Claims that the Travelers (NYSE: TRV) is illegally trying to enforce the terms in unfiled side agreements to a large deductible workers’ comp policy are now in the hands of a California Department of Insurance administrative law judge. The department’s administrative hearing bureau held three days of evidentiary hearings in the dispute between Davidson Hotels and Travelers before ordering additional post-trial briefing.
The case at hand, Davidson Hotel v. Travelers, is being handled by ALJ Kristin Rosi. The ALJ also presided over a similar dispute involving Adir International and Travelers that was heard over a year ago. A decision in the Adir case is still pending. Unfiled – therefore unapproved – side agreements are highly controversial and have been found to be void and unenforceable in other cases.
Davidson’s case is being handled by Nick Roxborough, partner with Roxborough Pomerance Nye & Adreani. Michael O’Day with DLA Piper represented The Travelers.
Here Davidson claims that terms in the unfiled insurance program agreement (IPA) that accompanied the large deductible policy it had with Travelers from 2009 through 2012 caused it to overpay for its workers’ comp coverage. At immediate dispute is a 2015 demand for $936,419 in additional collateral for the program to cover the runoff claims. Davidson refused to pay.
Travelers has also filed for arbitration in the dispute under a clause in the IPA that calls for the hearing to be held in Connecticut. Out of state arbitrations are generally found to be contrary to California insurance law.
The IPA, which had not been filed with the Department, also included other financial terms that affected what Davidson paid under the program. These included the loss development factor that was applied to claims to determine collateral requirements and the terms for medical cost containment expenses that went into the cost of administering claims.
At trial, Davidson officials testified that Travelers was holding $1.6 million in collateral for 20 open claims when it made the $936,419 demand. It says Travelers’ own reserve estimates, however, put the value of the claims at just $1.5 million. Thirteen of the claims are from California.
The Atlanta-based hotel management company also alleges that the demand is inflated due to poor claims handling by Travelers and the application of loss development factors from the unfiled side agreements. It argued at trial that the valuation for the additional collateral jumped from a projected amount of roughly $250,000 in March 2015 to the actual $936,419 demand in September of that year after its claims were shifted to adjusters in Travelers’ runoff unit. Davidson officials testified that some of its claim files were shuffled through as many as five different adjusters and that this turnover increased the overall cost of the claim.
Davidson also raised issues with the way Travelers calculated medical cost containment charges under the program. It noted that the carrier billed it for 27% of any savings obtained through medical bill review up to $10,000 per bill. The 27% charge applied even if the only action taken was to reduce the bill to what was allowable under the fee schedule. The unfiled program agreements then allowed Travelers to charge a 7% fee on the amount of the bill that was allowable under the fee schedule.
Davidson officials testified that they paid Travelers $1.3 million for medical bill review services over the four years. The same services from its subsequent guaranteed cost policy with a different carrier were just one-quarter the cost.
California Crackdown
The California Department of Insurance cracked down on the use of unfiled side or collateral agreements starting in 2011. At that time, it ordered the Workers’ Compensation Insurance Rating Bureau to remind its carrier members that collateral agreements that altered the obligations of carriers and insureds must be filed before use.
The Bureau is a private, but quasi-governmental organization financially supported exclusively by insurance carriers in whose interests it operates.
A year later the Department took enforcement action against Zurich for using unfiled side agreements, including agreements that required arbitration of disputes outside of California and under another state’s laws – the same type of terms that Travelers seeks to enforce. Under a settlement agreement, Zurich agreed not to enforce the objectionable terms.
The Department also ruled an unfiled agreement from Applied Underwriters was void and unenforceable.
Since this time the Department also promulgated an update to Insurance Code Section 11658 that clarified that such side agreements must be filed before use. The update, which was clarifying the then existing law, was approved in 2016.
No Jurisdiction
Travelers defense maintains that CDI lacks jurisdiction to hear the case. It argues that hearings before the Department under Insurance Code section 11737(f) only apply to disputes involving rate filings, not form filing disputes. It maintains that it had no obligation to file the program agreements at the time claiming that the IPA didn’t modify the coverage and was not an endorsement.
Travelers’ argument is similar to the central one raised and lost by Applied Underwriters in the Shasta Linen case. There the Berkshire Hathaway (NYSE: BRK.A) subsidiary made a similar argument about its unfiled reinsurance participation agreement. ALJ Rosi handled that dispute and rejected that line of reasoning. Applied eventually conceded the point and filed an amended RPA for approval and dropped its challenge of the Department’s findings.
Travelers too has subsequently filed large deductible program collateral agreements.
At trial, Travelers also questioned Davidson’s motivations in the case. It maintained that in 2015 Davidson learned of the California disputes over unfiled agreements and began looking for a way out of its financial obligations to Travelers.