Federal Regulation- Good Or Bad; Wanted Or Unwanted?

Selling the state agency that provides workers' compensation insurance could result in a long legal challenge, a former Oklahoma attorney general warned a legislative panel Wednesday.

The sale of CompSource Oklahoma to a private insurance carrier probably would be challenged in court with the ruling eventually appealed to the state Supreme Court, said Larry Derryberry,who served as Oklahoma's attorney general from 1971-79 and whose practice includes insurance defense.

"We could be in a morass for two or three or five years," Derryberry said. "You don't know how quickly you'll get the Supreme Court to review this case. The Supreme Court is never predictable."

The Legislature passed a measure this year stating its intent to privatize CompSource no later than Dec. 31, 2010. Options include selling CompSource, which has about 300 employees, or mutualizing it, meaning its members would be the owners.

Derryberry said litigation could be avoided if CompSource is mutualized first and sold later.

CompSource is a nonprofit, self-supporting workers' compensation insurance company. It was established in 1933 by the Legislature as the State Insurance Fund to make sure businesses in Oklahoma have access to workers' compensation insurance coverage for their employees. It also provides workers' compensation insurance to most state agencies and to various public entities, such as school boards, cities and counties.

Attorney general opinions in 1988 and in 1995 determined CompSource is a state agency, Derryberry told members of the Task Force on the Privatization of CompSource.

To complicate matters, CompSource also could be considered a private enterprise because of the insurance policies it writes, Derryberry said.

Legislators may be limited under present law with what they can do with CompSource, he said. The state Supreme Court in 1975 ruled lawmakers could not use cash reserves from CompSource and appropriate that for state operations.

Derryberry said he thinks policyholders, not the state, would receive any money from the sale of CompSource.

Rep. Dan Sullivan, co-chairman of the task force, said legislation likely would be required to make changes to CompSource. Legislation also could be passed that addresses what happens to proceeds if it is sold, he said.

"Our purpose is to make sure that the workers' compensation system is solid," said Sullivan, R-Tulsa. "Our purpose is not to raid CompSource for an additional source of money.

"We're looking at the insurance market and whether or not a state entity should be competing with private companies for the same business when the state entity has a competitive advantage," Sullivan said.

CompSource has about a 5 percent advantage over private carriers because it doesn't have to pay premium taxes and doesn't have to contribute to a state fund to cover claims of an insolvent company.

Jason Clark, president and chief executive officer of CompSource, told the task force the agency has about 26,000 policyholders. He said 70 percent of its policies are for premiums of less than $5,000, with most of them for small businesses that cannot find affordable workers' compensation rates elsewhere. They make up about 10 percent of the income of the $257 million in premiums written by CompSource.

"The other percentage appears to be from state and other public entities," Sullivan said. "I would suspect that if the state agencies went out on the market and purchased their comp insurance there's a lot of private carriers that would take that risk."