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Insurer Hit With $20-Million Punitive Verdict : Courts: Los Angeles jury finds that state workers compensation insurance fund in effect overcharged on premiums.

August 19, 1995|THOMAS S. MULLIGAN | TIMES STAFF WRITER

A Los Angeles jury hit California's largest workers compensation insurer with a $20-million punitive verdict Friday, finding that the State Compensation Insurance Fund in effect systematically overcharged on premiums.

The verdict is one of the largest such penalties in California and believed to be the first of its kind in a workers comp case here.

For thousands of California employers--especially small businesses unable to find workers comp coverage elsewhere--the court action could result in significantly lower rates, say lawyers who brought the suit on behalf of a small chain of grocery stores.

"This is a company that for seven years has done whatever it wanted to do," Nicholas P. Roxborough, a lawyer for the stores, said of SCIF. "The only thing it understands is money, and we hope this verdict gets its attention."

The judge in the case issued a permanent injunction Friday ordering SCIF to change the way it deals with its customers--some 250,000 companies, or nearly half of all California employers.

SCIF vowed to appeal, calling the verdict and the injunction "a gross miscarriage of justice."

SCIF is a nonprofit public agency that is the insurer of last resort for employers that conventional carriers consider too risky. It also covers many firms that could find alternative insurers.

The grocery chain, Los Angeles-based Notrica's 32nd Street Markets, contended during the four-week trial that SCIF deliberately overestimated the future cost of on-the-job injury claims in the stores. That caused Notrica's insurance bills to jump and hurt its ability to shop for other insurers because the high claims-loss reserves made it look like a bad risk.

Notrica's attorneys argued that SCIF uses the same over-reserving method statewide, which they said has cost California employers an extra $750 million in premiums since the big insurer adopted the practice in 1989.

Notrica attorney Roxborough said other employers also are planning to file suit against SCIF.

Superior Court Judge James A. Satt, in his injunction, ordered SCIF to return to its pre-1989 claims-reserving method and to undertake other reforms.

The injunction itself is illegal, SCIF spokesman Frank Floyd said, because California law gives the insurance commissioner--not the courts--authority over how insurers calculate their reserves.

The chief counsel for Insurance Commissioner Chuck Quackenbush said he had not read the decision and had no comment.

And contrary to the plaintiffs' contention, Floyd denied that the order would mean a windfall of lower premiums for employers. Although the jury believed otherwise, SCIF maintains that it never did change its reserving practices but simply attempted to clarify them in 1989, Floyd said.

Friday's action followed an initial verdict on Monday, in which the jury, on a 9-3 vote, found that Notrica's had been overcharged by $478,606. SCIF was ordered to pay that amount--minus $152,611 in premiums that Notrica's had withheld during the dispute. The jury, after three more days of deliberation, tacked on the $20 million in punitive damages Friday.

Notrica's contended at trial that the unfair reserving method was imposed July 1, 1989, at the behest of John A. (Jack) Webb, SCIF's then-president, who foresaw that California one day would deregulate workers comp rates and spur a possible price war among insurers.

To hang on to customers, SCIF would have to meet its rivals' price cuts even if it meant losing money, Notrica's attorneys told the jury. You cannot wage a price war without a war chest, so SCIF began fattening its bank account by over-reserving, which in turn pumped up premiums, the lawyers said.

Suddenly, Notrica's found that claims for even minor injuries were triggering mammoth loss estimates, its suit contends. Roxborough cited the example of a Notrica's employee who hurt his shoulder. Although the worker was willing to settle his claim for $4,000, SCIF carried it on the books as a $28,000 potential loss, Roxborough said.

Webb, who retired as SCIF president April 1, could not be reached for comment Friday.

During the trial, SCIF attorneys said the insurer was trying to boost its reserves because they were considered too low by industry standards, thus leaving the insurer vulnerable to unexpectedly high claims. SCIF contends that its premiums are fair, saying it's been able to hang on to customers after price deregulation finally arrived Jan. 1, increasing competition.

K.C. Bollier, SCIF president, said in a statement Friday that the punitive judgment would only hurt policyholders.

"The decision if allowed to stand would take money from our policyholders' pockets and provide an unwarranted windfall to a single disgruntled employer which we served properly throughout the coverage period," he said.

However, the $20-million judgment is small compared to SCIF's annual premiums of about $2 billion, so it is unlikely to have a noticeable impact on premiums.

Under state law, punitive damages are supposed to be borne by a company's stockholders--reducing dividends on their shares--and not passed on to policyholders through higher rates. But SCIF officials pointed out that since SCIF is nonprofit and public, its dividends go to the policyholders.

Michael J. Bidart, another of Notrica's lawyers, acknowledged that the punitive damages will go to his client and not to all policyholders. He said, however, that after adopting the over-reserving method, SCIF had actually reduced the ratio of dividends it was returning to policyholders.

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