APPLIED: Filed Rates Have No Impact On What Client Pays

In what can only be called a stunning admission in a case questioning the legality of the rates and plans used in an Applied Underwriter’s workers’ comp program, an Omaha-based executive of the company testified that the workers’ comp rates in the client’s actual California policy have “no impact on the charges the client pays.” The rates in the underlying guaranteed cost policy issued by the admitted California Insurance Company (CIC) are the only filed rates related to the Applied Underwriters’ EquityComp program.

The shocking revelation astonished those in the hearing room. It came in a case pitting Shasta Linen Supply, a California employer, against Applied Underwriters Captive Risk Assurance Company (AUCRA), California Insurance Company and their parent Berkshire Hathaway (NYSE: BRK).

The stakes are high for the Berkshire unit as the employer is seeking the “return of all consideration paid” under the program, which has reportedly been a popular product for the company in California and elsewhere (for prior coverage see Berkshire…).

The legal question in dispute is whether or not the Reinsurance Participation Agreement (RPA) that Shasta Linen was required to sign to take part in the EquityComp Program and the related documents are an unfiled workers’ comp rate plan and, therefore, illegal. Also in question is the validity of the arbitration clauses in the RPA that Shasta is fighting before the Department and before the Nebraska Supreme Court.

It was Patrick Watson, an Applied Underwriters sales manager who, under questioning by Department of Insurance Administrative Law Judge Kristin L. Rosi, made the admission that CIC’s filed rates are immaterial as to what the employer pays. Watson testified that he heads one of two teams that deal with California brokers and, by telephone, who work directly with California employers.

Workers’ Comp Executive could find no insurance license record for Watson in the CDI database.

The admission is of particular importance because the Applied Underwriters deal uses a RPA that written through the Bermuda-based Applied Underwriters Captive Risk Assurance Company, (AUCRA). AUCRA is an admitted carrier in California, but no rate filings have been made. Still it was the terms of its RPA that allegedly determined Shasta’s charges.

In case documents, Applied asserts that the agreement doesn’t need to be filed in California. The RPA provides the “formula and methodology for how the profit sharing/risk sharing retention component of the EquityComp program worked,” according to the documents it filed. “Since the RPA is a reinsurance contract, it does not have to be filed and approved by the CDI and unlike the guaranteed cost policy issued by CIC, does in fact contain a robust broad arbitration agreement.”

Applied maintained in a statement to Workers’ Comp Executive previously that “all necessary filings and approvals have been made with the California Department of Insurance. In the unlikely event the reinsurance participation agreement needs to be adjusted and/or filed, such a finding, by statute, would apply only going forward and would have no bearing on the current client dispute. If required, we will make any necessary adjustment and/or filing promptly.”

The ALJ’s decision will be one determinant of this.

Other cases filed against Applied and the EquityComp program allege that the RPA and its attachments do not provide enough information for an insured, or broker, to calculate the unusual combination of premiums, fees, and other charges the program assesses.

Reinsurance? Captive? Retro?

Applied Underwriters, Inc., AUCRA, and its counterparts, California Insurance Company, and Continental Indemnity Company are owned by Berkshire Hathaway and are part of its insurance group. All of the reinsurance we could find remains within the group, which has the possibility of raising a question as to the transfer of risk, a requirement in a reinsurance contract.

Applied and or its affiliates are facing multiple suits and challenges to the EquityComp program in several states including California, New York, Michigan, Maine, and Tennessee.

Applied’s documents specifically say that the program isn’t an unfiled retro.

In California, the “paper” – the actual insurance policy – is provided by California Insurance Company, which does have filed rates. Those are the rates Watson says are irrelevant. In other states, Applied uses different carriers in the Berkshire Hathaway Group.

The Applied deal is different from more conventional captive arrangements. Conventional captives, in general, have sections or levels in which employers pay the first [some level] of claims in the “A” section, and then participate with others in the captive up to [some level] in the “B” section, after which the fronting carrier who is at risk pays. The employer makes a capital contribution up front and claims are paid up to certain levels at which excess or reinsurance take over.

In the case of Applied’s EquityComp program, smaller employer who might not otherwise qualify for a loss sensitive plan, and who may be naive about such plans, are shown a minimum charge and a maximum charge over a three-year period.

According to one “scenario” presented by Applied claims totaling $30,000 would [did] cost the employer some $161,000 in additional deposits. In another scenario for another client $30,000 in claims would [did] cost some $150,000. In still another the same $30,000 in claims would [did] require the employer to pay an additional $350,000.

Workers’ Comp Executive has seen and reviewed multiple requests from insureds concerning an explanation of charges. In each case the insured says it has not been able to get a clear answer.

No Profit Payouts in Memory

The EquityComp program is marketed as a profit-sharing program, but to many it appears that equation is not only tilted but bent in Applied’s favor. For example, at the end of the three years, if the employer does not renew, a surcharge of 418% is charged to the open claims. Closed claims have a lower loss development factor, but closed claims are still surcharged, and the client is billed accordingly. That can mean the maximum amount is due if it hasn’t already been paid.

There’s also the question of the actual profit sharing and the return of unused capital. Workers’ Comp Executive has reviewed multiple RPAs issued under the EquityComp program and – perhaps we missed it – but we have not found any dates, timeframes or principles upon which capital or “profit sharing” will be returned to the client.

Watson, the Applied sales manager, also testified under oath that he has never participated in and has never heard of anyone else who has been involved in the return of premium or deposits to a client. Watson has worked at Applied for over a decade.

The company’s attorneys were less than forthcoming. They refused to comply with a direct and written order from the Judge to produce documents as follows:

• The number of EquityComp participants from 2008 and 2009 that had received a profit sharing distribution as of Jan. 1, 2015.
• How many “grievances, complaints or appeals” were filed by EquityComp participants between 2010 and 2014,
• How many arbitration demands had been filed by CIC, Applied Underwriters, ACURA or the EquityComp participants.

Watson also confirmed in his testimony that the California Insurance Company policy cannot be purchased separately from the Applied “reinsurance” deal and that it does not go into effect without the “reinsurance” contract with Applied.

Watson also stated that Applied uses California Insurance Company’s rates after schedule credits to determine what taxes and fees are to be paid to the state of California even though he testified that they have no impact on what the client pays. Similarly, these would be the same rates used as the basis for determining the amount of assessments to be remitted to the Department of Industrial Relations and the California Insurance Guarantee Association.