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FLASH REPORT!

APPLIED: Class Action Against Applied Underwriters Approved

A federal judge in New York state is allowing employers there to move forward with a class action lawsuit against Applied Underwriters and its sister companies including California Insurance Company. The basis is Applied Underwriters use of unfiled and unapproved reinsurance participation agreements (RPAs). The Berkshire Hathaway (NYSE: BRK.A) subsidiaries are accused of unjust enrichment and breach of contract.

The New York fight revolves around many of the same issues that many of the California lawsuits do. Applied was selling a workers' comp program based upon a Reinsurance Participation Agreement (RPA). The RPA allows for the purchase by Applied of a guaranteed cost policy which meets statutory coverage requirements. The plaintiffs allege, and the State of California and other states have has found, that the unfiled and unapproved RPA modified the terms of the filed and approved guaranteed cost plan in violation of state law.

“The defendants’ insurance scheme was so inventive and novel that it has been patented,” Judge John G. Koeltl for the Southern District of New York wrote, noting that this was allegedly designed to circumvent state insurance laws. “In spite of the patent, the scheme has drawn the scrutiny of the insurance regulators [in] at least three states – California, Wisconsin, and Vermont – which have each found that the scheme did, in fact, violate the insurance laws of those states.”

In the present case, “The plaintiffs allege that the ‘reinsurance and profit sharing’ contract is not actually a separate contract for reinsurance and profit sharing, but instead is an illegal contract of insurance that modifies the material terms of the workers' compensation insurance contract issued by the licensed insurer,” Judge Koeltl noted in his opinion.

Brokers who sold the arrangement are not named as defendants in this case, although many are defendants in other cases in conjunction with Applied or are being sued directly by their [former] clients.

The named defendants include Applied Underwriters, Applied Underwriters Captive Risk Assurance Company, Applied Risk Services Inc., Applied Risk Services of New York, Continental Insurance Company and California Insurance Company.

As in similar cases across the nation, the employers objected when they began receiving premium bills that far exceeded projections. In the case of NCS, annual estimated costs were $420,325, but the bill for January 2015 alone was $683,268. After refusing to pay, it received a demand for $1.59 million that included a cancellation fee of nearly $1 million, according to the decision.

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