AIA Approves Calif. Commissioner’s WC Reform Ideas

February 28, 2003

Calif. Insurance Commissioner John Garamendi has correctly identified many of the serious problems plaguing the state’s workers’ compensation system and the critical solutions that are vital to improving the marketplace, the American Insurance Association (AIA) said. AIA also applauded the commissioner’s decision not to appeal the Board of Equalization’s (BOE) ruling overturning the effort of the California Department of Insurance to retroactively tax workers’ comp deductible policies.

“We are encouraged that Commissioner Garamendi is using the bully pulpit of his statewide office to advocate and promote the need for changes and reforms to California’s struggling workers’ compensation system,” said Jeanne Cain, AIA vice president, western region. “Many of the commissioner’s ideas are consistent with reforms insurers have long been advocating. We strongly agree with his recommendations to control skyrocketing medical costs, reduce litigation and bring consistency to the permanent disability rating determination process. Systemic reforms are critical in order to restore profitability and attract new capital to California’s workers’ compensation market. Right now insurers are losing 20 cents on every dollar they collect in premiums,” she said.

“While we support many of Commissioner Garamendi’s recommendations, some of his ideas, such as creation of a 24-hour medical care system, have proved unsuccessful in other states,” said Cain. “The NAIC reviewed many similar projects attempted in the mid-1990s and found that they all failed. We look forward to working with the commissioner, the legislature and all parties committed to reforming California’s ailing workers’ compensation system.”

It was also announced that Commissioner Garamendi has decided not to appeal the BOE’s December ruling to overturn the Insurance Department’s efforts to retroactively tax deductible workers’ comp policies.

“We applaud the commissioner’s decision not to appeal the BOE’s ruling,” said Cain. “We strongly disagreed with the department’s assertion that reimbursements under deductible policies are ‘premium’ subject to gross premium taxation. Statutory language, legislative history, an opinion by the California Attorney General’s Office and the department’s own actions and correspondence provided the basis of AIA’s legal challenge filed with the BOE.”

AIA filed an appeal on April 5, 2002, requesting that the BOE review the department’s assessment notice and find that the department exceeded its authority and misinterpreted the statute which created the deductible policy program. Deductible workers’ comp policies were established in the Insurance Code by legislation sponsored by the Independent Insurance Agents and Brokers Legislative Council (now IBA West) in 1994.

“Commissioner Garamendi’s decision eliminates the threat to retroactively tax insurers and employers that use this cost-saving workers’ compensation insurance product,” said Cain.

The department’s Feb. 22, 2002, notice to insurers was the first time the department tried to collect taxes in the seven years the products have been available. Employers would have faced an estimated liability of over $100 million for these deductible policy payments if the tax had been upheld.

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