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Schaefer Ambulance

Precedential Decision 99-01: SCHAEFER AMBULANCE

On June 17, 1996, the Insurance Commissioner adopted the following Proposed Decision.

On January 11, 1999, the Insurance Commissioner designated the Order Adopting the Proposed Decision as a Precedential Decision pursuant to California Government Code Section 11425.60(b).


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San Francisco, CA 94105
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In the Matter of the Appeal of


From a Decision of


Real Parties in Interest.



This appeal to the Insurance Commissioner from a Workers' Compensation Insurance Rating Bureau (Bureau)1 decision presents the question whether appellant State Compensation Insurance Fund (SCIF) correctly reported medical-legal examination expenses in its unit statistical reports to the Bureau.

An evidentiary hearing on SCIF's appeal was conducted before Administrative Law Judge Michael D. Jacobs on December 18 and 19, 1995. SCIF was represented at the hearing by Stephen W. Summerhalter and Mary Jameson of the law firm Buchalter, Nemer, Fields & Younger. The employer real parties in interest2 were represented by Nicholas P. Roxborough and Drew E. Pomerance of the law firm Roxborough & Associates, and by Michael J. Bidart of the law firm Shernoff, Bidart & Darras. The Bureau was represented by Thomas E. McDonald of the law firm LeBoeuf, Lamb, Greene & MacRae and by Carol L. Joyce, Vice President, Legal, of the Worker's Compensation Insurance Rating Bureau of California.

At the hearing witness testimony and documentary exhibits were received into evidence. SCIF presented the testimony of SCIF Assistant Claims Manager Jeffrey Corderman and SCIF Vice President and Actuary James Neary. The employers presented the testimony of Lee Van Slyke, a consulting actuary, and H. Samuel Smith, an insurance consultant and claims administrator.

The parties filed written post-hearing briefs and on March 14, 1996, submitted the matter for decision.


The medical-legal expenses in issue comprise the costs incurred by the insurer to obtain medical examination reports prepared at the insurer's request by medical experts other than the workers' compensation claimant's attending physician. SCIF's appeal involves medical-legal costs incurred in adjusting workers' compensation insurance claims arising under policies in effect from December 31, 1987, to December 31, 1991.

SCIF reported the costs of medical-legal reports under the "incurred medical amount" category of the Unit Statistical Plan (herein sometimes "Plan"). For the reasons that follow, we conclude the version of the Unit Statistical Plan in effect during the period relevant to this appeal requires insurers to report medical-legal evaluation expenses as defense expenses and not as incurred medical expenses.3

Procedural History

In March 1994 the employers complained to the Bureau alleging SCIF incorrectly reported medical-legal report costs as incurred medical costs in SCIF's unit statistical reports for the employers' workers' compensation policies. The employers' complaint contends SCIF's failure properly to report medical-legal expenses as defense expenses, resulted in inflated experience modifications and thus artificially high premiums.

The Bureau investigated the complaint, considered information provided by SCIF and the employers, and found SCIF failed to report medical-legal costs under the proper Plan category. In a letter dated August 9, 1994, (Exh. 143) the Bureau informed SCIF of its decision the Unit Statistical Plan requires medical-legal report expenses to be reported as defense expenses. The letter directed SCIF to submit revised unit statistical reports for the employers' policies consistent with the Bureau's decision and informed SCIF the Bureau would revise the employers' experience modifications based upon the revised reports.

SCIF appealed the Bureau's August 9, 1994, decision to the Bureau's Classification and Rating Committee (C & R Committee), which heard the appeal on January 10, 1995, and voted to sustain the Bureau's decision.4 SCIF brings this appeal of the Bureau's decision to the Insurance Commissioner (Commissioner) under Insurance Code section 11753.1, subdivision (a).5

The Commissioner's Unit Statistical Plan

The California Workers' Compensation Unit Statistical Plan constitutes part of the Commissioner's regulations, at title 10, California Code of Regulations, section 2318.5. The Plan requires insurers to file statistical reports (termed "unit reports") with the Bureau for all insurance policies extending coverage under California workers' compensation laws. (Plan, Sec. I, pt. A.) The reported data are used to determine rate structure and experience modifications for workers' compensation insurance.

The Plan prescribes the loss, claim, exposure, and premium data to be included in the carrier's unit reports to the Bureau. The Plan also provides instructions for reporting experience data under specifically defined categories. Compliance with the Plan's instructions is mandatory. (Plan, Sec. I, pt. A.)

The Parties' Contentions

SCIF contends it properly reported medical-legal report expenses under Section II, part G, paragraph 13, of the Plan, "Incurred Medical Amount," which provides in pertinent part:

"The incurred medical shall be the total of all amounts paid and the outstanding medical for a particular claim.... 6

"(a) The following items shall be included with the incurred medical:

"(i) Contract Medical.7
"(ii) Hospital Reimbursement....
"(iii) Attending Physician's Fee....

"(b) Allocated Claim Adjustment Expenses. Allocated claim adjustment expenses shall be excluded from the incurred medical."

SCIF urges that the incurred medical category applies to all medically-related costs and is not limited to the items identified in paragraph 13 (a).

The Bureau and employers respond by arguing medical-legal report costs constitute allocated claim adjustment expenses, which the medical expense category expressly excludes. The Bureau and employers also contend the Plan requires medical-legal report expenses to be reported only as defense expenses, defined in Plan, Section II, part F, paragraph (k), as follows:

"[The] [a]mount paid in connection with the defense of a controverted claim which includes the following:

"(i) Amount paid for legal representation.

"(ii) Amount paid for medical testimony, examination or records where compensability or extent of disability is at issue, excluding amount paid for medical treatment.

"(iii) Amount paid for other defense expenses. Examples include, but are not limited to, such items as court reporter fees and fees for expert witness testimony."

In response to the Bureau and employers' argument, SCIF contends medical-legal examinations constitute medical treatment, the costs of which are expressly excluded from the definition of defense expenses under paragraph (k)(ii). SCIF further contends the defense expense category applies only to litigation costs.

We first consider the merits of SCIF's contention that medical-legal examinations constitute medical treatment.

Nature and Purpose of Medical-Legal Examination Reports

SCIF Assistant Claims Manager Jeffrey Corderman testified SCIF requests medical-legal reports as part of the claim adjustment process. (12/18/95 Transcript, p. 24: 12 - 14.)

Medical-legal reports typically contain the examiner's diagnostic, etiologic, and prognostic opinions concerning the claimant's injury, assessment of disability status, and recommendations regarding further indicated treatment. In the exemplar reports introduced into evidence, the examiner's opinions and recommendations are based upon review of medical records, history provided by the claimant, diagnostic examination, and diagnostic tests.

The evidence establishes that experts who conduct such medical evaluations at the insurer's instance render no medical treatment to the injured worker claimant. We find no support in the evidence for SCIF's assertion that medical-legal experts "treat" the claimant because they render diagnoses and opinions concerning disability and further indicated treatment. Their role as retained medical experts is not to provide treatment or establish a doctor-patient relationship with the claimant but to report their findings and opinions regarding compensability and disability to the insurer.

Having rejected SCIF's contention that medical-legal evaluations constitute medical treatment, we turn next to its contention that the defense expense category applies only to litigation costs.

Applicability of the Defense Expense

Category to Medical-Legal Reports

SCIF argues the inclusion of such costs as attorney, court reporter, and expert witness fees in Section II, part F, paragraph (k), evinces the intention that the defense expense category applies only to litigation-related costs. This argument overlooks the plain language of the definition, which clearly contemplates expenses incurred in defending the claim during the claim adjustment process as well as those incurred to litigate a claim.

In particular, the phrase "in defense of a controverted claim" in the definition of defense expense cannot reasonably be construed to apply only to litigation. The term "defend" denotes to protect, to deny, or to oppose, as well as to present the respondent's case in an administrative proceeding. (See, e.g., Black's Law Dict. (5th ed. 1979) p. 377, col. 2.) The insurer thus "defends" the claim by opposing or denying any aspect of the claim or by taking measures to protect its interests and those of its insured against noncompensable or inflated claims.

Moreover, the costs of medical examinations are included as defense expenses under Section II, part F, paragraph (k)(ii). Therefore, by the Plan's very terms, the insurer's request for a medical examination where compensability or disability is at issue implicitly constitutes a measure in defense of a claim.

Similarly, the meaning of "controverted claim" in the definition of defense expense cannot by context or connotation be construed to mean only litigated claims. We agree with the employers' contention that a claim is uncontroverted only where the insurer accepts the claim and is 100 percent satisfied with the conclusions reached by the claimant's treating physician.

The evidence establishes that medical-legal reports are requested only where the insurer controverts some aspect of the claim. Insurance consultant H. Samuel Smith, who has had more

than 30-years of experience in the field of workers' compensation claims, testified that insurers request medical-legal reports only where some aspect of the claim is controverted or for the purpose of controverting the claim. (12/19/95 Transcript, p. 64: 4 - 22; p. 66: 2 - 10.) According to Mr. Smith, the controversy may relate to whether the claimed injury arose out of or in the course of employment, the extent of disability, the need for further treatment, or whether the claimant requires vocational rehabilitation benefits. (Id., at p. 59: 7 - 23.) We find Mr. Smith's testimony persuasive and supported by common sense.

For the reasons stated, we find that medical-legal expenses constitute defense expenses within the meaning of Section II, part F, paragraphs (K) and (k)(ii), of the Plan. We next consider and reject SCIF's alternative argument that the Plan does not preclude insurers from reporting medical-legal costs under either the defense expense or incurred medical category.

Medical-Legal Report Costs Constitute

Allocated Claim Adjustment Expenses

Medical-legal expenses relate to the adjustment of specific claims and therefore constitute allocated claim adjustment expenses under the Plan. The Plan defines allocated claim adjustment expenses as "[t]he expenses of a carrier, in connection with handling a claim, which can be directly allocated to a particular claim." (Sec. II, pt. F, para. 1 (a).)

Plan Section II, part G, paragraph 13, "Incurred Medical Amount," expressly excludes allocated claim adjustment expenses from the medical expense category. Allocated claim adjustment expenses similarly are excluded from the Plan's incurred indemnity category, with limited exceptions not here relevant. (Sec. II, pt. G, para. 12 (d).) We therefore hold that the Plan requires insurers to report medical-legal expenses only as defense expenses.

Previous Administrative Construction of the Plan

Our holding in this case is consistent with the California Insurance Commissioner's previous construction of the Plan's reporting requirements for policies incepting prior to January 1, 1993. In a letter to the Bureau dated December 15, 1994, concerning the proper reporting category for medical-legal expenses, then Insurance Commissioner Garamendi stated:

"[T]wo parts of the rules, Record Specifications Section II, subsection F.1.(k)(ii) regarding defense expenses and subsection G.13 (a)(iii) and 13(b), which includes attending physicians fees and excludes allocated claim adjustment expenses from incurred medical amounts, operating in tandem leads to one conclusion only, that medical-legal expenses are properly reported as defense costs except when involving the attending physician...." (Exh. 44.)

We find no reason to depart from the Commissioner's previous construction of the Plan's reporting requirements.

SCIF's Objections to the Remedy Ordered by the Bureau

SCIF contends the Bureau will be unable to determine actuarially sound experience modifications for the employers without reclassifying the medical-legal expenses of all similar employers' in California. SCIF's objection to the remedy contemplated by the Bureau is premature and potential issues SCIF raises regarding the remedy are not ripe for decision. These potential issues relate to the integrity of the experience modification formula. The formula compares the employer's loss experience to the expected losses of similar employers in California. Expressed as a fraction, the numerator comprises the employer's actual losses and the denominator comprises the expected losses of that employer combined with the expected losses of all similar employers. SCIF argues that a valid comparison of actual losses to expected losses is not possible where medical-legal costs are deleted from the numerator but not from the denominator.

At the hearing, the Bureau correctly noted that the denominator of the experience modification formula is a value adopted by the Insurance Commissioner as part of the Experience Rating Plan. A change to that value may be considered and effected only through the formal rulemaking process and not by decision in this adjudicative proceeding. On the present record we are unable to anticipate the legal and practical implications of adopting a retroactive change to the Experience Rating Plan.

The Bureau presented no evidence at the hearing on the issue whether a change in the expected loss value is required for the Bureau properly to recalculate the employers' experience modifications. If, after SCIF submits revised unit reports, the Bureau determines the employers' experience modifications cannot properly be revised without a retroactive change to the Experience Rating Plan, it must present its recommendations to the Commissioner for consideration. If the Bureau determines the experience modification recalculations can properly be executed without an expected loss value change, SCIF can, to the extent it disagrees with the recalculation, challenge it after it has been performed.

Determination of Issues

The Bureau correctly determined that the Unit Statistical Plan provisions in effect from January 1, 1983, until January 1, 1993, require the costs of insurer-requested medical examination reports, provided by medical experts other than an attending physician, to be allocated as defense expenses in unit reports to the Bureau.


Footnotes (converted to Endnotes for purposes of WWW presentation):

1. The Rating Bureau is a licensed rating organization within the meaning of Insurance Code section 11750.1. It serves as the Insurance Commissioner's designated statistical agent for the purpose of collecting statistics and rating information for workers' compensation insurance.

2. Real parties in interest Schaefer's Ambulance Service, Inc., Sectran Security, Inc., and Universal Courier, Ltd., are referred to collectively as the employers.

3. The version of the Unit Statistical Plan in effect between January 1, 1983, and January 1, 1993, governs determination of the issues presented in this appeal. All references to the Plan are to that version.

4. The C & R Committee's decision is contained in the minutes of its January 10, 1995, meeting (Exh. 146).

5. Insurance Code section 11753.1, subdivision (a), authorizes an aggrieved person to appeal the decision, action, or omission of a rating organization to the Commissioner.

6. Plan, Section II, part F, paragraph 1 (aa), defines outstanding medical as "[t]he carrier's individual case estimate of all future medical payments on the claim."

7. Plan, Section II, part F, paragraph 1 (e), defines contract medical costs as "[t]he actual costs incurred by the carrier under medical contracts with physicians, hospitals, and others which cannot be allocated to a particular claim."



The January 10, 1995, decision of the Workers' Compensation Insurance Rating Bureau's Classification and Rating Committee upholding the Bureau's August 9, 1994, decision, is affirmed.


I submit this proposed decision on the basis of the hearing held before me and I recommend its adoption as the decision of the Insurance Commissioner of the State of California

DATED: May 8, 1996


Administrative Law Judge
Department of Insurance

Last Revised - November 30, 2001

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