Flash Report: Judge Sanctions Applied Underwriters’

By: Brad Cain

It’s an all too familiar story for California employers, but this time there’s a happy – for employers – twist. As always, the dispute revolves around workers’ compensation coverages and Applied Underwriters’ reinsurance participation agreement (RPA). That RPA became infamous after the California Department of Insurance, after many stories in the Workers’ Comp Executive and its own investigation issued a cease and desist order against Applied Underwriters and its use of that RPA.

The case, Applied Underwriters Inc. v. Top’s Personnel, Inc., stems from a dispute over a $120,000 promissory note that Top’s signed in 2014. Applied alleges that with accrued interest Top’s owes it more than $126,000 under the note.

Applied Not Forthcoming in Discovery

As it has against several California employers, Applied Underwriters sought a home court advantage and sued Top’s, a New Jersey company, in Nebraska federal court for monies allegedly owed under a promissory note linked to Applied’s EquityComp program. That home court advantage may be illusory, however, as the judge in the case just granted Rule 37(b) sanctions against Applied, a Berkshire Hathaway (NYSE: BRK.A) subsidiary, for failing to provide information it was ordered to do so.

According to the court’s order, the sanctions stem from Top’s inability to get complete answers to its discovery questions, despite a court order for Applied to be more forthcoming. The tactic is familiar. According to court records, the company also refused to comply with orders by a California Department of Insurance administrative law judge to produce records in the Shasta Linen dispute. Attorneys representing California employers in other litigation have alleged similar kinds of discovery issues.

In the Top’s case, Applied maintained in legal papers that it fully complied with the discovery demand and argued that Top’s was merely on a fishing expedition. But the employer was seeking documents about the creation of its promissory note and its relationship to the reinsurance participation agreement (RPA).

Additionally, Top’s sought information about the somewhat murky relationship between Applied Underwriters Captive Risk Assurance Company (AUCRA) and Applied Underwriters. The court found both requests highly relevant to the case at hand.

“Applied Underwriters’ argument that defendant is on a ‘fishing expedition’ is unfounded,” Judge Cheryl Zwart of the Nebraska federal court noted. “The court’s March 31 Order was clear regarding the relevance of this discovery.”

“Applied Underwriters’ argument that defendant is on a ‘fishing expedition’ is unfounded. The court’s March 31 Order was clear regarding the relevance of this discovery.” – Judge Cheryl Zwart

More Discovery Misbehavior

The court also found that Applied was attempting to bury the defense counsel in paperwork with some of its responses. “[I]t appears Plaintiff provided a partial response to the interrogatory and expected the defendant to sift through the documents produced and extract the remainder of the answer,” the court wrote, noting that proper procedure required Applied to “identify and direct” the defense as to where the answer could be found in the documents it produced.

The court also faulted Applied for providing vague and unnecessarily imprecise responses not once but twice in spite of the court’s order for specificity. The court awarded Top’s reasonable fees, including attorney fees, for its work on the motion to compel. It also granted Top’s request to depose Jeffrey Silver, Applied’s counsel on the case and an executive vice president with the company. Applied identified Silver in legal papers as the only person that negotiated the promissory note on its behalf.

The court also warned Applied for a second time to follow the Federal Rules of Civil Procedure. “The Federal Rules are not guidelines: They are rules which all parties must follow in federal court lawsuits. Plaintiff is cautioned that sanctions, including dismissal of Plaintiff’s case, may be ordered if Plaintiff repeatedly fails to comply with the court’s rules and orders,” Judge Cheryl Zwart wrote.

 

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