SACRAMENTO, CA, July 28, 2016—The California Department of Insurance has agreed with Applied Underwriters to “stay,” or delay, a planned hearing on Insurance Commissioner Dave Jones’ request for a “cease and desist” order that, if granted, would have effectively prohibited the insurer from selling the current iteration of the non-guaranteed cost portion of its “EquityComp” workers’ compensation product in California.

The insurer has “voluntarily” agreed to temporarily stop selling the component within EquityComp policies that has been in controversy, but its more traditional guaranteed-cost comp policy is still being sold with no objection from CDI.  Attorneys for the insurer and CDI are now attempting to reach agreement on interim steps while the insurer challenges the Commissioner’s order in the Shasta Linen Supply case.

In that case, the Department concluded that the EquityComp program was illegal, as it was being implemented against Shasta Linen Supply, because the terms of the insurance contract were materially affected by a collateral Reinsurance Participation Agreement (RPA), which the insurer did not file with CDI or obtain its prior approval to utilize.  

Unlike traditional guaranteed-cost workers’ compensation policies, which establish a base premium that is generally unaffected by losses, the profit-sharing methodology of the RPA component of EquityComp policy can result in significant credits, or substantial additional payments, over a three-year period.

Applied Underwriters contends no such filing is required under California law, and has filed suit in Los Angeles County Superior Court for a declaratory judgment.  The insurer also challenges the Commissioner’s decision to designate the Shasta Linen Supply decision as “precedent” that could be enforced against other parties.

The “precedential designation” 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 did it require brokers or policyholders to effect mid-term or any other policy cancellations.

What the order did 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.

CDI then announced in a press release, erroneously, that the Commissioner had signed a “cease and desist” order preventing the insurer from selling similar policies to others.  In fact, what the Commissioner’s lawyers filed was a request for such an order—which could go into effect only if an administrative law judge agreed to authorize it after a hearing.  It is that hearing that has now been delayed by agreement of the parties.  

While these issues are being litigated, CDI has indicated broker-agents may continue to renew the one-year guaranteed-cost comp policies, and the company has said it will continue to fully honor all contractual obligations in its EquityComp program.