(Reuters) – Insurer Travelers Companies will pay $10.5 million in refunds and penalties for violations of California insurance law in 2006, the state's insurance department said on Monday.

Travelers will refund $9 million to customers and pay a $1.5 million fine for violations in the first six months of 2006, the state said.

Examiners looked at nearly 1,300 policies and found about 220 errors, mostly related to improper underwriting or the improper application of rates.

The state noted it received "extraordinary cooperation" from the company in the course of its probe.

A Travelers spokesman could not be immediately reached for comment.

ACE Ltd., Zurich Financial Services Group, CNA Financial Corp. and Pennsylvania Manufacturers' Assn. Insurance Co. agreed to the settlement to resolve allegations that they collected too much in workers compensation fees, the New York state attorney general's office said in a statement.

The New York State Workers' Compensation Board charges an annual fee of insurers that place workers comp business in the state, and insurers cover those fees with premium surcharges passed on to policyholders.

In 2000, the WCB adopted a new calculation method to determine the policyholder premium surcharges. As a result, some insurers collected too much from policyholders while others collected too little, according to the statement.

Former New York Attorney General Andrew Cuomo, who became governor Jan. 1, led the investigation after the state passed legislation in 2009 and 2010 to forbid such overcharging and recover the money from insurers.

Insurers said the discrepancy was ongoing since the 2000 shift, which created discord over how the annual surcharges were to be collected.

In a statement, Zurich-based ACE said it was “pleased to resolve this issue, which has impacted all insurers that wrote workers compensation coverage in New York since 2000.”

ACE, which agreed to pay $70 million under the settlement (see chart, page 3), said “the issue was caused by two conflicting state rules that created a discrepancy between the surcharge and assessment formulas that support the operation of the New York workers compensation system. This discrepancy resulted in the accumulation of funds over many years.”

ACE said the company fully complied with the state to collect specific premium surcharge amounts from policyholders and “made numerous attempts to address this issue with the state.”

In an e-mail, a spokesperson for Zurich said the insurer entered into an agreement with the WCB and New York attorney general to pay $37.5 million, which “resolves a difference of opinion as to the proper legal interpretation of laws enacted in 2009 and 2010 that imposed one-time assessments on certain insurers writing workers compensation insurance in New York.”

A spokesperson for Chicago-based CNA said the $5.75 million payment of excess funds to the state is neither a fine nor a penalty and that policyholders were not overcharged as far as premiums were concerned. The discrepancy was between how the surcharges were calculated by the WCB after 2000, the spokesperson said.

“The settlement resolved the issue created by a discrepancy in the definition of premium issued by the New York Compensation Insurance Rating Board and the New York workers compensation law,” Blue Bell, Pa.-based PMA Insurance Group said in a statement. PMA also said the state did not allege that policyholders were overcharged.

“I am pleased these members of the insurance industry and the state were able to reach an accord and hope that the spirit continues for the betterment of all New Yorkers,” WCB Chair Robert Beloten said in a statement.

The New York attorney general's office said the four insurers cooperated fully with the investigation. Other insurers that collected too much in surcharges should follow their lead “or they will be brought to justice,” Mr. Cuomo said in a statement issued before he became governor.

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