Court Rules Against State Fund in Schaefer Ambulance Case

Seven years after an initial lawsuit was filed, the California Supreme Court made a ruling unfavorable to the California State Compensation Insurance Fund (SCIF) in the case of State Compensation Insurance Fund, Petitioners, v. The Superior Court of Orange County, Respondent; Schaefer Ambulance Service Inc., et al., Real Parties in Interest.

The basis of the court’s ruling, filed on Feb. 1, 2001, was its interpretation of the language and scope of a statute, specifically “whether a workers’ compensation insurer is immune from civil liability under Insurance Code section 11758 for allegedly misallocating an insured employer’s expenses and reporting that misinformation to a ratemaking organization, resulting in higher premiums for its insured.”

“What was determined was that you can bring civil claims,” explained one of the attorneys who represented SCIF, Paul E.B. Glad of Sonnenschein, Nath & Rosenthal.

The appellants interpreted 11758 as meaning that disputes regarding the pricing of insurance or insurance rating had to be brought before the insurance commissioner or the Workers’ Compensation Insurance Rating Bureau [WCIRB]-not the civil courts. “Had we been successful, it would have meant that you couldn’t bring a civil action to attack rating and pricing decisions,” Glad said.

Glad maintained that dozens of such civil suits have been filed. In some of those suits, the 11758 argument was successful, but in a majority of the cases, the courts did not recognize the argument. “Had the Supreme Court gone the way we felt it should have, then in all of these cases, the courts would have been directed to allow this to proceed exclusively before the administrative body rather than in the civil courts,” he said.

The firm of Roxborough, Pomerance, Gallegos & Nye LLP, alleging that SCIF had misallocated and misreported insureds’ defense medical-legal expenses to the WCIRB, filed a class action lawsuit in February 1994 on behalf of Schaefer Ambulance Service Inc., Sectran Security Inc. and Universal Courier Ltd. (collectively Schaefer). Declaratory relief, compensatory and punitive damages, attorneys’ fees and costs were sought.

According to the high court’s ruling: “Schaefer asserts that section 11758 grants immunity only for antitrust on concert of action claims, not claims that an insurer engaged in unilateral misconduct. Along these lines, it disagrees with SCIF that this is a ratemaking case; rather it is simply a garden variety bad faith insurance dispute.”

“In our view, it’s going to trial on behalf of the tens of thousands of [SCIF] policyholders who had their premium artificially increased by [SCIF’s] bad faith conduct,” said Drew E. Pomerance, one of the attorneys representing Schaefer.

“Under the rules we discovered that defense medical-legal expenses are to be treated as an item of defense expense and not a medical expense,” Pomerance continued. “The significance of that is that in the computations to determine an employer’s loss experience, indemnity and medical payments are included in that, but defense payments are not. If you’re taking an amount of money that should not be counted against an employer’s losses and now putting it in a category that does count against the employer’s losses, you’re artificially driving up the premium.”

Between 1983 and 1993, workers’ compensation insurers in California reported losses to the WCIRB in a manner set by a unit statistical plan. Losses reported on an employer’s premium were categorized as one of three: indemnity, medical, or defense expense. At that time, California had a regulated rate structure by which workers’ comp insurers had to charge specified premiums to insured employers. The way the premiums were calculated was by using a formula, or experience modification factor. WCIRB considered only financial information reported in the indemnity and medical expense columns when computing an insured’s experience modification factor.

According to the Supreme Court’s ruling: “Medical-legal reports requested by the employer or insurer that were not prepared by the attending physician are properly allocated as defense expenses.” But Schaefer alleged, “SCIF either intentionally or negligently misreported such expenses as medical expenses to the [WCIRB]. Hence, the insureds’ experience modification factor was artificially inflated, which in turn allowed SCIF to collect excessive premiums.”

According to Glad, in 1993, the California Department of Insurance (CDI) made clarifications to the unit statistical report. A wave of litigation followed. The lawsuits alleged that before the CDI changed the unit statistical report, the way that all the insurers had been reporting medical-legal costs was wrong.

“With respect to other carriers out there who misallocated medical-legal expenses like [SCIF], we did bring actions against those other carriers as well,” said Pomerance, adding that a number of those lawsuits were settled.

SCIF, the earliest defendant, maintained that under the California workers’ comp system, such a determination should be handled administratively rather than in a civil action. A lengthy and complex administrative process to have the WCIRB and then ultimately the CDI decide the proper way to allocate the expenses has also been ongoing. The Orange County, Calif., Superior Court class action was stayed pending the administrative process.

In August 1994, WCIRB ruled SCIF had improperly reported medical-legal costs as medical, not defense, expenses. Following SCIF’s appeal, that determination was upheld the following January. On May 28, 1996, an administrative judge’s proposed decision affirming the WCIRB’s ruling was adopted by the Insurance Commissioner. Subsequent appeals brought the case back into the Superior Court and eventually into the Supreme Court.

Glad concluded that had SCIF been successful with the Supreme Court, it would have brought an end to a line of litigation that has been plaguing the workers’ comp industry for some period of time. “We don’t know where this is going to go now that we have to track both civilly and administratively,” he said.

Topics Lawsuits California Carriers Legislation Workers' Compensation