Workers Compensation Insurance Premium Disputes

By Arthur J. Levine, Ph.D., J.D., CPCU, ARM

Firm's Prole & Articles
This year, California employers will pay nearly $15 billion
for workers compensation insurance. Although premiums
the price insurers charge for coverage have dropped by
half in just four years, they remain a major expense and
an occasional severe headache for many companies.

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(Note: The following article was originally published in the

August 2007 issue of California Bar Journal. Attorneys successfully completing an accompanying quiz
qualified for Mandatory Continuing Legal Education (MCLE) credit. )
Yet, few business attorneys have more than a passing acquaintance with how their clients workers
compensation insurance costs are determined. Nor, perhaps more importantly, do most attorneys know
how to represent clients effectively when premium disputes arise. This article highlights the system basics
and touches upon some of the finer points.
How Insurers Determine Rates
Workers compensation insurers may charge any premium that does not tend to impair or threaten their
solvency or tend to create a monopoly. State Compensation Insurance Fund v. Superior Court (Schaefer
Ambulance) 24 Cal 4th 930, 103 Cal Rptr 2d 662 (2001). The old Minimum Rate Law, under which most
insurers charged the identical premium and then paid dividends, was repealed in 1995. Nevertheless,
virtually all workers compensation insurers still use the same base rates, which they apply to
standardized employment classifications.
Insurance Department regulations known as the Uniform Statistical Reporting Plan (or USRP), 10
California Code of Regulations 2318.6 et. seq. require workers compensation insurers to report policy
data (rates, payroll, employment classifications, claims, etc.) to a private, licensed trade organization to
which they must belong. Insurance Code 11751.4. This organization is the Workers Compensation
Insurance Rating Bureau of California, often called the WCIRB or simply the Bureau. The WCIRB serves
as the Insurance Commissioners statistical ratemaking agency. Insurance Code 11750 et. seq. It
aggregates and analyzes all of the data received from insurers.
The WCIRB then projects the rates that insurers will need to charge per $100 of payroll in one or more of
400+ classifications in order to pay projected claims during the coming year. These claim-cost-only rates
are called pure premium rates. Insurance Code 11730(f). The WCIRB recommends them to the
Insurance Commissioner, who approves or modifies them in an advisory capacity as adequate
following a public hearing. Insurance Code 11750(b). The WCIRB has statutory immunity in connection

with most of its ratemaking-related activities. Insurance Code 11752.7(f), 11759.

It is at this point that market competition begins to factor into the pricing system. Each insurer calculates
its own margins for non-claim expenses (sales expense, overhead, profit margin, etc.) and decides how
much to load the advisory pure premium rates. Since they are only advisory rates, insurers are also free
to deviate from them by filing actuarial support for their deviations. Rates must be adequate to cover an
insurers losses and expenses, not tend to create a monopoly in the market, and not be unfairly
discriminatory. Insurance Code 11732-3.
Insurers also develop rate modification plans applicable to individual policyholders, with rate credits and
debits for such characteristics as housekeeping, financial strength, safety training, etc. These would be
reflected in scheduling rating pursuant to Insurance Code 11730(j). All of these rate loadings, pure
premium rate deviations, and rating plans are filed with the Insurance Commissioner, and are open for
public inspection. Insurance Code 11735.
Thus, the first reason why market competition is structurally, although not legally, limited, is that every
insurer begins its premium calculations with the WCIRB-calculated uniform loss costs and the
Commissioners advisory pure premium rates. They then apply their somewhat modified rates to a
uniform regulatory employment classification system.
Experience Modifications
The second factor limiting market rate competition is experience rating. Insurance Code 11730(c). When
insurers report claims under the policies they issue, the WCIRB compares each employers claims history
to that of its industry competitors. This calculation produces a merit rating called an experience
modification for every employer large enough to have a minimally statistically credible claims history.
The purpose of experience (aka merit) rating is to provide an economic incentive (or penalty) for safety.
Indeed, employers with high experience modifications are assessed to pay for special Cal/OSHA
inspections and consultations Labor Code 62.7, 6314.1, 6354(a). An employer may not enter into an
employee leasing arrangement Labor Code 3602(d) to evade application of its experience modification.
Insurance Code 3600(d).
The WCIRBs calculation of experience modifications is governed by the California Experience Rating Plan,
or CERP, 10 California Code of Regulations 2353.1. Rather than making their own projections of a
policyholders likely claims experience, as they do for most other types of insurance, insurers must apply
to their policy the WCIRB-promulgated experience modification for the policyholder. Insurance Code
11734(a). Generally, an employer receives its first experience rating at the beginning of its third year in
operation.
Soon thereafter, the WCIRB inspects the employers premises and operations to confirm that the insurer
is reporting the employers payroll under the correct classification(s). The USRP also governs both insurer
reporting and classification assignments. Both the CERP and the USRP are posted on the WCIRBs
website,
Insurer data reports to the WCIRB under the USRP, called unit statistical reports or USRs, reflect data
deemed accurate as of eighteen months after insurance policy inception. Since premium is based, in part,
upon the employers actual payroll during the policy term, final premium cant be determined until the

insurer conducts an audit or physical examination of the employers books a few months after policy
expiration. Insurers must then submit updated USRs, typically tracking developments in claim value
estimates, annually for nine more years, as necessary.
Premium Disputes
With these basic processes, laws, and procedures in mind, categories of common premium disputes
begin to emerge. Most premium disputes involve one (or more) of the following five issues:
1. Did the insurer use the correct USRP employment or industry classification(s), and therefore apply the
correct pure premium and deviated rates? If not, did the employer, agent, or broker report the wrong
classification(s)? Did the insurer use the wrong ones? Did the WCIRB assign the wrong ones? WCIRB
classification assignment changes that increase premium are usually not retroactive. Insurance Code
11753.2(b). By contrast, the USRP states that payroll reallocation among existing classifications on a policy
is retroactive to the policys inception. The USRP directly governs data reporting only, not premium.
Nevertheless, given this rule, courts are likely to find additional premium owed under these
circumstances unless the facts support contract law defenses.
2. Did the insurer report to the WCIRB, and use for premium calculation purposes, the correct amount of
payroll? Did the employer keep proper payroll records? If not, what is the appropriate remedy? How did
the insurer treat overtime, bonuses, expense reimbursement, housing allowances, and benefits? Did the
employer improperly characterize employees as independent contractors, or did the insurer treat
contractors as employees where the policyholder didnt obtain certificates of insurance from the
contractors?
3. Was/were the WCIRB-issued experience modification(s) correct? Did it/they reflect incorrect
classifications and/or payroll? Did it/they fail to recognize an ownership change, thus incorporating or
failing to incorporate certain data?
4. Did the insurers improper claims handling (inadequate investigation, passive acceptance of the
employees doctors evaluation, failure to pursue subrogation, etc.) result in the reporting of overstated
claim value estimates? Did the insurer fail to send to the WCIRB an USR update reflecting a WCAB take
nothing claim determination, or crediting an allocation or subrogation recovery? If so, one or more
experience modifications would have been too high. The result would have been excessive premium and
possible Cal/OSHA assessments, as discussed above.
5. Did the insurer previously accept the employers current arrangements on prior-year audits, but has
now changed its opinion of classifications, employment status, recordkeeping sufficiency, etc. and
therefore seeks substantial additional premium?
Insurers often point to CERP and USRP language to justify their additional premium demands, but these
regulations only pertain to data reporting requirements. Ordinary contract defenses such as estoppel,
custom and practice, laches, and negligence of the insurers agent and/or contract premium auditor may
protect the policyholder from an additional premium invoice, even if the CERP/USRP requires the insurer
to file a corrected USR with the WCIRB. Nevertheless, as discussed below, it may be necessary to navigate
CERP and/or USRP issues in an administrative setting before raising defenses in court.
Administrative Review

It is often difficult to determine whether an employer must or even should file an administrative appeal
with the WCIRB, or with the insurer, or concurrently with both, and then demurrer to a premium
collection action rather than simply filing a complaint, cross-complaint, or answer in court. Since failing to
file a timely administrative complaint may ultimately prove fatal to a cause of action or defense, counsels
initial false step may prove the first one toward a malpractice action.
A party may appeal a WCIRB or insurer decision to the Insurance Commissioner. Insurance Code 11737(f),
Title 10, California Code of Regulations, 2509.40. The Commissioners decision can then be appealed to
the Superior Court by seeking a writ of administrative mandamus under Code of Civil Procedure 1094.5
and Insurance Code 11754.5. The Courts have made it clear, however, that the Commissioner has broad
discretion in interpreting workers compensation premium rules. Simi Corporation v. Garamendi 109 Cal
App 4th 1496, 1 Cal Rptr 3d 207 (2003).
Employment Status Issues
Employers pay workers compensation premium for their employees only, not for independent
contractors. Similarly, experience modifications reflect wages paid to, and injuries sustained by,
employees only. It would therefore make sense that any premium dispute involving the alleged
employment status of workers would require administrative review. This is not the case, however.
If the dispute is whether individuals are employees, neither the WCIRB nor the Insurance Department will
determine whether the payroll an insurer reports to the WCIRB and the WCIRB uses for experience rating,
and which the insurer also uses to charge premium, is correctly reported and used. The Commissioners
right to refuse making this determination is currently being litigated. Whether insurers can use the
disputed payroll to calculate premium should not be an administrative issue, except perhaps on the
theory that an insurer violates its filed rating plans by doing so. The courts may nevertheless require that
administrative expertise be brought to bear on the issue under either the administrative exhaustion or
primary jurisdiction doctrines. Jonathan Neil & Associates, Inc., v. Freddie Jones 33 Cal 4th 917; 94 P.3d
1055; 16 Cal Rptr 3d 849 (2004)
Claim-Valuation Disputes
As the California Supreme Court noted in 2001, numerous Court of Appeals decisions have sanctioned
civil claims against workers compensation insurers alleging that their misconduct resulted in unjustifiably
higher premiums. State Compensation Insurance Fund v. Superior Court (Schaefer Ambulance Service,
Inc) 24 Cal 4th 930, 103 Cal Rptr 2d 662.
Its well-established, though, that that there is no administrative remedy concerning an insurers
substantive handling and valuation of workers compensation claims. This is so even though claimshandling directly affects the WCIRB-issued experience modification, which the insurer must use to
compute premium. Claims handling and valuation disputes that affect workers compensation premium
are a matter for the courts. Lance Camper Manufacturing Corp. v. Republic Indemnity Co. 44 Cal App 4th
194, 51 Cal Rptr 2d 622 (1996), Tricor California, Inc. v. SCIF, 30 Cal App 4th 230, 35 Cal Rptr 2d 550 (1994).
Punitive damages are recoverable for bad faith claims-handling causing inflated premium. A policyholder
who suspects claims-mishandling or improper valuation often experiences an initial challenge in gaining
access to the insurers claim file. Labor Code 3762 sets forth employer rights in this area.

State Compensation Insurance Fund

Although many employers refer to the State Compensation Insurance Fund as their insurance company
or as simply the state, it is actually neither. SCIF is a Public Enterprise Fund created by Insurance Code
11773, enacted pursuant to Section 21, Article XX of the California Constitution. It functions, on the one
hand, as what is sometimes called the insurer of last resort. This means that under most circumstances,
SCIF cannot refuse to insure any applicant. Insurance Code 11784.
On the other hand, SCIF is charged with being fairly competitive with other insurers and neither more
nor less than self-supporting. Insurance Code 11775. State coffers do not back-stop SCIF. Insurance Code
11771. SCIF is even vulnerable to punitive damages for the adverse premium impact of bad-faith claims
handling, just like private insurers. Notrica v. SCIF 70 Cal App. 4th 911, 83 Cal Rptr 2d 89 (1999). Aspects of
SCIFs pricing were discussed in P.W. Stephens v. SCIF 21 Cal App 4th 1833, 27 Cal Rptr 2d 107 (1994) and
in Rail Services of America v. SCIF 110 Cal App 4th 323, 1 Cal Rptr 3d 700 (2003), but many other SCIF
practices have not been addressed by our courts.
Premium Fraud
Some employers intentionally underreport the amount of their payroll, knowingly report payroll under
the wrong workers compensation classification, pay medical bills under the table to avoid their inclusion
in experience rating, and/or engage in other types of workers compensation premium fraud. Insurers and
government agencies have become more aggressive in prosecuting alleged premium fraud. In part, this
may reflect the special surcharge upon all workers compensation policies which provides funds (allocated
through the Insurance Commissioner) to district attorneys. Insurance Code 1877, et. seq., 8 California
Code of Regulations 15607. In any event, attorneys should advise their clients of the severe penalties that
exist for premium fraud. These include fines of ten times the premium difference, and up to five years in
state prison. Insurance Code 756, 1871.4, 11755, 11756(a), 11760, 11880, and Labor Code 3820.
Can an insurer be liable for bad-faith conduct in charging and collecting premium? The California
Supreme Court said no in 2004 in a case involving automobile insurance premium, Jonathan Neil &
Associates, Inc., v. Jones, supra. Its reasoning seems equally applicable to workers compensation, and
Jonathan Neil was applied, albeit under arguably narrow circumstances, in Tilbury Constructors, Inc., v.
State Compensation Insurance Fund, 137 Cal App. 4th 466; 40 Cal Rptr 3d 392; 2006.
Nevertheless, an insured may sue for malicious prosecution if an insurer (or its legal counsel) engages in
bad faith collection tactics. Citi-Wide Preferred Couriers, Inc., v. Golden Eagle Insurance Corporation 114
Cal App. 4th 906; 8 Cal Rptr 3d 199; 2003, hearing denied. An interesting, open premium-related question
is exposure to punitive damages if an insurer cancels a policy in bad faith, falsely claiming premium is due
in order to fall within Insurance code 676.8s limited reasons for permissible cancellation.
Workers compensation insurance premiums are an ongoing, substantial expense for most California
employers. As these summary points suggest, the law in this area presents a dynamic and complex weave
of statutes, regulations, case law, administrative procedures and rulings, jurisdictional murkiness, market
controls, market competition, insurer custom and practice, lofty public interest, and economic/political
self-interest.
ABOUT THE AUTHOR: Arthur J. Levine, Ph.D., J.D., CPCU, ARM

Arthur J. Levine, Ph.D., J.D., CPCU, ARM - Workers Compensation Insurance Premium Attorney and Expert
Witness/Consultant
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended
to provide legal advice as individual situations will differ and should be discussed with an expert and/or
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contact the author.