After weeks of negotiations about the scope of open-meeting and public-records provisions, legislators appear to be satisfied with the language that State Compensation Insurance Fund proposes to limit application of open-meeting and public-records laws to its business. The latest series of amendments to SB 1145, authored by Sen. Mike Machado (D-Linden), allows exemptions for trade secrets and information related to internal audits. This is not the transparency real carriers are made of.
But does the latest language make SCIF any more transparent to the public, enough that it can be properly scrutinized? Or are clever lawyers allowing SCIF to stash information of public interest in another area?
The amendments add an exemption for records that are trade secrets, "...including without limitation, instructions, advice, or training provided by [SCIF] to its board members, officers, and employees [regarding its] special investigation unit, internal audit, information security, marketing, rating, pricing, underwriting, claims handling, audits, and collections."
"If the goal is to make SCIF more transparent, then everyone should know what their audit procedures are. Why would it be a trade secret?"
— Attorney Nick Roxborough
It also exempts from public disclosure those internal audits that contain proprietary information, including any correspondence or memoranda connected with the audit. One important addition, not included in previous versions of the legislation, allows the Bureau of State Audits, the Division of Workers' Compensation and the Department of Insurance to view proprietary information to guarantee compliance with applicable law. But no public report can be made with the information.
In March 2007, President Jim Tudor and Vice President of group programs Renee Koren were fired after it was revealed how lack of transparency allowed management, particularly in relation to SCIF's group programs, to engage in questionable behavior. Janet Frank, a former CNA executive, took over as SCIF president in October. Other than that a few of the players have changed and State Fund Board Chair Jeanie Cain, who is also policy director for the California Chamber of Commerce, was then and is now chairperson.
The contentment with the latest language is rather puzzling considering that just a few weeks ago legislators and some in the industry felt the exemptions in the bill were too broad. A major component of SB 1145 subjects SCIF to the California Public Records Act, and the board of directors, which now meets in private, to the Bagley-Keene Open Meeting requirements.
If the point was to open the shades and let the sun shine in, SCIF was going to great lengths to tint the glass. Staffers said that if SCIF didn't come up with some better language, the Legislature might do something on its own.
"[SCIF] hasn't made the case for the draft," Mark Rakich, chief consultant for the Assembly Insurance Committee, told Workers' Comp Executive.
"If KPMG says your audit shows that you're upside down by $3 billion, there is nothing that says that's a trade secret."
– Mark Webb, vice president of Governmental Relations for Employers Direct
Insurance Company
After the producer community expressed concerns about confidentiality of claims data, the bill was amended slightly to allow brokers access to files they need to service their clients.
Legislators were still concerned about the remaining overly broad exemptions. But SCIF has managed to win them over. The Legislature agrees that SCIF must keep some things close to the vest if the quasi-public enterprise is to remain fairly competitive.
"They made the argument that proprietary information falls within their [function] as a private carrier," Rakich says, adding that the legislation is quite a bit narrower than the original language.
And the bill makes changes to the Public Records Act rather than to the insurance code.
Maybe so, but some industry skeptics appear unconvinced that this narrows the scope sufficiently. The latest draft of the bill actually adds to the exemptions while attempting to narrow the scope. "It still seems too broad to me," says one Capitol insider.
Most of the legislation remains untouched, including information pursuant to contracts, which would still not be made available to the public until after a certain period of time has passed. That the Legislature seems willing to accept that a quasi-public enterprise with a significant chunk of the California workers' comp market can maintain the same proprietary information as a private carrier is a mystery to some.
Rakich told Workers' Comp Executive prior to the amendments that "[SCIF] thought with its lawyers [the language] was a good faith proposal." He also opined that Jeannie Cain, chairwoman of SCIF's board of directors, relies on the advice of "unnecessarily cautious counsel."
SCIF's outside law firm is Sheppard, Mullin, Richtor & Hampton. It's unknown who specifically has been advising Ms. Cain on the nature of the language, but some industry sources suspect internal counsel has also been involved.
Nick Roxborough, an attorney with Roxborough, Pomerance & Nye, and frequent critic of SCIF, says it's not out of line for a fairly competitive SCIF to want to keep employee training manuals proprietary. But the public, in addition to regulatory entities, has a vested interest in other items that SCIF wants to keep private.
"If the goal is to make SCIF more transparent, then everyone should know what their audit procedures are," Roxborough says. "Why would it be a trade secret?"
Roxborough says that if employers with SCIF policies are going to be audited, they should at the very least know what the requirements and procedures are going to be, so they can be prepared. Rates are also an area that should be open to public debate.
"The public needs to know what rates SCIF is going to charge because then employers or labor can say those rates are too high. There may also be [insurers] that would say the rates are too low," Roxborough says.
Based on his reading, Mark Webb, vice president of Governmental Relations for Employers Direct Insurance Company, says there appears to be some confusion between what should be protected as a trade secret versus privileged information, such as audit privilege. "I can see where they're trying to go, but I'm not convinced they're going about it the right way," Webb says.
He says internal audits are meant to make sure that SCIF is unnecessarily exposing itself to serious risk or litigation by reviewing various operational and management functions. Because of the type of information that comes up in internal audits, it could either be considered privileged information or trade secrets. A piece of correspondence from an internal audit could be considered privileged information—but a trade secret?
SCIF Financials Not Transparent
SCIF also uses outside auditor KPMG to audit its financial statements. KPMG does not certify the financial statements nor does it provide GAAP statements. It simply says it relies on information provided by SCIF.
"If KPMG says your audit shows that you're upside down by $3 billion, there is nothing that says that's a trade secret. By calling it a trade secret, are there additional remedies and rights that SCIF is getting?" Webb asks.
The industry as a whole has not taken a position on this bill, but the Association of California Insurance Companies (ACIC) had expressed concerns about overly broad exemptions. Now it appears satisfied.
"We think SCIF and Machado have done a sufficient job as to how SCIF operates pursuant to open meetings," says Theo Pahos, lobbyist for ACIC.
SB 1145 is off suspense and heading to the Assembly floor. Companion bill AB 1874, authored by Joe Coto (D-San Jose), is sitting in Senate Appropriations.