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Workers’ Compensation Insurance
Some State Agencies Are Paying Millions of Dollars More Than Necessary to Provide Benefits to Their Employees

Report Number: 2019-106

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October 29, 2019

Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: Report 2019-106

Dear Ms. Howle,

This is the response of the California Department of Human Resources (CalHR) to the draft audit report regarding Workers’ Compensation Insurance. CalHR is committed to administering the State’s workers’ compensation program in an efficient, effective, and fiscally responsible manner.

The report concludes that CalHR should, in the interest of fiscal responsibility, provide a cost-benefit analysis to each of the insured state departments comparing the estimated cost of participation in the master agreement with State Compensation Insurance Fund (State Fund) with the cost of insurance.

CalHR will work with State Fund to prepare these estimates and provide them to the affected departments. We will provide details about our efforts in our follow-up responses to you.

Please do not hesitate to contact me if you have questions.


Eraina Ortega

State Fund

October 29, 2019

Elaine M. Howle, CPA
California State Auditor
621 Capital Mall, Suite 1200
Sacramento, CA 95814

Dear Ms. Howle:

State Compensation Insurance Fund (State Fund) hereby provides response to the draft finding of the California State Auditor (CSA) report entitled, Some State Agencies Are Paying Millions of Dollars More than Necessary to Provide Benefits to Their Employees. The CSA conducted this audit and issued one recommendation.

State Fund appreciates the work performed by the CSA and the opportunity to respond to the recommendation. Attached are our comments and response to the recommendation contained in the draft report.

If you have questions or require additional information, please contact Donna Babineau, Claims Compliance Director, at (323) 981-3113.


Donna Babineau
Claims Compliance Director
State Compensation Insurance Fund

Enclosure: State Fund's Response to Draft State Audit Report
Workers' Compensation Finalizations

Cc: Vern Steiner, President and CEO, State Compensation Insurance Fund
Margie Lariviere, General Counsel, State Compensation Insurance Fund


State Fund has prepared the following comment and plan.

Recommendation: To ensure that the State Agencies have adequate time to review settlement requests and provide settlement authority, State Fund should create and follow a policy by May 2020 to provide settlement authorization requests to agencies at least 30 days before settlement conferences.


Comment and Plan: The Agencies and State Fund have established guidelines for communicating finalizations which contemplate that State Fund will complete a settlement authorization request (SAR) at the earliest opportunity. Pursuant to the guidelines, State Fund strives to provide the SAR to the agencies within 30 days of receipt of all Maximum Medical Improvement (MMI) reports. This means that the proposed finalization worksheet will generally be forwarded to the agencies at least 30 days before settlement conferences. However, as stated in the Audit Report, there are factors outside State Fund’s control that make it impossible for us to anticipate and submit a SAR 30 days prior to a hearing in every single instance. The established finalization guidelines take these factors into consideration. There are also exceptions to the SAR recommended timelines such as agreements with specific agencies for delegated authority. State Fund will continue to make every effort to provide the agencies as much time as possible to review the SAR by following the guidelines and providing oversight to ensure adherence.

The finalization guidelines are enclosed and available at


Target Completion Date: May 2020.

State Fund also provides the following comment to the audit’s factual findings:


The amounts in Table 4 do not include the liability reserve for incurred but not reported (IBNR) claims. IBNR refers to claims that have been incurred during the policy period and have not yet been reported to the insurance company and future development on claim reserves that have been reported to the insurer. While most insurance claims can be settled within a few years of the date of injury, some claims, due to their size and complexity may take years, or even decades to reach resolution. The amount of the adjuster case reserve estimate is not known with certainty until the claim is resolved. The IBNR reserve exists to ensure that adequate funds are set aside and available to pay all costs associated with the claim benefits due to the injured worker and also the administration costs of administering the claims incurred against the policy.



To provide clarity and perspective, we are commenting on State Fund’s response to our audit. The numbers below correspond to the numbers we have placed in the margin of State Fund’s response.


State Fund’s comment is misleading. Although State Fund is correct that the guidelines it mentions establish a time frame for completing settlement requests, State Fund has consistently failed to comply with these guidelines. We reviewed 15 settlement requests and found only one instance in which State Fund sent the settlement request within 30 days of receiving the maximum medical improvement (MMI) report. More importantly, the state agencies we reviewed assert and our testing demonstrates that the amount of time State Fund provides agencies to review the settlement request is not meeting the needs of the agencies that receive services from State Fund. As we state here, our testing found that State Fund did not provide agencies with at least 30 days to respond to many settlement requests, which limited the agencies’ ability to delegate the authority necessary to effectively resolve claims during settlement conferences.


State Fund’s claims compliance director clarified in subsequent correspondence that State Fund does not intend to implement the recommendation. Rather, she indicated that State Fund will assess how well it is meeting the guideline and implement any changes by May 2020.


We acknowledge State Fund’s perspective that there is a degree of uncertainty in estimating the cost of workers’ compensation claims, as we state here and further discuss throughout the report when describing the various factors associated with settlement alternatives. In addition, as State Fund notes, the amount of such reserves is not known with certainty until the claim is resolved. However, this uncertainty also encompasses the possibility of costs being greater than or less than the estimated incurred cost we used to develop our estimates. Based on the significant difference between the estimated costs and the cost of insurance purchased by these agencies, we stand by our conclusion that the State could save significant amounts by using the master agreement rather than purchasing insurance.

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