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Void and Unenforceable as a matter of law…Applied Underwriters’ Fights CDI Cease & Desist

Another legal battle between Applied Underwriters’ and its EquityComp program and the California Department of Insurance. This one more than a year in the making. CDI is set to square off again against Berkshire Hathaway subsidiary over the illegality of its EquityComp program and the unfiled reinsurance participation agreement that it uses.

The fight will take place in a Los Angeles Courtroom where Applied is seeking a writ of mandate. It is attempting to undo the Department’s June 2016, order declaring the RPA void as a matter of law, and therefore unenforceable. Applied Underwriters’ sought but failed to obtain a temporary restraining order from the same court last year. 

In defending its decision and order, CDI maintains that Applied skirted the safeguards in Insurance Code sections 11658 and 11735. Those require policies and collateral agreement to be filed with the Department “by submitting one policy document for approval, and withholding an additional side policy agreement that substantially modified the parties’ obligations under the approved document.” The Department argues that “Shasta’s guaranteed cost policy was merely a pretense because it was completely changed by the RPA.”

The underlying guaranteed cost workers’ comp policy was issued by California Insurance Company (CIC) – an affiliate of Applied Underwriters and was contractually purchased by Applied, not the employer client.

“As a participant in the web of interconnected agreements that dramatically changed the terms of its policy, CIC had a legal obligation to file or cause to be filed any collateral agreements that changed the terms of its policy,” CDI argues. “CIC must not be permitted to hide behind its affiliate, AUCRA, to avoid its legal obligations.”

Applied claims that Insurance Commissioner Dave Jones exceeded his authority and says the order is based on a flawed interpretation of the rate and form filing laws. It argues that the RPA is merely a contract between a client and a company that is not its workers’ comp insurer and thus is outside the commissioner’s purview. It also rejects the notion the Insurance Commissioner has the authority to void an agreement in the first place.

 

 Real Impact

CDI is using the words of Applied officials while under oath to show the true effect of the RPA on the program.

Applied’s vice president and chief actuary couldn’t cite a single example of when the guaranteed cost policy’s dispute resolution provisions would prevail.  Instead, he said, all disputes would be settled by the provisions in the RPA. But CDI says that statement makes its case.

In many instances, still today, Applied Underwriters’ is suing clients (or former clients) in out of state courts. CDI is taking no action and seems helpless to stop it.

Additionally, CDI says that Applied’s own sales manager admitted under oath that the RPA essentially supersedes the terms of the guaranteed cost policy.

Finally, CDI says that Applied’s own patent for the Reinsurance Participation Plan documents the fact that the program is designed to skirt regulatory authority to allow small and medium-sized firms to participate in “retrospective” plans they otherwise would be barred from buying.

But Applied says its program is various things depending upon the particular litigation.

“The illegality of Petitioners’ RPA is highlighted by the fact that the policies that CIC actually filed explicitly forbade side agreements,” the Department noted. “Thus, Petitioners created an appearance that the guaranteed cost policy was a stand-alone document but subsequently changed the contract terms, governing law, and dispute resolution mechanisms via an unfiled and unreviewed document.”

The Department also rejects Applied’s claims that its Applied Underwriters Captive Risk Assurance Company (AUCRA) unit was denied due process because it was not specifically noticed in an underlying appeal. “This argument is disingenuous. Both CIC and AUCRA are owned by AU, and the three entities share the same members of the board of directors,” CDI points out. “If AUCRA and its RPA were truly separate, CIC would lack the authority to address the employer’s complaints and should have asserted its alleged corporate distinctness at the onset of this dispute. It did not.”

As a further example of the interconnectedness, CDI notes that California Insurance Company would cancel a policy if an insured in the EquityComp program does not agree to the RPA. Attorneys for Shasta Linen also note that Applied marketed the program as a single integrated product, not separate agreements.

“The Request to Bind Services shows the [Guaranteed Cost] coverage forms will be ‘subject to’ the RPA terms and the coverage forms will be canceled or terminated unless the RPA is signed,” notes one attorney. “What greater evidence could there be of a tying agreement.”

 

Applied’s Position

In seeking to vacate the Department’s order, Applied’s attorneys maintain that the Commissioner only has the authority to disapprove an unfiled workers’ comp rate on a going-forward basis and only after issuing a notice of intent to do so.

Applied also argues that the Commissioner lacks any statutory authority to void a policy form or endorsement that was not filed as required by Insurance Code section 11658. Applied argues that there is no consequence for noncompliance with the section.

Applied also contends in its petition for the writ that the RPA has no effect on the terms of the underlying CIC policies.

“In determining that the RPA modified the CIC Policies, the Commissioner ignored the legal corporate separateness of CIC and AUCRA,” Applied argued, maintaining that sharing directors and officers is not enough to pierce the corporate veil. Additionally, it maintains that CDI is missing the distinction between program charges and premium charges, although filings indicate that Applied’s own officials used the terms interchangeably on the witness stand.

As a public service, Workers’ Comp Executive has made its entire series of news articles about Applied Underwriters’ EquityComp program unrestricted. You can read many additional articles by clicking here.

Workers’ Comp Executive will provide additional coverage on the case as it develops.

Note: Applied Underwriters’ has sued Workers’ Comp Executive (WCE) and lawyer Larry Lichtenegger for trademark violation asserting its name can’t be used to describe a webcast specifically about Applied’s practices. WCE believes the lawsuit was intended to prevent and is now intended to chill public discussion of important issues. A motion to dismiss the case was taken under consideration a year ago, we await the ruling. Click here to learn about the DVD.

 

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