CDI Bars Applied Underwriters’ From Re-Litigating Issues

By: Brad Cain

The California Department of Insurance’s chief administrative law judge just issued a ruling that could speed resolution of a lot of cases against Applied Underwriters. It was a significant loss for Applied, and it applies to virtually all insureds prior June of 2106 when the new RPA was put into use.

More than a year after the California Department of Insurance declared Applied Underwriters’ Equity Comp Program unfiled and unapproved reinsurance participation agreements (RPA) to be void and illegal as a matter of law, no less than eight employers are still embroiled in disputes — over the same issues. Because of the new ruling, the end is in sight for those filed and yet to file.

“As much as Applied would love to burden every one of its former insureds with a week-long trial and re-litigating everything a second time, the judge is having none of it,”  –– attorney Nick Roxborough

“As much as Applied would love to burden every one of its former insureds with a week-long trial and re-litigating everything a second time, the judge is having none of it,” says attorney Nicholas Roxborough who is representing Platinum Security. “Legally it makes a lot of sense. There was an exhaustive “hearing, the witnesses said what they said, the documents say what the documents say, so it makes sense in balancing the burden of having another hearing on the same subject with the same witnesses and virtually identical documents except for some numbers when there have already been findings and conclusions.”

Much of the delay has been attributed to litigation tactics employed by the Berkshire Hathaway subsidiary (NYSE: BRK.A). “They’ve done everything in their power to delay, delay, delay,” says attorney Larry Lichtenegger who is representing Goodwill Industries in the proceedings. Delay and increase costs to their former insureds seem to be the style of litigation from Applied.

Judge Rosi the Decider

But Chief administrative law judge Kristin Rosi is putting a stop to many of Applied’s tactics. Rosi just issued an order that takes official notice of the full record in the Shasta Linen case and that prevents Applied, in current cases, from re-litigating the facts, findings, and legal conclusions arising from that precedential decision.

She notes in particular that Applied had the opportunity to fully litigate these issues in that earlier case and prove their point if they could, but opted to settle with the Department. That settlement left the Shasta Linen decision intact, and as a precedential decision, it applies to similar disputes.

“The Shasta Linen proceedings and decision were quasi-judicial, and Respondents failed to exhaust their judicial remedies,” ALJ Kristin Rosi notes in the new order. Applied initially challenged the Department’s decision in that case with a writ petition in state court, but dropped that challenge as part of a settlement agreement with the Department before the court ruled on the petition. “Thus, the Shasta Linen findings and decision have a preclusive effect on all subsequent proceedings, including the above-captioned appeals.”

“Thus, the Shasta Linen findings and decision have a preclusive effect on all subsequent proceedings, including the above-captioned appeals.” – Judge Kristin Rosi

The ruling means that Applied is prevented from arguing – again – that the Department is overstepping its jurisdiction in hearing these disputes because it raised that argument and lost it in Shasta Linen. It also means the end of unnecessary costs for insureds.

Rosi notes that Applied was well aware that similar disputes would be coming down the pike and yet dropped its challenge and settled with the Department anyway. “[C]rucially, at the time Respondents executed the settlement agreement, they had already been served with six additional administrative appeals, all challenging EquityComp’s legality under the Insurance Code,” she notes.

Attorneys for the aggrieved employers say this will streamline the hearings to apply the precedential nature of the Shasta decision to their cases – i.e., obtaining a finding that the RPAs in their cases are also void and unenforceable because they were never filed or approved for use in California. Instead of a week of hearings, they say it could be wrapped up in a day or day-and-a-half.

As a precedential decision, the Shasta Linen findings are intended to be applied to other similar cases that arise before the AHB. In the pending cases, however, Applied and CIC argue that the Commissioner’s finding that the EquityComp RPA was void and unenforceable does not necessarily apply to the RPAs it required these employers to sign. The employers argue that the RPAs are the same but that Applied’s stance drags out the process and drives up the cost of the litigation.

A Lot More Cases Coming

Sources tell Workers’ Comp Executive that dozens of other employers will be filing their cases. Current appeals were filed by Action Roofing, Arevalo Tortilleria, Goodwill Industries of the San Joaquin Valley, Platinum Security, and Van De Pol Enterprises. The Department has been handling the pre-trial motions and briefings in the cases in a consolidated fashion, but each employer will receive an individual hearing. Not included at this point are more recent appeals filed by Hot Cakes Inc. (IHOP), Mike Rose’s Auto Body and Sandman Inc. (Star Concrete).

Applied’s Failed Strategy

Applied has been demanding its day in court to argue over the similarities and differences between the RPA used with Shasta Linen and the RPAs that others had to sign. Insurance industry experts, however, say there is no meaningful difference in the various RPAs that Applied used. Until Applied reached a settlement agreement with the Department, it had never filed any of the RPAs it used, and none of the ones in dispute here were ever approved for use in California – just as the one in Shasta Linen was never approved and therefore found to be illegal.

Applied continued to argue, as it did unsuccessfully in the Shasta Linen case, that there is no statutory basis for the Commissioner to hear these appeals. The appeals are filed under Insurance Code section 11737(f). Applied argues that questions as to whether the RPA is an illegal, unfiled ancillary agreement is outside the scope of hearings allowed by the cited section. It maintains that the Commissioner can only hear appeals over the application of an insurer’s rating system. Additionally, it maintains that private employers cannot initiate such appeals and that only the Commissioner can start a proceeding to determine if the RPA is an unfiled rate.


These arguments, however, were all raised and rejected in the Shasta Linen case and ALJ Rosi says there is no need to rehash these settled issues.

“Basically, Judge Rosi sees no point to re-litigate issues that have already been decided. This is quite an extensive order,” says Roxborough. “As a result of this Order, we expect Platinum’s trial, and all other similarly situated employers who have trials at the DOI, to be shortened, focused and more cost-effective for the employer.”

Lichtenegger also points out that the taking of judicial notice of the evidentiary record will allow the parties to get to the key issue quickly – showing that the EquityComp RPAs used in these cases are the same or “substantially similar” to the RPA in Shasta Linen.

When that is accomplished, each employer’s RPA will be considered void and unenforceable, just as it was in Shasta Linen. And a shorter trial and quicker resolution will result.

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.