Flash Report: Applied Knuckles Under On Unfiled RPAs

By: Brad Cain

APPLIED UNDERWRITERS’ EQUITYCOMP PROGRAM IS DEAD IN CALIFORNIA

Berkshire Hathaway’s Applied Underwriters’ and California Insurance Commissioner Dave Jones have signed a new “Stipulated Consent Cease and Desist Order” which bars Applied Underwriters’ from selling its EquityComp program. Applied had already stopped selling its EquityComp program in California.

More importantly, though, the consent order also prevents Applied Underwriters’ from enforcing its unusually high runoff loss development factors, (LDFs), and other key provisions in the unfiled and unapproved reinsurance participation agreements (RPAs) that are currently out in the market. Observers agree that is a crucial win for California employers.

It is clear that the Applied Underwriters’ Equity Comp RPA is unfiled. It has never been, is not currently, and never would have been approved in California.

“This is good for employers and the CDI, but Berkshire was likely to going to lose anyway,” says plaintiff counsel Nick Roxborough. “The brand already has a bad reputation.”

“Moreover, the Order provides additional evidence that Applied has engaged in wrongdoing. It provides exquisite foundational evidence for existing lawsuits, and on a going forward basis, it may provide some sort of assurance that Berkshire may act properly like other carriers,” he told Workers’ Comp Executive.

Also crucial for California employers involved in disputes with Applied is a provision requiring that “Arbitrations under either an RPA that is currently an in-force RPA or a past RPA entered into or issued in California will take place in California.” There will be no more arbitration hearings for California employers in Nebraska, the British Virgin Islands or anywhere else other than California. While this appears to be a big win for the Commissioner Applied has already been agreeing to Arbitrate in California in most cases for some time. Arbitration is not always an advantage for the employer and in many cases can be more expensive.

“Fortunately, this issue remains at the court of appeal for both the CDI and our client Luxor Cabs who already – and successfully – argued that the arbitration clauses are unenforceable as a matter of law.

Applied also agreed not to apply the run-off loss development factors “to any policy at any time, including upon termination, cancellation or nonrenewal of the RPA or termination, cancellation or nonrenewal of the Policy.” The deal calls for actuaries from the Department and the Berkshire companies to attempt to come up with an acceptable set of LDFs that will apply to policies and RPAs.

“The devil is in the details,” Roxborough warns. “Applied Underwriters’ is changing things and modifying the LDFs etc. shows that it acknowledges some problems. It will be very helpful in the courts,” Roxborough says.

Writ of Mandamus

The settlement agreement specifically does not settle the writ of mandamus filed by Applied seeking to overturn the Commissioner’s decision in the Shasta Linen case. The decision holds RPA to be illegal and details a range of issues that do not meet legal standards.

Applied may submit a proposed collateral agreement through the usual process, as can any other carrier, and may not use it until it is not disapproved by the Department.

Applied does not admit to any of the allegations in the Commissioner’s notice and amended notices regarding the illegality of its EquityComp program.

A copy of the new “Stipulated Consent Cease and Desist Order” can be found here in our Resources section.

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