Flash Report: Voided Applied Underwriters EquityComp RPA Update

By: Brad Cain

Workers’ Comp Executive is fielding calls from brokers and employers who are confused about the mixed messages they are hearing from and about Applied Underwriters EquityComp program. We wanted to update and analyze the situation. They are reporting that Applied Underwriters’, the Berkshire Hathaway BRK.A (NYSE) subsidiary, is downplaying the significance of the CDI decision, which voids its reinsurance participation agreement (RPA). It is maintaining that the decision only applies to the one insured that brought the case – Shasta Linen Services. That is technically correct, but there is a big butt and you should know that the California Department of Insurance is moving slowly but it is moving.

It is clear that both sides will likely file appeals to the decision. Applied to either continue its various arguments that the RPA doesn’t need to be filed or to try to keep the decision from being applied to all other employers. Multiple legal authorities with whom we spoke tell us that such an argument will most assuredly fail. “Saying this case doesn’t apply to all employers is like saying Brown v Board of Education only applies to the Topeka Schools,” says one lawyer noting the seminal case that ended segregation in all public schools.

Shasta Linen’s lawyers lost the case on the damages, leaving Shasta Linen owing money. They will appeal that part of the decision. They won on the RPA issue mostly due to the intervention of Judge Rosi, who took over questioning the Applied Underwriters’ witness after the lawyer couldn’t seem to frame a question that was clear enough to be answered.

Our special report will have many facts and some analysis on both of those issues.

The Technicality Applied Is Using

Under the Insurance Code, the decision isn’t effective until 30 days after its January 22nd mailing date and technically – Applied is correct – it only applies to Shasta Linen. But there is a big but here. So, while it is true that unless and until the Commissioner designates the recent decision against Applied Underwriters’ as precedential, it applies only to the parties in that decision. Here’s the big but – that aspect of administrative law doesn’t negate the basis for the Commissioner’s decision.

The Big But

That aspect of administrative law, however, doesn’t negate the basis for the Commissioner’s decision. The California Department of Insurance clearly found – a judge ruled – that the RPA is a collateral agreement that must be filed and approved in order to be enforceable. The 10-page RPA has never been filed (and therefore is not approved) in California and CDI declared it void. There are apparently multiple versions or variations in use in California, but none of them have filed as of yesterday.

The decision is the latest in a series of enforcement actions over the failure to file certain agreements with the Department that effectively alter the terms of an insurance policy. These actions – and the recognition by the Courts of the Commissioner’s authority in this issue – include the enforcement action against Zurich in 2012 and case law in both federal court in California and state court in New York.

More importantly, the Shasta Linen decision is entirely consistent with current Department regulations and new form filing regulations that will likely become effective shortly and which clarify existing law. The oft-cited February 14, 2011, directive from Commissioner Jones to the WCIRB that stated, in part, that the Insurance Commissioner has prohibited the use of Collateral Agreements, which is synonymous with the term side-agreement, concerning workers’ compensation insurance unless they are attached to the policy also applies.

The Department has to walk a fine legal line during the appeal period.

“In general, under existing law, insurers must file collateral/ancillary agreements. It is unlawful for an insurer to use any unfiled policy or endorsement form, including a collateral/ancillary agreement, that modifies the obligations of the parties,” CDI spokeswoman Nancy Kincaid tells Workers’ Comp Executive. “In this case, the agreement [Applied Underwriters’ EquityComp RPA] was not filed with the department for review, so, in this case, the agreement is not legal.”

Logical Conclusion

“If the RPA is void in Shasta’s case because it was never filed and the Department confirms, as it has, that the RPA has never been filed in California, then logic dictates that the RPA is void and unenforceable in California for all employers,” says Carmel-based attorney Larry Lichtenegger who represents many clients adverse to Applied.

The Department’s Kincaid confirms that Applied has never filed the RPA or RPA variations that it is using.

That said, while Applied Underwriters’ representatives wouldn’t talk to Workers’ Comp Executive, they did tell another trade they intend to reach out to CDI and begin file and approval talks.

Draw your own conclusion, but retroactive filing isn’t possible under California law and any changes the Department requires – and there are some big holes in the RPA as you will learn in our special report – will not be retroactive. Even if Applied Underwriters’ wants them to be insured’s do not have to accept one sided contract modifications. There are then, some significant litigation possibilities both for clients no longer in the program and for clients currently in the program, according to Lichtenegger.

Legal representatives for Applied Underwriters’ and California Insurance Company, which writes the underlying guaranteed cost policy and handled the defense of the RPA, did not respond to our calls for comment.

Team Coverage provided by Brad Cain and Dale Debber

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. See story here …


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.