Shasta Wins Ruling in Insurance Case

The California State Insurance Department recently ruled that two affiliates of Berkshire Hathaway Inc., Omaha, NE, broke California law with an insurance scheme that boosted profits while raising costs for a family-owned laundry, according to news reports.

In his ruling, California Insurance Commissioner Dave Jones said that Applied Underwriters and California Insurance Co. designed a workers’ compensation program called EquityComp to circumvent his department’s review, “to the disadvantage of small- and medium-sized businesses.” The arrangement meant smaller businesses would risk high costs as workers’ comp claims occurred, rather than paying steady rates based on past claims. The decision resulted from a complaint by TRSA operator member Shasta Linen Supply Inc., Sacramento, CA.

California Insurance properly filed its insurance policies and rates with the State Insurance Department before selling a policy to Shasta in 2009, according to the report. Then California Insurance had Applied Underwriters sell Shasta a “reinsurance participation agreement,” or “retroactive non-linear insurance policy,” called EquityComp, which had lower rates. The first policy had a “guaranteed cost” based on past claims, so its rates would remain steady for the duration of the policy. But EquityComp based its rates partly on current claims – making it “loss-sensitive” – and raised rates as claims occurred, essentially shifting the risk of claims from the insurance company to Shasta.

According to Jones’ summary of the dispute, California Insurance argued that EquityComp is an agreement between Applied Underwriters and Shasta, not an insurance policy, and that because it doesn’t alter the rates or terms of an insurance policy, it isn’t subject to state regulators’ review.

In his ruling, which is subject to court appeal, Jones said that Shasta filed a complaint with Jones’ office in August 2014, seeking to have the policy voided and money refunded. In his ruling, Jones said that the reinsurance participation agreement is void and that EquityComp does modify the first insurance policy’s rates and obligations, making it subject to his department’s review.

He said California Insurance and Applied Underwriters created EquityComp to avoid state government’s review of the workers’ compensation coverage. Because the EquityComp agreement is void, Jones ruled, Shasta doesn’t need to make additional EquityComp payments and California Insurance must refund money that Shasta paid in excess of its guaranteed-cost policy. The California State Insurance Department will review whether Berkshire and other companies also are selling workers’ compensation policies that haven’t been reviewed by the department.

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