State Compensation Insurance Fund (SCIF) did not violate any duty of fair procedure when it kicked Cumbre Inc. from its preferred broker network seven years ago as part of an effort to reduce its loss ratio, according to a ruling by the California Court of Appeal. The court sided with California’s largest workers’ comp carrier on all counts in affirming a trial court’s ruling (see Verdict… and Jury Finds… for past coverage).
On appeal, Cumbre challenged the lower-court ruling on a number of issues, the central one being whether State Fund’s process was procedurally fair. The doctrine of fair procedure holds: “When a private business has substantial economic power and the use of that power can affect one’s ability to earn a living—the decision-making must be both substantively rational and procedurally fair.”
After briefing the case, the court issued a tentative ruling indicating that it would side with State Fund but allowed oral arguments on November 2 as a last attempt to sway the court. Cumbre was unsuccessful.
The court noted that Cumbre argued SCIF violated fair procedure by failing to give the criteria used in its decision, conducted the proceedings in secret and didn’t give Cumbre the opportunity to contest the charges against it. The court rejected this, noting that the termination letter informed Cumbre that the decision was based on its three-year combined average loss ratio exceeding 80%, and that a loss limitation of $175,000 per occurrence was used to determine the ratio. “This adequately informed Cumbre of the ‘charges’ against it,” the court wrote, noting that Cumbre’s appeal was then reviewed twice.
Now that the decision is official, Cumbre is in a quandary. Beyond losing the opportunity to recoup on its losses, the agency is still on the hook for State Fund’s legal costs associated with the case. That bill was in excess of $200,000, and now with the appeal costs the total is estimated to be in the neighborhood of $300,000. How this tab is settled will go a long way to determining if the issue is appealed to the California Supreme Court. A related federal lawsuit over Cumbre’s post-trial application to be a licensed broker for State Fund also hangs in the balance.
“We’ve officially offered to pay all of their costs, just not in one lump sum. We can pay in installments, and if they agree, then we’re fine and we’ll drop all of the cases tomorrow,” Michael Holzman, Cumbre’s vice president and chief operating officer, tells Workers’ Comp Executive. “If they are intent on putting us out of business … then they’re probably going to end up hurting us pretty bad and ending up with nothing at the end of the day.”
Holzman notes that a decision on an appeal to the Supreme Court will have to be made shortly as the deadlines are tight. To this point, he maintains that they have not received a definitive statement from State Fund as to what it would take in terms of payment plan to settle the case.
A full copy of the court of appeal’s decision is available in our resources section or by clicking here.