State workers’ comp fund directors quit

Two directors of the State Compensation Insurance Fund have resigned amid concerns about possible conflicts of interest, the board chairwoman said Wednesday.

The resignations followed questions about whether the men should be fund directors at the same time that their insurance firms were collecting millions of dollars in fees from the fund.

“The potential of a conflict of interest is a problem,” said Chairwoman Jeanne Cain, a top official at the California Chamber of Commerce. “I recommend that we don’t have these kind of appointees” in the future.

State Fund is the largest insurance provider in California, issuing $6.1 billion a year in policies, and handles workers’ compensation injury claims from state government employees. It also is the largest workers’ comp carrier in the nation.

Resigning from the board were Frank DelRe, 59, president of Western Insurance Administrators Inc. of Long Beach, and Kent Dagg, 55, executive director of the Shasta Builders Exchange in Redding.

DelRe was appointed in 2003 by Gov. Gray Davis. Dagg was appointed in 2004 by Gov. Arnold Schwarzenegger. Neither DelRe nor Dagg returned telephone calls requesting interviews.

Cain said each man cited personal reasons for submitting his resignation, one in late October and the other this month. She said she didn’t specifically ask for the resignations.

The two resigned after discussing perceptions of possible conflicts of interest with the governor’s office, said officials in the Schwarzenegger administration. The officials asked to remain unnamed because personnel matters were involved.

The state-run fund and its five-member board have been the focus of attention all year from the governor’s office, the Legislature, the state auditor and the insurance commissioner.

State Fund must have a board that is “independent, vigilant, curious, questioning and, above all, cannot be compromised,” California Insurance Commissioner John Garamendi said. “It is far too important to the economy of California.”

The quasi-public, nonprofit State Fund serves as a workers’ compensation insurer of last resort for employers who have difficulty getting coverage from insurers in the private sector.

At issue with the two board members were “administration fees” paid to their companies. Both men run organizations that form groups of businesses to buy workers’ comp insurance jointly.

DelRe’s and Dagg’s companies do extensive business with State Fund, which compensates them for placing millions of dollars’ worth of workers’ comp insurance policies with the fund on behalf of small and medium-sized employers.

In July, the board voted to hike brokers’ commissions to encourage them to funnel more relatively low-risk group policies through associations like those operated by DelRe and Dagg.

An increase in sales generated by such associations would directly benefit DelRe’s and Dagg’s companies, which are paid fees of as much as 3% of the value of an employer’s workers’ comp premium.

DelRe’s Western Insurance Administrators “is State Fund’s largest group program manager with over 25,000 employers participating in our various groups,” according to its website.

Dagg’s Shasta Builders Exchange arranges workers’ comp coverage for hundreds of Northern California companies.

State Fund, which was created by the Legislature in 1914, says it insures about 232,000 employers “from small businesses to large group associations.”

In recent years, State Fund has grown tremendously, gaining close to a 60% market share in California. With the expansion, the fund came under greater scrutiny, even while cloaking its operations in secrecy.

The agency -- a hybrid of a state agency and a private company -- operates behind closed doors and rejects the idea that it is subject to the state’s public record and open meeting laws, even though its board is appointed by the governor and its workers are state civil servants.

The involvement of DelRe and Dagg in board decisions that affect their companies’ bottom lines long has been troublesome, said Insurance Commissioner Garamendi, who has been jousting with State Fund for much of his four years in office.

“The common interests of all employers are perhaps not forefront in the minds of board members who are dependent upon [State Fund] for their income. Therefore the independence of the board is compromised,” he said.

Garamendi, the Democratic lieutenant governor-elect, noted that DelRe and Dagg were not the first people who did business with State Fund while sitting on the board of directors. He urged Schwarzenegger and future governors to avoid appointing directors with real or perceived conflicts of interest.

Steve Poizner, the Republican insurance commissioner-elect who will succeed Garamendi on Jan. 8, said he was “a proponent of increased transparency for the State Compensation Insurance Fund” and stressed that it “must be managed with the utmost integrity.”

Another official who has tussled with State Fund, state Sen. Jackie Speier (D-Hillsborough), called the DelRe and Dagg resignations “wise.” Putting vendors on the board of directors “screams conflict of interest,” she said. “Whether perceived or real is irrelevant at this point.”

Top executives from private-sector workers’ comp insurers said they hoped that the resignations would spur greater disclosures at State Fund.

“They play it both ways,” said Stanley R. Zax of Woodland Hills-based Zenith National Insurance Co., the state’s largest private-sector workers’ comp company. “If you’re not subject to open meetings laws, you could argue that you should be subject to the same disclosure that the Securities and Exchange Commission requires of corporate officers and directors.”

marc.lifsher@latimes.com