Flash Report: Massive Appellate Loss for Applied Underwriters’

A California Court of Appeal just handed Applied Underwriters a significant defeat. The case will affect Applied negatively in its numerous battles with California employers formerly enrolled in its EquityComp and SolutionOne workers’ comp programs.

In a published opinion – that is citable in the other disputes – the Fourth District Court of Appeal ruled the arbitration provision, and the delegation clause in the reinsurance participation agreement (RPA) is illegal and unenforceable because the RPA was never filed with the state prior to use. “This is bigger than big,” says attorney Larry Lichtenegger who won the decision against the Berkshire Hathaway (NYSE: BRK.A) subsidiary. “The same analysis that the court used to declare the arbitration clause and the delegation clause unenforceable in this case is applicable to all of the other provisions of the RPA, which modify the guaranteed cost policy and make Applied’s defenses in this case contrary to the law.”

“This is bigger than big,” winning attorney Larry Lichtenegger

The court of appeal reached essentially the same conclusion in Nielsen Contracting v. Applied Underwriters as the California Department of Insurance did in its 2016 Shasta Linen precedential decision, but the main issue here was the arbitration and delegation clauses in the RPA. In Shasta Linen, the Department held that the entire RPA was illegal and unenforceable.

“The decision further confirms the careful reasoning by Judge Kristin L. Rossi at the California Department of Insurance in Shasta Linen,” says attorney Nick Roxborough. “It is an exceptionally well written and thoughtful opinion that will benefit all current and former Applied policyholders.”

The court of appeal’s decision was 3 to zip.

In both cases, the court and the department found that the RPA modified and supplanted the terms in the approved guaranteed cost workers’ comp policy issued by California Insurance Company and therefore had to be filed in order to be enforceable. The filing requirement is in Insurance Code Section 11658.

Applied did not file the RPA, and both the court and the Department noted why – to circumvent state regulation.

More Fights Coming

The court of appeal decision in Nielsen is the first published in California on the enforceability of these unfiled terms. As such it is expected to be raised in the numerous cases now making their way through various courts.

An appeal to the California Supreme Court, however, is expected.

“They [Applied] cannot afford to let this stand, but the Supreme Court is unlikely to take this case,” says Lichtenegger. “The Supreme Court has absolutely no reason to take the case. There are no conflicts in the district courts, and there is nothing bad about the reasoning.”

Others note that the decision will make it clear to policyholders that they can proceed to court with their complaints, rather than be forced into or to fight their way out of arbitration. “This firms up the idea that the policyholder can use the fact that the RPA was not filed as a legal basis to say the entire contract is void,” say other Applied case watchers.

Unhelpful, Unsupported, Unpersuaded, and Without merit

The court of appeal did not hold back in its dismantling of Applied’s arguments. Applied maintained in the case that the issue of enforceability of the arbitration and delegation clauses should be decided by an arbitrator. In the alternative, Applied argued that if the court ruled on the enforceability issue, it should uphold the provisions.

Neither argument held sway. The court used terms such as “unhelpful,” “unsupported,” “unpersuaded” and “without merit” throughout the opinion about Applied’s arguments and its citations to other cases. The court went out of its way to note that Applied made nearly identical arguments in the Shasta Linen case – and lost there as well.

“Based on this evidence, we are unpersuaded by defendants’ attempt to recharacterize their integrated EquityComp program to suggest that the statutory filing requirements should not apply,” the court of appeal wrote in the decision. “We likewise find unhelpful defendants argument that the added arbitrations provision was not an ‘endorsement’ or a ‘collateral agreement under applicable law.”

While the issue of the delegation clause [disputes regarding the RPA are delegated to the arbitrator] and arbitration clause was what was specifically before the Court, the failure to file these provisions with the Department of Insurance is what made the agreements unlawful.

Therefore, Appellate Court’s ruling, by necessity applies to all of the unfiled agreements, including the entire RPA.

A copy of the Appellate Court’s decision can be found here in our resource section..

-30-