What Really Is The Cost of Doing Business with Applied?

Applied Underwriters Appeals to Supreme Court $10,000 Case

By: Dale Debber

Business to business litigation usually doesn’t get much attention. It is a given that those who engage in commerce will on occasion also need to engage an attorney and ask the courts to resolve a conflict. This is part of the cost of doing business, and it is a cost that affects the largest – and the smallest – businesses. But not necessarily equally as you see as you finish the story of how some big guys may “bully” their little insureds.

There is an iconic coffee shop in the Echo Park area of Los Angeles named Chango Coffee. Chango Coffee, Inc. was apparently formed in 2004. Also, in 2004, Chango Coffee, Inc., bought the Applied Underwriters’ SolutionOne integrated employee management products from various Berkshire Hathaway subsidiaries, including workers’ compensation insurance. They appeared to have had a long relationship that hit the rocks in early 2012.

Unlike most of the well-publicized cases involving various Applied Underwriters’ products, this Complaint does not necessarily directly deal with the workers’ compensation insurance product so much as a different part of the package. It seems that Chango gave Applied access to its checking account in order that Applied or one of its affiliates could write payroll checks. The matter at hand concerns an amount more that $10,000 but less than $25,000.

“We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.”

According to Chango Coffee, it was the administration of payroll processing and the way in which money was withdrawn from one of Chango’s bank accounts in early 2012 that caused the lawsuit, and, apparently an end to their business relationship. As is the case with anything involving Applied, it is, naturally, more complicated than that. The Complaint alleges conversion and fraud. Applied denies that.

It is important to remember that the Complaint was filed on January 2, 2014.

No story regarding Applied Underwriters’ seems to be complete unless there is an attempt by Applied to compel arbitration. Such is the case here. Without delving into the details of either the facts or the legal theories behind this attempt, the Superior Court denied Applied’s motion to compel arbitration. Applied appealed that ruling. The Court of Appeal decided, in a published opinion, that the order that Applied was appealing was not appealable and dismissed the appeal.

The Court of Appeal’s opinion was filed on May 26, 2017, some 3 ½ years into the ligation.

Now, Applied Underwriters filed a Petition for Review with the Supreme Court on July 6, 2017. Chango filed its answer to the Petition on July 26th.

That means at the earliest, a final decision as to whether this dispute is subject to arbitration will be made three and one-half years after the Complaint was filed and over five years from the alleged actions that formed the basis of the Complaint. It may take longer depending on whether the Supreme Court accepts review and the scope of its opinion if it does.

That’s just a final decision on just one motion.

This Complaint isn’t, at its core, a workers’ compensation insurance dispute over the various issues that have arisen before courts and regulators across the country regarding the nature of the Applied Underwriters’ reinsurance participation agreements (RPA), the effect of non-compliance with state insurance filing requirements, or how costs are determined by Applied Underwriters’ and its subsidiaries under insurance policies and collateral agreements over time. But while the Complaint in Chango Coffee is different from many of the other complaints swirling around Applied Underwriters, there is one thing they all appear to have in common: a long and litigious path to resolution.

Chango Coffee is a small business. On the other hand, according to its 10-Q for the first quarter of 2017, Berkshire Hathaway and its subsidiaries had revenues of $65,187,000,000. Its net earnings for that period were $4,139,000,000. Applied Underwriters and its subsidiaries’ revenues and earnings are part of that figure.

Here is part of Note 21 to Berkshire Hathaway’s first quarter 2017 10Q:

“We are parties in a variety of legal actions that routinely arise out of the normal course of business, including legal actions seeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.”

Chango Coffee is the Plaintiff in an immaterial normal and routine bit of litigation that no shareholder of Berkshire need worry about. Instead of calling Chango Coffee a “small business”, therefore, Chango Coffee is in reality, comparatively a gnat.

And the way one deals with a gnat is to swat it.

In this case, it appears that the litigation is moving forward, very slowly, and that the sums expended have not driven the Plaintiff to abandon its claim or go out of business. So, many would say this is business as usual, and nothing to see here, so just move along. Applied is certainly correct in defending its position, just as is Chango Coffee for asserting its.

It appears, however, that these days even the simplest of business needs require a complex transaction to fulfill. Complexity in transactions favors the author of the complexity. There are rules of law that deal with that reality in litigation, but small businesses should not necessarily have to question whether every aspect of keeping a business afloat requires, at a minimum, the services of a capable lawyer.

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.