What do we do now? 

That question is plaguing every broker-agent who has a client in the Applied Underwriters’ Equity Comp program in light of orders signed by California Insurance Commissioner Dave Jones that seek to prohibit the insurer from “issuing or renewing” policies that include provisions from a “Reinsurance Participation Agreement (RPA)” that the Department of Insurance has found to be illegal. See related story.

 

For at least two reasons, IIABCal cannot provide legal or any other advice to brokers on what actions they should take, if any. 

The first is that the legal and factual parameters of the dispute are by no means fixed.  CDI has set forth its legal opinion and has issued orders to implement it, but that constitutes little more than an opening salvo.  The insurer does not hold with the CDI analysis, believes its policies are completely legal, and has indicated it intends to file suit to block the Commissioner from enforcing his order.

Even the CDI order signed this week, purporting to order the company to cease and desist in “issuing or renewing” contracts subject to the controversial RPA, will take effect only after the insurer is given a hearing to present its views.

The second reason the Association is constrained is the application of antitrust law. 

Because IIABCal is a trade organization of competing broker-agents, any “recommendation” or “advice” we might provide could subject the Association and its members to criminal liability for “concerted activity” in the insurance marketplace.  Fundamentally, competitors cannot agree to take actions in concert; every broker-agent must decide for him- or herself what action is appropriate.

However, antitrust law does not prohibit us from providing factual information or offering opinions about the next procedural next steps.

• •  Broker-agents should carefully read the cease and desist order Commissioner Jones signed this week.  It is available here.  It carefully distinguishes the one-year guaranteed-cost workers’ compensation policy offered by these insurers from the three-year RPA agreement.   It is the legality only of the latter that is in question.

 

•  If the cease and desist order takes effect, it would effectively prohibit Applied Underwriters from issuing new, or renewing any of the existing, three-year RPAs.  It appears that the one-year guaranteed-cost workers’ compensation policies are not subject to the restrictions and can be renewed.

•  The Department is not encouraging policyholders to terminate their current workers’ compensation policies mid-term, or to take action to terminate their current RPAs with Applied Underwriters, notwithstanding CDI’s determination that the RPA is “null and void.”  Only newly issued or renewed RPAs are at the heart of the order signed this week.

•  CDI officials have said they do not envision bringing enforcement actions against broker-agents who may have sold RPAs prior to the effective date CDI took action against them, “absent special circumstances.”  What constitutes a “special circumstance,” like beauty, is in the eye of the beholder.  Hypothetically, a producer selling a policy he did not understand could constitute such a special circumstance, although it is not clear from the way the RPA was designed by Applied Underwriters, and the vast discretion it reserved to itself, that any broker could ever have fully understood or been able to predict how the RPA would actually work for a given client.   And even if CDI elected not to bring charges against brokers, it is likely that plaintiffs’ lawyers would not feel so constrained.

•  One of the provisions in the ancillary agreements apparently states that failure to renew the RPA after three years triggers a significant jump in incurred loss reserves that employers are required to pay immediately.  By declaring that agreement “null and void,” the practical effect of the Commissioner’s orders may be to put employers in a substantially better position than they were previously—permitting them to realize the benefits of the one-year workers’ compensation coverage, but excusing them from potentially onerous and expensive retroactive costs of the RPA.

•  Applied Underwriters takes very strong objection to the CDI’s analysis and findings, and believes its RPA is fully legal under California law.  Here is a brief summary of points the insurer provided IIABCal.