The resignations of two members of State Compensation Insurance Fund's board of directors last month, presumably at the behest of the governor's office over concerns of possible conflict of interest, were an initial peek into the Wonderland of State Compensation Insurance Fund safety groups. The resignations from the state's largest writer of workers' comp are just the tip of the iceberg. Big dollars and small services, political influence and incestuous insiders, are what this story is about. But it's turning into a lot more nightmare than fairy tale.

As you will read here, safety groups are no small potatoes at State Fund, making up an estimated one-third of total premium. And a source inside of State Fund  reveals some of the inside workings of the groups.

It's now a matter of just how far down the rabbit hole California's politicians and regulators want to burrow, but what they'll find is an underworld that would have made even Alice's head spin. And in this world the Mad Hatters are the administrators who earn fees – some in the millions – by administering State Fund's estimated 400 safety groups. Just how deep into the world of California politics these fees go is now a matter of investigation.

If there is a King of Hearts, it would be State Fund president Jim C. Tudor, who has for years nurtured the groups as if they were his lucky deck of cards.

But that deck is now missing two aces: Frank DelRe, president of Western Insurance Administrators, and Kent Dagg, chief executive director of the Shasta Builders Exchange. Both resigned from the board of directors last month.

Some of the big names at the group tea party, like DelRe, are former State Fund employees who saw the possibility of a cash cow and have struck it rich. State Fund pays administrators of the largest groups up to 3 percent of the premium, according to a fee schedule obtained by Workers' Comp Executive in 2003. It is unclear if commission fee schedules have changed, and State Fund refuses to comment on the matter.

DelRe and Dagg

DelRe's Western Insurance Administrators administers workers' compensation groups for seven trade associations. DelRe himself runs at least two of those associations, the Western Regional Master Builders Association and California Automotive Services Association. Both are nonprofit entities.

Western Regional Master Builders Association had more than $7 million in the bank as of the end of 2004, and collected $807,000 in membership dues and assessments that year, according to official documents, the most recent year available. California Automobile Services had a more modest $433,000 on its books at year-end.

Income for Western Insurance Administrators is not available publicly, but sources at State Fund tell Workers' Comp Executive the fees are "significant."

DelRe could not be reached for comment on this story at Western Insurance's headquarters in Long Beach.

Redding-based Shasta Builders Exchange had $2.9 million in total assets at the end of 2005, according to official filings. It also collected $272,000 in membership dues. What's not clear is how much it earned specifically from State Fund administrative fees.

Dagg told the Redding Record Searchlight newspaper that he gave up his director's seat to focus on an affordable housing initiative in the Northern California city. He refused an interview with the Executive. But in the Redding paper he denied allegations that he and DelRe resigned to avoid a potential conflict of interest.

"I knew there would be people questioning this, so rather than draw attention to the board I decided to take myself out of the picture," Dagg told the paper.

 Big Fees and What Services, Exactly?

State Fund refuses to discuss the size of the fees it pays safety group administrators. Not so amazingly perhaps, safety group administrators won't either. In fact, it's safe to say that employers that belong to safety groups may have no clue that the groups, most of which also collect annual membership dues from insureds, also are paid by State Fund.

So the question is: Where do those fees and dues go? Following the money is not so simple: First, the fees go to the administrators. And, we've learned, the fees are big enough that the administrators sometimes fight among themselves – just like brokers – for new members.

"Safety groups try to raid each other all the time," a State Fund source familiar with group operations says. "One of the worst used to push for these letter campaigns. He wanted access to a statewide market, even though he was regional and that would conflict with a lot of other builder groups we handled." And when other trade associations with small safety groups infringed on his territory, "he'd get angry and contact Tudor," the source says.

"There's an incestuous relationship with these groups and State Fund, DelRe especially," says the State Fund source. Tudor and DelRe are clearly very close.

The State Fund source says that some administrators try to keep such a low profile that some employers are put into groups without ever knowing it. That provides the opportunity to funnel more cash to the group administrators.

The automated rating system presently in use recognizes group eligibility factors, such as class code and X-Mod, and automatically puts employers into the groups. This provides both a discount to the employer, and the additional possibility that in this competitive world of pricing wars, the business will come to State Fund, and, of course, a fee will go to the administrator. The administrator has done nothing to bring this business in and, in almost all cases, it also belongs to a broker.

"A lot of these little [safety group] organizations are not vocal. They might send out a letter saying 'Thanks for being a member,' but they mostly go out of their way to stay under the radar," the source says. "They're very low profile and don't want to make themselves noticed by policyholders. But they certainly want to solicit more members."

One of the biggest issues is what these administrators provide in services. Some hold safety conferences and dispense safety brochures, but much of the literature is produced by State Fund, with State Fund logos. It gives the literature to the administrators for free.

It is easy to understand then how Tudor uses them to develop political allies on many fronts. Fees are paid to administrators and they use various vendors. These group administrators become political allies and are allegedly called upon by Tudor to make things happen, or not happen, at any level of government.

"The group contract used to be boilerplate and include safety training, safety forms and safety services," the State Fund source says. "The Fund gives them money to provide something that we already provide to policyholders. And there is a complete lack of oversight."

"Curiouser and Curiouser" Bonus Dividends

But the story gets "curiouser and curiouser," as Alice said. One of the biggest issues concerning groups in years past, when State Fund used to reward employers with good safety records, is the use of bonus dividends.

Employers that had favorable loss experience received individual dividends. If they also belonged to a safety group with favorable experience, State Fund would pay bonus dividends. The administrator doled these out to safety group members, according to the State Fund source and according to brokers who spoke with Workers' Comp Executive on condition of anonymity for fear of reprisal.

According to the State Fund source, not all of those dividends went to insureds; some part of them allegedly was pocketed by the administrators.

"The payment of bonus dividends by groups was always cloaked in secrecy," the State Fund source says. "Group representatives never knew how much the bonus dividend was. Not even the district manager was being told the real figure. That stuff went on for quite a while. We all wondered how much money was basically part of a shell game."

One broker says that according to language of the membership agreement of Western Master Builders Exchange, if the policyholder fails to keep his policy in force for a year and/or fails to renew the policy with the association after the first year, all earned dividends are forfeited.

And the forfeited amounts were allegedly kept by the administrators.

"I had a major contractor insured with SCIF through the association. I moved them to a union ADR [alternative dispute resolution carve-out] program also with SCIF," he says. "End result: They forfeited their earned dividend."

He said he made numerous complaints to SCIF and DelRe questioning the legality, but that got him nowhere.

State Fund groups do provide their members with discounts on premium. And although most of the members are happy to receive such discounts to cut up-front costs, it's unclear how loud the uproar would be if they knew just how this secretive world works.

Up till now, none of them has screamed, "Off with their heads," but as more light shines on the old bonus dividend issue, that time may come.

The Queen of Hearts doesn't like her tarts stolen. Nobody else does either.

All of this leads to one major question: Besides the group administrators,  where does the money trail lead?

-30-

NOTE: This story is the lead article in this week's print edition of the Workers' Comp Executive.  There are two new articles this week concerning the unfolding issues at State Fund: Publius address its Governance we have a follow-up on Scott Heib, the small roofer and how groups get involved in political efforts. Click on these links to read the stories now.

Other related articles:

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.

July 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.