State Fund severs ties with group administrator; issues update on audit

California’s State Compensa-tion Insurance Fund has terminated its relationship with Western Insurance Administrators and resumed its relationship with Shasta Builders’ Exchange.

“I can confirm we don’t have a business relationship with Western Insurance Administrators any longer,” State Fund Spokeswoman Jennifer Vargen told Insurance Journal. Vargen declined to discuss the reasons for the action. She did confirm that SCIF “renewed its contract with the Golden State Builders Exchange, an association made up of individual builders, of which Shasta is a part.”

Based in Long Beach, Calif., WIA used to serve as administrator for eight SCIF safety groups and was State Fund’s largest program manager with more than 25,000 participating employers. On its Web site, WIA touted its “ongoing 50-plus [year] relationship with the State Fund.” WIA did not respond to a request for comment.

State Fund’s termination of WIA comes six months after State Fund’s board of directors terminated its president, James Tudor, and another senior manager over what it termed as their “unacceptable” operation of the insurer’s administrative fee program that compensates organizations like WIA to place State Fund policies at discounted group rates.

The ousting of Tudor and Renee Koren, the latter who was responsible for overseeing State Fund’s group programs, came after Gov. Arnold Schwarzenegger’s administration confronted WIA President Frank DelRe over a potential conflict of interest concerning administrative fees paid to WIA while DelRe served as a State Fund director.

DelRe and Kent Dagg, CEO of the Redding, Calif.-based Shasta, resigned last fall after administration officials discussed the potential conflicts with the two directors.

Following the resignations of DelRe and Dagg, SCIF began an internal investigation that led to the firings of Tudor and Koren.

In March, Nanci Clarence of the San Francisco law firm of Clarence & Dyer LLP, which is overseeing the internal review, told an oversight hearing of the Senate Banking, Finance and Insurance Committee that the inquiry is focused on the administrative fee program.

The program began in 1993 to provide group members discounts to reflect lower risk due to workplace safety programs run by the groups, Clarence told the committee.

In an update on the internal review issued August 23 by State Fund, the insurer stated the team conducting the review “determined they had taken the matter has far as they could and that it should be referred to the California Highway Patrol.”

As a result of the referral of the internal probe to the CHP, the California Department of Insurance and the San Francisco District Attorney’s Office formed a task force to investigate “allegations of potential misconduct” by Tudor and Koren, according to the report.

The report added that due to the task force’s criminal probe, State Fund is unable to provide information on what the internal review revealed that led to the CHP referral and the formation of the task force.

“State Fund has been cooperating actively with the task force assembled to investigate whether any criminal conduct has taken place at State Fund or in connection with its operations,” the report stated.

In March, California Insurance Commissioner Steve Poizner ordered an audit of SCIF. “This audit will be an independent, thorough, top-to-bottom examination of State Fund to include a review of matter relating to the recent dismissals [of Tudor and Koren], as well as all aspects of the organization and its governance,” Poizner said.

Jennifer Kerns, a spokeswoman for Poizner, said the audit will be completed later in October.

In the August 23 report, SCIF reported it has made “fundamental” reforms of the administrative fee program “following a rigorous review of both operational and legal issues, as well as a complete analysis of the business case for the program.”

As what it called a “first step,” SCIF ceased all disbursements of administrative fees as well as payments to several unspecified vendors.

A review of the business merits of the administrative fee program by outside consultants concluded the program and the use of group administrators should be retained, the report disclosed.

“These programs help balance State Fund’s business portfolio and improve safety,” the report stated. “When properly administered and refocused on safety services, administrative fees are a worthwhile investment for State Fund.”

New contracts with group administrators are being drafted containing “carefully defined expectations, performance metrics, mandatory audits and financial incentives for safety program participation.” Groups that fail to meet the revised contractual obligations will not be permitted to participate in the insurer’s group program unless they demonstrate their willingness to conform their operations to the new standards, the report stated.

According to the report, State Fund has also instituted more stringent controls on expenditures and strengthened corporate governance to keep abreast of industry best practices.

The insurer also is developing a code of ethics and guidelines on financial conflicts of interest for board members, officers and employees, and has established a whistleblower hotline operated by an outside company.

In addition, SCIF’s board will be recommending the number of directors be increased, according to the report. The insurer wants to add six positions to its top management ranks.

Janet Frank, executive vice president of North American Field Operations for CNA Financial, has been hired as Tudor’s replacement. Frank, who could not be reached for comment, will take over in early October according to Vargen.