State Compensation Insurance Fund is trying to sponsoring legislation that would allow it to provide workers’ comp coverage for its California insureds outside of California. In 2009, State Fund had $722,851,000 in net underwriting losses and a combined ratio of 161.5%, according to its 2009 annual report.
The carrier has no experience adjusting losses outside of the state and no mechanism to rationally keep up with or follow changes in the laws of so many other states.
State Fund made its intentions known a couple of weeks ago and since then has been discussing possible language with legislative staffers. AB 228, authored by Filipe Fuentes (D-Van Nuys), would authorize SCIF to insure an employer whose principal place of business is in California against the employer’s liability for workers’ comp benefits, under the law of any other state, if SCIF insures the employees who work within California.
What the Labor Code (currently) allows is for State Fund to cover a California employer’s exposure for its California employees working temporarily outside of the state on a specific assignment. The legislation would expand the authority. According to State Fund, because of the conditions set forth in LC 3600.5(a), if the employee is hired and regularly employed in California and is temporarily working out of state, any injury is compensable under California law. Therefore, even though it was incurred out of state, it is really a California exposure. State Fund insures this exposure itself.
The private sector opposes this move, and many questions remain, given State Fund’s mission, outlook, current negative financial condition, and personnel issues.
This includes whether such authority is really in the best interests of State Fund or the rest of the workers’ comp market.
“They’re in kind of a sweet spot in that we’re in the first part of a two-year session,” says Gideon Baum, chief consultant for the Senate Committee on Labor and Industrial Relations. “There is no real need for speed. There is plenty of time to vet the issues.”
SCIF’s Sales and Marketing Analysis
Jennifer Vargen, spokeswoman for State Fund, tells Workers’ Comp Executive that State Fund doesn’t currently track how many employers have insurance policies with State Fund and separate policies for out-of-state exposure.
According to data that State Fund says it paid to obtain from Dun & Bradstreet, approximately 45,000 employers have headquarters in California and documented out-of- state locations, Vargen says. “Our intention is to serve the subset of these businesses that are not only headquartered in California, and have employees outside of California, but also conduct the majority of their operations in California. Our best estimate is 20,000 to 30,000 California businesses may qualify for the program,” she says.
Unrated and No Certificate of Authority
State Fund says that providing this kind of coverage is one of the suggested efficiencies from brokers that they say would make it easier to do business with the carrier. Right now, California employers have to buy separate policies from other carriers for their out-of-state employees. Mark Rakich, chief consultant for the Assembly Insurance Committee, says this legislation would allow State Fund to offer a service that would make it more competitive.
“It would allow them to write these [out-of-state] operations and allow them to compete for accounts,” Rakich says, adding that employers who wanted to use State Fund were discouraged by the fact that multistate policies were not available. “That’s the reason I didn’t go to them before, [but] now they can serve me,” he says.
“There is no real need for speed. There is plenty of time to vet the issues.”
—Gideon Baum, Senate Labor and Industrial Relations Committee
Another source, who asks not to be identified, says this is SCIF’s trial balloon – it is finding out if it can sell the Legislature on SCIF writing original coverage in other states.
Mark Sektnan, president of the Association of California Insurance Companies, says ACIC has opposed this move every time a state fund has wanted to do it. As a quasi-state agency, State Fund doesn’t have to pay the federal taxes that other carriers do.
“Technically, State Compensation Insurance Fund is not an insurance company. How are they going to do this? They don’t have a certificate of authority in, say, Nevada,” Sektnan says. “[Taxes] give them an unfair advantage. If they want to act like an insurance company, they need to become an insurance company.”
Brokers have mixed feelings about the legislation. They acknowledge the administrative ease of doing business by having to deal with only one workers’ comp policy for all employees, including those few positions that may be next door in Nevada. While this may create efficiencies, it also has its risks.
“State Fund would be incurring losses from other states. That’s not why they were formed. Their [proper] niche is when the market gets real hard,” says Greg Osorio, a broker with CompLeader in the Bay Area, adding that he is sure State Fund wants to help its customers, but there are probably other attractive incentives. “I don’t think most companies are that altruistic. [State Fund] could be looking for additional premium to bring in.”
“The concern is what if they start incurring some losses from other states,” says Osorio, noting that State Fund is no longer A.M. Best rated. “What does that do to our market here?” he asks.
In 2002, due to a downgrade from B+ to B-, State Fund requested that A.M. Best no longer rate it. State Fund, with its huge underwriting losses and an outrageously horrific expense ratio, says it no longer plans to be rerated.
Bob Brachman, a broker with Wilshire Insurance Agency in Los Angeles, says it’s “no big deal” either way. “Unless they can’t get coverage anywhere else, most small businesses [with State Fund] don’t have any out-of-state exposure,” he says.
“State Fund would be incurring losses from other states. That’s not why they were formed. Their [proper] niche is when the market gets real hard.” —Greg Osorio, broker
Larry Evans, a broker with John O. Bronson Co. in Sacramento, says that it actually makes sense from a broker standpoint. It’s very difficult to place coverage for a single employee working out of a home office, especially if it’s an employer with a high X-Mod.
“You get a salesman in two or three states, and if you’ve got [the employer] in State Fund, there’s a reason for it. We end up having to go to NCCI pool in that state [to find coverage],” Evans says.
He says that with this kind of option, the broker could just add employees working in Rhode Island to the existing policy.
[This] would keep it at the same
X-date, so we don’t have some small account floating around the agency,” Evans says.
Owen Taylor, principal with Owen-Dunn Insurance Services, seconds the efficiency argument but adds a note of caution about risks in other states.
“Different states have different laws…The Oregon court just ruled that the woman working in a home office is entitled to workers’ compensation after tripping over her dog. I see where other laws can be a problem, even if it is good for brokers,” Taylor says.
(Filed by Bess Shapiro in Sacramento)