State Fund Wins Major Workers’ Compensation Class Action Suit

June 23, 2003

State Compensation Insurance Fund has won a final decision in the largest and longest-running class action lawsuit in the 89-year history of California’s workers’ compensation system. San Francisco Superior Court Judge John Munter’s final ruling rejects all claims sought by plaintiffs – who sought more than $1.1 billion in damages – and validates the claims reserving and business practices of State Fund, California’s largest workers’ comp carrier.

Plaintiffs in the case – A & J Liquor Co. Inc., et al vs. State Fund – alleged that State Fund adopted and implemented from 1989 through mid-October 1995 an unlawful claims reserving standard – “maximum probable potential” – and thereby overcharged and damaged 163,900 policyholders who entered into or maintained a workers’ comp insurance contract with State Fund between Jan. 1, 1987 and Dec. 31, 1994 and who were eligible for experience rating or group dividends.

Stating that State Fund always acted in “good faith,” the judge rejected the plaintiffs’ allegation that State Fund “overreserved” and inflated surplus to build up a “war chest” to compete for market share against private carriers in California’s $15 billion workers’ comp marketplace.

“At all relevant times and in all material respects, State Fund’s management acted in good faith toward its policyholders with respect to the matters of reserving, dividends, and premiums,” wrote Munter in his 117-page final decision. Munter concluded that “the plaintiffs have failed to prove that there has been a breach of the implied covenant of good faith and fair dealing; or that there has been a breach of contract; or that there has been fraud or deceit; or that there has been violation of California’s unfair competition law. Likewise, on each of these theories of recovery, plaintiffs also have failed to prove causation and damages.”

Munter ruled that plaintiffs “shall recover nothing” and that State Fund may request an award of the costs of the suit that was filed on Feb. 9, 1996. Plaintiffs’ attorneys included attorneys William Kershaw, Lyle Cook, Donald Carlson and Drew Pomerance.

“Judge Munter delivered justice for State Fund, its policyholders and California’s workers’ compensation insurance system,” said State Fund president Dianne C. Oki. “The decision also validates that State Fund always acts with integrity in all aspects of its business.” Oki added, “For 89 years, State Fund has protected the interests of California’s employers, their injured workers, California’s workers’ compensation insurance system and its economy. We are obviously elated with this decision which is a significant victory for all Californians.”

The plaintiffs, A&J Liquor Co. Inc., Mac’s Radiator Service Inc., D&L Automotive Repair, Ira Newman Inc., and U.S. Guards Company Inc., filed the class action against State Fund individually and on behalf of all “similarly situated” companies.

In the last year, plaintiffs’ counsel informed legislators that State Fund would lose the case and predicted that the State of California would ultimately have to pay the aggregate damages up to $2 billion. Consequently, the case was closely watched by the Legislature, the California Department of Insurance, employers and the workers’ comp industry.

The trial lasted 113 days and included more than 1,200 exhibits.

The Business Trial Practice Group of the law firm of Sheppard, Mullin, Richter & Hampton LLP – headed by Gregory Long, Fred Puglisi, Jim Burgess, Justine Casey and Phil Atkins-Pattenson – led the defense of State Fund in the seven month trial.

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