Attorney's worker's compensations claims bolstered by national insurance scandal

Houston Chronicle
Nov. 10, 2004

Years ago, workers' compensation costs were skyrocketing, and the blame was flying.

Employers faulted the big jury verdicts. Insurers blamed excessive medical procedures. And everyone blamed the plaintiffs lawyers.

But Scott Clearman may have stumbled upon the reason workers' compensation insurance rates in Texas were going up and remain some of the nation's most expensive: collusion by insurance companies to artificially inflate the price.

Clearman, an insurance lawyer with McClanahan & Clearman in Houston, sued 152 insurance companies under the Racketeer Influenced and Corrupt Organizations Act, or RICO, on behalf of the Wall Street Deli in 1998, believing the shop was paying more than it should have, based on the standard insurance rates for workers' comp.

Clearman remembers the raised eyebrows he got: "Oh, come on there a conspiracy between insurance companies and insurance brokers?"

That was a hard sell in 1998, he recalls.

But the political climate suddenly changed last month when New York Attorney General Eliot Spitzer sued Marsh & McLennan for taking payoffs from insurance companies to fix bids rather than negotiate the best price. The lawsuit accused the insurers of bid rigging and fraudulently steering contracts to win business, which inflated the price of insurance.

Clearman's allegations of collusion have taken on more cachet at a time when a half-dozen committees have been meeting throughout the year to fix the system when the Legislature convenes in January.

Rick Levy, legal director of the Texas AFL-CIO in Austin, asks how it can be that since 2000, the number of claims in Texas has dropped by 23 percent, the loss ratio has fallen by 47 percent, yet premiums have risen 45 percent?

Clearman is best known for representing the families of people who worked for companies that improperly purchased secret "dead peasant" life insurance policies. When the employees died, their employers received the face value of the insurance policies.

Clearman said he became suspicious in the early 1990s when he noticed insurers weren't going after everything they could in disputes with their customers who might have been delinquent in paying their premiums.

"I couldn't figure it out," Clearman recalled. That is, until he realized insurance firms didn't want those who bought their policies to know they paid too much.

Clearman sent letters to general counsels in the state, asking if he could examine their insurance policies. Most didn't believe they were being overcharged or didn't want anyone to know they might have been.

In 1991, Clearman sued on behalf of 32 companies in Texas including La Madeleine, Academy Corp. and Imperial Holly Corp., alleging they were victims of an antitrust conspiracy by 237 insurance companies, two brokers and one insurance trade group. About half the insurers ended up paying $208 million to about 5,000 Texas businesses that had been overcharged for workers' comp.

He suspected the insurance collusion was bigger than Texas and filed a nationwide conspiracy case on behalf of Wall Street Deli.

The deli, which is now in bankruptcy, had used Marsh as its broker and had purchased the coverage from Reliance Insurance, which is now in receivership.

Clearman calculated that Wall Street Deli paid $155,000 more than it should have for workers' comp insurance between 1988 and 1992.

"We were pretty surprised that could happen," said Tom Sandeman, former chief financial officer for the Wall Street Deli.

The Texas Department of Insurance regulated the rates and checked each filing to make sure companies were properly charged. But many insurers required their client companies to sign a secret "side agreement."

Those side agreements, which insurers were using to cover their portion of the expected losses of the high-risk insurance pool, weren't permitted by insurance regulators, Clearman said. The regulated rates already included a provision to cover those losses.

Jerry Johns, president of the Southwestern Insurance Information Service in Austin, wouldn't comment on litigation.

But he said that mainstream workers' comp insurers charge a rate sufficient to cover losses. They have had nothing to do with the kind of allegations been made recently, such as the payment of contingency fees.

U.S. District Judge David Hittner initially certified the Wall Street Deli RICO case as a class action, but that was reversed by the 5th U.S. Circuit Court of Appeals in 2003 because of the possibility the insurance policies were individually negotiated.

Last year, Clearman appealed to the U.S. Supreme Court, which declined to hear the case.

As the Wall Street Deli case continues in Hittner's court, Clearman said he's been contacted by companies worried they've been cheated, too.

"Before Spitzer's case, we were just out here singing in the wind," he said.

Copyright 2004 Houston Chronicle

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