California Insurance Chief Poizner Sues to Block Workers’ Comp Fund Sale

August 28, 2009

In a move that was not completely unexpected, California Insurance Commissioner Steve Poizner announced that he will file a lawsuit to have the $1 billion sale of State Compensation Insurance Fund (SCIF) assets declared unconstitutional.

Poizner said the transaction could lead to skyrocketing workers’ compensation insurance costs for California’s construction firms, agricultural industry and other small businesses.

“In these tough economic times, the state should be doing everything possible to create jobs, not use budget gimmickry to hurt the economy,” Poizner said in a press release. “The Schwarzenegger Administration simply got it wrong with their proposal and the Legislature failed to adequately scrutinize the consequences.”

The sale of part of the fund came about as part of an effort to pass a state budget that was seriously late and in the red. The budget, which was passed last month, authorizes the state Department of Finance to sell or otherwise dispose of assets and liabilities belonging to SCIF with the intent of raising $1 billion in general fund revenue.

The state constitution requires the Legislature to enact “appropriate legislation” to establish a “complete system of workers’ compensation,” Poizner said. The system specifically includes SCIF as a self-supporting entity whose assets must be devoted solely to providing compensation to injured employees and their dependents. Selling SCIF’s assets for the purpose of benefiting the General Fund is not “appropriate legislation” and therefore violates
the constitution.

Governor Arnold Schwarzenegger’s office told newspapers the sale was legal and appropriate.

But, others weighed in supporting Poizner’s action.

“Selling SCIF at fire-sale prices could further destabilize the workers’ comp market in California, and Commissioner Poizner is right to demand a halt to the governor’s plans,” said the Los Angeles-based group Consumer Watchdog, in a statement.

One of the primary roles SCIF plays in the workers’ compensation insurance market is to be the insurer of last resort, Poizner said. Many employers who hire workers in dangerous occupations – such as roofers, construction workers, agricultural workers, etc. – have difficulty in finding workers’ compensation insurance in the private market because of the nature of the work these occupations perform and therefore they are forced to purchase insurance from SCIF.

Construction and agricultural workers are SCIF’s two largest industries, representing 27 percent of their business.

In addition, many newer small businesses that have yet to establish a safety track record are also compelled by the market to purchase workers’ compensation insurance from SCIF. Of SCIF’s 200,000 policyholders, nearly 75 percent are small businesses that have less than $5,000 in premiums per year.

Overall, SCIF sells nearly one out of every five workers’ compensation insurance policies in the state.

SCIF has been raising rates faster than the rest of the workers’ compensation insurance market. In the last year, it has raised rates by 25 percent.

Experts at the Department of Insurance predict that the sale of SCIF assets will incur the risk of not having enough funds left to pay the remaining liabilities and as a result cost each of its 200,000 policyholders thousands of dollars in additional premiums, Poizner said.

The lawsuit is expected to be filed in Sacramento County Superior Court in the coming days.

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