Flash Report: EquityComp Settlement -Nothing For Existing Customers

By: Brad Cain

The ink is barely dry on the settlement agreement between Applied Underwriters and the California Department of Insurance. Attorneys adverse to Applied in the many open cases say it should bolster their position in court which is good for employers. The bad news, however, is there may be no quick way out for employers already in litigation with the Berkshire Hathaway (NYSE: BRK.A) subsidiary over its EquityComp product.

Going Forward

The Department has required new disclosures which must be signed by employers which are supposed to put an end to what the Department terms were Applied’s “bait and switch” tactics. Even so, it urges caution for employers considering the product.

“Even the revised products are not appropriate for businesses unable to adequately evaluate the pricing, obligations, and risks of such a complex product,” the Department wrote. “The Department advises any employer considering such a complex product to consult expert including those with legal and actuarial expertise in workers’ compensation products.”

“Even the revised products are not appropriate for businesses unable to adequately evaluate the pricing, obligations, and risks of such a complex product,” – California Department of Insurance

In other words, regarding EquityComp, the California Department of Insurance is saying caveat emptor, buyer beware.

Litigation To Continue

“I’ve already talked to Applied, and their position is that the settlement doesn’t change anything in the past cases – you still have to litigate,” says attorney Larry Lichtenegger. “So, they intend to continue to litigate. However, their position in that litigation has just been substantially damaged.”

“Applied will continue to seek to enforce the prior RPA as the settlement is prospective only,” says well-known California Republican political PR man Rob Stutzman now representing Applied. Stutzman was Deputy Chief of Staff to former Governor Arnold Schwarzenegger.

“Applied will continue to seek to enforce the prior RPA as the settlement is prospective only.” – Rob Stutzman, Outside PR Man

The stipulated agreement leaves in place the precedential decision in the Shasta Linen case. It found the original EquityComp reinsurance participation agreement to be void and unenforceable as a matter of law. The Department agreed that the precedential decision, however, is only directly applicable to administrative proceedings before the Insurance Commissioner.

In court, employers will still have to win a finding that the arbitration provisions, the application of runoff loss development factors and other objectionable features of the program are unenforceable because the RPA was not filed.

Lichtenegger and others say that Applied’s agreement to stop fighting the Commissioner’s decision in Shasta Linen should carry weight with the courts.

“This is a final, precedential decision by the person most knowledgeable about workers’ comp insurance in this state. It’s the person that approves and disapproves policies,” he says, noting that Applied can no longer argue in court that the Shasta decision is unreliable. “It’s going to be pretty tough for a judge to ignore it.”

Similarly, attorney Nicholas Roxborough says the settlement will be beneficial for employers in disputes not only with Applied but with any carrier that did not properly file with the Department. “[The settlement] basically means if any employer has a factual situation or circumstance similar to Shasta Linen, the Shasta Linen case is precedential and is going to govern,’ he notes.

“So, whether it is a Berkshire Hathaway or a non-Berkshire carrier if they failed to file side agreements the enforceability of those agreements is probably going to be governed by the Shasta Linen case. So that’s a pretty big deal.”

The attorneys note that Applied’s capitulation to a settlement and agreeing to file its rates and forms — something it steadfastly refused to do in the past – allowed it to avoid an appellate court ruling upholding the Department’s decision. Such a decision would be binding on future cases in that appellate district and if taken to the Supreme Court and upheld then binding statewide. “They didn’t want that,” says Lichtenegger. “The only chance they had was to enter into a settlement that says it is binding on all CDI hearings. It’s just not binding and precedential on the courts.”

Even with this caveat, Roxborough notes that the settlement seriously undermines Applieds prior arguments. “If they’re agreeing that [Shasta Linen] is precedential then I don’t know how they could with a straight face argue to a court of appeals that ‘yes, we agreed that it was precedential but we don’t think that it governs you at the court of appeal,’” he says.

Future Unclear

As part of the settlement negotiations Applied changed its position and filed an initial rate plan for its EquityComp program – something is had refused to do and argued strenuously that it was not required to do so. It has also submitted a revised reinsurance participation agreement for approval which the Department has done.

What’s unclear at this point is exactly what are the terms of that amended agreement and how it will impact the final rates that employers pay. CDI officials are currently unable to provide a copy of the forms – both the amended RPA and an updated acknowledgment and disclosure agreement.

Applied’s rate filing promises that the terms of the amended RPA – it’s now calling it a Reinsurance Rating Participation Agreement or RRPA – will clearly explain how the final costs are derived, but at this point that cannot be independently evaluated without the actual approved form. A common area of dispute under the prior iteration of the program was that employers couldn’t figure out what was driving the variation in their monthly bill.

Compline’s premium rating system is already able to calculate rates for Applied Underwriters’.

For its part, Applied says the renewed EquityComp program will be for employers with premiums in excess of $500,000 per year. That level of premiums is supposedly high enough to ensure a certain level of sophistication to enter into the such a complex product, but attorneys note that this is no guaranty that there would still not be disputes and misunderstandings.

They point out that the majority of the disputes involve employers with at least this much premium.


Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.