In two previous posts, on April 19, 2016 and June 21, 2016, we reported on the EquityComp workers’ compensation program offered by Berkshire Hathaway subsidiaries Applied Underwriters (Applied) and California Insurance Company (CIC). In the wake of the California Insurance Commissioner’s ruling in Shasta Linen that the EquityComp program is invalid and unenforceable, Applied Underwriters and the Commissioner on September 6, 2016 stipulated to a Cease and Desist Order. The Order can be found online here: Stipulated Consent Cease and Desist Order. Insureds under the program should read it carefully, as it presents them with a number of options.
CIC and Applied agreed first not to issue or renew any “Reinsurance Participation Agreements” (RPAs) in connection with any California policy, until it’s been submitted to the Commissioner and “not disapproved.” CIC nonetheless may renew a guaranteed cost workers compensation policy in force as of July 1, 2016 (though apparently not with its attached RPA).
Perhaps most importantly, the Order addresses the chief source of complaint by policyholders about the RPA – its onerous run-off provisions. Applied and CIC agree not to enforce the run-off loss development factors laid out in the RPA. Instead, the Commissioner, Applied and CIC will attempt to agree on appropriate run-off loss development factors to be applied to existing RPAs. If they can’t agree, the Commissioner will hold a hearing to determine them.
In addition, Applied and CIC have agreed not to enforce the arbitration provision requiring arbitration in the British Virgin Islands. Any arbitration under a current or former RPA must take place in California. (If a dispute arose, policyholders would still be free to sue in court and argue that the arbitration provision is entirely unenforceable.)
It’s important to note that Applied and CIC are continuing to challenge the Commissioner’s Shasta Linen decision invalidating the RPA. They have filed a writ proceeding in Los Angeles Superior Court and moved to stay enforcement of the Commissioner’s decision pending a final judgment. The stipulated Cease and Desist Order thus only fixes a state of affairs until the writ proceeding is completed.
Policyholders with EquityComp programs should carefully monitor the proceedings to determine in particular what run-off loss development factors have been agreed to or decided on.