Javier Primera, the president and owner of Burbank 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. None of his six employees have ever filed a workers’ compensation claim and he can’t recall any large premium cost hikes since his original $2,000 went to purchase an insurance policy.
Nonetheless in a lawsuit filed last month he alleges that fund executives essentially 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 the insurer, commonly referred to as State Fund, were retaining 1.25 percent to 3 percent 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 and were ostensibly created to provide employers in the same lines of business with similar rates and discounts. And since State Fund is a non-profit, any excess funds should be returned to policy-holders in the form of premium rebates or dividends.
State Fund was established 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 other private insurers. The fund has over 220,000 policy-holders and annual revenues generated from premiums total a little over $2 billion.
But over the last 15 years or so the San Fransisco-based entity 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 over-reserving against claims, charging higher premiums than necessary.
In one case involving Los Angeles-based Notrica’s 32 Street Markets, an L.A. jury hit the fund with a $20 million punitive damages verdict; in another case filed by Irvine-based Smilecare Inc., an Orange County jury found no evidence of over-reserving and ruled in favor of the fund.
Internal investigation
Julie Jenkinson, a spokeswoman for State Fund, declined to comment on the latest litigation involving Acro until an initial hearing on July 31 in Los Angeles Superior Court.
But its roots date back to April 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.
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 February 2005. James Tudor, a 34-year veteran of State Fund, took over as president.
Two years into his tenure, though, in March 2007, Tudor was ousted amidst an internal investigation into lax 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 had recently resigned. It is the sales of these discounted policies that are at the heart of the current litigation.
The state insurance department now suggests that the fraud could top $1 billion. And 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 attorneys it has not declared a dividend since 2001.
“The essence of our complaint alleges that there was an abuse of the corporate structure by administrators who provided no real benefit to the companies but took large parts of the excess earnings that would have gone back to shareholders,” said Bruce Simon, an attorney at Pearson Simon Soter Warshaw & Penny LLP, the Sherman Oaks-based law firm that is representing Acro.
The law firm is seeking class action status for the lawsuit. Simon said the firm has “gotten an enormous response from other potential class members, as well as people who have information about the way things are being done at state fund.” He declined to elaborate further.
Primera said he decided to become a lead plaintiff in the case after observing the disarray at State Fund.
“I am not looking to get rich. I felt someone needed to represent the small business owners like me trying to make a living and trying to do things the right way,” said Primera, who has run his company for the past five years.
Acro oversees and hires subcontractors in the renovation of pre-existing office space. The firm recently completed a renovation of human resources company Administaff’s Glendale sales office. Before going into business for himself, Primera was a project manager for a commercial contractor in Glendale.
Frank Falzetta, a Los Angeles-based partner at Sheppard Mullin Richter & Hampton LLP, is representing State Fund in the lawsuit. He did not return calls for comment.
