Calif. Commissioner Orders Audit of State Compensation Insurance Fund

March 29, 2007

California Insurance Commissioner Steve Poizner has ordered an audit of the State Compensation Insurance Fund (SCIF), amid questions regarding the corporate governance and management of the organization. The audit follows the firing of two key members of the fund just days ago.

“Today, I am ordering an Audit of SCIF,” Poizner said yesterday. “This audit will be an independent, thorough, top-to-bottom examination of SCIF to include a review of matter relating to the recent dismissals, as well as all aspects of the organization and its governance.”

Meanwhile, the Senate Banking, Finance and Insurance Committee yesterday held a hearing as “the first step in an ongoing process to scrutinize the State Fund,” according to Committee Chairman Mike Machado.

At the hearing, State Fund Board Chair Jeanne Cain testified that the board needs to be expanded and the compensation increased, saying the five-member board is too small and the pay ($100 per meeting) is too low for an organization of the size of State Fund. Cain also testified State Fund’s market share is projected to fall to 26.7 percent in 2007, down from the high of 53 percent reached in 2003.

Nanci Clarence of the San Francisco law firm of Clarence & Dyer LLP is overseeing the internal investigation of SCIF. She testified that the investigation is focused on the administrative fee program that provides discounts to group programs. Clarence explained the administrative fee program was begun in 1993 to provide group members discounts to reflect lower risk due to workplace safety programs run by the groups.

Both Clarence and Cain testified the investigation is ongoing. Clarence said “We are following the evidence wherever it leads us” and involves extensive examination of electronic date and dozens of interviews with State Fund employees.

Clarence testified that evidence uncovered during the investigation was of such importance that it required an interim presentation to the board before the investigation was completed. That presentation led to the firings of former president James Tudor and Renee Koren, vice president in charge of group programs. Clarence added that because those were personnel matters, “our ability to provide specifics [of the investigation’s findings so far] is somewhat limited.”

In a separate action, Poizner issued directives to SCIF regarding structural and operational changes. He called upon SCIF to respond to his call to action within 14 days or face formal regulatory action, which could include a public hearing.

The Commissioner advised State Fund to address the following:

1. SCIF must transfer internal audit oversight to the board of directors or to an independent audit committee of the board of directors.

2. Establish an audit committee comprised exclusively of board members to maintain oversight and communication with both the internal and external audit functions in order to ensure the integrity of the SCIF’s financial statements, internal controls, the fund’s compliance with legal and regulatory requirements, and the findings of internal and external audits.

3. Immediately establish a chief financial officer and a chief investment officer position. SCIF does not currently have those positions.

4. Limit the general counsel’s responsibilities to legal services only so as to maintain objectivity and to avoid potential conflicts of interest.

5. Immediately dismiss or place on administrative leave of all members of SCIF’s management who knew of, or who by virtue of their positions should have known of, improper payments made by SCIF.

6. Adopt a clear conflict of Interest policy and code of ethics for board members and management staff to avoid the types of conflicts of interest which have occurred at SCIF in recent years.

Commissioner Poizner also met with Gov. Arnold Schwarzenegger late Tuesday to brief him on the Department of Insurance’s recommendations and his plans to call for an audit. Poizner also met with the new president of SCIF, Larry Mulryan, to urge cooperation during the examination.

“California’s businesses and injured workers depend upon SCIF to serve as a healthy, functioning organization,” Poizner said. “Anything less than full public accountability and transparency is wholly unacceptable.”

Additional information for this article was provided by CDI.

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