By DREW COMBS
Javier Primera, president and owner of construction contractor Acro Constructors Inc., wouldn’t appear to have a huge gripe against California’s State Compensation Insurance Fund.
After all, he’s only been a customer of the quasi-governmental insurer since 2004, when he hired the first employee at his small general contracting company in Burbank.
None of his six employees have filed a workers’ compensation claim. He can’t recall any large premium cost hikes since his original $2,000 went to purchase a policy.
Nonetheless, in a lawsuit filed in June, he alleges that fund executives committed fraud, and he is owed money.
“We thought we were happy with it,” he said. “When you don’t know anything else, you think you’re getting the best deal.”
What Primera and his lawyers say he didn’t know was that administrators affiliated with State Fund were retaining 1.25% to 3% of premiums as bonuses and other types of payments,money that they say should have been returned to policyholders.
These administrators oversee safety groups or employer associations that date to 1943. They were created to provide employers in the same lines of business with similar rates and discounts. And since State Fund is a nonprofit, any excess funds should be returned to policyholders in the form of premium rebates or dividends.
State Fund was started by the California legislature in 1914 as a low-cost insurer of last resort for employers who were unable to get workers’ compensation insurance from private insurers.
The fund has more than 220,000 policyholders. Yearly revenue from premiums is $2 billion.
But in the past 15 years or so, San Francisco-based State Fund has lurched from one crisis to the next. During a workers’ compensation crisis in the early 1990s, several employers sued State Fund, accusing it of stockpiling reserves and charging higher premiums than necessary.
In one case involving Los Angeles-based Notrica’s 32 Street Markets, a jury hit the fund with a $20 million punitive damages verdict. In another case filed by Irvine-based Smilecare Inc., a jury found no evidence of over-reserving and ruled in favor of the fund.
State Fund spokeswoman Julie Jenkinson declined to comment on the latest litigation involving Acro until an initial hearing set for July 31 in Los Angeles Superior Court.
The roots of the lawsuit date back to 2004 when former Insurance Commissioner John Garamendi sued the insurer in an attempt to pressure the fund into opening its books to see if it was passing on claims savings to employers.
Former State Fund president Dianne Oki was hauled before the Legislature to explain the slow response in reducing premiums, prompting her to announce her resignation in 2005. James Tudor, a 34-year veteran of State Fund, took over.
Two years into his term, Tudor was ousted in March amid an internal probe into accounting practices and conflict of interest charges. Those charges involved the sale of discounted polices through outside employer associations with ties to board members who recently had resigned. It is the sales of these discounted policies that are at the heart of the current litigation.
The state Department of Insurance now suggests that the fraud could top $1 billion. Earlier this month, State Fund asked the California Highway Patrol to take part in its probe. Named in the Acro lawsuit is Tudor as well as Charles Savage, the insurer’s former top lawyer, who recently resigned his position but still serves as one of the fund’s eight assistant chief counsels.
State Fund routinely paid dividends or reduced premiums from excess earnings for years. But according to Primera’s lawyers, it has not declared a dividend since 2001.
His firm, Pearson Simon Soter Warshaw & Penny LLP, is seeking class action status for the lawsuit.
Primera, who oversees and hires subcontractors in the renovation of existing office space, said he decided to become a lead plaintiff in the case after observing the disarray at State Fund.
Frank Falzetta, a Los Angeles-based partner at Sheppard Mullin Richter & Hampton LLP, is representing State Fund in the lawsuit. He didn’t return calls for comment.
Combs is a staff writer with the Los Angeles Business Journal.
