Mixed Ruling In Applied Underwriters Class Action

By: Brad Cain

A federal district court judge struck a fundamental set of allegations in a proposed class-action lawsuit filed by three California employers against Applied Underwriters and its EquityComp and SolutionOne programs but is letting claims of unfair competition proceed.

The proposed class action by Shasta Linen Supply, Pet Foods Express and Alpha Polishing against the Berkshire Hathaway (NYSE: BRK.A) subsidiary stems from its failure to file the workers’ comp program’s reinsurance participation agreements with the state for approval prior to use.

District Court Judge William Shubb is allowing these unfair competition claims to proceed, but he struck fraud claims filed under the Racketeer Influenced and Corrupt Organizations Act (RICO). The RICO claims were amended into the case earlier this year and attorneys’ familiar with the numerous cases against Applied note that the claims would have been hard to win given the company’s structure and the nature of the statute. However, they were encouraged that the court is allowing the case to move forward.

Shubb found no evidence that Applied “actively concealed the structure of the insurance program or the existence of the RPA from regulators, plaintiffs, or the public generally.” The judge held that there is no plausible intent to defraud if there is an “obviously alternative explanation” for the behavior. “Here, the ‘obvious alternative explanation’ is that defendants simply did not think the RPA needed to be filed,” Shubb wrote. “This explanation clarifies why defendants explicitly described the insurance program’s structure and the existence of the RPA in documents that were provided to plaintiffs and in a publicly available patent, and yet did not file the RPA.”

Shubb rejected the allegation and refused to give the parties leave to amend on this point. “Given the existence of the patent, even if plaintiffs were given leave to amend the court cannot see how they would be able to plead facts to create a plausible inference that defendants intended to conceal the structure of the program and thereby defraud plaintiffs,” he wrote.

Unfair Competition

Shubb refused to dismiss the unfair competition claims that are at the heart of the case and found that the plaintiffs have standing to seek a declaratory judgment that the RPA and Applied’s entire workers’ comp programs are void – the same conclusion that Insurance Commissioner Dave Jones found when the Department reviewed the program.

In a settlement with the Department, Applied agreed to file an amended RPA for approval but is still enforcing the old, unfiled and unapproved RPAs that were issued before that date. Those were declared void and unenforceable by the Department of Insurance.

“[T]he existence of the operative contract creates a real and immediate threat of repeated injury for the plaintiffs,” Shubb noted in finding that Shasta and the others could seek injunctive relief from the courts as well as restitution in the form of any profits that Applied earned off of their money.

While the court allowed the unfair competition claims to go forward, Shubb expressed his disagreement with Commissioner Jones’ findings in the administrative hearing against Applied. Jones’ precedential decision in the case found that the RPA was void and unenforceable as a matter of law because it was never filed as required by Insurance Code section 11735.

Citing section 11737, however, Shubb maintains that an “unfiled rate is not unlawful per se.” The judge maintains that an unfiled rate is not illegal until the Commissioner serves notice, holds a hearing and then disapproves the unfiled rate. At that point, the unfiled rate is illegal but only on a prospective basis, according to Shubb.

Experts generally think Shubb’s reasoning on the contract itself is inconsistent with insurance law and therefore flawed.

Copies of Shubb’s order in the case are available in our Resources section or by clicking here.