Flash Report: Applied: And A Fight Breaks Out!

Applied Underwriters’ is making aggressive moves to defend its EquityComp workers’ comp program. The Berkshire Hathaway (NSYE: BRK.A) subsidiary is demanding that the California Department of Insurance retract its press release announcing a Cease and Desist Order, and is also asking a state court to step in and tell the Commissioner he shouldn’t have done what he did. Applied also issued a “Fact Sheet” the veracity of some of which is being challenged by certain authorities.

The California Insurance Department is sticking with the legality of its Cease and Desist Order and dismissed the demand letter by telling Workers’ Comp Executive that answers “can be found in the department’s previous releases.”

Let’s Take Them One by One – The Letter:

In a letter to Insurance Commissioner Dave Jones, Applied Underwriters’ is demanding that the Department retract and correct its June 29th news release announcing a “cease and desist order.” Applied maintains that this statement is erroneous and that there is no valid cease and desist order at this time.

“In fact,” the letter says, “CDI has not issued a cease and desist order against either CIC or AUCRA,” the letter by attorney Shand Stephens of the DLA Piper lawfirm, states. “CDI only has issued a Notice of Hearing and Order to Cease and Desist…The Notice is clear that any order to cease and desist against CIC and AUCRA will issue only if allegations in the Notice are proved at a hearing.”

“Moreover, by stating that a cease and desist order is in effect, the June 29 release also constitutes a de facto cease and desist order issued without due process,” Stephens says.

The Department’s news release was still on its website and has not been amended as Applied demands.

For its purposes, Applied says the CDI’s release is creating confusion, market turmoil, and, in some cases, economic harm to California Insurance Company’s policyholders and brokers.

Stephens’ letter notes that quotes in the release attributed to Commissioner Jones stated that Applied and CIC must stop selling and renewing the product. This idea is inaccurate, Applied’s Stephens maintains.

But the reality appears not to be as Applied Underwriters’ states. It is twofold:

First, that Applied Underwriters’ says it has stopped selling its EquityComp Program is renewing the guaranteed cost policies only. Whether or not they are being renewed under the RPA we have not discovered; And secondly, even more importantly CDI does have the legal authority to order Applied and California Insurance Company to cease and desist selling unfiled and unapproved ancillary agreements.

CD is well within its rights to order the Cease and Desist according to two sections of the insurance code:

Section 1065.1.

Whenever the commissioner has reasonable cause to believe, and determines, after a public hearing, that any person specified in Section 1010 is conducting its business and affairs in such a manner as to threaten to render it insolvent, or that it is in a hazardous condition, or is conducting its business and affairs in a manner which is hazardous to its policyholders, creditors or the public, or that it has committed or engaged in, or is committing or engaging in, any act, practice, or transaction which under any provision of this code would constitute ground rendering the person subject to conservation or liquidation proceedings, he may make and serve upon the person such order or orders as shall be reasonably necessary to correct, eliminate or remedy such conduct, condition or ground.

The commissioner shall serve notice of any hearing required by this article upon the person, stating the time and place therefor, and the conduct, condition or ground upon which the commissioner would make his order. The hearing shall occur not less than 20 nor more than 30 days after notice is served upon the person.

The public hearing was the Shasta Linen case in which the CDI found the RPA to be unfiled, illegal, void and unenforceable.

And Section 1065.2.

(a) Whenever it appears to the commissioner that any conduct, condition or ground set forth in Section 1065.1 exists, and that irreparable loss and injury to the property and business of a person specified in Section 1010 has occurred or may occur unless the commissioner acts immediately, the commissioner may, without notice, and before hearing, issue and cause to be served upon such person an order requiring such person to forthwith cease and desist from engaging further in the acts, practices or transactions which are causing such conduct, condition or ground to exist.

(b) At the same time, an order is served pursuant to subdivision (a) of this section, the commissioner shall issue and also serve upon the person a notice of hearing to be held at a time and place fixed therein which shall not be less than 20 or more than 30 days after the service thereof. The notice shall contain a statement of the conduct, condition or ground which the commissioner deems violative of the provisions of Section 1065.1.

(c) At any time prior to the commencement of a hearing as provided in Section 1065.1 or subdivision (b) of this section, the person may waive the hearing and have judicial review of the order by means of any remedy afforded by law without first exhausting administrative remedies or procedures.

The last time a Cease and Desist was issued according to CDI officials was Lumbermen’s Underwriting Alliance in May of 2015, due to its financial condition.

The Writ

Beyond the Department’s communications, Applied Underwriters’ is asking a Los Angeles Superior Court to review and vacate the Commissioner’s June 20th decision in the Shasta Linen case. The petition for writ is also asking for a declaration that the Commissioner exceeded his power and jurisdiction regarding workers’ comp rates and forms under Insurance Code sections 11658 and 11735.

“Applied still doesn’t get it,” says Attorney Nick Roxborough.

Applied maintains that Jones’ order in the Shasta Linen case should be struck down for the following reasons:

  1. The Commissioner and ALJ in the underlying proceeding acted in excess of their powers and jurisdiction in addressing issues and issuing the remedy imposed in the Order;
  2. CIC and AUCRA were deprived of a fair trial;
  3. The Order is unsupported by the findings;
  4. The findings are unsupported by evidence;
  5. The Order is contrary to law; and
  6. The Order is so inconsistent with the prior determinations of the Commissioner as to be arbitrary and capricious,” the company maintains. Applied also argues that Commissioner Jones acted in excess of his statutory authority.

“The department’s response is that we do not comment on pending litigation. We will have no comment beyond that.”

Attorney, Larry Lichtenegger agrees with Roxborough, “Trying to have a judicial review of the Commissioner’s decision – trying to get a judge to say Jones doesn’t know what he’s talking about is not likely to happen,” he says.

There will be a more complete assessment of the Writ early next week.

The Fact Sheet

The fact sheet asserted among other things that the RPA has been both filed and approved. There is ample evidence to prove that contention is inaccurate. There are more statements in the fact sheet that appear to sources to have questionable veracity.

“It’s a typical misrepresentation that Applied always makes,” says Lichtenegger.

Click here for copies of Applied’s documents.

 

The Letter

The Fact Sheet

The Writ

 

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Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.