Not the First Denial…

U.S. Supreme Court Rejects Applied Underwriters Again

The United States Supreme Court rejected two petitions filed by Applied Underwriters and its Applied Underwriters Captive Risk Assurance Company alter ego. The Berkshire Hathaway (NYSE: BRK.A) subsidiary was asking the court to overturn court decisions in California and Nebraska that found the arbitration provision in Applied’s reinsurance participation agreement (RPA) to be unenforceable.

Applied sad dogCalifornia’s Department of Insurance reached a similar conclusion in an administrative hearing involving a different employer and declared the RPA to be void and unenforceable, although the Department’s action has done little to stem the tide of disputes.

The Supreme Court’s action came in a dispute between Applied and a California employer – CM Laundry LLC, which is a subsidiary of Citizens of Humanity LLC. It was the second Supreme Court denial for Applied Underwriters’ the first being in the similar case, that of Minnieland Private Day School.

The action leaves in place a finding by a California Court of Appeal and the Nebraska Supreme Court that state law in Nebraska makes the RPA’s arbitration clause and its delegation clause unenforceable.

Attorney’s familiar with Applied’s legal tactics say the outcome was predictable.

“This is not a surprising result. The decisions of the California Court of Appeal and the Nebraska Supreme Court were well reasoned and based on a specific Nebraska statute declaring arbitration agreements ‘concerning’ insurance are void and unenforceable,” says attorney Larry Lichtenegger.

“Reading the statute, I cannot possibly see how a different result would be possible. As it usually does, Applied wants to have its Reinsurance Participation Agreement sufficiently separated from its declared ‘seamlessly integrated’ EquityComp program so that it can do anything it wants without insurance department approval. Since it is impossible to see the RPA as anything other than an agreement ‘concerning’ insurance, as the Nebraska statute declares, it is, and it will continue to be a failed effort by Applied.”

“Applied Underwriters will do anything, even if it’s not remotely possible to achieve, to run up costs of the insured employers in an effort that on its face is an attempt to validate what is already an illegal program…” – Larry Lichtenegger, Attorney

The Court of Appeal found that the McCarran-Ferguson act controls and reverse preempts the Federal Arbitration Act. Key to this decision was the court’s finding that the RPA was an integral part of the insurance product that Applied was selling.

The U.S. Supreme Court also left in place a decision by the Nebraska Supreme Court that finds state law there prohibits the parties to an insurance contract from including an arbitration agreement covering future disputes over the insurer-insured contractual relationship. Section 25-2602.01(f)(4) of the Nebraska Uniform Arbitration Act (NUAA) prohibits arbitration of any agreement concerning or relating to an insurance policy.

The case, as with many others involving the controversial Applied Underwriters’ EquityComp program, stems from a dispute over what the employer allegedly owed Applied for the claims incurred under the program. Applied sought to invoke the RPA’s arbitration provisions that call for arbitration in the British Virgin Islands under Nebraska state laws.

The employer sought relief in California and Nebraska courts and won.

Lichtenegger says Applied’s attempt to appeal to the US Supreme Court “is just further evidence that Applied Underwriters will do anything, even if it’s not remotely possible to achieve, to run up costs of the insured employers in an effort that on its face is an attempt to validate what is already an illegal program, but is also gauged to make litigation so expensive for its insured that they will eventually give up and walk away without the return of excess deposits. That is, as I see it, Applied’s ultimate goal.”