Applied Underwriters Loses On Arbitration – Again

The California Court of Appeal for the Sixth District says Applied Underwriters cannot force a former insured under its controversial EquityComp program to settle its disputes in arbitration. This is another in a series of Appellate losses for Applied Undwriters’ on the same issue.

The court says the form that included the arbitration clause was never filed nor approved by the California Department of Insurance and therefore the trial court judge was justified in finding it void and unenforceable under California law.

The decision in Jackpot Harvesting v. Applied Underwriters is another in a string of rulings against the Berkshire Hathaway (NYSE: BRK.A) subsidiary. Berkshire is in the process of selling the controversial unit. The identity of the potential buyer has been kept secret as have the terms of the possible sale.

The case dates back to late 2013 and early 2014 when Jackpot signed up for Applied Underwriters’ EquityComp program by submitting a request to bind and signing the accompanying reinsurance participation agreement (RPA). California Insurance Company, Applied’s carrier in California for the program, simultaneously issued – at the direction of Applied Underwriters’ – a guaranteed cost workers’ comp policy to Jackpot effective Jan. 1, 2014.

“It is undisputed that, of these documents, Applied filed only the CIC Policy with the California Insurance Commissioner,” the court writes, noting the arbitration provision was only in the request to bind. The unfiled RPA also included a forum selection clause that called for disputes to be heard in either federal court or Nebraska state court.

Went South Quickly

The court points out that Jackpot became dissatisfied with the program after signing up. It alleged that Applied wrongfully increased policy premiums and mishandled the workers’ comp claims that were filed under the policy.

A lawsuit ensued with Jackpot alleging fraud and claiming Applied violated Insurance Code section 11658 by using unfiled collateral agreements including the request to bind and the RPA. Applied asked the Monterey Superior Court to compel arbitration, but it refused.

“The trial court determined that the arbitration agreement in the Request to Bind was void and unenforceable, as it was a collateral agreement that should have been filed for approval under section 11658 before being sold to Jackpot,” the court of appeal notes. “The trial court also found that the arbitration agreement violated ‘Insurance Code section 11658.5 (nondisclosure of negotiability),’ and that the entire Request to Bind was ‘illegal, void and unenforceable in its entirety’ because it was a ‘collateral agreement in violation of California Insurance Law.’”

Applied’s Theories Rejected

The Court of Appeal found that “Jackpot specifically challenged the arbitration agreement, and therefore the trial court properly determined the legality of the agreement in the first instance. Jackpot specifically targeted the arbitration agreement as invalid in its complaint, and it raised separate grounds of invalidity applicable to both the Request to Bind as a whole and to the Reinsurance Participation Agreement.” Jackpot maintained that the arbitration agreement is illegal under both California as well as Nebraska law.

No matter how many times it loses on the arbitration agreement issue Applied Underwriters keeps using it.

The court notes that Jackpot’s challenge to the arbitration provision in the request to bind was distinct from claims it made about other elements of the EquityComp program. In light of this specific challenge separate from the challenges to the RPA, the court says the trial judge was correct to address the issue of its enforceability rather than sending it on to an arbitrator to decide.

The Court of Appeal also reaffirmed that the request to bind is a collateral agreement under California law and therefore triggered the filing and approval requirements in sections 11658 and 2268. The court notes that the arbitration clause and its application of Nebraska law “materially changed the dispute resolution terms in the CIC policy” and therefore constitutes a collateral agreement that must be filed and then endorsed to the policy. Having failed to file the document, the arbitration agreement was void and unenforceable.

Copies of the decision in Jackpot v. Applied Underwriters is available in our Resources section or by clicking here..