Flash Report: CDI in Courtroom Showdown With Applied Underwriters’

By: Brad Cain

Attorneys representing the California Department of Insurance and the California Attorney General’s Office will be in a Los Angeles courtroom later today defending Insurance Commissioner Dave Jones’s landmark finding that Applied Underwriters’ Captive Risk Assurance Company, (AUCRA), reinsurance participation agreement (RPA) is void and unenforceable. The Berkshire Hathaway subsidiary is seeking a stay of the administrative order claiming irreparable harm, but the state maintains that any harm Applied is suffering is self-inflicted by its actions and practices.

Scores of lawsuits filed by insureds and former insureds over legality and unconscionability of the reinsurance participation agreement are being adjudicated in various tribunals.

“[T]o the extent Petitioners have lost business, it is largely due to Petitioners’ own decision to stipulate to a [Cease and Desist order] in which they agreed to stop selling the RPA in California,” says Deputy Attorney General Brian Wesley in a brief filed with the court. “Certainly, Petitioners’ decision to stipulate to the C&D creates doubt in the community regarding the viability of its programs. The C&D explains why consumers are reluctant to continue their business relationships with the Petitioners.”

The legal wrangling is part of the Shasta Linen case in which the CDI found the reinsurance participation agreement (RPA) to be void and unenforceable because, among other things, it was never filed with nor approved by the California Department of Insurance. Applied Underwriters’ uses the RPA in its EquityComp and (to some extent in its) SolutionOne programs Applied Underwriters’ claims that it is has lost business accounts and that its reputation has suffered in the aftermath of the Shasta decision. After it’s initial decision, the California Department ruled that the Shasta decision is precedential and does apply to other insureds.

Applied Underwriters’s briefings in the case claim that cancellations are up 75% since the Shasta Linen decision was issued last June. It also complained about the negative press it has received in the wake of the Shasta decision, as well as its legal troubles in other states. The state maintains that these complaints are misplaced.

Applied Underwriters’ has begun selling a new product which is a regular policy; it is priced competitively and apparently selling quite well.

“Further, Petitioners complain about publicity stemming from their voluntary agreement, which they knew would be made public. Self-inflicted harm does not qualify as irreparable harm,” says Wesley, noting the standard that must be met to support a stay of the order.

The attorney also notes in the brief that Applied Underwiters’s complaints about the impact of the cease and desist order are outside the scope of this legal proceeding, which is focused solely on the administrative order in the Shasta case.

The state’s brief also notes that Applied Underwriters’ is now making unsupported claims that over 60% of the participants in its EquityComp program make a profit. When ordered by the hearing officer to present such evidence during the Shasta Linen administrative hearing, Applied refused to do so – twice. In fact, the only evidence provided was the testimony of an Applied executive that he had never participated in and had never heard of anyone who had been involved in the return of premium or deposits to an EquityComp client. At the time the executive had worked at Applied for over a decade.

“Petitioners’ request for a stay is made for an improper purpose,” says Wesley. “If this Court were to issue a stay, it would harm the public policy of this state and thus, harm the public interest because Petitioners seek the stay to influence litigation in other cases involving other entities that are not parties to this action.”

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