Applied Underwriters – Continuing Investigation …

Flash Report: Applied In Apparent Violation of CDI Consent Decree

By: Brad Cain

In an apparent end-run around the California Department of Insurance, Applied Underwriters, the Berkshire Hathaway (NYSE: BRK.A) subsidiary is instead using state courts in Nebraska to sue at least two California employers for a combined $5.5 million and is fighting to have a third case moved to the Midwest.

Further, Applied Underwriters is barred by a consent decree which it signed with the California Department from dragging California employers to other states and then subjecting them to court cases or arbitration over demands for payments.

CDI officials say the Department’s legal unit is reviewing the lawsuits in light of Applied’s past representations and agreements, but as of deadline had not commented on Applied’s actions.

In one case filed in the District Court of Douglas County Nebraska, Applied claims that the insured farm labor company failed to make required payments on a $485,689 promissory note it signed earlier this year. In addition to the amount of the note plus daily interest, Applied is alleging a breach of its reinsurance participation agreement (RPA) by the insured not making a payment on the note.

The RPA has been declared illegal by the California Department.

Applied is seeking nearly $3.6 million from the company for the alleged breach of the RPA. The total amount sought includes $1,320,912 in “early cancellation charges,” according to Applied’s complaint in the case.

The second employer is a Southern California restaurant chain that also signed a half-million-dollar promissory note which has some $300,000 due. Applied maintains that the company has stopped paying on the note, which is an alleged violation of their RPA. Applied is seeking $1.2 million for the alleged breach of the RPA.

In both cases Applied’s RPA requires “any legal suit, action or proceeding arising out of, related to or based upon this Agreement, or the transactions contemplated hereby or thereby must only be instituted in the Federal Courts of the United States of America or the Courts of the State of Nebraska, in each case located in Omaha and the County of Douglas.”

Applied’s exhibits do not include a signed disclosure by either employer that they were informed in advance that the dispute resolution provisions contained in ancillary agreements to workers’ comp policies are negotiable. Such is a requirement under California law.

The California Legislature passed SB 684 in 2011 that required insurers seeking to include arbitration or dispute resolution agreements that require the use of out of state courts and other state laws to disclose this fact up front and to allow negotiation over the provisions. Gov. Jerry Brown signed the bill into law, and its provisions took effect for policies issued on or after July 1, 2012. Both RPAs were signed after this date.

Superior Court Action

In a related issue, a California Superior Court just rejected an attempt by Applied to force a third California employer to litigate in Nebraska. As in the above cases, Applied is trying to use provisions in the RPA to force disputes to be resolved in its home state rather than in California where the employer’s operations are located, and the policy was enacted.

“Under Insurance Code section 11658.5, an insurer intending to use a forum selection clause governing the resolution of disputes concerning workers’ compensation insurance issued to California employers was required to have disclosed that forum selection clause to an employer like [Redacted]. CIC is an insurer attempting to use a forum selection clause to force this dispute to be litigated in Nebraska,” the Contra Costa Superior Court in an order denying Applied’s motion for a stay based on inconvenient forum. “However, it is undisputed that the forum selection clause was not disclosed in compliance with section 11658.5. As a result, section 11658.5(c) is clear: California becomes the default forum for this dispute.”

The court also rejected Applied’s arguments that even if the RPA is void, the forum selection clause could still be enforced. “[T]here is a specific statute that directly addresses forum selection clauses in the context of workers’ compensation insurance,” the court pointed out. “That statute applies here, and that ends the analysis.”

Commentary

It is clear the Department is failing to take action – let alone aggressive action to prevent employers from spending tons of money in court fighting Applied. The Consent decree got nothing for the Department it didn’t already have except an agreement by Applied to discuss its startlingly high and punitive Loss Development Factors. Brokers are getting sued all over the place – We are tracking many of these lawsuits – and brokers are not receiving clear direction from the Department moving forward.

Employers and brokers should be asking a lot of questions of the California Department including:

  • Does it intend to protect business insurance consumers?
  • Do the orders it issues or signs mean anything to anybody?
  • When will it stop being out lawyered by Applied Underwriters?
  • Does it intend to enforce California insurance law?

Correction: A Flash Report yesterday incorrectly stated that the consent decree Applied Underwriters signed with the California Department of Insurance bars it from pursuing court cases and arbitration proceedings against California employers in non-California jurisdictions. The decree’s dispute provisions are limited to barring out-of-state arbitration proceedings.