Applied Underwriters Losing, Settling Multiple EquityComp Disputes

The California Department of Insurance’s hearing bureau is making its way through a backlog of cases filed by former insureds in Applied Underwriters’ EquityComp program, but progress is fleeting. New cases continue to be filed with state officials reporting at least seven new cases in recent times.

Resolving the cases is slow going with each involving extensive briefing and evidentiary hearings. Two cases recently resolved either through settlement or by decision averse to Applied after four other decisions went in favor of the employer. Dozens of other employers are still mired in the process nearly three years after the precedential Shasta Linen decision struck down the program.

And even when a decision by the Insurance Commissioner goes an employer’s way it may not be the end of the line. At least one employer who won their case at the Department as of press time was still facing a state court action filed by Applied seeking damages for an alleged breach of contract and or “quasi contract.”

The Berkshire Hathaway (NYSE: BRK.A) subsidiary is also challenging several of the decisions that went against it by former Insurance Commissioner Dave Jones. CDI officials note that petitions for writ are pending to overturn the decisions. Applied took a similar action after the Shasta Linen decision came down, but ultimately dropped that writ and settled with the Department. That settlement specifically recognized the precedential nature of the decision and the Department has barred Applied from relitigating the issues that were resolved in that case.

Similar Findings

The decisions reached to date each reaffirm the Commissioner’s exclusive jurisdiction to hear and decide the cases and find that the program’s reinsurance participation agreement (RPA) is void and unenforceable. “Because the RPA applied unfiled rates and supplementary rate information, contravening Insurance Code section 11735, the RPA is illegal and void,” former Commissioner Dave Jones wrote in a decision just released by the Department. “The RPA cannot be reformed, and no compelling reason exists to enforce it. Accordingly, the RPA must be severed from the guaranteed cost policies.”

The finding came in a case filed by Arevalo Taqueria which spent nearly three years in the EquityComp program. Four months before the program was due to expire, however, Arevalo was hit with a bill that was over five times the previous month’s charge.

“Arevalo could not afford this monthly payment and sought an explanation for the monumental increase,” the decision notes. “EquityComp representatives could not explain how the bills were calculated, stating the information was proprietary. As a result of the lack of information and Arevalo’s inability to afford this payment, Arevalo stopped paying for EquityComp.”

The decision found that:

  • Respondents’ RPA contained rates and supplementary rate information that must be filed pursuant to Insurance Code section 11735. Respondents violated section 11735 by failing to file the RPA’s rates and supplementary rate information.
  • Respondents misapplied their Insurance Code section 11735 filings by overriding their filed rates with the RPA’s unfiled rates and unfiled supplementary rate information.
  • Because the RPA applied unfiled rates and supplementary rate information, contravening Insurance Code section 11735, the RPA is illegal and void. The RPA cannot be reformed, and no compelling reason exists to enforce it. Accordingly, the RPA must be severed from the guaranteed cost policies.

Overall, Arevalo paid nearly $387,000 into the program, while Applied said it owed another $227,000. “To the extent [Arevalo has] remitted to any of Respondents funds in excess of the total amount that may be validly charged under Appellants’ guaranteed cost policies, [California Insurance Company] shall refund the excess to Appellants within 30 days of the date of this decision,” Jones wrote.

Arevalo is the target of Applied’s state court action alleging breach of contract or quasi contract. The parties were due in court yesterday for a status conference on the case which had been stayed pending the Commissioner’s decision; however, the outcome of the status conference was not known as of deadline.

Dozens of Cases Still Active

Another case filed by Goodwill Industries of San Joaquin Valley was on the verge of a final decision, but an attorney for the employer says the case was settled without the need for final adjudication by the Commissioner. Dozens of others though are still in process before the Department’s administrative hearing bureau.

According to CDI officials, there are over two dozen appeals filed by employers currently in process at the department. A handful have already completed their evidentiary hearings and are awaiting a decision. The others are in various stages of litigation. Last year at this time there were over 30 active cases.

Copies of the final decision in Arevalo Taqueria v. California Insurance Company; Applied Underwriters are available in our Resources section or by clicking here.

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.