California’s largest workers’ comp carrier is facing renewed charges that the way it handled and continues to handle its broker network is procedurally unfair to brokers seeking access to its markets. The charges are part of a case coming up before the California’s Court of Appeal filed by Cumbre Insurance Services, which lost on the issue at the trial court level last year. (See Verdict… for additional coverage of the original trial.)
But Cumbre’s attorneys maintain that the original court decision was flawed. Like State Compensation Insurance Fund’s 2003 decision to terminate Cumbre from its preferred-broker network, it says the court failed to consider all of the facts in the case of how SCIF made that decision.
“In this appeal, Cumbre will demonstrate that, despite the jury verdict, undisputed evidence introduced at trial, including testimony of SCIF’s own witnesses, establishes that SCIF’s termination process did not comply with the procedural fairness requirements of the duty of fair procedure,” Cumbre maintains in its opening brief to the Fourth District Court of Appeal. The argument focuses on whether SCIF gave Cumbre enough information about its decision to terminate their relationship and how to appeal that decision to meet the standard of fair procedure.
“When a private business has substantial economic power and the use of that power can affect one’s ability
to earn a living—the decision-making must be both substantively rational and procedurally fair.”
— Doctrine of fair procedure
The doctrine of fair procedure holds: “When a private business has substantial economic power and the use of that power can affect one’s ability to earn a living—the decision-making must be both substantively rational and procedurally fair.”
At the time of the termination and again at trial, SCIF maintained that Cumbre was jettisoned from the broker network because its book of business with SCIF was too unprofitable. SCIF was kicking out brokers with loss ratios over 80% as it sought to prop up its finances. But Cumbre maintains SCIF violated its own procedures in evaluating its appeal of the termination decision and ignored errors in its own calculations.
“SCIF’s internal appeal process was so inherently flawed that any use of that process violated the procedural fairness requirements of the duty of fair procedure,” Cumbre maintains. “Failure to advise brokers of the exclusion criteria SCIF applied; conducting the appeals in secret; failing to provide brokers with the evidence relied on by SCIF in deciding appeals; and failing to give brokers any opportunity to contest the charges relied on by SCIF in denying appeals, were each, in and of themselves, a violation of the duty of fair procedure.”
Along with its appeal, Cumbre also filed for and received a writ of supersedeas that stays any attempt by SCIF to collect on its court cost award from the original trial. Without the writ, Cumbre could have been forced to pay out hundreds of thousands of dollars or to post a bond to cover the amount of the award. That the court granted the writ is viewed by some as a positive sign for Cumbre’s case.
No Appeal Necessary
While the case is not yet scheduled for oral argument, SCIF filed its response earlier this month, maintaining that the process it afforded Cumbre was more than fair and that Cumbre should be denied a second bite at the apple.
SCIF maintains that its notice and appeal process not only met but went beyond what it was required to do in handling the termination.
“Fair procedure only require that State Fund provide notice of the charges upon which the termination was based…State Fund’s notice to Cumbre set forth the precise reason for Cumbre’s termination: Cumbre’s loss ratio for the policy years 1999, 2000 and 2001 exceeded 80% with a loss limitation of $175,000 per occurrence applied to total incurred losses,” SCIF argues in its response. “This notice left no doubt as to the reason for termination. Thus, SCIF’s notice satisfied the requirements of the duty of fair procedure.”
SCIF also challenges the notion that its appeal process was less than fair, maintaining that under the duty of fair procedure it had to provide only an opportunity to be heard, not a full-blown appeals process.
“Cumbre contends the jury instruction regarding the duty of fair procedure and special verdict form incorrectly stated the law regarding the procedural fairness prong of the duty of fair procedure. This contention is wrong,” SCIF notes. “This Court set forth the requirement for procedural fairness in its 2007 Opinion: [p]rocedural fairness usually requires certain components, including notice, an impartial decision maker, and a meaningful opportunity to respond or to be heard.”
The carrier argues that its written appeal process in the termination program more than met this standard.
Federal Action Under Way
Beyond the action pending in Southern California, Cumbre has a separate federal action pending before the Ninth Circuit Court of Appeal that stems from the posttrial interaction between SCIF and Cumbre.
“After the jury trial, Cumbre applied to be a licensed broker for State Fund, but they rejected the application saying that they wouldn’t do business with us as long as we were in litigation with SCIF,” says attorney Jim Powers, who represents Cumbre on the appeal. “We filed action in San Francisco federal court on the basis that denial of the application on the grounds that we were exercising our right to sue is a violation of our constitutional rights.”
Powers says that the federal action has been fully briefed, but he doesn’t expect a decision until after the state court of appeal rules, which could happen later this year. “We should have oral arguments and a decision this year. That’s a guess, but it’s probably in that realm,” he told Workers’ Comp Executive.
In the state court of appeal case, Cumbre was seeking unspecified damages, plus $165,472.29 for 2003 override commissions. SCIF pegs the amount that Cumbre was seeking at $47 million.