Is Your Workers Compensation Program Unlawful?

by Farella Braun + Martel LLP
Contact

A popular workers compensation insurance program offered by Berkshire Hathaway subsidiaries Applied Underwriters Captive Risk Assurance Company (Applied Underwriters) and California Insurance Company may be in trouble. On January 21, 2016, the California Insurance Commissioner adopted an administrative decision finding that a critical piece of the program had not been submitted for approval and was therefore void. Any company now insured under this program should carefully monitor developments and consider alternative options for workers compensation insurance.

The Applied Underwriters EquityComp program is unusual. It consists of a normal “guaranteed cost” policy (the premium is not sensitive to loss history) issued by California Insurance Company. The insured in addition signs a “reinsurance participation agreement” (RPA) with Applied Underwriters, billed as a “profit-sharing” plan. The RPA actually controls what the insured pays under the program and results in workers compensation insurance that is loss-sensitive.

Shasta Linen Supply complained to the Insurance Commissioner that Applied Underwriters shouldn’t be allowed to enforce the RPA because it had never been approved for use in California. The Commissioner agreed. Both sides asked for reconsideration of that decision and it’s now been withdrawn because of the appeal. But the Commissioner is expected to issue a final decision sometime this summer, probably confirming that the RPA is “void.”

In the meantime, in a San Francisco Superior Court lawsuit brought by Luxor Cabs, the court also ruled that the RPA is void and unenforceable. That decision is now on appeal. In the wake of the Commissioner’s ruling, Shasta Linen filed a class action lawsuit against Applied Underwriters in the Eastern District of California alleging fraud and unfair business practices. Three other lawsuits against Applied Underwriters have been filed in the last few months in California federal courts, and there may be more in various California state courts. The program is under attack in other states as well.

Several features of the program and the way it is sold appear to have prompted the complaints by Shasta, Luxor and others. Shasta and others have alleged that the program is sold with a description of how the program works, including projected minimum and maximum premiums over a three-year period (it is sold as a three year program). But they allege they were not given the RPA until they had already agreed to the program.

The RPA itself is virtually incomprehensible, which should raise red flags for any company. But the monthly invoices received from Applied Underwriters begin to illuminate how the program works in practice.

Insureds are billed monthly for “capital deposits” and “base fees.” Deposit and fee requirements are front-loaded to some extent, and will jump once the first claims are asserted, though they may level out later. The deposits and fees are intended to cover claims payments and claims handling costs, with the prospect that some part of the capital deposit will be returned eventually once all claims are closed.

And therein lies one of the chief complaints. Any claims still open at the end of the program can result in a spike in demand for capital deposits during the “run-off” period (until all claims presented are closed). In addition, the RPA stipulates that Applied Underwriters can hold onto the company’s deposits for up to seven years before returning any excess. (The RPA is opaque about what amounts will be returned, though presumably it is the capital deposits still being held once all claims are closed and seven years have elapsed since the program’s end.)

A second complaint arises from the RPA’s cancellation provisions. If the company seeks to cancel mid-program, it faces not only a demand for run-off reserves, but also an “Early Cancellation” fee equal to 20% of the “anticipated premium.” Both the cancellation fee and the hefty run-off capital deposit requirements may serve to handcuff companies to the program. Moreover, the RPA contains onerous provisions requiring that any disputes be arbitrated in the British Virgin Islands under Nebraska law. (The Luxor Cabs court ruled this provision unenforceable for the same reason that the Commissioner found the RPA void.)

On the other hand, some companies have done well under the program, paying significantly lower workers compensation costs even taking into account the long-held capital deposits. This is attributed in part to what is perceived to be an efficient claims handling operation run by Applied Underwriters.

We recommend that companies insured under the EquityComp program, at minimum, review their experience and monitor the recent challenges to the program. If the Commissioner’s decision is confirmed, Applied Underwriters is probably going to have to cease selling the program and work out an orderly process to transition insureds out of existing policies. Applied Underwriters will likely try to put in place a new program approved by the Commissioner to which it could try to shift existing policyholders. Other insurers may offer enticing premiums to capture market share from Applied Underwriters. Insureds will in any case want to be prepared to transition in an orderly way to a new workers compensation insurance program, whether with Applied Underwriters or another insurer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Farella Braun + Martel LLP | Attorney Advertising

Written by:

Farella Braun + Martel LLP
Contact
more
less

Farella Braun + Martel LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.