EquityComp’s Questionable Legality Losing Business for Applied

By: Brad Cain

Questions about the legality of the central document in the EquityComp and SolutionOne workers’ comp programs is costing Applied Underwriters’ accounts – lots of them according to the Berkshire Hathaway subsidiary. In court filings, Applied says cancellations are up 75% since Insurance Commissioner Dave Jones declared its reinsurance participation agreement (RPA) to be void and, Applied’s filing says, dozens of brokerages are no longer placing business with it.

Applied made the claims in a brief seeking a stay of the Commissioner’s order in the Shasta Linen case. The company maintains that news coverage of the case is driving away business and causing it to suffer irreparable harm. The issue is set to be argued in court later this month.

“The Shasta Linen order being challenged in this proceeding has caused and continues to cause great irreparable harm to the Petitioners, including through press and media that damages the company’s reputation in the marketplace, damages the business the Companies have spent years building, and damaged the Companies’ critical relationships with insurance brokers, who are the source of Petitioner’s business,” Applied’s general counsel Jeffery Silver maintains in a declaration supporting its motion to stay the action. Since the Department’s June 20 decision and order in the case, Silver says 34 brokerages notified the company that they will no longer place business with Applied. “The reasons for these terminations, as articulated by the client or the broker, include uncertainty about whether Petitioners could legally offer them coverage, whether the brokers might accrue liability for dealing with Petitioners, and some have presumed that Petitioners must be guilty of some offense and refused to deal the Petitioners on principle.”

Applied’s brief does not mention that it signed a cease and desist order with the Department agreeing not to sell new or renewal coverage in workers’ comp products that use unfiled and unapproved RPAs.

The company also reports an uptick in the number of clients canceling their policies and seeking coverage elsewhere. “Clients terminating their accounts with Petitioners have risen 75% since the Shasta Order was announced on June 25, 2016,” the company says in the filing. The aforementioned cease and desist order that Applied signed prevents it from applying the run-off loss development factors in the RPA for “termination, cancellation or nonrenewal of the RPA or upon termination, cancellation or nonrenewal of the Policy.”

Applied says it is also facing an increase in legal proceedings as well. “The Shasta Order has also spawned no fewer than 48 different litigations and arbitrations across the United States,” Silver notes in his deposition.

Profit Sharing

Of interest in Applied’s filings is a declaration by Michael Gonzalez, a vice president of Alliant Insurance Services. In the declaration, made under penalty of perjury, Gonzalez declares that “[m]any of my clients have obtained profit sharing distributions under their EquityComp account.”

Gonzalez’s declaration stands in sharp contrast with the testimony of an Applied executive during the Shasta Linen administrative hearing. Patrick Watson, an Applied Underwriters sales manager, testified under oath to administrative law judge Kristin L. Rosi that he had never participated in and had never heard of anyone else who had been involved in the return of premium or deposits to a client. At the time, Watson had worked at Applied for over a decade.

Workers’ Comp Executive has been unable to identify any employers who have received “profit sharing distributions” from their EquityComp programs.

The question of the profit sharing distributions was ignored by Applied’s attorneys during the Shasta case as they refused to comply with a direct and written order by Judge Rosi to produce evidence – twice. “In order to secure a complete and accurate record, the ALJ twice ordered Respondent to provide the number of participants who received a profit-sharing distribution, the date upon which their program ended and the date upon which they received a distribution,” Rosi noted in her decision. “Respondent refused to comply with the ALJ’s order. Pursuant to Evidence Code sections 412 and 413, the Commissioner infers from Respondent’s failure to produce this readily available evidence that AUCRA has not made any profit-sharing distributions.”

In other words, Applied Underwriters’ refused to provide such evidence to the California Department of Insurance, and now it comes with a declaration from a broker who says his clients have.

As of deadline, the California Department of Insurance had not filed its reply brief about why Applied’s request for a stay should be denied.

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.