Flash Report: Another ALJ Rejects Lara’s Interference

By: J Dale Debber

A second administrative law judge at the California Department of Insurance has stood up to California Commissioner Ricardo Lara. The commissioner, directly and through his senior staff, has been accused of interfering in decisions involving the controversial Applied Underwriters’ EquityComp Program just after he accepted money from people close to Applied Underwriters’ and met with its president Steve Menzies. At stake are hundreds of millions of dollars for California employers.

At issue is whether or not the Commissioner has authority to order a non-licensee to do anything, and the Department’s authority to remedy contract disputes.

The amended proposed decision abjectly rejects Lara’s interference into the dispute and is in lockstep with another ALJ’s findings. The issue is about the questions of remedy in these disputes. The ALJs are holding that Lara’s remedies are beyond the Commissioner’s statutory authority and thus outside the scope of their proceedings.

ALJ John Larsen penned the latest rebuke in an amended proposed decision for Steve Wills Trucking and Logging LLC. The ruling explicitly denies Applied Underwriters any additional monies for Wills Trucking’s time in the controversial program.

More importantly, Larsen also declares that the question of any final premium owed by either party is a contractual matter that is beyond the Commissioner’s authority to resolve.  The same position attorney Larry Lichtenegger has been arguing in numerous cases before the Department and now before a Superior Court (for past coverage see Lara Sued…).

“I appreciate Judge Larsen’s analysis of the law,” says Lichtenegger. “It’s the recommended analysis that I’ve wanted the Commissioner to adopt for some time now.”

First Go Around

Larsen’s initial proposed decision followed precedent and found the unfiled and unapproved reinsurance participation agreement (RPA) in the EquityComp program to be illegal and unenforceable. The proposed decision ordered Applied to return Wills any funds “in excess of the total amount that may be validly charged under Appellant’s guaranteed cost policy” and did not order Wills to pay anything to Applied.

The proposed decision, however, was not adopted by Lara and Larsen was ordered to address questions about the Shasta Linen decision and whether it obligates Wills to pay the full premium of the guaranteed cost policy, as well as questions of appropriate remedies. The questions are similar to those posed to ALJ Clarke de Maigret when the Department refused to adopt his proposed decision in the Van de Pol case (see ALJ Rejects…).

Both ALJs have now made clear that the majority of the questions the Commissioner’s office asked them to take evidence on are questions of law that are beyond the scope of the proceedings before them.

In both cases, the ALJ’s amended proposed decisions again refused to award any additional funds to Applied.

Contractual Question

Attorney Lichtenegger notes that Larsen’s amended proposed decision goes to the heart of the remedy issue. The remedy he seeks is the return of the excess funds that were not used to pay overhead or claims. Due to the company’s low loss ratio, he maintains it’s due a refund under the profit-sharing provisions of EquityComp.

Recent decisions by the Department in other cases involving Applied, however, would have similarly situated companies paying out more to by ordering them to pay the full premium under the guaranteed cost policy that was purchased by Applied to provide statutory coverage and give an air of legitimacy to the program. The decisions also precluded the companies from recovering monies from Applied.

The Decision

“Respondents argue that the Commissioner lacks jurisdiction to award the remedy Appellant seeks in these proceedings because the remedy of reformation is contractual one that is exclusively reserved for the courts. Yet in the alternative, Respondents request a contract remedy of their own that represents the difference between the total annual premium stated on the guaranteed cost policies and what the Appellant paid,” Larsen notes. He maintains that neither remedy is with the scope of the Commissioner’s authority.

“The powers of administrative officials are limited to those expressly granted by statute, or as may fairly be implied from the statute granting the power. Insurance Code section 11737, subdivision (f) only grants the Insurance Commissioner jurisdiction to decide disputes over the manner in which an insurer or rating organization’s rating system has been applied in connection with the insurance afforded or offered,” Larsen writes. “Neither of the parties’ requests for contract damages are within the Commissioner’s jurisdiction. Accordingly, the ALJ does not order the payment of premium to either party.”

Larsen submitted his amended proposed decision to Bryant Hensley, Lara’s Special Counsel. He maintains that if either believes the proposed decision does not sufficiently address the questions they raised, then they will have to refer to other legal authority to address the issues.

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