SACRAMENTO— State Compensation Insurance Fund's in-house attorneys renewed their lawsuit against the insurer for its hiring of private outside counsel after a trial court judge threw out three of their four causes of action. However, there are indications that a warming of relations between the California Attorneys, Administrative Law Judges and Hearing Officers in State Employment (CASE) on the one hand, and the new leadership of State Fund on the other, which may lead to a friendly resolution of the dispute. But no one is singing yet.

"This lawsuit really reflects our frustration with the old State Fund administration. They had been contracting out for years and it had been growing and growing," says Pat Whalen, lead counsel for CASE, which represents the nearly 500 civil service attorneys employed by State Fund. "They're paying lawyers five-hundred, six-hundred, eight-hundred bucks an hour and that's not good for our members or the policyholders."

Whalen is hopeful that the new leadership at State Fund will be more reasonable on the issue, telling Workers' Comp Executive that a recent get to know you meeting with State Fund president Janet Frank left CASE officials with a sense of optimism. "We don't want to battle this out in court for the next five years, so we're hoping that she comes at it with a new approach," he says. "If she's interested in reducing the contracting out then we could certainly see our way to some kind of settlement here."

Whalen's sentiments are echoed by State Fund spokeswoman Jennifer Vargen. "We have been interested in engaging them in communication and keeping the lines of communication open," she says. Vargen, however, declined to discuss any specific steps that State Fund might take, citing the on-going nature of the litigation.

As to the status of the case, a new amended complaint is now pending before Sacramento Superior Court Judge Loren McMaster. Earlier, McMaster refused to toss out CASE's fourth cause of action— that in 2001 State Fund officials engaged in fraud during settlement negotiations over two grievances CASE filed that challenged State Fund's use of private outside counsel.

The amended complaint renews charges that State Fund is violating Government Code section 19130 by hiring outside counsel at fees that exceed what it would cost to use its own in-house attorneys. In the 2001 agreement CASE agreed not to challenge State Fund's use of outside counsel in exchange for assurances that outside attorneys would only be used in cases stemming from its liability policies.

CASE says that data provided by State Fund in 2006 showed that its use of outside counsel actually increased during the period of time the agreement was in effect and that private attorneys were used in cases outside the scope allowed under the deal. CASE alleges that State Fund had only 30 cases assigned to outside counsel in 2000— the year before its pledge to CASE to reduce the use of outside counsel— but 1,668 cases were assigned to private attorneys as of September 2006.

CASE's complaint maintains that the agency's actions damaged the career opportunities of its members and is asking the court to enjoin State Fund from using private attorneys in violation of section 19130. In the event that fraud is found, CASE is seeking unspecified punitive damages.

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Filed in San Francisco by Brad Cain