State-run insurer faces major changes

California’s new insurance commissioner moved quickly Tuesday to force changes at the troubled State Compensation Insurance Fund, wracked by the firing of top executives, resignations of board members, conflict-of-interest questions and reports of fiscal mismanagement.

Commissioner Steve Poizner met with Gov. Arnold Schwarzenegger for 45 minutes to outline a plan for sweeping changes less than a week after a top management shake-up at the insurer, known as State Fund. It provides workers’ compensation insurance for 230,000 California employers.

“I have the clear authority to instruct any insurance company, including the State Fund, to make these changes if I come to the conclusion that policyholders could be at risk,” Poizner said. “I have enough data to take these actions.”

Problems at the state government-controlled fund have been unfolding for months. In November, two board members resigned under pressure amid conflict-of-interest allegations.

State Fund Chairwoman Jeanne Cain said Tuesday that the San Francisco-based insurer would welcome Poizner’s ideas.

A state Senate committee has called a hearing for today on the results of an external audit that uncovered lax accounting and mismanagement and led to the firings last week of State Fund President James Tudor and Vice President Renee Koren.

State Fund’s new interim president, veteran insurance consultant Lawrence Mulryan, has submitted the review’s findings to the California attorney general’s office, which is evaluating the documents.

After the meeting, Schwarzenegger said he agreed that State Fund’s new leadership and its board “should work together with the insurance commissioner to restore confidence in the fund and make sure the board operates with the integrity the public expects,” a spokesman said.

Poizner laid out to the governor his plans to tighten management at the $6-billion company, the nation’s largest workers’ compensation insurance carrier.

Poizner said he would conduct a “top-to-bottom” audit and would seek the prompt dismissal or suspension of all executives who had knowledge of any improper payments.

He is proposing increased oversight powers for the fund’s five-member board, creation of a board audit committee and the hiring of a chief financial officer and a chief investment officer.

The commissioner has also directed his fraud investigators to work with the attorney general’s office to look for evidence of possible criminal activity at the agency.

“I’m very surprised that the largest workers’ compensation company in the nation is missing basic protections that any large organization would have to ensure that governance is strong,” Poizner said.

The sweeping changes called for by Poizner represent one of his first major initiatives since he took office in January.

The board’s external review of State Fund’s operations uncovered financial practices involving the sale of discounted policies sold through outside associations with links to former board members.

Numerous people familiar with the investigation said the questionable payments could involve hundreds of millions of dollars over the last decade.

The nearly century-old fund serves as insurer of last resort for small- and medium-size companies that have difficulty buying insurance from the private market.

Workers’ compensation insurance pays for medical care and disability benefits for employees injured on the job.

Keeping the fund healthy is crucial to the state’s economy, Poizner said.

“The State Fund still provides close to 40% of all workers’ compensation policies in the state and has a $20-billion investment portfolio,” he said.

“It is the market leader,” Poizner added. “It impacts every workers’ compensation insurer, every employee and every business in the state of California.”

The fund board’s external review, done by Clarence & Dyer, a San Francisco law firm specializing in financial crime investigations, convinced board members that “a leadership change is in the best interests of the organization and, most importantly for our policyholders,” said Cain, a top official at the California Chamber of Commerce.

Cain plans to brief the Senate Banking, Finance and Insurance Committee today on conditions that led to a managerial breakdown while the outside examiner, Nanci Clarence, will spell out the audit findings that led to Tudor’s firing.

Interim State Fund President Mulryan is expected to propose an operational and ethical overhaul.

Cain said Poizner’s plans for reform had “the same objectives that the board is supporting, so we look forward to working with him in the coming weeks and months.”

marc.lifsher@latimes.com