When Allen Ravert heard about restaurants that were banding together to pool insurance for workers’ compensation claims, it made sense to sign up his Studio City restaurant, Mexicali Cocina Cantina. For one, the rates were 15 percent lower than he could find anywhere else.
But after several years with the self-insured group, California Restaurant Mutual Benefit Corp., he received a surprising letter: It had an $80 million deficit and Ravert needed to pay an additional $21,000 to help close the hole.
Mexicali Cocina was one of roughly 1,500 companies that the group hit with new assessments, reaching as high as hundreds of thousands of dollars. Ravert and his co-owners, Bernadette O’Rourke and Glen Dobbs, refused to pay, as have others.
The insurance group has gone after at least eight L.A. restaurants and restaurant chains for nonpayment, including Hamburger Hamlet, Du-Par’s and chain El Gallo Giro, which has been tapped for $829,000. The group filed two of the lawsuits seeking payment from these and other restaurants in the state earlier this month.
Ravert is angry and has switched insurers. But cowed by the prospect of a messier fight, he has agreed to pay.
“I couldn’t believe anything could be managed that poorly,” he said. “Why should I be penalized?”
The insurance group said it was surprised to discover the deficit and is blaming it on negligence by a company it hired to run the system, CHSI in Las Vegas. It claims CHSI underestimated costs and did not set rates high enough. CHSI did not respond to a request for comment, but has denied the allegations in court.
“There are issues with respect to how they underwrote the group,” said Marcus Hall, an attorney representing CRMBC. “The actuarial estimates that were procured under CHSI’s administration were negligently low.”
CRMBC, based in Ontario, is the only self-insured group for restaurants in California, and in the wake of the deficit discovery, membership has dwindled to about 700 from a peak of 1,600 employers statewide.
Other types of employers have formed self-insured groups, including auto dealers, private schools and livestock producers. Their members pool the risk of liability from workers’ compensation claims among themselves and are not run by a for-profit insurer. Rates are often lower than competitors and any profits are redistributed back to its members. But CRMBC’s deficit difficulties are a reminder of their potential pitfalls, said Jerry Prendergast, principal of Culver City restaurant consultancy Prendergast & Associates.
“In the short term, it might cut my monthly costs. But in the long run, what’s my level of risk and liability?” he said. “What happens when that pool of funding goes away and now we’re all assessed extra money to pay for the losses?”
Out of vogue
The California Restaurant Mutual Benefit Corp. was launched in 2005 amid an explosion of self-insured groups in reaction to a rise in workers’ compensation insurance rates. The phenomenon has since tailed off. Only one has been founded in California since 2008, compared with 31 groups founded between 2002 and 2008. Many struggled to keep up capital and about one-third of those groups are no longer active.
CRMBC’s rates were initially lower than most competitors and, in growing to be the largest self-insured group in the state, it appeared to thrive. A dividend of $7.1 million to employers was announced after its first year.
But a late 2011 audit discovered a huge problem. The group had been undercharging members for years and needed some $80 million more to cover projected liabilities from existing claims. It levied $47 million in new assessments against its members in 2012 – and has not ruled out the possibility of more.
The news was tough to swallow for members.
Kaya Bromley, a CRMBC board member who was then the executive director of a Jack in the Box franchise association, said she got together with several other restaurant chains to determine whether they should sue or break off from the group. But an analysis found that a breakup would have cost them more than staying in, due to legal fees and the fact that claim payouts tend to skyrocket once a failed self-insured group goes into conservatorship. They gritted their teeth, paid and stayed in.
“Historically, when groups have failed, the members pay far more,” she said.
That’s cold comfort to Ravert and his partners. They plan to pay $26,000 – the lawsuit CRMBC filed against them added a 25 percent collection fee – and have left the group. Court documents show the company contributed $116,000 in about five years and had just $2,000 in actual workers’ compensation claim losses. Mexicali Cocina has switched to a more expensive insurance company, which costs close to $30,000 a year, compared with the $18,000 it paid in 2011.
“Restaurants are so labor intensive that it really affects our business,” Ravert said. “It keeps us from expanding and paying higher wages.”
About 90 percent of the members have paid, Bromley said, and enough have elected to stay in the group – for now – for it to continue operations.
Some restaurant operators maintain the group is still worth it. Biff Naylor, owner of the Du-Par’s diner chain, was hit with a $37,000 lawsuit. He said he won’t pay it because the assessment was related to a separate subsidiary of Du-Par’s that no longer exists. But he wants to stay in the group.
“We got a very favorable rate. It was way below market and that didn’t hold up,” he said. “But even with the assessment, we were still below market.”
