Insurers stymied by stalemate on workers' comp.

Fraud, costs continue to rise as politicians fail to act

"The single most important thing that happened this year is that there was no reform of the workers' compensation system," said Stanley Zax, chairman of Woodland Hills-based Zenith Insurance Co.

It was a year in which everybody, Democrats, Republicans, business people and the general public realized that the fraud-ridden, $11 billion workers' comp system had to be reformed, Zax said.

Yet despite that recognition, 1992 was a year "full of sound and fury, signifying nothing," said Alan Tebb, president of the California Workers' Compensation Institute.

After months of negotiation and a special legislative session, the Democrat-controlled legislature was unable to work out a reform package that Republican Gov. Pete Wilson would approve.

A package authored by state Democrats, which would place caps on medical evaluation and vocational rehabilitation plans, reduce stress claims, increase workers' comp benefits and stiffen fraud statutes was vetoed by Gov. Wilson in early September.

Assemblyman Burt Margolin, D-Los Angeles, chairman of the Assembly Insurance Committee and the main author of the legislation, said the package would have saved employers $1.15 billion a year.

But that savings estimate was disputed by Lloyd W. Aubry, Jr., a Wilson cabinet member who said increased benefits paid to employees in the package would diminish any real savings. Aubry, director of the state Department of Industrial Relations, called the amount of savings that would occur after paying out the increased benefits "a wash."

And Roxanne Gould, lobbyist for the California Chamber of Commerce, said the Democrat package would actually cost employees an additional $300 million if it was enacted. It wasn't.

Calling the reform package "phony" and "fig leaf" reform, Gov. Wilson vetoed the package and called a special session of the legislature to work out a workers' comp reform package.

The special session in October was over almost before it began, when Wilson announced he would veto his own bill which was rewritten in the Democrat-controlled Assembly Insurance Committee.

The major sticking point was benefits. Wilson's package would not increase benefits until $1 billion in savings could be calculated. Margolin and other Democrats cut that to $500,000, a number unacceptable to the governor.

Margolin offered to meet with Wilson and "negotiate on anything and everything" in the package, but hope for reform this year died in October.

Although the legislature was unable to pass a workers' comp package, 1992 marked the real beginning of a war against workers' comp fraud by the state Department of Insurance and a number of private insurance companies.

This month Insurance Commissioner John Garamendi told the Business Journal that the department's ongoing battle against workers' comp fraud was "one of our greatest successes" in 1992.

"With the establishment of a new Workers' Compensation Insurance Fraud Unit within the department's fraud bureau, we are cracking down on workers' compensation fraud as never before," Garamendi said in a written response to questions submitted by the Business Journal.

The Department of Insurance, in concert with other law enforcement agencies, arrested 16 individuals for workers' comp fraud and has 300 open investigations statewide, Garamendi said.

He noted that the bureau is now receiving 1,000 suspected workers' comp fraud claims a month. Before this year, the bureau had only 527 complaints in 13 years.

But Zenith chief Zax was not impressed with Garamendi's anti-fraud action.

"He hasn't even got to the starting gate yet," Zax said. "He's not even brought one action against a major medical fraud ring."

Zenith took matters into its own hands and filed four separate Racketeer Influenced and Corrupt Organization Act lawsuits against Southland doctors, lawyers and medical clinics Zenith claims were running fraud mills. Two of the cases were settled, the comp claims against Zenith were dropped and the settlement drove one medical clinic out of business, Zax said proudly.

Zenith was not the only insurer to go after workers' comp fraud. Others, such as Transamerica Insurance Group, created fraud investigation units that saved them millions in dismissed claims.

Insurers hired detectives to investigate suspected fraud claims and then refused to pay the bills that were determined to be bogus. Many doctors, lawyers and clinics dropped claims against the insurers rather than face charges in the public light of a workers' comp hearing.

The legislature's inability to enact a reform package was the most important insurance issue in 1992 and its failure to pass a no-fault auto insurance bill was second, said Thomas F. Conneely, president of the Association of California Insurance Companies.

Failure greeted bills by a number of different legislators which would have created a new type of no-fault, basic auto insurance for Californians for $220 a year. The idea behind no-fault is that a driver's claims would be paid by his or her own insurer without regard to who was at fault in the accident, but the driver would give up rights to sue.

"It's important because many, many people are unable to buy auto insurance," Conneely said.

But the public didn't get no-fault and most didn't get their Proposition 103 rollbacks this year, either.

Four years after Prop. 103 was enacted, the Department of Insurance was still battling with insurance companies to pay the rollbacks. Under Prop. 103, insurers must pay policyholders a certain amount of the excess in premiums they were being charged four years ago.

In 1992, a few insurers, including Los Angeles-based Mercury General Corp., came forward and agreed to pay the rollbacks. But only $270 million of the mandated $2.3 billion in rollbacks has been paid.

Garamendi told the Business Journal that he hopes the department's court battle with Woodland Hills-based 20th Century Industries will that. Arguments in the case, in which the insurer is challenging Prop. 103 on a number of counts, began in December.

"Once the current hurdle has been cleared with what I believe will be a strong victory (for the state) in the 20th Century lawsuit, I am confident that more insurance companies will come forward with the rebates they owe their customers," Garamendi said.

But some insurance industry experts, including Gerald Lewinsohn, an insurance analyst with Merrill Lynch Global Securities of New York, say there's a good chance 20th Century will prevail in the case.

If insurers did not pay rollbacks this year, many had large pay-outs associated with the Los Angeles riot in April 29 which wreaked an estimated $1 billion worth of property damage. Insurers ended up paying out $775 million in claims. Los Angeles-based Farmers Insurance Group of Cos. took the hardest hit, paying out $75 million in claims.

But a more lasting effect of the riot on the insurance industry is the attention it focused on the charge that insurers "redline," or don't provide coverage in minority and low-income areas, said Patti Lombard, spokeswoman for the Western Insurance Information Service.

The riots and the fact that some claims against non-admitted carriers, or insurers not licensed by the Department of Insurance to do business in California, were not paid marked the real beginning of the department's crackdown on non-admitted carriers, Lombard said. It had taken actions against these carriers before, but the riot triggered stepped-up enforcement, he noted.

According to Garamendi, in the past two years the department has taken a lot of enforcement actions against non-admitted carriers, including issuing 50 objection letters, issuing 42 cease-and-desist orders and seizing seven unlicensed companies.

In addition to the enforcement actions, the department issued regulations which mandate that insurance brokers who sell insurance for non-admitted carriers file detailed financial information about those carriers with the department before placing business with them. Those regulations were approved by the state Office of Administrative Law in November.

After the riots, Garamendi held hearings in which many community members and insurance brokers testified that large insurers would not provide coverage in South Central Los Angeles.

Garamendi has issued regulations, which have not yet been approved, which would allow an insurer a higher rate of return, or a lowered one, depending on how well it provides coverage in these areas.

The Los Angeles riots caused more insurance losses than any other civil unrest incident in U.S. history, but only ranked third for the worst losses in a catastrophic year for insurers nationwide.

"The national perspective is this was the worst year on record for catastrophes," said Sean Mooney, chief economist for the New York-based Insurance Information Institute.

Altogether, assorted natural and man-made disasters spurred $17.5 billion in insurance pay-outs, Mooney said. The previous record was $7.9 billion in 1989, he said.

Hurricane Andrew caused more than $10 billion in claims, followed by Hurricane Iniki with more than $1 billion in claims, Mooney noted.

Insurance companies nationwide lost $1.3 billion in the third quarter of 1992, Mooney noted. Their nine-month earnings totaled $6.3 billion, down 37 percent from $10.1 billion a year earlier, he said.

Los Angeles-area based insurers posted mixed results this year.

Earnings were up at Mercury General Corp. The L.A.-based auto insurer reported nine-month earnings of $58.5 million or $2.15 a share, compared to $48.8 million or $1.80 a share the year before.

Earnings were boosted by the fact that in the third quarter for the first time since 1989, Mercury did not have to set aside funds for Prop. 103 rollbacks since it completed a one-time payment to Mercury policyholders of $43.1 million in the third quarter.

Meanwhile, 20th Century Industries, the auto insurer which has been battling against a $100 million Prop. 103 rollback, also reported higher earnings in the first nine months.

The Woodland Hills-based insurer posted earnings of $94 million or $1.83 a share for the nine months vs. $83.9 million or $1.63 a share a year earlier.

Earnings were down this year at Zenith Insurance, to $21.2 million, or $1.12 a share for the first nine months from $37.6 million or $1.98 a share the year before. Zax blamed payouts on claims related to Hurricane Andrew, Hurricane Iniki and fires in Northern California.

Transamerica Insurance Group reported earnings rose to $12.4 million for the first quarter of 1992 from $11.5 million in the 1991 period. The quarter was the last earnings report issued by the Woodland Hills-based property-casualty insurer, because the parent company, San Francisco-based Transamerica Corp. announced July 20 the unit was for sale.

Under accounting law, earnings of companies which are for sale are not reported, explained Dick Greibel, spokesman for the property-casualty company which specializes in commercial lines.

The parent company announced it was selling the property-casualty insurer "to focus resources on less cyclical businesses," Greibel said. In November it announced it would sell the property-casualty unit at a initial public offering to be held in 1993 rather than to an individual buyer.