Applied Underwriters Must Face New Jersey Action

A New Jersey Superior Court of Appeal says Applied Underwriters and its various affiliates must respond to a state administrative action to sanction the companies and must do so through the administrative process not the courts. The carrier is facing sanctions for what the New Jersey Department of Banking and Insurance (DOBI) alleges was the illegal use of a reinsurance participation agreement (RPA) to overcharge the state’s employers. Such charges are familiar to the industry and employers in California.

The administrative action dates to 2019, when the state Insurance Commissioner issued an order to show cause as to why Applied’s admitted carrier, Continental Insurance Company, should not be suspended and Applied Risk Services’ producer license revoked. The Department also ordered the company to show cause why it should not be blocked from collecting any additional premiums under the retrospective rating plans or ordered to unwind the programs.

The order focused on Applied’s sale of its EquityComp, SolutionOne, and PremierExclusive programs. “Respondents marketed and sold an unfiled and unapproved workers’ compensation program with impermissible retrospective rating to at least 300 New Jersey employers that, based on a sampling, resulted in approximately 85% of those employers owing approximately $18.9 million to Respondents, often in excess of [New Jersey Compensation Rating and Inspection Bureau’s] approved premium rates,” the order maintained.

“Indeed, it speaks volumes that appellants began the legal process by filing an administrative petition before the Commissioner—replete with citations to her legal authority to act—rather than invoking what they now contend is the exclusive jurisdiction of the Superior Court”  –– New Jersey Superior Court

Prior to the order, Applied and the Department had been in negotiations over the alleged improprieties, with the Department issuing a letter demanding that Applied “make whole” all New Jersey employers by unwinding the contracts. It threatened formal enforcement action if Applied didn’t comply.

In response, Applied initially filed a petition to have the dispute heard by the state’s Office of Administrative Law – the same OAL that it later filed the court action to avoid. Applied’s petition was denied, and the following day Commissioner Marlene Caride filed the order to show cause.

The order quotes from a patent Applied obtained for the RPA that the Department says is evidence of its intent to evade regulatory oversight. “Disclosed herein is a reinsurance-based approach to providing non-linear retrospective premium plans to insureds that may not have the option of such a plan directly,” the patent notes.

The order also cites earlier findings by California, Vermont, and Wisconsin that the Applied programs were an illegal end-run around state oversight by using an unfiled and unapproved collateral agreement that modified the underlying guaranteed cost policy. Applied’s lawsuit ensued.

Jurisdiction

The issue raised by Applied in the case is whether the Department can pursue an administrative action against the companies or must rely on the state’s Attorney General to bring a lawsuit in Superior Court. The governing law is section 20 of the New Jersey Insurance Producer Licensing Act of 2001.

“[Plaintiffs] argue Section 20 channels all claims of violations of our insurance statutes by non-admitted foreign insurance companies to the Superior Court and disallows the Commissioner from bringing an administrative action against them,” the court notes in the opinion. “Conversely, the Commissioner maintains that Section 20 does not confine her jurisdictional recourse to an injunctive action in the Superior Court.”

The court sided with the Commissioner finding that “Regardless of its foreign or domestic status, a company engaged in the insurance business in New Jersey is subject to the ‘strict regulatory control’ of DOBI.” It went on to find it unlikely that the Legislature wanted to confine the Commissioner’s options solely to a lawsuit. “The Commissioner may be able to achieve compliance and a satisfactory result administratively, without the formality and limitations of the rules of Court for civil actions,” it wrote.

“To be sure, the Superior Court has cognate jurisdiction under Section 20, but it does not have the Department’s special expertise in insurance regulation,” the court pointed out. “Indeed, it speaks volumes that appellants began the legal process by filing an administrative petition before the Commissioner—replete with citations to her legal authority to act—rather than invoking what they now contend is the exclusive jurisdiction of the Superior Court.”

The decision sends the dispute back to OAL for Applied to respond to the Department’s order to show cause. Copies of the Super Court of New Jersey’s decision are available in our Resource section or by clicking here.. Copies of the original Department of Banking and Insurance’s order to show cause are available 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.