Insurance Commissioner Steve Poizner is getting plaudits from the industry for filing a lawsuit challenging the constitutionality of the governor’s plan to sell $1 billion in State Compensation Insurance Fund assets. In his 18-page lawsuit, the commissioner accuses the governor of usurping both the complete system of workers’ comp and the insurance commissioner’s authority. Industry experts say they’re passionate arguments, but will they withstand legal scrutiny?

“I think he should be supported for getting out in front of this.” —Mark Webb, EDIC

“I think he should be supported for getting out in front of this,” says Mark Webb, vice president of governmental relations for Employers Direct Insurance Company.

The administration hasn’t batted an eye since the Legislature approved the transaction as part of the budget in July, despite concerns from employers, the industry and regulators. It has yet to say when it will respond to Poizner’s suit.

The lawsuit names the Department of Finance and the Treasurer as defendants, and is seeking an injunction on constitutional grounds, citing Article XIV, Section 4. SCIF is named as a real party in interest in the suit.

According to the lawsuit, Poizner asserts that ABX4 12—the budget bill that allows the sale of SCIF’s assets—is unconstitutional under Article XIV, Section 4 for two reasons. It violates the intended use of SCIF’s assets and violates Proposition 103.

Depositing the profits from the transaction in the general fund for any purpose is a violation of the constitutional provision that says SCIF assets must be used for purposes related to workers’ comp. The petition reads in pertinent part:

“The provision requires the Legislature to enact ‘appropriate legislation’ to establish a complete system of workers’ compensation.’ That system specifically includes SCIF as a self-supporting entity whose assets must be devoted solely to providing compensation to injured workers and their dependents.”

The suit goes on to say that the state’s attempt to use SCIF as “a cash cow” violates the intent of that article of the constitution, which authorizes the Legislature to create SCIF only to be part of the workers’ comp system.

Webb says after reading the suit, he’s a bit “underwhelmed.” He notes that the same article also vests the Legislature with plenary power over workers’ comp. He adds that the article also refers to a “state compensation insurance fund—lowercase. People frequently confuse SCIF with scif.” 

“In my opinion, that is a mistake. The Legislature has broad authority to craft whatever mechanism it wants to guarantee a market for mandatory workers’ compensation insurance,” Webb says. “That does not mean, in my view, that the edifice on Market Street is somehow constitutionally blessed.”

Proposition 103

The language about the sale in budget bill ABX4 12 expressly excludes the insurance commissioner and the state attorney general from the transaction. Finance is vested with the responsibility of carrying out all aspects of the transaction. Poizner argues that this amounts to a violation of voter-passed Proposition 103.

Proposition 103 changed the office of insurance commissioner from an appointed official to an elected one. The petition says it was not the intent of the voters to give the insurance commissioner’s powers to a nonelected official. It reads in pertinent part:

“…ABX4 12 requires that SCIF’s assets be sold, and the transaction negotiated, by the Director of Finance, a gubernatorial appointee. Moreover, the statute provides that the sale need not be approved by the Insurance Commissioner, the State elected official with the statutory duties of regulating the insurance industry, ensuring the solvency of insurance companies (including SCIF) and protecting insurance policyholders.”

This action constitutes an “impermissible amendment” to Proposition 103, the petition says.

The petition also alleges that ABX4 12 does not task the Director of Finance with the requirement to protect SCIF’s financial position or the policyholders whose policies will remain with SCIF. 

Doug Heller, executive director for Consumer Watchdog, says the Proposition 103 argument has merit, and he supports the commissioner’s efforts to stop the sale.

“The idea of the administration going around the insurance commissioner in an effort to sell off some [assets] of SCIF is not only dangerous but violates the voters [intent], which was, ‘We want an independent insurance commissioner to oversee this industry,’ “ Heller says.

He adds that the sale of these assets means more than just a buyer and a seller. The marketplace will pay the ultimate price.

“What happens if there is another workers’ comp crisis, and SCIF is just a hollowed-out entity? It’s not like selling old police cars we don’t use anymore.” —Doug Heller, Consumer Watchdog

“What happens if there is another workers’ comp crisis, and SCIF is just a hollowed-out entity? It’s not like selling old police cars we don’t use anymore,” Heller says.

 SCIF spokeswoman Gina Simons says that as the insurance regulator, Commissioner Poizner understands the industry and SCIF’s important role in it.

“It’s appropriate that his office is involved in action that would impact policyholders and injured workers,” Simons says, adding that she’s sure that there have been “conversations” with Finance, but she has no details on participants or progress. She’s also not sure if SCIF will jump into the litigation.

Administration Says It’s in the Right

Prior to the passage of the budget, SCIF’s Board of Directors passed a resolution opposing the sale. There has been some speculation as to whether this would interfere with the sale. The administration says it’s on solid ground.

“We continue to believe that we can achieve a higher value for the state by selling a portion of SCIF that will maintain a stable workers’ compensation system for California,” says Mike Naple, spokesman for the Governor’s Office. “We never would have pursued this if, in fact, we thought it was illegal.”

Department of Finance spokesman H.D. Palmer says Finance is working “collectively” on moving the sale forward.

“The next step is to get the… evaluation of assets and liabilities of the Fund. We’re in the process of determining who we are going to hire to do that evaluation,” Palmer says, adding that an RFP has not been issued yet.

As to the legal challenges laid out by Commissioner Poizner, Palmer says, “We believe we can carry this out in a way that is legal and maintains the integrity of the Fund.”