Colorado’s Workers’ Comp Fund Pinnacol: Swagger and Success Invite Scrutiny

If there is one thing that Colorado’s quasi-public workers compensation provider, Pinnacol Assurance, has not been accused of being, it is being timid.

When the state government tried early this year to tap the Pinnacol reserves for upwards of $500 million, to help balance the state budget, Ken Ross, Pinnacol’s president and chief executive, fought the attempt successfully, and pulled no punches. He threatened to sue.

He also said that, quite frankly, he thought Pinnacol would do much better if the ties to government were severed completely, and in return for that autonomy, Pinnacol would gladly pay taxes it is exempted from currently.

There are those in the Colorado insurance community who say that maybe it is that kind of swagger that has brought down the wrath of the lawmakers.

“I think Pinnacol is very well run, and sometimes when a company is doing well and is successful and profitable, it’s hard to keep quiet,” said Gary Frisch, the government affairs chairperson for the Professional Independent Insurance Agents of Colorado.

“I think Pinnacol had to respond,” added Frisch. “I didn’t find any of their responses were out of line. They were trying to defend the successful operation of their company.”

The responses include those made most recently, at the conclusion of a set of hearings made by lawmakers into the operations of Pinnacol.

When the state lawmakers dropped the bill that would have appropriated Pinnacol’s reserves, back in April, they passed a law a week later calling for an annual audit of Pinnacol and interim committee hearings on Pinnacol operations. At the time, the lawmakers said it was the threat of being sued that caused them to back away from taking the reserves.

Others said the committee hearings were Pinnacol’s punishment for its effrontery.

During the hearings, some legislators asserted that Pinnacol had lavish digs, exorbitant salaries, and extravagant entertainments, and they suggested that this excess might be coming at the expense of paying claims.

They noted that Pinnacol has a building in Lowry worth $25 million, that nine executives make six-figure salaries, including Ross ($448,813), and that Ross once spent $1,500 for a single night at the Mirage Hotel in Las Vegas. They also let it be known that Pinnacol has a luxury box at Invesco Field, home of the Denver Broncos.

At the same time, workers testifying before the committee maintained that Pinnacol denied their legitimate claims unfairly. A Durango firefighter said that he had to sell his home after he injured his back and Pinnacol denied him surgery. Others said Pinnacol investigators videotaped them to catch them in fraud. Documents were shown that said Pinnacol paid adjustors and doctors based on performance standards that included net income targets, thereby giving them a disincentive to approve claims.

7 Bills

At the end of the hearings, the committee decided to send seven bills to reform Pinnacol to the state Legislature, which reconvenes in January. Among the bills, one would add workers to the company’s board, one would require insurers demonstrate probable cause before initiating surveillance of possible fraud, and another would increase the penalty insurers pay for wrongfully denying or delaying medical claims.

Keeping in character, Ross and Pinnacol put out a statement the next business day after the decision to send the bills, a statement that accused the committee of “bias.” It said that Pinnacol was “not broken and does not need to be fixed,” and accused the committee of exceeding the bounds of its stated intent. The committee was charged with investigating Pinnacol and its operations, but many of the bills would apply to every Colorado workers’ compensation insurer, the statement said.

“The committee has produced bills, six of which are clearly beyond the scope of their charge,” Ross and the Pinnacol executives said. “The law establishing the committee was clear in its mandate: study Pinnacol operations, not the entire industry. Moreover, there was neither testimony heard nor evidence presented to support a number of the bills that were approved today.”

The statement said the committee took no time to understand Pinnacol’s business and spent an inordinate amount of time hearing testimony from injured workers, testimony Pinnacol was unable to refute because of legal requirements and worker privacy.

Pinnacol’s Defense

During the hearings Pinnacol said that its executive compensation was not out of line in the insurance industry standards, and that while Pinnacol spends 1 percent of its policy premiums on entertainment, the industry average runs about 6 percent to 8 percent.

“The proposed legislation can only be viewed as highly partisan, rather than remedies to any identified problems,” Pinnacol said.

Pinnacol can afford its truculent strategy, perhaps, because it has fairly widespread support among the business community, Frisch noted. He himself has business with them, and he has confidence in that business.

“I am very please with the way Pinnacol handles the business I send them,” he said.

Many assert that Pinnacol has been instrumental in turning around the once troubled workers’ compensation market since it was given more autonomy in 2002. Since 2005, Pinnacol has cut its rates by 42 percent and returned $350 million in dividends to policyholders.

During the state budget discussions, Pinnacol had hundreds of supporters it could rally to picket the Capitol building and a number of business groups, including the National Federation of Independent Business, dispatched their lobbyists to its aid.

In an online poll conducted by the Denver Business Journal in September, 52 percent of 632 respondents said “Leave it alone,” while 28 percent said “Make it a completely private company.” At the same time, only 19 percent said either “Increase state control over it” or “Make it a state-run agency.”

The bills that were proposed for consideration by the Legislature in January go to the Legislative Council office to see if they can indeed be proposed or if they need to be amended first.

In the meantime, Pinnacol said it needs to study the bills in more detail before it can respond. But, be assured, whatever Pinnacol decides, it will not surrender its independence lightly.

“Over the next few weeks, we will review the impact of the proposed legislation, confer with the business community and policyholders, and be ready to discuss the proposed legislative changes if and when they are introduced in the legislature during the next session,” the company said.