Good Loss Ratio No Matter: Applied Wants More than the Max

Applied Underwriters’ Must Face Fraud Charges

Applied Underwriters will have to face a California employer’s fraud charges over its controversial EquityComp program after a federal district court judge refused to dismiss the claims. The case was filed initially by BSA Framing in state court but moved to the federal district to resolve alleged Racketeer Influenced, and Corrupt Organizations Act (RICO) claims.

The Berkshire Hathaway (NYSE: BRK.A) subsidiary successfully rebuffed the RICO allegations. In a ruling late last month, Federal District Court Judge Michael Fitzgerald granted a motion to dismiss the RICO claims without leave to amend after finding that “the failure to plausibly plead the existence of an enterprise it the most obvious [infirmity] and is independently fatal to the RICO claims.”

The removal of the RICO claims left only California state law claims to be resolved. The court offered Applied the chance to show cause why the case should not be remanded to state court to address these remaining issues, but it did not respond.

Fraudulent Marketing Alleged

Over the three years BSA was in the EquityComp program it paid $2.1 million in premiums into the program. Over this same period, Applied paid out only $352,623 for BSA-related claims, according to court documents. BSA alleges that the scenarios presented to it when it was considering the program contained misrepresentations and omissions that led it to believe that joining the EquityComp program would be more financially beneficial than it turned out to be.

Applied Still Wants More than the Promised Maximum

In cracking down on Applied’s marketing and operation of the program, the California Department of Insurance called Applied out for using “bait and switch” marketing tactics.

BSA claims that the program scenarios that Applied outlined failed to show that it could be required to pay more than the top-end amount listed in the materials. In the end, BSA says it was required to pay $868,583 more than what was represented as the maximum during the marketing phase.

The company also alleges that Applied falsely claimed that it would only use BSA’s actual claims experience to determine its final cost. The marketing materials state that “[o]nly your own individual claims experience is used to determine your final cost and is independent of the claims experience of any other policyholder.”

BSA claims, however, that once it was in the program, it learned that Applied used “Exposure Group Adjustment Factors” to calculate the final cost. BSA claims that this adjustment required it to pay a proportionally higher base fee because it had relatively low losses compared to others in the program. It says those insureds in the EquityComp program with very high losses paid a much smaller proportion of their losses as a base fee.

The company also claims that Applied used deceptive language “to obfuscate and hide from any person reading that document the manner in which an insured’s payment obligations are to be determined.”

“As the court has ‘dismissed all claims over which it has original jurisdiction,’ it is disinclined to exercise supplemental jurisdiction over the remaining state law claims,” Judge Fitzgerald held. The case is now headed back to the Riverside County Superior Court.