For Selling the Applied Underwriters Deal…

Shasta Linen Settles With Broker

By: Brad Cain

The employer at the center of the case that successfully challenged the legality of Applied Underwriters’ EquityComp workers’ comp program reached an agreement to settle a related dispute with its former broker. Terms of the settlement have not been disclosed. A Sacramento Superior Court dismissed the lawsuit at Shasta Linen Supply’s request following the filing of a settlement agreement.

The settlement stems from a lawsuit Shasta filed nearly three years ago as it grew unhappy with Applied Underwriters EquityComp program and the relationship unraveled as it faced significant unexpected costs under the three-year Applied Underwriters EquityComp program. Shasta sued its former broker for negligence, breach of implied contract, intentional misrepresentation and negligent misrepresentation.

Shasta was not alone in taking action against their broker for recommending the EquityComp program and numerous other cases against brokers are pending in California and outside the state.

Workers’ Comp Executive has elected not to publish the identities of the various brokers or firms being sued in California and around the country because they sold clients Applied Underwriters EquityComp deals.

The arguments in the various broker lawsuits are similar and focus on allegations that the producers did not understand the EquityComp program or how its controversial reinsurance participation agreement (RPA) would work and, therefore, shouldn’t have recommended the program. Without understanding how the charges would be calculated the lawsuits allege that the brokers could not evaluate or present the real cost of the program or know how it compared to other plans. In some cases, the brokers were unaware there even was a Reinsurance Participation Agreement, let alone understand it.

In Shasta’s case, the original lawsuit alleged that the broker advised the company that the EquityComp program had a “cost ceiling,” but did not advise the company about the numerous terms and conditions that altered Shasta’s rights and obligations under the underlying policy. The lawsuit alleged that “The terms which Defendants failed to discuss include but are not limited to all of the following:

  1. That premium rates would dramatically increase over the course of the AU Program and that administrators of the AU Program would assert that Shasta must pay more than what Defendants represented as the ‘cost-ceiling’;
  2. That the AU Program carried severe financial consequences for failing to renew on expiration of three years and that administrator of the AU Program would claim the total amount of Shasta’s obligation under the AU program exceeded what Defendants represented as the ‘cost-ceiling’;
  3. That if there were open claims at the expiration of three years, AU program administrators would attempt to apply ‘run-off loss development factors’ to such claims and would assert Shasta must pay higher premiums such that the total cost of the program would be in excess of what Defendants had represented was the ‘cost-ceiling’ of the AU Program; and
  4. That if one or two open claims existed at the three-year expiration AU Program administrators would assert the total cost of the program was far in excess of what Defendants had represented was the ‘cost-ceiling.’”
  5. The terms that Shasta referenced in the lawsuit against its broker are the terms outlined – but which are, according to lawsuits either unclear or allegedly unconscionable – in the unfiled RPA that participants must sign to take part in the EquityComp program.

Insurance Commissioner Dave Jones rules on Monday that the RPA is void and unenforceable.

Shasta’s attorney did not respond to a request for comment on the case.

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.