In its complaint, the State Fund said Mr. Garamendis threats to “usurp controlfrom its statutorily established board of directors and management” are improper because it believes that RBC statutes dont apply to State Fund.

Mr. Garamendi told NU he is working on a response to State Fund's lawsuit, which was filed in San Francisco. “We have 30 days and I anticipate we'll take the 30 days,” he said.

Preserving the status of State Fund “has to do with reserves,” he explained. “One of the very difficult and serious problems facing all workers' compensation companies is to maintain adequate reserves,” he said. “Medical costs, litigation, indemnity and so forth are escalating, and escalating at an extraordinary pace, causing companies to have reserve problems,” he added.

What reserve levels are appropriate for State Fund?

Mr. Garamendi cited a letter sent by State Fund in May to agents and brokers discussing a reserve controversy between auditor PricewaterhouseCoopers and State Fund. “I'm not prepared today to make a statement as to what I think is adequate, but you can see what PwC thinks is adequate,” he said.

The letter (a copy of which was supplied to NU by the Fund) said that PwC has recommended that State Fund boost reserves by $800 million, retroactively to 2002. In the letter, State Fund said, however, that its reserves “have been deemed adequate by a well respected, independent, national actuarial firm, Milliman USA, in their role as State Fund's appointed actuary.”

“State Fund has $8.8 billion in reserves to ensure that we can meet all of our obligations,” the letter said, calling PwCs recommendation an “overreaction” to a difficult comp climate.

The State Fund, which has experienced exponential growth in recent years because of lack of capacity in the market, now writes more than 50 percent of all workers' comp policies in the state. According to the letter, State fund has 262,000 policyholders.

In its statement about legal action against the department, State Fund said it receives its authority to provide workers' comp insurance directly from the California Constitution and statutory mandate. State Fund also said Mr. Garamendi's efforts to “exert control” are “illegal and unwarranted” because the Fund is solvent and has adequate claims reserves to meet its obligations to injured workers and employers.

In March, Mr. Garamendi that the State Fund had put together, at his direction, a business plan to address its financial problems and reduce new business writings. Specifics of the plan include putting through a rate increase, reducing broker commissions, scrutinizing broker submissions, and putting stronger underwriting practices in place.

In April, he directed the State Fund to ease access requirements for small businesses that pay $25,000 or less in annual premium. He also directed the State Fund to amend review processes for other new business applications.

In a separate development concerning California workers compensation, Commissioner Garamendi announced that he had obtained a conservation order over insolvent insurer Fremont Indemnity Company last week, putting it under the operational control of the California department. The order does not impact employers now covered by Fremont Employers Insurance Company, a company formed in 2002 by Employers Insurance Company of Nevada, which purchased Fremont Indemnitys ongoing book of business at the time.

Reproduced from National Underwriter Edition, June 9, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.