Reforms on tap at workers' comp insurer State Fund

The scandal-plagued State Fund will get new oversight and must heed laws requiring openness.

By Marc Lifsher
Los Angeles Times Staff Writer

October 20, 2008

Next month, a little-known state agency that doubles as a $20-billion insurance company will hold its first public board of directors meeting in 94 years.

After years of secrecy, questionable behavior by board members and more recently scandal at the agency, the Legislature and Gov. Arnold Schwarzenegger ordered sweeping changes now underway.

It took a scandal, a criminal inquiry, a shake-up at the top and a scathing independent audit to bring a new order to the State Compensation Insurance Fund, commonly known as State Fund, which provides workers' compensation coverage for 190,000 California employers.

The government-backed insurance company will have a revised management structure, and it must comply with the same open-meeting and public-records laws that apply to all other state and local government agencies.

State Fund critics say the changes are overdue.

"It's an important step forward," said California Insurance Commissioner Steve Poizner.

"I think the State Fund has taken advantage of the fact that it's not really a private insurance company, but it's not really a traditional state agency too.

"There was damage done by its lack of transparency."

A well-managed State Fund is essential to the health of California's economy, said Poizner, whose investigators have joined forces with the California Highway Patrol and the San Francisco district attorney's office in a criminal probe that started more than a year ago.

Most of the changes in State Fund's organization were suggested by its board chairwoman, Jeanne Cain, and Poizner in the wake of a scandal that exploded in March 2007 with the sudden firings of President James Tudor and Executive Vice President Renee Koren.

The dismissals occurred four months after the forced resignations of two members of State Fund's five-person board of directors amid conflict-of-interest allegations.

A California Department of Insurance audit released in December found that between 1996 and 2007, State Fund paid $140 million in fees to former board member Frank DelRe for administering group workers' compensation insurance. An additional $125 million went to former board member Kent Dagg for similar work involving policies sold to building trades employers.

The audit portrayed an organization in which key executives spent indiscriminately, moving billions of dollars with little oversight, minimal public checks and balances, and little scrutiny in past years from the governor, Legislature or insurance regulators.

Despite vows by law enforcement officials to investigate possible criminal wrong-doing more than a year ago, there has been no public sign that the probe is near an end. No subpoenas or criminal charges have surfaced in connection with the inquiry.

State Fund currently writes $1.6 billion a year in premiums and controls about a quarter of the state's workers' compensation market, about half its share of six years ago.

Based in San Francisco, this unique public-private hybrid is the largest of more than 200 workers' compensation companies that operate in California. It competes with state-regulated private-sector insurers.

It also serves as the insurer of last resort for many small and medium-size employers that historically have had a hard time obtaining affordable, legally required coverage that provides medical care and compensation to victims of on-the-job injuries.

The changes underway will make the company less "insular" and will "bring in new ideas to make State Fund more like a real business," said Scott Hauge, a San Francisco insurance broker and president of Small Business California, a group that lobbies on tax and business-related issues in Sacramento.

Poizner lauded the new laws for modernizing State Fund's corporate governance. The five-member board, all appointed by the governor, is expanding to 11, getting increased oversight responsibilities and being made subject to strict conflict-of-interest rules. The larger board, which will be in place early next year, will have two members appointed by the speaker of the state Assembly and the Senate Rules Committee. The other nine are named by the governor.

At the same time, top management is being freed from following strict state government personnel rules. The president, once the only non-civil servant among the 8,000 employees, is now allowed to hire six executives to handle finance, risk management, information technology and other specialized tasks. She and the board are free to fire the top six executives without a lengthy civil service hearing process.

"These positions provide us a leadership structure similar to leading insurance companies that contains clear lines of accountability and responsibility for improved decision-making, transparency and performance," said State Fund President Jan Frank.

Passage of the two bills -- SB 1145 by Sen. Michael Machado (D-Linden) and AB 1874 by Assemblyman Joe Coto (D-San Jose) -- will give State Fund's leaders and regulators "tools so we can prevent what happened from happening again," said Machado, the outgoing chairman of the Banking, Finance and Insurance Committee.

"Board members must take seriously their fiduciary role on behalf of policyholders and the people of California," he added.

Increasing public scrutiny of the once-secretive State Fund should limit opportunities for executives and board members to become involved in the sort of alleged self-enrichment that prompted the current criminal investigation, said Peter Scheer, executive director of the California First Amendment Coalition.

"This is a powerful entity," he said. "Various constituencies, including taxpayers, need to have a better idea of what it does."

marc.lifsher@latimes.com