State regulators yesterday released a damning report about Beacon Mutual Insurance Co. that lays out how the state’s dominant workers’ compensation insurer for years used its money, market clout and political connections to drive out competition.

The 312-page “market conduct examination” details how Beacon’s top managers doled out “pricing favors” to large policyholders, plied insurance agents with unearned commissions and fancy golf trips and funneled contributions from the company’s former chief executive to politicians.

In some cases, Beacon gave discounts to favored policyholders that were so out-of-whack with their loss history that it cost the insurer millions of dollars, the report said.

The state Department of Business Regulation said yesterday that Beacon has agreed to pay a $2.5-million fine (of which $1.5 million will be suspended pending compliance with the department’s recommendations), and refund policyholders approximately $7 million.

Beacon is a nonprofit mutual insurer with about 15,000 policyholders who comprise about 90 percent of all insured employers in Rhode Island

Beacon’s new president and chief executive, James V. Rosati, said in a statement that the report reflects the company’s “past practices” and not the “reforms and changes that have been instituted at Beacon since April 2006.”

“Today at Beacon there are procedures and guidelines in place which will prevent the type of findings contained in the report from reoccurring in the future,” Rosati said. He also assured policyholders that Beacon is “a financially sound institution.”

The exam found, among other things, that:

•Beacon spent over $1.1 million on “golf-related events, attire and travel” from 2003 through 2005. That included about $110,000 for golf trips to Florida, California, North Carolina, Wisconsin and Scotland (the Scotland trip alone cost about $34,000), and at least $20,000 “to support the PGA career of an agent’s son.”

•Beacon paid a select few insurance agents a total of $2 million in “unearned commissions” between 1999 and 2002.

•Beacon maintained an unprofitable policy for a hospital in Massachusetts which Beacon was not even supposed to provide coverage for. The multi-year policy had “understated payroll” and was priced lower than it should have been. The losses on the policy, the report said, exceeded the premiums paid by about $10 million.

•Beacon wrote off to “bad debt” the uncollected balances of two accounts connected to representatives of the Rhode Island General Assembly at a time when Beacon was attempting to push for passage of legislation that would change its enabling act.

•Beacon’s former chief executive, Joseph A. Solomon, “offered to personally reimburse” 14 Beacon employees, board members and related consultants who contributed $15,600 to the political campaign of an unnamed candidate. The Journal has learned that the politician is U.S. Sen. Sheldon Whitehouse, a former director of the state DBR.The state examination, nearly two years in the making, is the most extensive conducted by the state of any insurance company. It expands upon a review last year run by an independent commission led by former Gov. Lincoln C. Almond and conducted by auditors from a consulting firm owned by former New York Mayor Rudolph Giuliani.

BUT WHILE extensive and detailed, the state examination leaves unnamed many of the key policyholders and politicians referenced in its pages.

Instead, it expands on several of the key players already well known to those familiar with the Beacon saga: Solomon, who was fired, and its chief of underwriting, David R. Clark, who was indicted 10 months ago by a statewide grand jury in what was described as an ongoing criminal probe.

State regulators are working to provide the offices of the state attorney general and U.S. Attorney with all background material “to help determine what, if any, crimes were committed,” according to a statement released yesterday by the governor’s office.

The governor called the report a “damning indictment” of Beacon and its “abuse of the public trust.”

“The study of Beacon Mutual’s conduct demonstrates that the problems went much deeper than even I suspected,” Governor Carcieri said in the statement. “Beacon Mutual’s former leadership fostered a corporate culture that suffered from weak management and controls; inappropriate producer, agency and vendor relationships; favoritism and bias in pricing; inappropriate and lavish spending; and a total disregard for public oversight and for Beacon’s public mission and purpose.”

Beacon was created by the General Assembly in 1990 as a nonprofit mutual insurer in response to a crisis in the workers’ compensation market in which carriers were leaving Rhode Island.

The so-called insurer of last resort, Beacon quickly grew to dominate the market; by 1994, its market share was 90 percent. “But as the workers’ compensation market stabilized,” the report said, “Beacon lost market share to carriers reentering the state.” By 1997, the report said, Beacon’s market share had dropped to 51.5 percent.

“The return of the carriers into the marketplace and the decrease in Beacon’s market share was the fulfillment of the legislative intent as stated in Beacon’s enabling legislation,” the report said in the 22-page executive summary. “However, instead of welcoming the competition, Beacon management changed its marketing strategy to win back its former position.”

To accomplish that, the report said, Beacon management focused on the independent insurance agents. Beacon sought to curry favor with its largest agents through “pricing favors,” which the company called “agent accommodations.”

The report also said that:

•Beacon maintained 13 accounts on its “VIP” list that “received preferential treatment.”

•Financial controls at Beacon were so lax that company checks of $5,000 or less were “automatically signed with printed signatures” without any verification about the appropriateness of the payment beyond the department that requested it.

•Beacon senior managers used their “unsupported discretion” to overturn the pricing decisions of their own underwriters after negotiating with insurance agencies; the company referred to this as its “Right Pricing philosophy.”

•Solomon, Beacon’s former CEO, and the company’s CFO, Cynthia Lawler, took advantage of Beacon’s “unwritten policy” of allowing spouses of executives on out-of-town business meetings.

•Beacon gave $15 million in discounts related to a managed-care program with Blue Cross & Blue Shield of Rhode Island, called CompAlliance, for which there was generally no “due diligence to determine the level of qualified coverage.

•Six of the 12 “safety groups” that Beacon purportedly created to reward companies that work to improve their safety records had a worse loss record that the 65-percent “target loss ratio” set by Beacon.

•Two policies affiliated with former members of Beacon’s board showed evidence of “outside influence in the underwriting,” and misclassifications that resulted in the policies being unprofitable. (Neither of the companies are named but it is clear from the description that one of them is Manpower Inc., which used to be owned by former board member Sheldon S. Sollosy, and the other appears to be Paul Arpin Van Lines, whose CFO was former Beacon board member Ed J. Braks.

The report also gives a far more descriptive picture about the excesses at the company, including $50,000 in lease payments on a Lexus and Volvo that Beacon paid for Solomon from 2003 to 2005. Solomon also authorized Beacon to buy a Lexus he had previously leased and then re-sell it to “a Beacon vice president” for $11,363 less than it cost Beacon. “The difference in price,” the report said, “was not included as income on the vice president’s tax forms.”

In addition to the corporate country club membership, Solomon paid $41,000 for club memberships for several senior managers, the report said.

Beacon’s practice of under-pricing favored policies may have more far-reaching consequences beyond what is dealt with in the DBR’s latest “consent agreement” with the company. The report implied that Beacon’s under-pricing of policies may have reduced the total amount in premium taxes that the insurer must pay the state. All insurers are supposed to pay 2 percent of their total premiums to the state. Beacon used to be tax-exempt, but Carcieri repealed the exemption during his first term, saying it gave Beacon an unfair advantage in the market.

With reports from Staff Writer Mike Stanton

larditi@projo.com