Colorado Committee Advances New Oversight for Workers' Comp Insurer

Legislation to overhaul the operations of Pinnacol Assurance Co., the state-backed workers' compensation insurer, cleared a special legislative panel in a party-line vote.

The Pinnacol Interim Committee concluded a week of hearings by recommending seven bills. Provisions would limit the insurer's reserve surplus and change the board to include nonmanagerial workers and injured workers. Broader provisions would reduce incentives for rejecting claims and double penalties for insurers who wrongfully deny or delay claims.

Pinnacol officials and Republican legislators warned the changes could lead to higher rates and market instability.

The proposed bills now go to the legislative council committee, composed of leaders from the House and the Senate, which will vote Nov. 10. If they win council backing, they will be considered when the state General Assembly reconvenes in January 2010.

Together, the proposals reflect legislators' concerns about transparency and checks-and-balances, said state Sen. Morgan Carroll, D-Aurora, chairwoman of the interim committee. She said a key component is the restoration of a mandated annual oversight report from Pinnacol.

"It gives us data metrics we care about," Carroll said.

Created by state statute in 1915, Pinnacol was reorganized from a state agency to a mutual insurance company ? still with limited state oversight ? in the 1980s and 1990s.

While the state subsidizes Pinnacol with tax breaks, participation in the state retirement plan, the use of fraud-investigating attorneys and other means, "We have no check and balance in Colorado. None," Carroll said.

As Pinnacol is a quasi-governmental entity, it must be accountable to the state, Carroll said.

"It horrifies me that we have any quasi-governmental entity that is so opposed to oversight," she said. "The more they freak out, the more I'm wondering why."

Legislators have questioned Pinnacol board's spending policies and the size of the insurer's surplus. Carroll said Pinnacol has yet to comply with a 2003 report that showed its executive compensation was about double that of comparable entities. By changing the compensation of the board of directors and mandating increased disclosure of its meetings and decision-making, the state can gain more oversight without dictating day-to-day business, she said.

In a statement, Pinnacol President and Chief Executive Officer Ken Ross said the agenda of the hearings was stacked against Pinnacol from the start. He said the committee also overstepped its mandate by pursuing steps that attack the industry as a whole.

"As we said from the start, Pinnacol is not broken and doesn?t need to be fixed," Ross said. "Some have called these proceedings the 'Pinnacol Follies' and a witch hunt. At a time when Colorado faces serious budget shortfalls and hard decisions regarding educational spending, infrastructure improvements and health care spending, the legislature decided to spend taxpayer dollars to study something that didn't need to be studied."

Earlier this year, lawmakers sought to take $500 million from Pinnacol's $650 million surplus to help balance the state's budget (BestWire, April 15, 2009). That proposal failed to become law amid an opinion from Colorado Solicitor General Dan Domenico that Pinnacol's funds "are not assets of the state," that its shareholders have vested rights and "seizing them would violate the Colorado Constitution." In the aftermath, the legislature formed a Pinnacol Interim Committee to study the workers' compensation market in the state and the structure, solvency and status (BestWire, Aug. 5, 2009).

The top five writers of workers' compensation insurance in Colorado in 2008, according to A.M. Best Co. state/line data, were: Pinnacol Assurance Co., with a 57.4% market share; American International Group, 6.2%; Hartford Insurance Group, 5.3%; Liberty Mutual Insurance Cos., 5.3%; and Travelers Group, 3.8%.