Berkshire Hathaway Inc. reached a settlement with the California Department of Insurance in regard to “bait and switch” allegations involving two subsidiaries, California Insurance Co., a workers’ compensation insurer, and Applied Underwriters Captive Risk Assurance Co., Inc., an affiliated workers’ compensation reinsurer.
Applied Underwriters is required under the terms of the settlement to provide insureds with more disclosures regarding policy terms. Also, the reinsurer is restricted in its ability to make sales to small businesses.
Law firms serving as California workers’ compensation panel counsel members may recall when the California Insurance Commissioner ruled in May 2016 that the two Berkshire entities were selling a workers’ compensation policy with side agreements considered to be illegal, since they modified the obligations of the parties under the initial policy.
At issue was the use of reinsurance participation agreements (RPAs), which Berkshire was allegedly selling without the required prior review and approval of the California Department of Insurance.
The two Berkshire units were allegedly working in concert to offer coordinated workers’ compensation policies under the name “EquityComp.”
According to the California workers’ compensation regulator, the RPA failed to disclose basic premium information, assessed excessive penalties in the event policy cancellation, was unclear on the terms of arbitrations, and obscured the calculation methods used for premiums, deposits, or other payments due.
Under the arrangement in question, California Insurance Company would sell a workers’ compensation policy to a California employer at a guaranteed cost determined in part by the insured’s average historical losses. At a later date Applied Underwriters Captive Risk Assurance Co. would offer the insured the “EquityComp” product, which was a retroactive non-linear insurance policy, according to the Insurance Commissioner, with adjustable rates based on current losses and no experience modification. Cancellation and non-renewal penalties also became applicable.
The second transaction worked to shift the burden of unexpected costs back to the insured, often a small business that lacked the capacity to fully understand the complicated premium calculations. Shasta Linen filed suit against Applied Underwriters relating to an EquityComp policy it purchased.
The Berkshire companies allegedly marketed and sold the reinsurance participation agreements without first obtaining approval from the California Department of Insurance.
Workers’ Compensation Insurance Regulation in California
California partially deregulated the workers’ compensation market about 20 years ago, leaving the state with limited regulatory authority over workers’ comp rates and insurance policy provisions.
According to a statement issued by the Commissioner, California’s regulatory authority over workers’ compensation rates is limited to the following:
- The rates must be sufficient to make sure the companies remain solvent,
- The rates cannot tend to create a monopoly in the market, and
- They cannot be unfairly discriminatory.
Workers’ compensation insurers are required to file their policy forms with the department.
California Workers’ Compensation Panel Counsel Implications
The settlement agreement resolves the dispute with Berkshire Hathaway, one of the largest carriers of workers’ compensation insurance in the country. The action is likely to cause some shifts in the market, as California Insurance Company and Applied Underwriters resume or accelerate sales activity. Related litigation may also be influenced by the Insurance Department’s action.
One benefit of the settlement, according to the Commissioner, is the following:
The settlement includes a dismissal of the writ petition filed by the insures in the Shasta Linen case, and the commissioner’s administrative decision in the Shasta Linen case will continue to stand as a precedent decision. This serves as a warning to other insurers that fail to file with the commissioner, for approval prior to use, any modifications to an employer’s workers’ compensation policy, and those that charge unfiled rates.
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