P. W. Stephens, Inc. v. State Compensation Ins. Fund, B063400

• Decision Date: 28 January 1994
• Docket Number: No. B063400,B063400
• Citation: 21 Cal.App.4th 1833,27 Cal.Rptr.2d 107
• Court: California Court of Appeals Court of Appeals
• Parties: P.W. STEPHENS, INC., Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.

Page 107

27 Cal.Rptr.2d 107

21 Cal.App.4th 1833

P.W. STEPHENS, INC., Plaintiff and Appellant, v. STATE COMPENSATION INSURANCE FUND, Defendant and Respondent.

No. B063400.

Court of Appeal, Second District, Division 2, California.

Jan. 28, 1994.

Hopper & Holmes and Douglas R. Holmes, Norwalk, for plaintiff and appellant

Sheppard, Mullin, Richter & Hampton, Pierce T. Selwood, Finley L. Taylor, Justine M. Casey, Anthony Castrilli, Los Angeles, Richard A. Krimen, Chief Counsel, Charles W. Savage, Asst. Chief Counsel, and Jody A. Carr, Staff Counsel, for defendant and respondent.

BOREN, Presiding Justice.

In this appeal, we conclude that respondent State Compensation Insurance Fund (SCIF) may impose "surcharges" as part of the premiums charged to its insureds. However, such surcharges must be reasonably and fairly imposed and are subject to administrative review. Accordingly, we affirm the decision of the trial court.

BACKGROUND

Appellant P.W. Stephens, Inc. (appellant) provides residential and commercial asbestos abatement services. SCIF provides workers' compensation insurance to appellant. Appellant has no other recourse than to procure its insurance from SCIF, since no private insurance carriers are willing to offer such insurance to asbestos removal companies, such as appellant.

In its complaint for injunctive relief and damages, appellant alleged that as part of the premium SCIF charged appellant for workers' compensation insurance, SCIF imposed surcharges which are illegal, unreasonable and unfair. The trial court sustained SCIF's demurrer to the first amended complaint and dismissed the action.

DISCUSSION

I. SCIF AND ITS RATING ORGANIZATION

SCIF is at once both an agency of the State and an insurance carrier. In these two roles, it is self-operating and of a special and unique character. (Burum v. State Compensation Ins. Fund (1947) 30 Cal.2d 575, 585-586, 184 P.2d 505; Gilmore v. State Comp. Ins. Fund, (1937) 23 Cal.App.2d 325, 329, 73 P.2d 640.) While for purposes of the workers' compensation insurance laws set forth in the Insurance Code (div. 2, pt. 3, chs. 2-4 [§§ 11630-11881] ) ¹ SCIF is an "insurer" on the same basis as any private carrier offering workers' compensation insurance (§§ 11731, 11750.1, subd. (a)), the Legislature has also established it as a state agency with "unique characteristics" and one which is exempt from many of the immunities, requirements restrictions and procedures applicable generally to state agencies. It is also subject to laws generally applicable to private insurance carriers (e.g., tax laws). (Courtesy Ambulance Service v. Superior Court (1992) 8 Cal.App.4th 1504, 1511-1514, 11 Cal.Rptr.2d 161; see § 11770 et seq.)

Article 2 of chapter 3 in the Insurance Code pertaining to workers' compensation policies sets forth what is known as the "Minimum Rating Law." The Minimum Rating Law empowers the Insurance Commissioner of the State of California (the Commissioner) to approve or issue "a classification of risks and premium rates relating to California workers' compensation insurance," which constitutes the minimum amount which insurers may charge as premiums to insureds falling within established categories or classifications. (§ 11732.) Thus, an insurer is prohibited from assessing premium rates less than those approved by the Commissioner. (§ 11736.) The purpose of the Minimum Rating Law is to require insurance premium rates which will assure adequate reserves to meet claims as they mature. (Contractor's etc. Assn. v. Cal. Comp. Ins. Co. (1957) 48 Cal.2d 71, 74-75, 307 P.2d 626.)

The Minimum Rating Law permits a system of "merit rating" or "schedule rating" and also allows "experience rating" to be used as a factor in setting rates for particular insureds. (§ 11730.) Essentially, workers' compensation insurers are permitted to determine premiums based on (1) schedules of rates or classifications by employers and occupations, and (2) the particular risk presented by the insured's experience or insurance history.

To assure that the minimum rates for workers' compensation rates are in fact "adequate" to meet all claims as they mature, and in order "to promote the public welfare," the Legislature authorized the establishment of rating organizations. (§ 11750 et seq.) A rating organization is defined in the Insurance Code as an organization having "as its primary object or purpose the collecting of rating information, the making of rates, rating plans and rating systems for workers' compensation insurance ... and presenting them to the commissioner for issuance or approval." (§ 11750.1, subd. (b).) The "Workers' Compensation Insurance Rating Bureau" (the Rating Bureau) is the rating organization of which SCIF is a member. Any such rating organization must be licensed by the Commissioner (§§ 11751.1-11751.25), and, subject to the approval of the Commissioner, it "may adopt any reasonable constitution, articles of incorporation, or agreement of association, and may make reasonable rules for the regulation of its members and the conduct of its business by bylaws or otherwise." (§ 11751.3, subd. (a).) A rating organization must also permit the Commissioner to appoint "four members of the public, two representing organized labor and two representing insured employers, to serve on the managing or governing committee of the [rating] organization." (§ 11751.1, subd. (h); see also §§ 11751.3, subd. (b); 11751.35, subd. (a).) In addition, SCIF is entitled "without election to membership on the managing or governing committee and on the classification and rating committee" of its rating organization. (§ 11751.3, subd. (a).)

As SCIF's licensed rating organization, the Rating Bureau publishes the California Workers' Compensation Insurance Manual (January 1, 1991; hereinafter, the Manual), a compendium of administrative rules governing the issuance of workers' compensation insurance coverage by SCIF and other carriers. The Manual also contains classifications, rates and rating systems which the Commissioner has approved pursuant to section 11730 et seq. The Manual is composed of what are properly considered administrative rules and regulations. Its contents have been promulgated by the Commissioner pursuant to Government Code section 11344 and incorporated by reference in the California Code of Regulations. (Cal.Code, Regs. tit. 10, § 2350.)

II. SURCHARGES

The parties do not dispute that SCIF and other insurers impose surcharges as a means of defraying the hazard, risk, accident experience or insurance history relating to a particular insured. Nothing in article 2 of chapter 4 (§§ 11820-11823), the Insurance Code provisions governing the manner in which SCIF's board of directors must fix SCIF's rates, directly prohibits such surcharges. ² Although SCIF is a special and unique state agency, the Legislature also designed it to "be fairly competitive with other insurers," also to be "more [ ]or less ... self-supporting," and to "transact workers' compensation insurance required or authorized by law ... to the same extent as any other insurer." (§§ 11775, 11778.) Other California insurers impose surcharges to reflect the risk and insurance exposure presented by a particular insured. It is well settled that the experience of a particular insured may be used as a factor in setting the premium. (State Comp. Ins. Fund v. McConnell (1956) 46 Cal.2d 330, 294 P.2d 440.) Likewise, section 11820 mandates that SCIF's rates "be fixed with due regard to the physical hazards of each industry, occupation or employment." SCIF reasonably argues that "premium" may generally represent an incorporation of "the rate, experience modification and any applicable surcharge." We do not think it matters much whether experience modification is reflected solely in a "premium rate" (§ 11823) or additionally in a "surcharge." The effect on the insured is the same as long as the insured has a means to rectify unfairness or arbitrariness in either case.

In the trial court, appellant alleged that SCIF could not lawfully impose any surcharge, and initially on this appeal so contended. Subsequent to oral argument, appellant abandoned this contention and now concedes that there is no legal prohibition. However, appellant still maintains its contentions that any surcharge must be reasonable and fair and that no administrative remedy exists.

Appellant's concession that SCIF may properly impose surcharges is well taken. Indeed, Rule VII of the Rating Bureau's Manual provides in part: "10. Rates. The basic Manual rates must be shown and applied on all policies. [p] If an employer is subject to an experience modification, the modification must be shown on the policy and applied to the premium developed by the application of the basic Manual rates. [p] A carrier may apply surcharge rates, a surcharge modification, or a surcharge premium to the policy. If applied, they shall clearly be shown separately from the basic Manual rates and the experience modification." (Italics added.) More recently, the Legislature added to the Minimum Rating Law the following provision, which recognizes the use of surcharges: "An insurer [including SCIF] shall not use any plan or methodology for the imposition of surcharges or reserves that is unfairly discriminatory." (§ 11737.5, subd. (a).) Thus, workers' compensation carriers, including SCIF, are not prohibited from imposing surcharges.

III. EXHAUSTION OF ADMINISTRATIVE REMEDIES

Appellant's second contention, however, raises the more critical questions: To what extent may SCIF impose surcharges, and what is an aggrieved insured's remedy if SCIF has imposed arbitrary, exorbitant, discriminatory or unfair surcharges? We must look to the Insurance Code and to the Commissioner's regulations to find an answer.

Section 11732 provides that the system of merit rating approved by the Commissioner must "be uniform as to all insurers affected." Thus, while the experience of a particular...