Workers’ Comp Executive Exclusive
Agents and Brokers and others in the workers’ comp world are beginning to question, they say, if State Compensation Insurance Fund’s announced plan for a fifty million dollar dividend is illegal. State Fund says the deal is done and that it is proper. Whether it is or not may be a matter for the California Department of Insurance which is in charge of regulating such things. Perhaps the legality of the dividend will become a matter for the courts. Here is the whole story:
Not long ago, but in plenty of time for the 2012 renewal season; State Find announced a $50 Million dividend based upon its 2011 policy year. The dividend is approximately, it says, 5.2% of its estimated annual premium for that year. The dividend, State Fund says, is payable to policyholders who qualify. There are three qualifications and herein may lie the illegality. State Fund says the qualifications to receive a dividend include:
Policyholder has paid its premiums timely and kept its policy in good standing in 2011.
Renew their policy with State Fund in 2012 and continue to pay timely.
Finalize their audit within six months of expiration.
It is the second issue, as you will see from the regulation cited below, that some think will prove problematical for the quasi-governmental carrier. So let’s first look at the pertinent parts of the insurance code:
Permission To Pay Dividends
11776. The actual loss experience and expense of the fund shall be ascertained on or about the first of January in each year for the year preceding. If it is then shown that there exists an excess of assets over liabilities, necessary reserves, and a reasonable surplus for the catastrophe hazard, then a cash dividend may be declared to, or a credit allowed on the renewal premium of, each employer who has been insured with the fund.
11777. Such cash dividend or credit is to be in an amount which the board of directors in its discretion considers to be the employer's proportion of divisible surplus.
It is clear from that code section State Fund is allowed to declare and pay dividends. It is also clear that the statute contemplates past years policies in that reserves and surplus are included.
There are two ways to read that section and the issue over the renewal credit. According to State Fund it permits the credit to be applied only to those who renew, while others contend that it means a credit is available to those who renew but those who don’t renew still receive the cash dividend.
The surplus is after all the result of all of the policyholders, not just those that renew, brokers and others argue, and therefore should be shared equally among all policyholders. There is also the matter of a potentially unfair inducement to renew.
Regs Prohibit Unfair Forfeiture of Dividends
And that brings us to Title 10 of the California Code of Regulations which seems to pretty clearly state dividends cannot be given only to those who renew. Here it is:
Section 2507.2 Prohibition Against Unfair Forfeiture of Dividend for Failure to Renew.
(a) Forfeiture of a right to, reduction in the amount of, or delay in the payment of, a policyholder's dividend due to the policyholder's failure to accept renewal of the policy or subsequent policies offered by the same insurer is coercive and illegal and shall constitute an unfair practice.
(b) This section shall not be deemed to prohibit a reasonable reduction in the amount of a policyholder dividend if
(1) the policyholder has elected to be considered for policyholder dividends under a plan which utilizes the premium and loss experience of the policyholder for two or more policy years, and
(2) the nature of the adjustment is set forth in a Dividend Statement which has been provided to the policyholder within thirty days after the inception of the first policy year for which such election has been made, and
(3) the policyholder does not remain insured by the same insurer during the complete term of the multi-year dividend plan. In the context of this paragraph, a “reasonable reduction” in the amount of policyholder dividends is defined as and specifically limited to the application of that most favorable dividend plan for which the policyholder then qualifies under the dividend procedures of the insurer unless some alternative dividend plan has been set forth in the Dividend Statement provided the policyholder.
(c) Paragraphs (a) and (b) herein are effective with respect to all workers' compensation dividends declared or payable after the effective date hereof.
The section came into being, experts tell us, during the period in the 1980s when Bruce Bunner was the appointed Insurance Commissioner. Insurers were conditioning dividends upon renewals and other tactics.
A 1948 Opinion
But there is yet another legal opinion upon which State Fund could be basing its position. And is a 1948 opinion covering several issues relating to dividends issued at the request of the then insurance commissioner by the California Attorney General in which the AG discusses, from a “stock” company perspective, the relative merits of participating policies and the liabilities set upon declaration of dividends.
The point the critics are making is one of fairness. The profits - or in State Fund’s case- underwriting losses against investment income - was earned based upon the payments of policyholders past not potential policyholder’s future. What’s being discussed –albeit from a legal standpoint - is that to take money from one set of policyholders and give it to another – or to a subset - is neither fair nor legal according to critics.
The regulation trumps the statute, lawyers say, because it was created later. We presume the same legal logic holds true for the 1948 Attorney General’s opinion.
A Department of Insurance spokesperson refused to comment on this issue.
“We believe we have the authority to issue the dividend as a renewal credit on the 2012 policy. And we will work with CDI to insure that we manage this appropriately,” State Fund’s Jennifer Vargen tells Workers’ Comp Executive.
Vargen confirms that only renewing policyholders will be eligible for the dividend in any form.
Filed by Dale Debber in Sacramento