Applied Underwriters’ is facing even more legal challenges. Now we learn that the SolutionOne program also uses a reinsurance participation agreement (RPA) which, like EquityComp, is unfiled and unapproved. But this time, it is Applied Underwriters’ actions or alleged lack thereof that got it trouble. The latest lawsuit is from an employer formerly contracted with Applied Underwriters’ SolutionOne workers’ comp program.
Despite having a 1% loss ratio, during its active term, from 2007 through 2010, while it contracted with SolutionOne West Coast Welding hasn’t received a profit-sharing distribution it says is past due. West Coast says it will prove that Applied Underwriters made repeated promises over an extended period that it would pay the distribution but has never paid it. Applied Underwriters is a unit of Berkshire Hathaway (NYSE: BRK.A).
West Coast filed its lawsuit asking to have both the SolutionOne RPA declared void, and the underlying California Insurance Company policies rescinded. It is asking the court for punitive damages in addition to having all premiums returned minus the amount actually paid in claims. The lawsuit accuses Applied Underwriters of fraud, misrepresentation and failing to act fairly or in good faith. Many of the actions and allegations are in line with those alleged in other past and current cases filed against the EquityComp program.
Attorney Larry Lichtenegger, who is representing West Coast Welding, says in the complaint that Applied intentionally structured the SolutionOne program and the RPA in a way to avoid regulatory oversight. He maintains that as with the EquityComp program the SolutionOne program used an unfiled and, therefore, illegal RPA to modify the payment requirements of the guaranteed cost policy issued by California Insurance Company as a result of the Collateral Agreement.
“In essence, what West Coast was required to pay did not match the premium requirements under the CIC policies,” says Lichtenegger. However, he maintains that Applied hid this irregularity from state regulators by having its Applied Risk Services unit ‘advance’ funds to CIC to make up the deficiency in premium as a result of the RPA’s terms.
“CIC is then able to show on its books that it receives all of its premiums, and the relevant regulatory agencies are not able to catch the shortfall because it does not audit the books of Applied Risk Services,” the lawsuit maintains. “All the regulatory agencies see is that CIC receives all of its premiums. This conspiratorial scheme was set up by Applied Underwriters, Inc. to fool the regulatory agencies and not ask questions about the RPA. This conspiratorial conduct makes all the Applied Defendants responsible to Plaintiffs for the damages.”
Lichtenegger is the Carmel-based attorney who has the most cases adverse to Applied and who is considered the leading expert.
Applied Changed Terms In the Middle
Moreover, the lawsuit alleges that Applied changed the terms of the RPA to its own benefit during the time West Coast was in the program.
“Applied unilaterally changed the terms of the RPA by amending the Exposure Group Adjustment Factors which control how much Applied was to earn from the premiums paid,” according to the lawsuit. “On August 14, 2008, some 7.5 months after the term began, Applied sent West Coast a letter attaching a new Table B allegedly replacing the Table B in the RPA and increasing Applied’s [fees as a] percentage of the payments received.”
Lichtenegger notes that the program documentation is ambiguous and uncertain making it difficult to understand the import of the change, but a closer examination reveals what was at stake.
“Table B’s Exposure Group Adjustment Factors operate to increase Applied’s share of the premiums paid, such that with low losses it was able to claim more of the premium as a percentage than if losses were in the middle to high end of the range of average national losses for industries of its kind,” [thereby lowering the distribution] he notes.
“The effect of the increased EGAFs was to increase the Allocation Factor by an approximate double, making Applied’s return (or expense portion of the premium) 88% instead of the [originally quoted and contracted] stated 44%.” That substantially affects the amount of the distribution.
West Coast also alleges that Applied has improperly denied it a return of the profit sharing distribution owed under the SolutionOne contract. Like the EquityComp program, Applied markets SoultionOne as a profit sharing plan.
West Coast says the RPA required a return of its share of the profits no later than three years after the last claim closed or three years after the end of the active term, whichever was later. Both trigger dates occurred in 2010, and it says the distribution was due by December 31, 2013. West Coast maintains that it still hasn’t seen a distribution in spite of numerous requests for one and “a string of documented e-mails” from Applied promising that one would occur.
“[T]hose promises from Applied were meaningless, not made with [an] intention to comply, but only to put off West Coast into a state of mind that Applied would actually do what it was contractually bound to do,” says Lichtenegger in the lawsuit. “On information and belief, West Coast alleges that the promises were made with intent to deceive, with intent to defraud, and with intent to lull West Coast into a sense of contractual security,” he says. “Applied had no intent ever to give back to West Coast any portion of the premiums it made under the program.”
In the Shasta Linen EquityComp case, the administrative law judge twice ordered the carrier to name the program participants who received a profit-sharing distribution and when, but Applied refused to provide any names or evidence of distribution to participants. The ALJ concluded from their failure to produce “this readily available evidence” that Applied had never made a profit-sharing distribution.
Note: Applied Underwriters’ has sued Worker’ Comp Executive and lawyer Larry Lichtenegger for trademark violation asserting we can’t use its name to describe a webcast specifically about them.