Insurers begin fleeing Southland to escape fraud; they shift focus to lower-risk Northern California.

Workers' compensation claims filed by Southern California workers have grown so onerous that some insurers are now curtailing their Los Angeles operations.

But Insurance Commissioner John Garamendi has sent down word that fraud prosecutions are on the rise, hoping to dam the flow of workers' comp insurers out of Southern California. Even so, some of the major workers' comp insurance writers are downsizing here.

In Southern California, workers' comp insurers reported they must pay out claims equal to 90 percent of premiums collected, while in Northern California they only pay out about 75 percent.

Late last month, ITT Hartford Insurance Group of Hartford, Conn., announced it would not reissue workers' comp policies to 3,450 businesses in Southern California. Those businesses pay ITT Hartford a combined $19 million in annual workers' comp premiums, said Jack Daley, an assistant vice president at ITT Hartford.

"We are committed to being a strong competitor in California. But our workers' compensation losses have become so high in Southern California, we have decided to trim our operations there and increase our market share in Northern California," Daley said.

As of Oct. 31, ITT Hartford had $200 million of workers' comp insurance in force in California. So far this year, the insurer has referred 750 suspected fraud cases to the State Insurance Commission, and most of those cases came from Southern California, Daley said.

"We are investigating another 1,075 cases on our own," he added.

Woodland Hills-based Transamerica Insurance Co. is also cutting back on its volume of workers' comp policies in Southern California. Transamerica officials said their decision was based on a conclusion that workers' comp fraud cases are taking too long to get to court.

"We saw the problem getting out of hand a year ago and started reducing the amount of workers' compensation insurance we write in Southern California," said Russ Faukes, vice president and Los Angeles center manager for Transamerica.

"A year ago, Transamerica had $110 million per year of workers' compensation insurance in force in the six Southern California counties," Faukes reported. "By the end of 1993, we'll reduce that to $50 million per year."

Transamerica maintains claim-investigation divisions in both Woodland Hills and Costa Mesa. But those divisions have been unable to sufficiently expedite prosecution of the skyrocketing number of Southland workers' comp cases.

"The District Attorney's office is inundated with so many cases, it is paralyzed," Faukes lamented.

California Indemnity Insurance, formerly of Burbank, moved its headquarters to Pleasanton, Calif. last July. It suffered combined losses of more than $40 million in the first nine months of this year, largely due to extensive claims in the Southland.

With the California Indemnity's decision to move north, its losses seem to be subsiding. It suffered a first-quarter net loss of $26.37 million. But net losses were trimmed to $11.03 million in the second quarter, and trimmed to $4.17 million in the third quarter.

California Indemnity chairman and president Joseph G. Havlick said in a prepared statement that his company's strategy is to keep reducing the number of workers' comp policies it writes in Southern California so it can return to profitability.

Despite the withdrawal or downsizing of many workers' comp insurers in Southern California, their competitors, such as Farmers Insurance Co. and State Farm Insurance, have avoided taking on more of the action due to reports of higher fraud in Southern California.

Spokesmen from Farmers and State Farm said workers' comp premiums account for roughly 3 to 4 percent of their companies' total premiums. Neither company plans to go after more workers' comp business, they said.

As more insurers cut back on worker's comp coverage, the burden gets heavier for the State Compensation Insurance Fund, the state-owned insurer of last resort.

To help curtail fraud before it drives more of insurers out of California, the State Department of Insurance now requires all workers' comp writers to have an in-house investigation department and encourages them to go after fraud perpetrators.

"In the 13 years before 1991, there was a total of 527 cases of suspected fraud reported," said Elena Stern, a spokeswoman for Insurance Commissioner John Garamendi. "This year, we're getting reports of 1,000 cases per month."

The state-owned State Compensation Insurance Fund collected $1.89 billion of the total $8.70 billion premium collected for workers' compensation insurance in California in 1991. That compared to $355.96 million for its closest competitor, Republic Indemnity Co. of America, according to the 1991 underwriters report of the San Francisco-based California Workers' Compensation Institute.

The State of California could find itself in a pickle if it ends up taking on more and more of the workers' comp business. That is because it would be on the hook for an increasing number of long-term disability payments, as well as payments for immediate treatment and suffering.

Ron Christensen, a spokesman for the San Francisco-based State Compensation Insurance Fund said the state-owned insurer's share of the Southern California market increased 8 percent in the first 10 months of 1992, as other carriers cut down their exposure.

Christensen insisted he isn't worried about the state fund having too much of the market, even though its market share increased from 21.94 percent at the end of 1990 to 22.27 percent at the end of 1991. He predicted the state fund's total premium may actually drop in 1992 because so many Los Angeles County businesses have downsized their work forces, leaving fewer workers to file claims.

California is trying to avoid the dilemma being experienced by neighboring Nevada. Many sources said Nevada has taken on too much of that state's workers' comp business. Nevada's state-owned insurer, the State Industrial Insurance System, is the sole provider of workers' comp policies in the state, except for self-insured plans. The state system's claims increased 5 percent in the past year, from $325.23 million in fiscal 1991 to $341.72 million in fiscal 1992.

As a result, Nevada's workers' comp system is eating away at its $566.31 million in reserves. Without some type of reform, the system won't be able to pay claims by the mid-1990s, said Fred Hinners, a spokesman for the Carson City-based department.

As things stand, Nevada has unfunded liability of $1.45 billion. In other words, the projected lifetime pay-out for already injured individuals covered by the plan is three times as large as the state's reserves, Hinners said.

"We have to have a major change in the workers' compensation laws in Nevada, or the reserves will run out," he said.

By comparison, California's system seems to be holding its own. Workers' comp providers here collected $8.7 billion in total premium in 1991 and paid out $6.9 billion in claims, according to state insurance records.

But if the State Compensation Fund of California keeps taking on a greater share of the business, and liability, it could face problems similar to Nevada's, warned Richard Wiebe, a spokesman for the American Insurance Association.

Wiebe recommended a different approach to solving the workers' comp problem.

"The actual benefits for the workers should be increased," Wiebe asserted. "The vocational rehabilitation system (for injured workers) is also wasteful. It isn't putting people back to work."

Even some workers' comp attorneys admitted that a disproportionate amount of fraud is being committed in Southern California, and only a few cases investigated can be brought to trial because the courts are so overcrowded.

Lloyd Rowe, president of the Los Angeles-based California Applicants' Attorneys Association, charged that part of the problem is that insurance companies haven't challenged enough of the suspect claims.

Glendale-based Fremont Insurance Co. would not likely be among those accused of not challenging suspect claims aggressively enough, however.

"We provide workers' compensation insurance for 10,000 employers from Ventura to Orange counties," said James E. Little, president and chief executive of Fremont. "We have four full-time investigators and three clerical employees to support them. For 1992 to date, we have gained convictions in all 16 workers' compensation fraud cases we prosecuted. Arrests were made in all 16 cases."

"We are spending $1 million on advertising in the next year," Little continued. "We are buying 500 billboards throughout the state; advertising in newspapers to tell people we have prosecuted the fraud cases."

Evidently, Fremont's investigative program has merit. Little boasted that the company had a 32 percent reduction in claims for the first 10 months of 1992, compared with the like 1991 period.

In some cases, doctors diagnosing injured workers are getting more money from the workers' comp system than the workers themselves, groused Rowe of California Applicants' Attorneys Association, a group of 1,000 workers' comp attorneys.

Other labor attorneys laid the blame on the California Legislature's failure to pass some type of tort reform bill.

Gov. Pete Wilson claimed he had the answer to workers' comp reform in October, and called a special session. But Assembly members decided Wilson's proposal needed strengthening, and they made some changes.

Once the changes were made, Wilson threatened to veto the bill if it passed, and it quickly died. Nearly two months later, state legislators and insurance companies are both promising that another workers' comp bill will be introduced in the upcoming legislative session, according to Jim Lewis, spokesman for House Speaker Willie Brown, D-San Francisco.

Labor attorney Royal F. Oakes, a partner in the Los Angeles law firm of Barger & Wolen, assessed the core problems that any reform legislation will need to address.

"California's workers' compensation insurance system is plagued by fraud and groundless claims," Oakes said. "There are all types of cases filed by workers who say their disability is caused by stress from work, but most of it is from non-work stress."