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Imagine a trial court lacking actuarial sophistication supplanting an underwriter's expertise in setting workers compensation insurance rates.
That essentially is what happened in Ohio, argues an amicus brief filed July 19 by employer and labor supporters of the state's monopoly workers comp insurer, the Ohio Bureau of Workers' Compensation.
The brief in the ongoing case of San Allen Inc. et al. vs. Stephen Buehrer, Administrator of the Ohio BWC addresses a class action lawsuit now before Ohio's 8th Appellate District after a 2012 trial court ruling that the bureau, the nation's largest state fund, abused its rate-setting discretion for years.
In March, the Cuyahoga County Common Pleas Court ordered the bureau to pay $859 million in restitution to nearly 270,000 Ohio businesses for allegedly overcharging them through a group experience rating plan that discounted premiums for employers that pooled their individual claims experience over an eight-year period.
The plaintiffs are employers that did not participate in a group experience rating plan. They allege they paid higher premiums to subsidize discounts that the bureau provided to group experience-rated policyholders.
Pool rating is prevalent across the United States, although typically it is limited to programs sponsored by associations of homogenous employers, sources said. But the preparers of a 2009 study by Deloitte L.L.P. wrote that they were unaware of any other state operating a group rating structure similar to Ohio's.
In the lawsuit with the bureau's group rating structure at its core, the Ohio trial court judge superseded the bureau's rate-making authority by devising a formula to determine the amount of money to be refunded to policyholders, said Roger Geiger, Ohio executive director of the National Federation of Independent Business.
“We just think it is very, very dangerous to ask the court to set rates,” Mr. Geiger said. “They have now created a formula, which is basically setting rates to calculate rebates, and that puts the court in the position of determining this formula that they just don't have the expertise to do.”
The court substituted its judgment for the bureau's by essentially ruling on the appropriateness of the bureau's rate-setting authority, agreed Andrew Doehrel, president and CEO of the Ohio Chamber of Commerce in Columbus, Ohio.
The chamber provides its members with a group rating plan insured by the bureau, and joined the NFIB and the Ohio AFL-CIO in filing the amicus brief.
“Amici's point is simple and direct: The courts are ill-equipped to deal with the complexities of premium-setting decisions for each of 260,000 employers, each having different loss experience, different projected cost of claims and different safety records, let alone factoring in projections as to the state of Ohio's economy, projected investment returns on loss reserves, the adequacy of State Fund reserves and literally dozens of other factors,” the brief states.
Mr. Doehrel also argues that although the bureau's surplus is currently solid, taking $859 million from the fund could force the insurer to raise its prices should its reserves diminish in the future.
“$859 million is nothing to sneeze about,” Mr. Doehrel said.
The defendant's supporters also argue that group-rated employers received reduced insurance pricing because they implemented solid safety programs that lowered their expenses.
They also argue that should the trial court's ruling stand, then every party that ever disputes the price they are charged for workers comp insurance in Ohio can take their grievance to court for relief.
But James A. DeRoche, a Cleveland attorney at Seaman Garson L.L.C. who is representing the plaintiffs, called the argument that the court has taken over rate-setting responsibilities from the bureau “complete and utter nonsense.”
The court merely determined the proper amount of restitution owed the plaintiffs, Mr. DeRoche said.
Meanwhile, bureau officials have been traveling to Ohio businesses to publicize the rebate checks. In May, the bureau announced that “larger-than-expected fund balances,” generated by its “strong investment management,” allowed the $1 billion in rebates to be distributed among 210,000 employers.
But some businesses threw away the checks, thinking they were not legitimate.
In addition to the $1 billion in rebates, the bureau also announced in May that it would “modernize” its premium collection system.
The Deloitte study found the bureau's group rate-setting structure to be unusual for several reasons, including failure to fairly align premiums with employer costs.
But Ohio's system is unique in many ways, Mr. Geiger said. For instance, Ohio employers historically have paid their premiums six months after their policy's inception. The bureau, however, said it is moving to a more common prospective premium collection system.