associates contend that treaties with the U.S. government and decades of legal precedent establish that the tribes are independent, sovereign nations and free from regulation by the state of California.

“We wouldn’t be doing this if it wasn’t legal,” said John Bracken, vice chairman of the Fort Independence tribe and chief executive of 6-month-old Independent Staffing. “We’re just exercising our sovereign rights laid out under the Constitution of the United States.”

It’s a familiar argument in California, where Indian tribes negotiated a deal in 1999 with the state to operate lucrative tribal casinos. But the gambling agreement doesn’t give Indian tribes carte blanche to operate off-reservation businesses beyond the reach of state regulators, said the Department of Insurance’s Whitfield.

“The ultimate issue here is, can the Indians provide an alternative to workers’ compensation to Mike’s Pizza in El Segundo?” Whitfield said. “And the answer is no.”

The Fort Independence enterprise is the latest of three such programs to surface in California in the last year, regulators say.

State Insurance Commissioner John Garamendi shut down one operator, a Nebraska-based employee-leasing company called First American Staffing, in December. His order accused the company of selling workers’ comp insurance in California without a license.

First American claimed to be operated by Nebraska Indian tribes, Whitfield said. Mark Hubble, an administrator of a company linked to First American Staffing who was named in the department’s complaint, couldn’t be reached for comment.

Another tribe selling workers’-comp-like coverage, the Blue Lake Rancheria Indians, sued the state in state court in Sacramento last November, accusing regulators of violating the tribe’s sovereign immunity.

The Blue Lake operation, called Mainstay Business Solutions, appeared on regulators’ radar last fall when state labor and insurance investigators were tipped off that an International House of Pancakes franchisee had signed up for the Humboldt County tribe’s insurance program.

The Department of Industrial Relations, which enforces California’s workplace laws, charged the restaurant owner with failing to provide workers’ comp coverage. (Glendale-based IHOP Corp. wasn’t party to the complaint against its franchisee.) Inspectors temporarily shut the franchisee’s nine restaurants in Sacramento and Fresno until he bought a policy from a state-licensed workers’ comp insurer.

State officials say they understand why employers might be tempted by low-cost insurance offered by tribal companies.

“The cost is going through the roof,” said Linda Peters, an attorney for the Department of Industrial Relations. “Certain people who are not tribal members see this as a loophole in the state’s workers’ compensation law.” But she warned that employers could be hit with heavy fines or could be shut down by the state if regulators determine they are in business without state-sanctioned workers’ comp policies.