State insurance office again overturns a judge’s ruling to a political donor’s benefit

San Diego Union-Tribune (CA)

Jul. 26--For the second time in two weeks, a senior California Department of Insurance official has overruled an administrative law judge and reversed a decision that could have cost an insurance company hundreds of thousands of dollars.

Records show Special Counsel Bryant Henley intervened Monday in a case against Applied Underwriters, a workers' compensation insurer whose executive and spouse donated tens of thousands of dollars to Insurance Commissioner Ricardo Lara's reelection campaign.

Henley signed a 47-page amended order just below Lara's name in the case filed by RDR Builders of Lodi. The action came days after Lara, elected in November, pledged to no longer participate in proceedings involving Applied Underwriters due the campaign donations.

According to the RBR Builders order, the insurance department has dozens of other complaints pending against Applied Underwriters.

The California Department of Insurance did not respond to questions about the ruling. Applied Underwriters and its lawyers also declined to discuss the latest actions or the political contributions.

In an interview with KQED broadcast Thursday, Lara said he has recused himself from all decisions related to Applied Underwriters, and he said that a different ruling he overturned on July 11 was his only reversal of a judge's order dealing with Applied Underwriters. That complaint was filed by Oceanside Laundry of Santa Cruz County, which argued that Applied Underwriters imposed excessive fees for its workers compensation policy.

"That's the only time we did it, because we felt we wanted to make sure we were consistent with the previous ruling, which was to protect consumers and protect these injured workers," Lara told the radio station. "There was a slight variation that the law judge wanted to do which would have put in peril the coverage for injured workers, and again, companies would have been left on the hook. And so, to make sure we kept constant with previous rulings, that is why I did what I did."

Because state officials did not respond to requests about the RDR case, it's not clear whether Henley might have signed the document because Lara has decided to recuse himself -- or whether the special counsel was signing the amended order at Lara's behest.

Attorney Larry Lichtenegger, the lawyer representing RDR Builders and Oceanside Laundry, said he was "extremely concerned" about both amended orders. He said Lara was acting outside the scope of his elected powers.

"In return for their campaign contributions, he exceeded his authority under Reg. 2509.69(c) by changing the recommendations of the (administrative law judge) in order to give Applied Underwriters a bonus for their illegal conduct," Lichtenegger said.

That specific California Code of Regulations section says the insurance commissioner "may make technical or other minor changes" to an administrative law judge's decision "or a change of a similar nature that does not affect the factual or legal basis of the proposed decision."

Lichtenegger said Lara's rulings would cost his clients $500,000 or more.

"What the commissioner did was change the result," he said. "That is not a minor change."

Lara told KQED that he met with Applied Underwriters president and CEO Steven Menzies, a conversation that some say could violate state rules against ex parte, or private, meetings between regulators and people with business pending before the agency.

"It was a very casual meeting," the commissioner said. "He wanted us to see if we could, and staff could, meet with him to review the cases before him and I said 'Absolutely.' Anyone can meet with our department staff."

Lara said the conversation did not affect his decision-making in the Applied Underwriters cases. He did not say when the meeting took place.

The California Government Code prohibits ex parte discussions.

"While the proceeding is pending there shall be no communication, direct or indirect, regarding any issue in the proceeding, to the presiding officer from an employee or representative of an agency that is a party or from an interested person outside the agency, without notice and opportunity for all parties to participate in the communication," the law says.

The Department of Insurance did not respond to questions about whether the meeting was appropriate.

Government ethics experts say it may be problematic.

"The fact that a commissioner is meeting privately with a litigant can certainly raise the specter of bias in the proceedings," said Hana S. Callaghan, director of government ethics at the Markkula Center for Applied Ethics at Santa Clara University.

Both of the amended orders that benefited Applied Underwriters came three months after Lara accepted more than $54,000 in campaign contributions from insurance executives and their spouses.

The San Diego Union-Tribune reported on those donations early this month. Most prior insurance commissioners have shied away from taking campaign funds from people they regulate. Hours after that report was published, Lara pledged to return the donations.

In a follow-up story last week, the Union-Tribune reported that Lara's office intervened in at least four cases involving Applied Underwriters after accepting the political contributions.

According to department records, Lara issued what are called non-adoption orders on June 27 in two other complaints against Applied Underwriters, one from fuel-delivery company Van De Pol Enterprises and one from Steve Wills Trucking and Logging.

Non-adoption orders are notices that the commissioner wants a judge to reopen a case that already has a proposed decision. One of the judges in the cases declined to reopen that case, saying there was no legal basis to do so.

The 47-page amended order issued Monday said Applied Underwriters is entitled to a "guaranteed-cost" premium from RDR Builders -- the same change Lara's office adopted on July 11 in the complaint Oceanside Laundry filed against Applied Underwriters.

Neither RDR Builders nor Oceanside Laundry purchased guaranteed-cost plans. Instead, they bought what are known as loss-prevention policies, which charge lower premiums if companies are able to reduce workplace injuries.

According to the amended order, the insurance commissioner imposed guaranteed-cost premiums because throwing out the policies altogether would have left the employers lacking any workers' compensation coverage for a period of time -- which is not permitted by law.

"Finding the entire arrangement void, including the policies, would leave appellants' uninsured for the period in question," the amended decision states. "That would be neither lawful, since the law requires appellants to have workers' compensation insurance, nor would it be in the best interests of the workers left without coverage for any injuries occurring during that period."

Regulators in New York, who last week announced a $3 million settlement with Applied Underwriters over its workers' compensation practices, declined to allow the company to collect additional premiums from buyers in that state.

Jerry Flanagan, a lawyer with the Los Angeles advocacy group Consumer Watchdog, said Lara was not only wrong to intervene in the Applied Underwriters proceeding, he did so at least twice after a state deadline had passed.

According to Flanagan, two stay orders Lara issued last month in the Oceanside Laundry and RDR Builders cases came after a 30-day window under which the commissioner was required to act.

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