The California Department of Insurance issued a precedential decision yesterday finding that American Labor Alliance, CompOne USA, Agricultural Contracting Services Association, and their leader Marcus Asay, has been selling workers’ compensation “coverage” illegally in California dating back to March 2016.
The Department renewed its call for the company to Cease and Desist and is telling employers holding certificates issued by these entities to check with it about the validity of the coverage.
The Department has twice before issued similar cease and desist orders with no apparent effect on ALA’s operations. Enforcement actions from both the Department of Insurance and the Department of Industrial Relations to date have been mysteriously absent.
The MEWA, despite not being a part of the California Guarantee Association, has collected the 2% surcharge which carriers charge for coverage. CIGA confirms it is not a member nor eligible for membership. ALA also has collected the fees for the Uninsured Employers Fund and other assessments made by the Department of Industrial Relations without either remitting or being allowed to charge and remit.
Despite C&D ALA to Keep on Selling
ALA officials say that they will file a notice of appeal as early as today, likely in federal court. They also say that ALA will continue operations, as they have since the initial cease and desist order was issued over a year ago, while the next appeal plays out. ALA continues to maintain that it is an entity claiming exemption (ECE) under the federal ERISA statute and therefore outside the purview of the CDI’s regulatory authority. But the United States Department of Labor issued documents indicating ALA is not a labor organization under ERISA.
After a lengthy hearing and evidentiary process, California Department of Insurance administrative law judge Kristin Rosi found that that ALA is a simple multi-employer welfare arrangement (MEWA) that is subject to state regulation under federal law. California law requires MEWAs operating in the state to comply with California insurance law, including obtaining a certificate of compliance as a MEWA, which ALA has not done.
Additional rules requiring MEWAs to maintain minimum surplus and to have reinsurance coverage also are not being followed.
ALA officials admitted first in an interview with Workers’ Comp Executive and then under oath that they formed the workers’ comp benefit plan without any initial capitalization and does not have any reserves or reinsurance. Benefits are being paid out of cash flow. ALA also admits to collecting state-mandated fees to fund Department of Industrial Relations’ operations and the California Insurance Guarantee Association but testified that they had never remitted the fees to these agencies.
No Workers’ Comp Coverage?
While Department officials refused to issue a blanket warning saying that the workers’ comp certificates and policies issued by the companies are invalid, CDI did offer a dire warning to employers holding such certificates.
“Employers who purchased insurance from American Labor Alliance or CompOne USA are likely at great financial risk,” says Insurance Commissioner Dave Jones. “Companies not properly licensed to transact insurance in California place policyholders at risk because the companies have not met the scrutiny required under state law. These unlicensed entities dangerously undermine consumer protections established by California law.”
Asay also admitted in an earlier interview with Workers’ Comp Executive that ALA is paying claims out of current cash flow.
According to independent legal experts, employers operating without statutory workers’ comp coverage lost one the ley protections of workers comp. Even if claims are getting paid, for now, employers may not have protection under California’s sole and exclusive remedy law. Injured workers, therefore, could bring tort damages cases against employers. Such claims are excluded from all Commercial General Liability policies, according to several experienced brokers.
Department of Industrial Relations officials were unavailable for comment about the ruling and its plans. DIR is charged with ensuring that California employers are operating with valid workers’ comp coverage that protects their employees. Employers found operating without valid coverage can be subject to penalties and be shut down until they obtain valid coverage.
ALA Appeal Coming
ALA attorney Charles Manock says the Department’s finding was not unexpected but maintains that the decision is something of a victory for ALA. He notes that the decision specifically addresses the issue of ECEs (Entities Claiming Exemption).
“The plus side to me is that California recognizes ECEs and it comes down to whether or not you’re in compliance,” Manock tells Workers’ Comp Executive. “So from our perspective we believe that we are and we also believe that we will prevail on appeal.”
Manock says that up to this point the state had not indicated whether it accepts ECEs or not. He maintains that the decision proves that it does. He says a notice of appeal will likely be filed today, likely in federal court.
The Department has not announced any penalties as of yet for the numerous violations of California insurance law but pointed out that state rules allow a $5,000 per day fine for each day a company transacted insurance without a license. The Department’s own cease and desist orders note that ALA began transacting insurance in March 2016. If ALA has been operating illegally all of this time as the Department’s actions indicate, the potential penalties are approximately $3 million. An alternative penalty is five times whatever amount of money that ALA received from selling and providing coverage without a license.
According to Compline which has the MEWAs employer list, ALA has hundreds of employer clients and covers tens of thousands of workers.
Department officials say that they are unable to comment about the on-going investigation and enforcement action pending against the companies. Employers holding certificates are urged to contact the Department to determine the validity of their coverage.
The status of a federal investigation is unclear at this time. Federal Bureau of Investigation officials raided ALA’s offices earlier this year and hauled away personnel records and copied computer hard drives during the search. A Federal Grand Jury is impaneled.
For past coverage see our investigations section by clicking here.