Colorado’s state-created workers’ compensation insurance company — Pinnacol Assurance — for years knowingly overcharged dozens of roofing companies millions of dollars in premiums it wasn’t entitled to collect, according to a lawsuit alleging the practice and records reviewed by The Denver Gazette.
Pinnacol largely did this by wrongly telling roofers that the subcontractors they hired did not have their own insurance coverage, a requirement in Colorado, when records showed they actually did — many of them with Pinnacol itself — and were forced to make up the premium difference or face cancellation, according to the lawsuit and several interviews.
Some roofers told The Denver Gazette the additional amounts they were charged nearly put them out of business, often leaving them to struggle with payment plans to avoid that outcome.
If they didn’t pay, Pinnacol threatened to cancel the companies' workers’ compensation policies, forcing them to scramble for coverage that’s difficult to obtain in an industry already deemed to be a high risk.
In turn, the lawsuit claims, the millions in additional revenues Pinnacol pocketed helped boost the bonuses and other financial incentives given to its top executives, with two CEO's last year splitting more than $1.5 million in compensation between them — about $644,000 to the outgoing CEO after just three months and nearly $830,000 to the current CEO after only nine months on the job, records obtained by The Denver Gazette show.
And several other Pinnacol executives were similarly handed bonuses that topped 50% of their base salaries, the majority of which already exceeded $200,000, records show.
Premium overcharges would also have helped Pinnacol amass a surplus of more than $1.5 billion last year, two decades after state auditors slammed the quasi-government agency for being in financial trouble while paying its executives top dollar, records show.
What’s more, Pinnacol was flagged as early as 2017 about its double-billing practice, according to documents and interviews. Pinnacol said it was the client's fault for not having provided accurate paperwork and worked with them to correct the issue.
Lawyers involved with the lawsuit say it's unclear whether Pinnacol’s tactics extend to other high-risk industries, such as construction or mining companies and are seeking class-action status to include them. If so, the amount of mis-billed premiums could easily reach into the tens of millions of dollars, the lawyers say.
In all, Pinnacol challenged some of the lawsuit's claims as "inaccurate," noting the litigation process would ultimately make that determination.
In court records, Pinnacol has asserted its analyses were accurate and that it can only calculate a client’s premiums based on the company’s concise and honest recordkeeping. Bad records will inevitably yield bad calculations and it described the company that filed the lawsuit — Gold Star Premium Roofing in Wheat Ridge — as being "difficult" when trying to assess if its subcontractors were properly insured.
A half dozen companies not involved in the lawsuit shared records with The Denver Gazette that appeared to show they were charged additional premiums for having at least one subcontractor that was already insured, virtually all of them with Pinnacol. The companies shared the documents on the condition they not be named because they feared it could affect their coverage.
In the meantime, Pinnacol has been paying dividends to the companies it insures, including the ones who say they have been overcharged. Pinnacol by law operates as a mutual company where clients are considered its owners and profits are to be shared. Last year, that dividend averaged out to be about $1,400 per company, records show.
Business has been so good through the years that Pinnacol has frequently asked legislators to separate it from government oversight so it can operate as an independent private insurance company. The bills have been defeated each time, the latest in 2021.
Pinnacol is a political subdivision of the state whose sole purpose is to be the insurer of last resort, benefiting injured workers in Colorado and the dependents of deceased ones. Although it is controlled by a nine-member board appointed by the governor, the state has none of its fiscal liability nor budgets any money for its operations.
But because of its public purpose and the near-monopoly it holds, it is subject to government oversight — precisely why its conduct is under scrutiny, according to the lawsuit.
“Pinnacol’s practices allow it to assert significant audited premiums against its insureds, which permits Pinnacol to wrongfully and improperly collect vast monetary sums of additional premiums from its insureds,” according to the lawsuit filed in Denver District Court. “Because the roofing contractors are not prepared to pay these additional audited premiums, many companies and individuals were subjected to financial hardships, including collection lawsuits, business failures, and other debt-related hardships.”
Subcontractors were already insured
Colorado law requires companies to pay additional insurance premiums to carriers whenever subcontractors are found not to have had their own state-mandated workers’ compensation policy or, in the case of a sole proprietorship, such as a self-employed independent contractor, had not waived the coverage. Subcontractors with their own employees cannot waive the workers' right to coverage.
Pinnacol determines this by annually auditing the books of the companies it insures. In the lawsuit, Pinnacol identified it had done more than 5,600 audits of roofing company clients between 2015 through 2021.
Those audits, Pinnacol said, generated more than $9.5 million in additional premiums for purportedly uninsured subcontractors the companies had used.
It's unclear just how many roofing companies exist in Colorado, but one estimate, by the Better Business Bureau, says there are at least 2,600 of them. The industry annually generates more than $230 million in payroll for Colorado workers, insurance records show.
Lawsuit records show a small sampling of the audits Pinnacol conducted the past few years purportedly found roughly one in every five contained wrongly charged premiums because the subcontractor was either already insured or had waived the coverage. '
Pinnacol is challenging that assertion, saying in court filings that the records aren't as clear as Gold Star says, with some needing more detailed analysis to be sure they're even the right subcontractors.
The lawsuit by Gold Star and its owner, Caine Knapp, lays out how it was overcharged nearly $90,000 in additional premiums in 2020 for a half dozen subcontractors Pinnacol said were uninsured.
Public-facing databases maintained by the Colorado Department of Labor and Employment, however, show many of the subcontractors were not only insured, but their coverage was with Pinnacol.
For its part, Pinnacol said it has no clue who a company's real subcontractors might be "unless the companies are providing accurate records."
“The thrust of (the lawsuit) is that … Pinnacol could have checked its own database for whether the subcontractor had insurance or the Department of Labor’s website for insurance coverage verification or waiver of coverage,” Gold Star’s attorneys, Damian Stone and Erik Neusch, wrote in a request to make the lawsuit a class-action one that stretches to the entire construction industry.
Pinnacol has argued that the responsibility to make sure it doesn’t overcharge is on the companies, not Pinnacol. And one of its own auditors said in a deposition that Pinnacol’s policy did not require a database search to determine if a subcontractor was already insured, court records show.
Pinnacol said Gold Star was a “difficult” client that frequently avoided audits and would not provide it with accurate subcontractor records, according to court filings, specifically undercutting the amount of payroll it paid its subcontractors. The payroll is a necessary component in determining the cost of a policy premium and, as a result, Gold Star, according to Pinnacol, has “avoided paying tens of thousands of dollars in premiums for years.”
Stone, Gold Star's attorney, said the company has struggled like many others in the industry and tried to stay on top of its business.
"As a new roofing company in 2016, Gold Star made some errors but paid all the penalties assessed by Pinnacol," Stone said. "And going forward, Gold Star hoped to have a partner to help the business succeed."
Pinnacol is the purported insurer of last resort for companies to buy workers’ compensation coverage in Colorado. As a result, it holds about half of all the policies statewide, state insurance reports show.
For the roofing industry, it is essentially the only place to acquire the coverage affordably, since many other insurance firms will not offer it. By law, Pinnacol cannot turn away any company needing insurance, but can adjust its premiums to compensate for the additional risk.
The company insures about 55,000 Colorado businesses of all types, covering about 1 million workers. There are no public numbers to indicate how many of Pinnacol’s policies are with the roofing industry alone, but state data on claims indicate it to be substantial.
After Pinnacol, the company with the largest market share of all workers’ compensation insurance in Colorado last year was Zurich American of Schaumburg, Ill., with slightly more than 3% of the policies, according to the Colorado Division of Insurance.
S&S Construction Services COO Sergio Sarabia, left, directs Jesus Alvarado Mendez on where to move heavy equipment around the shop and Sarabia and his wife Gabriela’s second company, Paragon Sheetmetal and Fabrication, on Wednesday, Oct. 11, 2023, in Denver, Colo. (Timothy Hurst/Denver Gazette)
Large companies frequently find insurance with independent carriers, but smaller ones often have no recourse but to use Pinnacol, industry insiders say.
“With Pinnacol, there was no other choice and I’ve been doing my due diligence for years to find a competitive price,” said Gabriela Sarabia who owns S&S Construction in Aurora with her husband, Sergio. “I don’t know if the premium is a fair one or not because there isn’t anyone else. They are the only one that will do roofing workers’ comp in Colorado.”
Pay or risk closure
The Sarabias started their small construction business in 2019 with the hope of building something for their growing family.
As a painting firm that also did roofing, it frequently relied on other businesses to work with them in getting jobs done. It’s not an uncommon approach, several industry insiders said.
Many of the subcontractors the Sabias hired were self-employed, so they frequently carried their own insurance or signed waivers declining the coverage. Since many of the workers spoke only Spanish, the waivers were in the language they understood.
Gabriela Sarabia said there was a large learning curve, but she made sure to have the paperwork on hand when Pinnacol came to check.
S&S Construction Services CEO Gabriela Sarabia sits for a portrait in her office on Wednesday, Oct. 11, 2023, in Denver, Colo. (Timothy Hurst/Denver Gazette)
As a new customer, Pinnacol selected S&S Construction for an audit and, according to Sarabia, told her a number of the subcontractors they used had not signed insurance waivers.
“That’s when they charged me this large amount — about $40,000 — when we were just starting out, because they said my subs didn’t have workers’ comp and I needed to pay it,” Sarabia said. “Either we paid it or we couldn’t collect any checks on the work that was already done, which meant we couldn’t pay anyone else.”
It turned out that nearly all the subcontractors had signed waivers or were insured, Sarabia said, but not until S&S had already taken on a payment plan with Pinnacol to prevent her new business from shutting down.
“They were putting info into their report that shouldn’t have been figured in, adding things that shouldn’t have been,” Sarabia said. “After we went through the whole show with accountants and lawyers, all those costs were on my shoulders, not Pinnacol’s.”
Pinnacol said privacy rules prevent it from discussing Sarabia's claims, but described them as imprecise. It said any determination of whether a subcontractor's waiver is valid requires a closer look and only applies to the officers of that subcontractor company. That means any subcontractor with employees can't waive the coverage for its workers, only for its corporate officers.
S&S Construction Services COO Sergio Sarabia talks with a client while at his desk at his and wife Gabriela’s second company , Paragon Sheetmetal and Fabrication, on Wednesday, Oct. 11, 2023, in Denver, Colo. (Timothy Hurst/Denver Gazette)
Other companies said they were treated the same, The Denver Gazette learned. They were audited, told subcontractors didn’t have the required insurance and were billed thousands of extra dollars in premiums. Most paid.
Gold Star said while Pinnacol is a state-created entity, it doesn’t operate as one and that "Pinnacol’s conduct … runs counter to the purposes for which Pinnacol was created,” the lawsuit states.
"To me, Pinnacol's statutory purpose is to provide the lowest possible rates for Colorado workers," Stone told The Denver Gazette. "Pinnacol should want to create a system that prevents insureds from paying premiums for subcontractors who already have insurance or have waived it."
The Denver Gazette asked the Colorado Roofing Association if any of its members had experienced similar audit outcomes.
Its executive director, Debbie Hathorne, said in an email that the organization had “not had any other member bring this up as a problem for us to look into.”
The roofing association is one of 39 professional groups to which Pinnacol last year contributed more than $208,000.
And of the roofing association’s 11 board members, eight are insured with Pinnacol, including its president.
Pinnacol is listed as an “industry leader sponsor” on the association’s website and the only one that is a workers’ comp insurance company.
Pinnacol said the donations are all part of its effort to work with the community it's mandated to help.
"We take our role seriously," said Liz Johnson, Pinnacol’s director of public relations. "In addition to remaining connected with those that we serve, we believe that community and social responsibility are important to the success of our policyholders and as a workers’ compensation carrier that plays a critical role for the state of Colorado."
In his lawsuit, Gold Star owner Knapp said he refused to pay the additional premiums when he learned his subcontractors were already covered.
The result: Pinnacol canceled Gold Star’s policy.
Without the insurance, Gold Star could not work in Colorado or collect on the jobs it was contracted to finish. Knapp said he was forced to find costlier insurance coverage.
What followed were Pinnacol letters demanding payment for the additional premiums or it would send the matter to collections, a costly process that easily could take a bad turn on Knapp’s credit.
The Gazette reviewed audit reports from six other roofing companies Pinnacol had charged additional premiums and found many of the subcontractors were already insured at the time of the audit period.
"Due to Pinnacol's market power, the roofing industry has few alternative options for workers' compensation insurance in Colorado," Stone told The Denver Gazette. "If a contractor refuses to pay Pinnacol's audited premiums, they might not be able to get other insurance."
In effect, a company could likely find itself out of business.
"As a general matter, we rely on the cooperation from our policyholders to ensure that workers are adequately covered," Johnson said.
More premiums helps salaries boom
The amount Pinnacol executives are paid has been at issue since state auditors targeted it in 2003 and again in 2010, records show.
Except for annual financial audits, it's been more than two decades since state auditors have taken a detailed look at Pinnacol’s operations. The Colorado Division of Insurance last did a financial examination in 2021.
Pinnacol points to a legislative change in 2002 that essentially improved how the company operated, reverting from one where the state was liable for any insolvency to one that operates more like a private mutual insurance firm with zero state liability.
“Pinnacol’s predecessor had been in troubled financial condition for nearly 20 years, had not issued a dividend during that time period, and was operating under a state-directed recovery plan,” Johnson said. “That is no longer the case. Pinnacol today is a high-performing domestic mutual insurance company … that’s rated among the top 2% of the highest-performing property-casualty insurance companies in the country.”
Things have gone so well, Johnson said, that Pinnacol has had seven consecutive years of declining premiums and eight consecutive years of dividend payouts to its company clients. By law, Pinnacol is a non-profit, pays no state or federal taxes, and does not file any public tax returns as other non-profits do. And the report it sends to the governor and legislature each year outlining how much its executives are paid comes in December — nearly a year after those salaries were already doled out.
Not only has Pinnacol consistently scored better with injured workers than other insurance carriers in the market, it’s become a safer workplace, too, Johnson said.
“The number of worker injuries have consistently fallen in recent years due in large part to successful occupational safety programs, both taught and promoted by Pinnacol,” she said. “Pinnacol’s total claims fell nearly 20% from 2014 to 2022.”
What’s more, although Pinnacol’s market share remains high today, it is demonstrably lower than the 60% it held in 2015. And in 2019, just before the COVID-19 shutdown occurred, Pinnacol had amassed assets topping $3 billion for the first time in its history, while its market share in Colorado dropped to 56%, records show.
"With regard to premiums, Pinnacol has recently delivered seven consecutive years of declining rates for a cumulative decrease of 40%," Johnson said.
A legislator who has tracked Pinnacol for years said compensation at the state-created non-profit company is frequently an issue at the Capitol.
“It comes down to this basic tension: In a lot of respects, Pinnacol thinks it is a private entity, and it behaves accordingly,” said the legislator, refusing to be identified because of a sensitive position within the General Assembly. “Executive compensation numbers are part of that thinking. But that is wrong, in my opinion. It is a state-chartered entity that serves a public purpose.”
Pinnacol said its salaries are comparable to the private insurance market and sometimes even lower.
“We would note that although organizational performance today is extraordinarily higher than in previous decades — including within an increasingly complex market — executive salaries are within the range and in some cases below the rate of inflation compared to those reported in 2003,” Johnson told The Denver Gazette.
The bulk of an executive’s performance grade is based on Pinnacol’s loss ratio of expenses and claims compared to the premiums it collects. Last year that was just over 56%, records show — demonstrably better than the nearly 70% in payouts it recorded in 2010.
A national review of Colorado’s insurance industry found that Pinnacol’s loss ratio has consistently been about 12% higher than private carriers from 2013 through 2021, likely due to the higher-risk clients it takes on, such as roofing companies.
In the lawsuit, Stone, the attorney, wrote: “Pinnacol’s improper auditing practices … are driven by Pinnacol’s incentive programs that enrich its officer, directors, and employees rather than for the benefit of its insureds.”
Taking Pinnacol private
With business booming, dividends consistently issued, salaries at top dollar and fewer injured workers, critics say it hardly appears Pinnacol is the measure of last resort for companies. Rather, it’s turned into a thriving enterprise.
“Having an industry-experienced team that can navigate today’s market complexities ensures that we remain a modern, competitive and stable resource that can be accessed by all Coloradans, including those that rely on our being Colorado’s workers’ compensation carrier of last resort,” Johnson said.
A variety of legislative efforts to take Pinnacol private, the last in 2021, have failed over the years. In the last, several legislators who voted against it said they were in favor of the idea, just not the timing of it, giving credence to notions a similar push will inevitably appear again.
Others worried that if Pinnacol was allowed to walk into the private sector, it's unlikely there would be anyone left to cover the companies that actually need a last-resort option.
The previous effort, House Bill 21-1213, was put forth by Rep. Matt Soper, a Delta Republican, and it hinged on Pinnacol making a one-time $305 million payment — some have called it a payoff — to the state general fund earmarked for helping workers impacted by the closure of coal-related businesses in Colorado.
Additionally, Pinnacol would buy out its employees’ retirement plans with Colorado PERA for another $305 million.
In return, Pinnacol would separate from the state and become a private company, independent to offer insurance outside of Colorado — it currently is limited by law to only in-state policies — as well as other forms of insurance aside from workers’ compensation. Essentially, Pinnacol would become little different than any other mutual insurance firm in the marketplace.
During hearings on the bill before the State, Civic, Military and Veterans Affairs Committee in March 2021, then-Pinnacol CEO Phil Kalin said the company’s market share was steadily dropping because it could not offer coverage to Colorado-based companies with employees in other states. Going private would help it remain profitable.
The decline, Kalin said, “will only accelerate. Fewer and fewer Colorado workers will enjoy the protection we specialize in.”
“The limitations being put on us are slowly strangling us, driving businesses to out-of-state stock companies,” he said. “Our whole intent is not to be showing big profits or big losses in any line of business and we do that very well.”
Yet records show Pinnacol would have a surplus of more than $1.6 billion in 2021 — its largest ever — and would dole out more than $90 million in dividends over two years, or about $1,700 to each of its policyholders.
Pinnacol said the surplus is actually "in line with industry standards" and it "must maintain higher levels of capital" as part of its obligation to cover future liabilities.
In opposition to the bill — it was defeated 10-1 in committee — a member of the Colorado Workers’ Compensation Education Association in Grand Junction testified that legislators should remember Pinnacol “is a political subdivision subject to public oversight.”
That oversight, WCEA attorney Royce Mueller testified, “includes the board of directors” and is in place for specific public purposes.
As the insurer of last resort “with the assurance that (Pinnacol) executives are not incentivized by profit or salary, but rather to assist the state in fulfilling the mandate that all injured workers have access to workers’ compensation benefits,” Mueller said. “Given the level of (Pinnacol’s) success, one can understand why Pinnacol would want to privatize as it starts keeping those significant profits.”
Pinnacol told The Denver Gazette that "Pinnacol's previous conversations around privatization are irrelevant" and that "Pinnacol has no plans to privatize today."
Sarabia pondered the salaries of Pinnacol's top executives while comparing it to the difficulties her industry faces in finding adequate and affordable workers' compensation insurance.
"That just seems like an awful lot of money for people at a place that's supposed to be our last resort," she said.
Editor's Note: An earlier, incomplete version of this report had inadvertently appeared online during the editing process. This story has also been updated to include additional comments from Pinnacol Assurance.
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