CDI’s Court Clogged With Applied Underwriters’ EquityComp Cases

Administrative law judges at the California Department of Insurance in recent weeks have held three evidentiary hearings in disputes between California employers and Applied Underwriters/California Insurance Company, and the understaffed unit has over ten times that many cases still waiting in the wings. The growing number of disputes related to the Berkshire Hathaway (NYSE: BRK.A) subsidiary’s workers’ comp program EquityComp are likely to clog up operations at the Department’s hearing bureau for the foreseeable future.

Having lost before the Department before, Applied’s attorneys are laying the groundwork for future appeals to the courts. Aggrieved employers are seeking a broadly applied cease and desist order to stem their legal costs.

These cases are the first to go to hearing at the Department even though nearly two years have passed since the Department handed down its precedential decision in the Shasta Linen case. That decision deemed the reinsurance participation agreement (RPA) that sets the terms of the EquityComp program to be void and unenforceable as it was never filed prior to use. All of the current disputes involve employers that were enrolled in the Applied Underwriters’ EquityComp program under RPAs that were never filed nor approved.

They are seeking similar determinations that their RPAs too are illegal and unenforceable but are forced to do so on a case-by-case basis.

The hearings themselves are far from the last step in the process as employers seek to avoid claims for additional payments and/or the release of the excess funds that Applied is holding. Additional post-hearing briefs and reply briefs have been requested in each of the cases heard so far and that trend is expected to continue as the Department works through the growing list of complainants.

Even when the Department hands down its decisions, the cases are not likely to be over. Applied has made it clear that these hearings are its chance “to make its record” in preparation for legal challenges through the court system.

Unbelievably, part of that record is an argument that even if the RPA is illegal, it can still be enforced.

In a recent hearing for the appeal that Goodwill Industries of San Joaquin Valley filed, Applied’s attorneys are preparing to argue that the employer knew what it was buying and therefore the terms in the RPA that the Department and most recently a California Court of Appeal ruled to be illegal should nonetheless be enforced. Goodwill’s attorney, Larry Lichtenegger, maintains that no one understood what was involved in the program – not the employers that bought it or their brokers.

“If it’s the case that Goodwill entered into a program and we would argue knowing full well what that program provided, and there was a reasoned decision to do so, it seems to me that that would be a factor that weighs into consideration of enforcing the RPA,” says attorney Spencer Kook for California Insurance Company and Applied.

ALJ Clarke de Maigret pushed back on the issue. “I haven’t seen any cases where it is the case that a court says that a factor militating in favor of enforcing an illegal agreement is that the buyer knew what they were getting. That seems like the argument that you are making,” the ALJ asked.

“That’s not an inaccurate summary of the argument,” said Kook. “They got what they knew they were going to get.”

Questions of Remedy

Complicating the cases is the need to find a remedy if the Department finds that the employers in these cases are similarly situated to Shasta Linen, i.e., that they’ve been held to the terms of an illegal and unenforceable RPA.

Many people were upset with the remedy offered in the Shasta Linen decision, which required it to pay what would have been due under the guaranteed cost policy. That outcome works for some but not all of the litigants. Alternative remedies are now being sought in the pending cases.

In the latest case to appear before CDI’s hearing bureau, Goodwill’s attorney Larry Lichtenegger argued a unique remedy: enforce the one offered in the new “RRPA” that Applied ultimately did file with the Department after it dropped its challenge to the Shasta Linen decision. That remedy is an annual “true-up” of the captive cell using the incurred losses rather than the projected or developed losses. The revised RRPA requires such true-ups annually beginning 12 months after the policy expired.

“We’re now 2.5 years after the end of the program so I’m going to be asking you to make an order that we’re already too late for the first annual one and that there should now be annual true-ups,” Lichtenegger told ALJ Maigret. He will also be asking the Department “to declare the [old] RPA is invalid and unenforceable by [Applied Underwriters Captive Risk Assurance Company] because of the failure to file.”

Others too are seeking relief from Applied’s continued efforts to enforce the RPA that the Department declared illegal in Shasta Linen. Some are looking for a broad cease and desist order from the department for themselves and “all other similarly situated California customers” of Applied.

“As Alex Arevalo testified at the hearing, neither the ruling in Shasta Linen, nor ATI’s own administrative appeal, nor the Official Notice, has caused AUCRA to cease pursuit of enforcement of the RPA. Indeed, even after dismissing its arbitration petition, AUCRA recently sued ATI in state court,” notes attorney Gregg Rapoport in a post-hearing brief filed for his client Arevalo Tortilleria Inc. “Beyond this case, Respondents are continuing –– successfully in some cases, and at substantial cost to insureds in all cases –– to pursue enforcement of the illegal and void RPA against many other employers in California through litigation and arbitration, despite a series of rulings by both federal and state courts confirming their agreement with Shasta Linen.”

Attorney Nick Roxborough notes that he too will be seeking an order finding the RPA void ab initio and unenforceable in its entirety and a cease and desist order. As to any additional remedies, he plans to seek those in the courts. Roxborough represents Platinum Security, which had its hearing last month.

Initial decisions in these cases are expected this summer. In the meantime, new cases continue to pour into the Department.