SACRAMENTO, CA, June 9, 2017 —The California Department of Insurance announced a settlement this week that will allow Applied Underwriters to resume selling new, and renewing existing, workers’ compensation policies in its EquityComp program, and resolve all issues that the parties had been litigating.
In 2016, a CDI administrative law judge ruled that the EquityComp program, as applied to one policyholder, Shasta Linen Supply, was illegal to the extent that the carrier failed to file with, and receive advance approval of, CDI to utilize a collateral 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 administrative law judge’s decision in that case was “adopted” as legal precedent by the Insurance Commissioner, and CDI announced it intended to seek a cease-and-desist order that, if granted, would have prohibited the insurer from selling policies like the one Shasta Linen Supply purchased.
The decisions by the Commissioner did not mean that the Applied Underwriters policies were void, or that employers with its policies were 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 could be treated as legal authority and cited in other cases with identical or similar facts. And CDI sought to prevent the insurer from renewing new three-year RPAs.
Applied Underwriters contended that CDI’s analysis was flawed, factually and legally deficient, The insurer argued that that the Reinsurance Participation Agreement was 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.
In the settlement agreement announced this week, the company agreed to drop its challenge of the Commissioner’s actions, and to file all future RPAs with CDI in the future. In addition, actuaries for CDI and Applied Underwriters have agreed upon new Loss Development Factors (LDFs) that would be applied (even retroactively) to all policies in which there is an active Reinsurance Participation Agreement (RPA) in effect. The new LDFs would not apply to older policies in which there was no longer an active RPA in effect, but in which there were still some open claims from a prior RPA.
In its press release announcing the agreement, CDI noted that the RPA utilized by Applied Underwriters in the Shasta Linen case “did not disclose basic premium information, levied hefty penalties for policy cancellation, failed to disclose required binding arbitration outside the U.S., and obfuscated the methodology for calculating premiums, deposits, or other payments due.”
It also included an unusual admonition for policyholders who might be tempted by the initially lower premiums such products can offer: “Even the revised products are not appropriate for businesses unable to adequately evaluate the pricing, obligations, and risks of such a complex product. The department advises any employer considering such a complex product to consult an expert with legal and actuarial expertise in workers' compensation products.”
To read the full press release issued by CDI, click here.
Applied Underwriters has created a website with information for California insurance brokers on these issues, including descriptions of its revised product offerings, and detailed historical information on its dispute with CDI. To review the materials Applied Underwriters has prepared for California brokers, click here.