Insurance company hit with $20 million verdict.

A Los Angeles jury recently ordered California's largest workers' compensation insurer to pay a $20 million punitive damage award to one of its former clients, a small chain of grocery stores in Southern California. The jury found that the State Compensation Insurance Fund ("SCIF") deliberately "over-reserved" for workplace injuries at Notrica's 32nd Street Markets, causing a significant increase in the chain's premiums and hurting its chances to look for another insurer (since the high reserves created the impression that the employer was a bad risk). In addition, the judge in the case issued a permanent injunction ordering SCIF to reform its claims reserving method. Notrica's 32nd Street Market v. SCIF, No. BC016464, L.A. Superior Court (August 18, 1995).

The implications of this ruling for California employers are twofold. First, the decision demonstrates the importance of employers being aware of and exercising their rights (many of which stem from the recent reforms of the workers' compensation system). Second, because of this result insurers may be more hesitant to settle claims filed by injured workers, which stands to benefit employers.

Case Background

Notrica became insured by SCIF in 1988. In 1989, according to Notrica, SCIF began to estimate its claim files (and thereby establish reserves) based on the "maximum probable potential" of a claim, rather than its previous "reasonable" or "realistic" standard. This practice, Notrica alleged, resulted in the overestimation of the future cost of workplace injuries and thus "over-reserving."

Because of this over-reserving, Notrica contended that its workers' comp premiums increased by hundreds of thousands of dollars during the policy years of 1990 through 1993. Further, Notrica claimed that to avoid exposure of its practice, SCIF refused to allow it (or a company it had hired to manage its workers' comp claims) access to workers' files.

At Trial

Notrica alleged that the over-reserving was part of a plan orchestrated John A. Webb, the president of SClF at the time. According to Notrica, in 1989 Webb foresaw the possibility that workers' comp rates would be deregulated in California, causing a price war among insurers. To ensure its ability to compete in this price war, Notrica alleged, SCIF began to fatten its bank account by over-reserving (which in turn boosted premiums).

SCIF contended that the method it used to handle claims was reasonable and consistent with other insurers in the industry. Further, SCIF claimed that its change in the reserving standard in 1989 was not actually a modification, but rather a semantical "tweaking" of the language in the claims-estimating manual. Finally, SCIF argued that its refusal to provide access to claim files was based on a legitimate need to protect the privacy rights of injured employees and that its refusal to deal directly with third party representatives was to avoid having information passed on second hand.

The jury agreed with Notrica, finding that it had been overcharged by $478,606. After three more days of deliberation, the jury ordered that SCIF pay $20 million in punitive damages. In addition, the judge ordered that SCIF return to its pre-1989 claims-reserving method and undertake other reforms.

SCIF has stated that it will appeal, calling the verdict and injunction "a gross miscarriage of justice." According to SCIF, the injunction is illegal because state law gives the insurance commissioner, not the courts, authority over how insurers calculate their reserves.

Employer Rights

This ruling, combined with recent legislative reforms, place California employers in a position to exercise some control over their workers' compensation premiums. The first step to cost savings, however, is being familiar with the key provisions contained in the so-called Employer Bill of Rights, passed in 1993. These measures are designed to improve communication between employers and their insurance carriers and to involve employers in issues that directly affect their premiums.

Cancellations

An insurer must provide 10 days written notice of cancellation of a policy for 1) failure to pay a premium when due; 2) failure to report payroll; 3) material misrepresentation by the employer; or 4) failure to cooperate with a claims investigation. An insurer must provide 30 days written notice of cancellation of a policy for: 1) failure to comply with safety standards or written recommendations of a loss control representative; or 2) a material change in ownership or operations that alters the nature of the risk.

Information & Assistance

The Workers' Compensation Insurance Rating Bureau must establish a "policyholder ombudsman" who will assist employers in obtaining and evaluating information that impacts their rates/premiums and who will represent employers in disputes with the insurer.

Insurers must provide written notices to policyholders with policies written or renewed on or after January 1, 1994, that state employers' rights to: 1) obtain written policy information and contact the ombudsman for assistance; 2) obtain an explanation of dividend information for participating policies; and 3) know the date the first unit statistical report will be filed. Insurers must also provide a written summary of the rating law changes enacted.

Disputed Claims

The employer must provide written notice to its insurer whenever it has actual knowledge of facts disproving an employee's claim. If an employer believes no compensation is payable and advises the insurer and the Workers' Compensation Appeals Board in writing, the insurer must give the employer 15 days prior notice of any hearing at which a settlement is to be approved.

Claim Reserving and Claim Files

The insurer must provide a written report of case reserves upon the request of the employer. In addition, upon request, the insurer must discuss with the employer "all elements of claims file... that affect the employer's premium" and provide copies of file documents that affect the employer's premium.

Case Impact

The ruling in Notrica's 32nd Street Market v. SCIF places insurers in a very difficult position. If the insurer fails to promptly pay benefits owed to an injured worker, the company could be hit with fines and ordered to pay additional monies to the injured employee. If, on the other hand, the insurer settles the claim and the employer disagrees with this decision, the insurer could find itself defending an expensive lawsuit.

In balancing these alternatives, it seems reasonable to assume that insurers will seek to avoid litigation with their policyholders (and the huge damages that could be awarded, such as in this case); therefore, insurers are likely to be less inclined to attempt to settle workers' comp claims. This stands to benefit employers, as awards issued through the workers' comp system are often less than the amount for which an insurer might be willing to settle a claim. This lesser amount, when figured into the employer's experience rating, will result in a lower workers' comp premium for the company.

Joseph L. Beachboard is an employment attorney and the President & Publisher of The California Labor Letter. Readers may receive a complimentary copy of the December issue by calling [phone] and referencing the Los Angeles Business Journal.