Calif. Commissioner Discusses Workers’ Comp, Homeowners’ Insurance

California Insurance Commissioner John Garamendi recently took time out from his schedule to chat with Insurance Journal Online Editor Dave Thomas regarding SB 938, “use it and lose it” practices against homeowners, workers’ comp reform, the fire season, and his announcement to run for lieutenant governor in 2006. To hear the complete audio interview, please visit www.insurancejournal.com/broadcasts/audio.

Insurance Journal: Let’s start with SB 938. It was recently defeated in the Senate Banking, Finance and Insurance Committee. What is the background on this and where are things going to go from here?
Insurance Commissioner John Garamendi:<$> This was a part of the ongoing effort in dealing with the broker and commission scandal that has rocked the national insurance industry. Obviously, everybody is aware of what took place at Marsh McLennan and the effect that’s had and the other settlements that have been obtained both in New York by Eliot Spitzer and by myself here in California.

There’s no doubt in my mind that we have a problem with brokers not disclosing to their customers how and who’s paying them. What we wanted to do here is make sure that customers, if they have been told by their broker that the broker’s working for them, that the broker really is. The bill unfortunately was defeated in committee. The insurance industry and the agents and brokers out there came down with both feet on top of it and that bill is on the side track now and it very well might not be coming back next year.

However, we are continuing to proceed with regulations which are done under a different code section and we believe that we have the legal authority and frankly the responsibility of providing definition here so the problem that emerged in the broker insurance industry isn’t repeated and consumers out there who are being assisted by a broker actually know what’s in it for the broker. It’s fairly straightforward. I know there’s a lot of opposition to it, but there’s a problem and it needs to be addressed. This bill would have done it. The regulations, on a different track, I believe will provide significant information to customers and therefore be helpful.

IJ: Have you had conversations with some of the trade associations out there and also some agents in California, just getting their feedback?

Garamendi: Absolutely. We’ve had many discussions. We’re actually conducting workshops on the proposed regulations. The first workshop has taken place. There are going to be additional formal conversations. Brokers are more than willing to share with me their thoughts, many of whom say, “What’s the problem? What’s the big deal here? Of course we should be telling our customers this kind of information.” There are others who are very strongly opposed to it. We’re going forward.

IJ: Another issue that has been prevalent, and your department has put out some press on this, is the “use it and lose it” practices in the homeowners insurance market. Can you give us a little background on that and where that’s headed right now?

Garamendi: “Use it and lose it” has been a longstanding problem that we’ve attempted to deal with from my very first days in office. We tried a series of actions, first of all a bulletin saying “Here’s how we see this issue,” and the insurance industry said, “No you can’t do it that way; you have to do it by regulations.” We then wrote regulations and those were thrown out by the appellate court. We tried legislation and the Legislature didn’t move the bill and now we’re back to something that is I think very powerful and very simple and that is disclosure.

The insurance industry will have to tell the consumer up front before a check is written, before a contract is signed, exactly what the insurance company is going to do to the customer when the customer files a claim. It’s pretty simple stuff: “If I file a claim, what happens to me? Do my rates go up? If I file two claims in a given period of time do I get nonrenewed?” That’s important to the customer. Otherwise they may very well have a program and an insurance contract that’s worthless to them because they will lose unknowingly; their contract might not be renewed. This regulation is a disclosure regulation. We have the authority under law to require that the policy be honestly and completely described to the customer before the customer buys it.

It’s important that every customer know that up front before you buy the policy what will happen when you file a claim or you file two claims. The industry says less than one half of 1 percent of homes in California are affected. We do not have specific data, although the regulations will require companies to provide us with specific data on renewals and on price increases. But beyond that even if the industry is correct, that’s still over 40,000 homeowners a year in California that are affected by the “use it and lose it” program.

IJ: Would you say that your office has been hit by a number of phone calls from customers obviously concerned with this issue?

Garamendi: Everywhere I go, and I talk to people around the state, I hear from them about this particular problem and as we have been pushing this new legislation and pushing these new regulations people hear about it and say, “That happened to me.”

IJ: Can you give us an update on where you see workers’ comp going over the next coming months?

Garamendi: When I first came to office in the winter of 2002 and 2003 we put together two task forces: one made up of industry, one made up of consumers of workers’ compensation insurance, as well as the employees or workers. The result was a roadmap to reform workers’ compensation, dealing with the medical portion as well as the indemnity and the administrative functioning of the system. That road map has been carried out rather closely to what we suggested with the Davis administration with regard to medical cost in the system. The Schwarzenegger administration then followed with some of the indemnity and some of the administrative issues. They took a slightly different path from the one that we suggested, although they went in a similar direction.

That second reform has not really taken hold yet. The Schwarzenegger legislation, SB 899, has had very little effect as of Dec. 31, 2004. However, the Davis legislation that was signed in fall of 2003 has had a very dramatic and significant effect on the cost of workers’ compensation claims. The insurance industry has reported that for the year 2004 their loss ratio declined to 45 percent, an extraordinary situation, one that has never been equaled in the history of workers’ compensation, at least that we can find. To have such a low loss ratio, even a combined ratio, for most companies is very low and certainly historically low compared to recent years.

The industry’s doing very well in California and the price of premiums should be dropping dramatically, although it has not. The insurance industry has maintained a very healthy margin between the cost of claims and administering those claims and their premium level. There’s going to be a lot of pressure on this industry. There’s a lot of room for competition here. We’re seeing new companies enter the insurance marketplace. We’re seeing old companies expanding their business and we’re seeing some very healthy profits in the workers’ compensation field.

On the other hand we’re seeing some very unhappy injured workers who in their view are being denied benefits that are justified, including medical treatment that is justified. All of this needs to be sorted out. My guess is we’re going to see further cost reduction. Whether that’s followed by rate reductions of premiums remains to be seen.

IJ: You mentioned new companies. Any timetable on when we might see some new workers’ comp insurers coming into California?

Garamendi: We already do. We have three or four new companies. There are several more that are looking to get in. That’s good news. So there is more competition out there. Some main line companies that may have all but moved out of California are now moving back into California so we’re seeing the Berkshire Hathaway Group, Liberty Mutual and AIG moving more capital and capacity into California and that’s good news.

IJ: How do you see the overall health of the State Fund?

Garamendi: State Fund has kept its prices very high while their cost of claims has just plummeted. I mentioned a 45 percent loss ratio and that’s largely State Fund’s. State Fund is far too rapidly replenishing its surplus and taking care of its reserve issues. I’ve asked them to develop a business plan so they could do this over five years, but it appears to me that by keeping their rates very high they will be financially healthy any time now, maybe within the next few months or the next six months.

IJ: Obviously 2003 was a very bad year with the fires. What are some suggestions that you have for people as we look into the fire season of 2005? How can they help prepare themselves and get ready for what unfortunately could be a very bad season?

Garamendi: Homeowners ought to have adequate insurance to rebuild their home if there’s a total loss. One of the major lessons out of the Southern California fires was that people didn’t have sufficient insurance to rebuild their homes in the case of a total loss. Usually it seems to us that this was the problem that the insurance industry brought to their customers. In my view, they lowballed many of the customers’ policy limits, perhaps so they could then obtain the business. That’s all well and good until you have a total loss. With a total loss, then people are on the hook for a large amount of money. Check it out. Make sure that you’ve got enough insurance to satisfy your needs.

This coming fire season, make your home fire-safe. Get rid of the brush around your home, give yourself a defensible space. I recommend that people get rid of their wood shake roofs and put on a good concrete tile roof. Close up the eaves. All of those things can save your home.

We’re pushing the homeowners’ bill of rights which deals with a host of issues (use it and lose it issues, the amount of time that a person has to rebuild his home when he’s in a declared state disaster, etc.). It’s very clear that 12 months is not enough time in that circumstance. Even today, perhaps less than 20 percent of the homes have been rebuilt and occupied, and that’s 19 months after the fires.

We also know that some insurance companies, although we think this may be much less of a problem now since I’ve been screaming about it, is that they’ve blanketed an area, redlined an area and said they’re not going to provide insurance in that area even though there are many homes in that area that are safe from fires and there are also homes in that area that are not safe. We’re asking the insurance company not to redline an area but rather to pick and choose and underwrite appropriately.

IJ: Recently there was a partial verdict in the Executive Life case. Can you talk a little bit about that case and what your thoughts were regarding its outcome on policyholders?
Garamendi: The Executive Life is a longstanding issue. After I sold the failed, bankrupt Executive Life Insurance Co. to the French consortium, three years after that sale, a whistleblower in France said there was a secret agreement that left the ownership of the company with Credit Lyonnais, the state-owned bank. So a lawsuit was commenced alleging fraud and conspiracy on the part of the consortium of the French insurance companies.

Prior to the trial, which was now two and a half months ago, we settled for some $790 million with all but one of the French defendants. The remaining defendant, Artemis, owned by Francois Pinault and owns Gucci and a few other companies, refused to settle, we went to court. The first half of the jury trial is completed, in which the jury found that there was a conspiracy. There was fraud and we’re now proceeding to the penalty phase of the trial. Mr. Pinault was not found to be guilty of this although his company was found to be guilty of conspiracy to participating in a fraud against this department. We’ll see where it goes from here on out.

We’re moving toward the penalty phase. We expect to be successful in the penalty phase. The judge has been very strong in telling us and the French company Artemis that he wants settlement discussions. He’d like to see this thing settled without going to the jury for the penalty phase. So we’re doing what the judge says. We will soon be in discussions with the French company Artemis to see if there’s a resolution for this. If not, then we’ll wind up in a jury trial with the same jury on the issue of damages and penalties. Let me make it clear. The total money that has been received thus far in this is $790 million, of which $715 million is in the Executive Life Insurance Company estate.

IJ: There is always talk that you are planning to run for office. What are your future plans as you foresee them right now?

Garamendi: I intend to seek the office of lieutenant governor in the 2006 election. That’s going along well. The campaign is in great shape, my name identification is really high and my opponent’s name identification is really low, so we’ll see what happens.