The governor's office has taken initial steps to eliminate the potential for corruption and to bring integrity to State Compensation Insurance Fund. Two of five directors resigned after issues concerning a potential of conflict of interest were raised by the Workers' Comp Executive. The men were serving as directors while at the same time collecting millions of dollars in fees through the administration of State Fund safety groups. Today's resignation story was broken in the Los Angeles Times by staff writer Marc Lifsher. However, inside technical details the Times did not provide are reported here.

The conflict issues were raised by the Workers' Comp Executive prior to the board's vote to appoint James C. Tudor as president last September.

The directors who resigned are Kent Dagg, executive director of the Shasta Builders Exchange in Redding, and Frank DelRe, president of Western Insurance Administrators Inc. of Long Beach.

Dagg's Shasta Builders Exchange is affiliated with the Golden State Builders Exchange, according to an article published in 1998 by Workers' Comp Executive. It provides coverage for some 20,000 contractors in California. DelRe's Western Insurance Administrators handles several groups with a total of about 25,000 employers for State Fund.

September 2006
Tudor Appointed SCIF President
After a lengthy search of trying to find someone from the outside to run State Fund, the board votes to approve Tudor as president.

September 2006
SCIF Plans 20% Commission Hike For Group Business
Read the story that was the impetus for Dagg's and DelRe's resignations. The State Fund board was preparing to approve an increase in group business commissions to 12 percent from 10 percent effective October 1.

June 2006
Garamendi Delighted to See New SCIF Board
Garamendi applauds the appointment of Jeanne Caine as chairman of State Fund's board, as well as the appointments of Kent Dagg and Vincent Mudd as board members.

February 1996
20,000 Builders Form Group to Cut W/C Costs
Read about how 20,000 builders formed the Golden State Builders Exchange safety group with State Fund in an effort to shave their costs.

Administrator's Functions: Are They Mythical?

It is unknown exactly what functions administrators perform to earn their fees. Even many of the workplace safety pamphlets they give their members are produced by State Fund. Policies in the respective groups are written directly though special State Fund underwriting operations known internally at SCIF as LAG, BAG and SAG; acronyms for Los Angeles Groups, Bay Area Groups and Sacramento Area Groups.  They perform all of the same underwriting and issuing functions as any other SCIF underwriting unit including determining risk acceptability and overriding requirements when need be. Group policies are treated essentially the same as any non-group policies with insureds being billed in the same way, and broker relationships handled in the same way.

However, insureds placed into groups receive extra discounts on rates, and have their experience pooled for the purposes of determining and providing dividends. There are allegations that the administrators have in the past doled out the dividends and others say administrators retained a percentage of those dividends. The Executive was unable to confirm the dividend payout structures in time for this Flash Report.

Reaction

"I hope that this will renew interest within the administration in rethinking the governance of SCIF," says Mark Webb, vice president of governmental affairs for Employers Direct Insurance Company. "The policyholder board concept made sense decades ago, but we need a more transparent and accountable structure in today's environment. This is simply not the way to oversee the operations of a multi-billion dollar business enterprise."

Other industry sources say the Legislature is also interested in bringing more transparency and better governance to State Fund. Two ex-officio non-voting members of its board are appointed by the leadership of each house.

Tudor's Tenure May Be in Question

The move in the governor's office towards a more ethical State Fund may place Tudor's position as president at risk. Both former directors are known to be his close friends. DelRe and Tudor speak frequently and have been known to socialize for years.

In addition, Tudor is known by insiders to be the "mastermind" behind State Fund's several hundred group programs and uses them to develop political allies on many fronts by virtue of the fees paid to administrators and by fees paid to vendors associated with the groups. These political allies are allegedly called upon by Tudor when he needs to make something happen at any level of government. They sometimes act as seconds for him in the process.

Tudor has full control of State Fund at every level. The seven vice presidents serve at his exclusive pleasure and he directly gives them their assignments. Each vice president controls one or more of the major State Fund operations including legal, claims, marketing, business operations, information technology, personnel and contracting, and more.

All of this power – control of one of the largest insurance companies in the world – is in the hands of one person with little or no oversight from an experienced or independent board. The existing board has little if any insurance experience and little or no real corporate governance experience.

"The potential of a conflict of interest is a problem. I recommend that we don't have these kind of appointees in the future," Jeanne Cain, current Chairman of State Fund's Board told the Los Angeles Times.

Last August the Executive wrote about the board voting to approve a 20-percent commission increase for group business. The plan was suggested by Tudor and the vice presidents ostensibly to encourage brokers to write more business into groups. This was shortly before the board, voted to confirm Tudor. For this story click here.

But it was Cain who led the board through the confirmation vote on Tudor knowing in advance both of these board members' potential conflicts and of the close personal relationships between DelRe and Tudor.

Cain is an executive with the California Chamber of Commerce, itself a State Fund policyholder.

The two vacancies will be appointed by the governor who must, under current law, choose them from among State Fund's policyholders.

The question is this: Many of the state's insurers and large corporations are insured by State Fund. Will the governor's office continue the forward movement and act to bring good governance to State Fund by appointing board members from either the insurance world or from large corporations who understand corporate governance?