SACRAMENTO, CA, June 23, 2016 - California Insurance Commissioner Dave Jones signed an order this week effectively prohibiting Applied Underwriters’ from providing its current iteration of “EquityComp” workers’ compensation policies in California – and prohibiting any other insurer from offering similar products for sale.
The order, pursuant to provisions in the California Government Code, designates a legal analysis CDI employed in a February administrative case involving one workers’ compensation policyholder, Shasta Linen Supply, as a legal “precedent,” thereby enabling CDI to use it as an enforcement tool in other cases and against other parties.
To review the Commissioner’s Order, signed and made effective June 20, 2016, click here.
CDI contends the EquityComp program is illegal to the extent that the carrier failed to file with, and receive advance approval of, the California Department of Insurance of a collateral Reinsurance Participation Agreement (RPA). Unlike traditional guaranteed-cost workers’ compensation policies, which establish a base premium that is generally unaffected by losses, the profit-sharing methodology of the EquityComp policy can result in significant credits, or substantial additional payments, over a three-year period.
The order signed by Commissioner Jones does not mean that Applied Underwriters’ policies are void, or that employers with its policies are in violation of the laws requiring workers’ compensation insurance coverage. Nor does the order require brokers or policyholders to effect mid-term or any other policy cancellations.
What the order does mean, however, is that the decision in the Shasta Linen Supply case can now be treated as legal authority that can be cited in other cases with identical or similar facts. In the Shasta Linen case, CDI in practical effect prohibited Applied Underwriters from collecting over $240,000 in subsequent assessments from the employer.
Highly placed legal sources in the CDI have indicated to IIABCal that absent unusual circumstances associated with a particular placement, it is unlikely the Department would take any action against a producer solely for selling such policies – at least issued prior to the effective date of the Shasta Linen Supply order.
Applied Underwriters has said it intends to file suit challenging the Commissioner’s actions, contending CDI’s analysis is both factually and legally deficient, The insurer argues that that the Reinsurance Participation Agreement is not required to be filed with the Commissioner, but that its operative provisions were all included in an underlying reinsurance agreement that was, in fact, not only filed with, but approved by, CDI in advance. The company says it will continue to fully honor all contractual obligations in its EquityComp program, and notes that the Commissioner order required Shasta Linen Supply to pay $200,000 in unpaid premium on the guaranteed-cost component of the program.
To review a synopsis of the Applied Underwriters position, click here.
In the original Shasta Linen Supply case, Acting Chief Administrative Law Judge Kristin Rosi found that the collateral plan documents deviated in several material ways from the requirements of traditional policies, and that the elements of the RPA were not adequately disclosed to the broker or the policyholder.
By December 2012, Shasta Linen had paid over $934,000 in premiums and assessments despite a much lower promised cap—and despite a three-year cumulative loss of only $268,000. The company had a payment of $200,000 on reserve, and then received an additional bill for an additional $244,000, which it refused to pay and resulted in legal action being commenced. However, by virtue of its participation in the plan, the insurer now calculates that Shasta Linen may qualify for profit-sharing on the account.