Applied Underwriters Loses Two in Arbitration, Owes Employers

By: Brad Cain

Two California employer went head to head in mandatory arbitration with Applied Underwriters over its EquityComp program. They won according to court filings seeking affirmation of the awards for $550,093 and $280,130 respectively. In these cases, and others where Applied has lost in arbitration, it attempts to overturn the awards and to keep such facts from public knowledge by asking the courts to keep the awards under seal.

The arbitrators in the cases found that the reinsurance participation agreements that Applied uses in the EquityComp program are void and unenforceable because they were never filed for approval before being used. The conclusion is the same one that Insurance Commissioner Dave Jones reached in the Shasta Linen case, which is a precedential decision.

Bayless Engineering

The employer in the second case, Bayless Engineering, is seeking the return of over a half-million dollars which is the difference between what it paid into the program and what the premiums should have been under the underlying guaranteed cost workers’ comp policy. The arbitrator rejected a counterclaim filed by Applied seeking to extract over $33,000 in additional premium from Bayless. “This award is against Respondent [Applied] and in favor of Claimant [Bayless] on Respondents counterclaim,” arbitrator James L. Warren found in the case. Warren is a retired judge.

Following a hearing this spring, Warren found that Applied’s reinsurance participation agreement was void and unenforceable as it was never filed with the California Department of Insurance for approval before use in California. Warren called the EquityComp program a “seamlessly integrated package” that included the RPA issued by Applied and the guaranteed rate policy issued by California Insurance Company – an Applied affiliate.

The arbitrator found the RPA to be a collateral agreement to an insurance policy that altered the terms of that guaranteed cost policy. Insurance code section 11658 (a) and Title 10 section 2268 both require policies, endorsements and collateral agreements to be filed and approved before being sold to California employers.

After finding the RPA to be unlawful and unenforceable, Warren found that Bayless “is responsible only for the premiums and costs associated with the three guaranteed cost policies issued by CIC for the policy years 2012-2013, 2013-2014, and 2014-2015.” The arbitrator also ordered Applied to pay interest on the overpayments owed to Bayless.

Evidence submitted indicates that Bayless paid $2,072,065 into the EquityComp program, but total premiums owed to CIC amounted to just $1,521,9723, according to the filings. Bayless currently has filed for court confirmation of the award. Applied is asking for it to be set aside.

Barker Management

In one of the recent cases filed by Barker Management, a federal district court affirmed the arbitrator’s award of $280,130.63 – the amount Barker paid in excess over what the guaranteed cost policy alone would have cost. The Berkshire Hathaway subsidiary (NYSE: BRK.A) was demanding that Barker pay it an additional $122,597.96, which was rejected by the arbitrator. So the win effectively is $402,728.59.

In the Barker case, federal judge James V. Selna rejected Applied’s argument that the arbitrator “acted in manifest disregard of the law” when he rejected its claim that employers lack a private right of action to enforce the filing requirements in section 11658. Judge Selna notes, however, that the law is unclear as to whether a private right of action does or does not exist. Given the ambiguity, he says the arbitrator’s ruling could not rise to the level of manifest disregard of the law, and therefore the court lacked any basis for setting it aside. “Thus, even if the arbitrator did improperly conclude that there is a private right of action under section 11658 of the California Insurance Code, this Court does not have grounds to vacate the award for this reason based on the record before it,” Selna wrote in finding for Barker and confirming the award.