January 28, 2023
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In a crunch, State Fund targets small businesses


The State Compensation Insurance Fund, a government-sponsored insurer of last resort that’s hurting for business, has taken its hunt for cash into the courts, suing mom-and-pop contractors and billion-dollar companies alike in the Tri-Counties.

The suits appear to be part of a crackdown on collections as the fund prepares to lay off thousands of workers amid falling market share and a struggle to get costs under control.

Created in 1914 by the California Legislature, the State Fund provides workers compensation insurance to firms that can’t find it elsewhere. It has historically controlled about a fifth of the market, but its share peaked to more than 50 percent after workers comp reforms forced other insurers out of the state in 2005. That share declined to less than 15 percent, and the State Fund said in October that it planned to lay off more than a quarter of its 7,300 employees in order to reap more than $175 million in cost savings, according to reporting in the Sacramento Bee and industry publication Workers Compensation Executive.

“[W]e operate at an expense ratio over 90 percent. We spend more operating the company than we do on benefits to injured employees,” State Fund CEO Tom Rowe said in a widely circulated email to employees at the time.
While the most high-profile case in the region involves Select Staffing of Santa Barbara, small businesses are the latest to feel the heat.

In recent weeks, the State Fund has filed seven separate lawsuits against small builders and contractors that it alleges have not paid their premiums. The suits are small — each seeking about $30,000 — and a State Fund spokeswoman said the flurry of collections suits is not related to the fund’s struggle to control its costs.

“There has not been any major increase or decrease in the amount of policies being referred to collection agencies,” spokeswoman Gina Simons told the Business Times via email. “Accounts that do not pay their bills are referred to the collection agencies after we have exhausted all of our efforts.”

However, some of the business owners being targeted by the lawsuits say they have been treated unfairly by the State Fund. One business owner, who did not want to be named because the company is working with the State Fund to resolve its lawsuit, said that several employees made claims the owner believed were false.

When the owner asked the State Fund to investigate the potential fraud, the fund’s agents told the owner that it was the owner’s job to provide evidence of fraud because the State Fund did not have the manpower to mount an investigation.

“They said it was cheaper to pay the employee’s claim off than to investigate. They told me I would have to find [the employee] and see if they were doing any thing wrong. I told them, ‘That’s your job,’ ” the business owner said. The business owner refused to pay the potentially fraudulent claims and switched insurance providers. “You’re hiring somebody to take care of your business, and they’re sitting back and collecting the money. [The State Fund] is helping the employee, not the employer.”

Simons, the State Fund spokeswoman, disputed the business owners’ characterization of the fund’s practices. “State Fund’s policy is to thoroughly investigate every suspected fraudulent claim we uncover or that is reported to us,” she wrote in an email.

Last year, the State Fund won a state court lawsuit against Santa Barbara-based Select Staffing for $30 million in underpaid premiums and $2 million in punitive damages, plus $18 million in accrued interest. By November, however, it became clear that the State Fund’s suit had been filed against an entity within Select’s family of companies that had few assets to repay such a large judgment.

In November, the State Fund took the aggressive legal tack of filing a federal Racketeer Influenced and Corrupt Organizations Act, or RICO, case in Los Angeles court. The case was filed against Select’s entire family of companies, which generate $1.8 billion in revenue per year, and named several of Select’s principals in an effort to claw back an $80 million payout they engineered during a recapitalization of the company.

That case is in settlement talks, but even a large settlement with Select won’t fix a $175 million budget deficit this year or beef up its capacity to investigate phony claims.

The staff cuts at the State Fund are expected to take effect in the second quarter of this year.

• Contact Stephen Nellis at snellis@pacbiztimes.com.