APPLIED: Broker Lawsuits Tied To Controversial EquityComp Deals

By: Brad Cain

Applied Underwriters and its affiliated corporate entities are not the only ones feeling the wrath of employers upset about the EquityComp program they bought. In a growing number of cases, the brokers who put employers into the program are now being sued. In one case, so is a broker that moved the client out of EquityComp.

It appears as though it’s about to get uglier folks.

Employers’ attorneys who have filed suits against brokers maintain the brokers didn’t understand the program themselves and, therefore, should not have recommended it to clients. They say the brokers could not explain how charges would be calculated, therefore, the broker couldn’t validate the real cost of the program or accurately compare its costs relative to other plans – a vital professional service for their employer clients.

Producers who told or implied to clients that Applied’s EquityComp program is less expensive without considering all of its cost factors may be finding themselves in trouble.

In many cases, the lawyers note that brokers were not provided all of the plan documents in advance of the sales process and, therefore, didn’t review them before recommending the program. In one case, the RPA – Reinsurance Participation Agreement – was not provided to brokers, let alone employers, until days after the program was in effect. At least one employer in a hazardous class says it was told by Applied’s representatives that it had to sign and return the RPA immediately or have coverage rescinded. We look at some of the other issues below.

RPA Not Filed in California

As background, the legality of Applied’s key plan document, the Reinsurance Participation Agreement, is currently being tested in an administrative proceeding pending before the California Department of Insurance. Numerous court and arbitration battles around the country also are battling to have it declared void. Decisions in at least some of the cases are expected before the end of the year. [See Applied: Decision]

The fact is that the Applied Underwriters’ Reinsurance Participation Agreement has never been filed nor has it been approved in California.

Applied contends it does not need to file the RPA because it is a reinsurance agreement. Therein lies the fight as lawyers counter Applied’s assertion with many arguments, among them, that because it changes the payment terms of the underlying California Insurance Company policy, it must be filed and its rates and charges reviewed and approved in order to be sold.

Lawyers also say the California insurance code defines reinsurance as a contract only between two insurers and not between an insured and a carrier.

Lawyers challenging the RPA want it declared void and unenforceable. If that happens the EquityComp program would be in question, presumably as would be the enforceability of its payment provisions.

In California, a similar agreement, an IPA from Zurich American concerning a large deductible program that was not filed was held to be void and unenforceable. In at least one case lawyers are arguing the Zurich agreement and the Applied RPA are nearly the same; that both modify the payments terms of the policy and, therefore, are void if not filed.

Cases Against Brokers

In some cases, brokers didn’t see or review the RPA during the solicitation process. And testimony by Applied’s Patrick Watson, during the trial before the ALJ, confirmed that the RPA was not provided to brokers unless they specifically asked for it. [See Applied: Filed…]

Workers’ Comp Executive is aware of and has reviewed the allegations in several cases already filed against brokers. Some of the cases were filed jointly against the broker and Applied, while others just target the broker and agency [for past coverage see Applied: Filed Rates…, Fraud Case…, Applied: Decision…].

Workers’ Comp Executive has decided, at least for now, to not name the affected brokers.

The cases mostly focus on brokers’ alleged failure to adequately inform the employers about the terms, conditions and costs of the program beforehand, and of the potential penalties if they left. Workers’ Comp Executive has anecdotal evidence that competing brokers are now encouraging prospective insured’s to sue both Applied and their former broker as a result of their experiences.

At least one broker has advised its insured to sue both it and Applied.

In at least one case, the broker’s E&O carrier is cooperating in the Applied Underwriters lawsuit. Its strategy is to help itself by assisting the employers’ case in order to mitigate its own damages under the theory that if the employer wins against Applied and is made whole, the broker (read E&O carrier) will have no liability.

The Cases Against Brokers

In one case, the employer alleges about the broker and Applied “The defendants never intended to provide an effective, low-cost program of workers’ compensation insurance coverage. In truth, defendants intended to apply an incoherent and complex system of multipliers to plaintiff’s actual claims experience, generally resulting in payments by plaintiffs to defendants of more than four times the sums paid out to injured workers,” the complaint notes. “In other words, only about 25% of the money would go to the workers. Seventy-five percent would go to [the] defendants.”

One claim against a broker alleges “had defendants exercised proper care and skill in the foregoing matter, plaintiffs would not have signed up for defendants’ workers’ compensation program and would not have incurred the excess costs.” The lawsuit claims damages in excess of $1 million.

Employers allege that while brokers were explaining the terms of the EquityComp program they failed to discuss several terms that altered the employer’s obligations under the program. Here is a compendium of allegations:

  • The RPA contains no defined time period or formula for calculating any potential “profit sharing.”
  • The cost impact of claims on the required pay in amounts was not properly explained. A $30,000 claim requires a much larger pay in amount, per the sales documents.
  • The impact of Loss Development Factors, both during the agreement period and after expiration was not explained, particularly if an insured does not renew for any reason.
  • Failure to explain that the purported cost ceiling of the program on the proposal was not in fact the maximum the employer could be called on to pay.
  • Failure to indicate the represented minimum the insured might pay could only happen if there were no claims and only then after some amount of time when the profit sharing, if any, happens.
  • The employer also alleges that there was no discussion of the potential financial penalties for not renewing the program or that run off loss development factors could be applied to claims that were open at the end of the three-year term. In the 400% range if the employer did (does) not renew for any reason.
  • In another case involving Applied and a broker, the employer alleges that it was misled by the marketing materials and presentations about the program.
  • The employers are generally asserting some combination of negligence, breach of implied contract, intentional misrepresentation and negligent misrepresentation fraudulent misrepresentation, fraudulent concealment, negligent misrepresentation, false advertising, breach of fiduciary duty, and professional negligence.

Cancellation Fees

In another instance, the employer is suing both the broker that placed it in the EquityComp program as well as the broker that advised it to cancel the policy mid-term and move to a different carrier. The employer wanted out of the program after its monthly payments allegedly kept increasing without any explanation being provided, a pattern Workers’ Comp Executive is hearing from multiple sources.

The employer claims the original broker advised it that the EquityComp program would be cheaper than its then current coverage and that its costs would fall within a specified range. The employer alleges this was not the case and is claiming that the allegedly faulty advice amounts to professional negligence.

The allegations against a broker who moved the account away from Applied’s EquityComp program, are that the broker advised the employer it [the employer] would not incur any early cancellation fees by leaving the program before the end of the three-year period. But this is not the case.

The Reinsurance Participation Agreement includes provisions for early cancelation penalties and that the “[broker] knew or should have known” this to be the case. It also alleges that both brokers knew or should have known that the “insuring agreements that the Applied defendants intended to effectuate via the Applied Program were illegal side agreements and unfiled rate plans barred under California Law.” Again the allegation is that the broker was professionally negligent.

Broker Provided Lower Payrolls

Another employer is claiming its broker committed professional negligence not only by placing it in the program but also by subverting the submission process as well. Allegedly, the broker, having been given accurate payroll figures by the employer provided the carrier with lower numbers to get a lower quote. As a result, Applied’s quote misrepresented the estimated cost of the pay-in amounts – both minimums and maximums – for the program. The employer alleges this caused it to be in a program that was unaffordable and not within its cost parameters.

One thing is apparent, and that is that these cases are likely to multiply