State Fund Plan Draws Fears of Higher Workers' Comp Rates

Construction companies and similar businesses beware: Workers’ compensation insurance rates could soar if a plan to sell part of the State Compensation Insurance Fund comes to fruition.

The budget compromise reached earlier this year by Gov. Arnold Schwarzenegger and the Legislature calls for the state to get $1 billion from the state fund. The only realistic way of doing so is by selling off its most profitable lines, which have been subsidizing workers’ compensation insurance rates for risky clients.

The state fund’s constitutional role is the insurer of last resort for tens of thousands of businesses such as construction companies and others with a high risk of worker injury. Through the years, the State Fund—which is run like a private company by a government-appointed board—has expanded to offer market rate coverage for lower-risk companies, such as advertising agencies and others.

Drive Up Premiums

The planned sale is significant because it likely would drive up premiums for the thousands of Orange County employers in high-risk industries since lower-risk policies subsidize riskier ones.

But the sale plan, little noticed amid the larger state budget battle, faces a hurdle. The 11-member state fund board—nine of whom were appointed by Schwarzenegger—has voted to oppose the sale of its business assets, saying it not only would harm the solvency of the state fund but also would hurt the state’s economy.

The administration contends the budget provision will be enforced despite the board’s opposition.

Even if the administration can force a sale, it’s unclear whether other carriers would step forward to buy the customer portfolio and at what price.

Business groups, struggling with the recession, fear their members will be hit with premium hikes without the possibility of buying affordable policies elsewhere. They’re concerned about a return to the situation of six years ago, when rates doubled and even tripled, forcing companies to lay off workers or leave the state.

The plan comes at a tough time. The entire workers’ compensation insurance market appears headed for an extended period of rate hikes and turmoil as medical and other claim costs have outstripped premium revenue.

For roofing companies, a spike in the state fund’s rates could force smaller operators to skirt the law.

“This will hit hardest those of us who are playing by the rules,” said Dave Chapman, president of Chapman Coast Roofing in Fullerton who also is president of the Roofing Contractors Association of South-ern California.

Chapman said his own company and most other roofing contractors are insured through the state fund.

“If this state fund sale happens and rates go up, I guarantee you more roofers will misclassify their employees so that they won’t have to pay the higher premiums,” Chapman said. “The more they raise the rates, the more cheating will go on.”

Past Example

Some fear a return to the workers’ comp market of a few years ago.

From 2000 to 2004, more than two dozen insurers dropped their California workers’ comp businesses and many employers saw their premiums triple in four years. As a result, thousands of employers flocked to the state fund, which by 2004 swelled to encompass more than half of all premium revenue in the state.

The state fund’s board members cited that recent history in their decision to reject the governor’s proposal.

State fund spokeswoman Gina Simons contends no sale could go forward without the board’s agreement.

The administration disputes that. The Department of Finance has hired a “sale side adviser” to analyze what parts of the state fund are most suitable to put on the block.

“We are moving forward with this. It was the intent of both the Legislature and the governor and it is now enacted state policy,” said H.D. Palmer, spokesman for the department.

The issue could end up in court, tying up any sale of the state fund’s book of business for months.

Fine is a staff writer with the Los Angeles Business Journal. Andrea Rangno contributed to this story.