RANCHO CUCAMONGA -- Was the State Compensation Insurance Fund just being a school yard bully when is former management terminated the "preferred broker" status of 140 brokerages around the state in 2003? Or was this move a rational response to a growing fiscal crisis at California's workers' comp carrier of last resort? The question is central to a lawsuit by one Southern California brokerage – Cumbre - that was caught up in the purge.  Now, six years later, a San Bernardino County jury is finally getting the chance to answer that question.

The case, Cumbre Inc. v. SCIF, involves serious questions about the rights of brokers and others who do business with SCIF, how disputes are resolved, and whether the doctrine of fair procedure applies to its broker contracts. That doctrine holds: "When a private business has substantial economic power and the use of that power can affect one's ability to earn a living—the decision-making must be both substantively rational and procedurally fair."

Simmering in the courts for years now, Cumbre's case has already been up to the court of appeals once and along the way garnered a decision that played a pivotal role in another case (Palm Medical v. SCIF) involving fair play and honest dealings between SCIF and its business partners. SCIF lost that one, but this one doesn't appear to be a slam dunk for either party.

And so it was that after five weeks of testimony, attorneys for Cumbre and SCIF squared off for a final time yesterday making lengthy closing arguments before sending the jurors off to their deliberations. Those deliberations are continuing today.

Process or Punishment?

Faced with the burden of proving the SCIF's decisions were irrational and that it failed to follow a process that was procedurally fair, Cumbre attorneys, Rick Friess and James Powers of Nossaman LLP, framed the termination program as an "ill-conceived plan" that would do little to solve the fiscal crisis that State Fund was experiencing at the time. Noting that the genesis of the broker termination program originated from former Insurance Commissioner Harry Low, Friess hammered on the point that SCIF seemed to adopt it without any real analysis as to whether it would actually help their situation.

"Where did SCIF ever say to the Insurance Commissioner that this isn't a good idea? [To ask him] to do the math," he asked, pointing out that terminating all the brokers reduced SCIF's reserve requirements by about $10 million when it was still under reserved by hundreds of millions of dollars."This was never going to fix its financial problems," Friess added noting that it only served to cause hardship for the affected brokers. He also maintained that SCIF conceded the folly of the program by moving to undo it less than a year later when all save Cumbre were ultimately let back in.

But SCIF's attorney, Andre Cronthall with Sheppard, Mullin, Richter & Hampton LLP, flipped this argument, maintaining that the terminations were an integral part of a broader recovery plan during a time of crisis. "The decision was rational because two Insurance Commissioners urged it, terminating the brokers sent a message to the others to watch their loss ratios and it reduced the amount of commissions paid [on these money losing policies]," he told the jury. "And if that business was coming to SCIF anyway, they shouldn't have to also pay a commission."

He also countered the notion that the program was undone, maintaining that it is still in effect today. Brokers with loss ratios consistently above 80% will be put on a watch program and ultimately terminated if results don't improve, he told the jury. "And there is no evidence that SCIF disagreed with the Insurance Commissioner over whether [the program] was a good idea. That's a point they clearly agreed on," Cronthall added.

SCIF is California’s market of last resort.

Stakes Are High

"You can't beat somebody up and then say 'I'll stop doing it as long as you agree not to complain about the past injuries.'" -- Attorney Rick Friess, representing Cumbre

At stake is Cumbre's and parent Coachella Valley Insurance Services' right to recoup lost commissions from State Fund, which exceeded $1.4 million in the year prior to its broker access being revoked, and last profits. Cumbre was the largest broker included in the terminations, having about 600 accounts with the insurer at the time that amounted to $16 million in business with SCIF. Those commissions dropped to nothing within two years of the decision after the renewals ran their course. More telling though is its alleged current and future damages from lost profits that it could have earned. According to testimony delivered at the trial and reiterated during the summation, Cumbre's damages could exceed $47 million, according to Friess.

SCIF, however, was conceding nothing. Even if the jury found an obligation of fair procedure and that SCIF acted irrationally -- points that Cronthall denied -- Cumbre suffered no damages that weren't of its own doing. He argued that Cumbre had a faulty business model by focusing too heavily on the workers' comp market and that it could have mitigated any losses by agreeing to drop its lawsuit and seek reinstatement.

But Friess says this was an untenable position for Cumbre, likening it to a school yard bully stealing someone's milk money and then offering to stop for a price. "You can't beat somebody up and then say 'I'll stop doing it as long as you agree not to complain about the past injuries.'"

With the jury expected to reach a quick verdict we'll soon find out who's drinking a cool glass of milk and who's licking their wounds. Stay tuned.

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