The State Worker

The State Worker: CalPERS insurance lawsuit entering next phase

Jon Ortiz
Jon Ortiz

The simmering fight over CalPERS’ decision to jack up its long-term-care insurance premiums is about to get hotter next week when the fund responds to a lawsuit that, among other things, accuses its leaders of falling down on their legal obligation to do right by members.

The Los Angeles Superior Court complaint seeks to represent about 150,000 CalPERS members who took out private policies between 1995 and 2004 to cover convalescent care, in-home living assistance and similar services. Nearly all the policies guaranteed inflation-adjusted payments for the life of the policyholder.

CalPERS stopped selling the so-called “lifetime, inflation-protected” policies and periodically raised premiums because the program was going broke, squeezed by underperforming investments and soaring payouts it hadn’t anticipated when pricing the open-ended policies. Many private-sector insurance carriers had the same experience selling long-term-care coverage and got out of the business. Today, CalPERS’ $3.6 billion long-term-care fund is the second-largest in the nation.

Then last year, CalPERS’ board signed off on an 85 percent premium hike on the Cadillac plans, timed for 2015 and 2016.

Longtime policyholders rebelled. Legislators held a hearing. Then came the lawsuit that alleged CalPERS violated state insurance law and sold the Cadillac policies with a lie that rates “would be fixed and would never rise based on the consumer’s age or health.”

CalPERS asked the court to throw out the lawsuit. Its arguments: (1) We didn’t do anything wrong. (2) Even if we did, you can’t sue the government. (3) Insurance laws don’t apply to us. We’re not an insurance company. (3) Policyholders received the benefit of coverage. Nobody got ripped off.

The court hasn’t settled that debate yet because the plaintiffs rewrote their lawsuit with a new argument: CalPERS and its individual board members mishandled the long-term care program so badly that they violated their legal obligation to watch out for members’ interest above all else.

It’s called “neglect of fiduciary duty.” Accusing CalPERS board members of that is is like calling Captain America a communist. Fightin’ words.

CalPERS and its board, the complaint says, “grossly underpriced premiums, failed to properly fix premiums” and engaged in an overly aggressive investment strategy that didn’t pan out.

The lawsuit also names the company that allegedly gave bad policy-pricing advice to CalPERS.

When asked for a response, fund spokeswoman Rosanna Westmoreland emailed this statement:

“CalPERS did not breach any obligations owed to its policy holders and did not mislead policy holders. We believe the amended claim is without merit and we will defend the case.”

An attorney for the plaintiffs, Stuart Talley, said he expects CalPERS on Monday to file arguments to dismiss the case.