Applied Underwriters Fined $3 Million by NYDFS Over EquityComp Program

The State regulators continue to clamp down on insurers that use side agreements (aka Program Agreements) for large deductible/loss sensitive programs that are not properly filed with the various Offices of Insurance Regulation. Florida, New York and California have been particularly active in this realm, with Illinois specifically writing a white paper on the overall large deductible topic and PEO that I spoke on a few years ago ... https://peocompass.com/role-large-deductible-policies-peos-failures-small-workers-compensation-insurers/ .

Additionally, the National Association of Insurance Commissioners ("NAIC") has been very active in the enforcement of side agreements... "One significant forms-related issue is that there are sometimes agreements outside of the insurance contract–that is, they are not specifically referenced within or attached to the insurance contract— established between the insurer, the employer and perhaps a TPA or another party. This is an issue because insurance laws typically require the filing of the policy forms and accompanying endorsements used to write workers’ compensation insurance." This definition from their white paper "Workers' Compensation Large Deductible Study", first published in 2006.

Bottom line is that there is a marked increase of enforcement on the state level of non-approved side agreements and I would anticipate more carriers being called out for their lack of proper filings and having approval to use the side agreements applicable to their large deductible/loss sensitive offering(s).

From our friends at workcompcentral.com ...

The New York State Department of Financial Services has fined Applied Underwriters $3 million for offering workers’ compensation insurance bundled with side agreements that weren't filed with or approved by the department.

In announcing the fine on Thursday, DFS said the bundled programs were sold under names including EquityComp and SolutionOne. The products, sold in New York from 2010 through 2016, included guaranteed-cost workers’ comp policies issued by Continental Indemnity Co., an Applied subsidiary, along with a “reinsurance participation agreement” that employers were required to enter into as part of the program, according to the department.

DFS said the RPAs involved complex cost calculations that were presented to employers in a misleading way. 

“Under the formula, policy fees could rise rapidly with the first few claims to levels substantially higher than what would have been paid under a typical linear retrospective model,” DFS said.

In fact, the non-linear model was unique enough that Applied received a patent for it in 2011, according to DFS.

Financial Services Superintendent Linda Lacewell said Applied Underwriters had been “illegally operating outside of the department’s oversight to sell a complex product to hundreds of New York small and medium-sized businesses.”

Applied Underwriters on Thursday said it was pleased to have reached a settlement with DFS after the matter had been under review for three years.

But Jeffrey Silver, general counsel for Applied Underwriters, denied any wrongdoing by the company.

“There was no wrongdoing on our part whatsoever, but there were filings that the department thought should have been made,” Silver said in a statement provided to WorkCompCentral.com “The nature and structure of the program was disclosed to participants who were large employers, and the participants were advised by their insurance brokers and other professionals.”

In the statement, Silver described Applied’s loss-sensitive program as a captive insurance program, which he said is covered in New York by a separate captive insurer law. The program gave businesses an incentive to improve their safety, he said, and a “significant number” of EquityComp participants did expand their safety programs, leading to lower workers’ comp costs.

The New York DFS launched its investigation of Applied Underwriters in December 2015. The company voluntarily stopped offering the side-agreement program in New York after the probe started. Under a DFS consent order, Applied won’t offer any equivalent side agreements and will file any future products with the department for approval. In addition, Applied won’t enforce any arbitration provisions in contracts with New York employers.

The fine comes as a sale of Applied Underwriters, which is owned by Berkshire Hathaway, is pending. The agreement with DFS removes a possible obstacle to approval of the sale by the state of New York, Applied said through a spokesman.

The New York Post reported last month that the Applied Underwriters buyer was Bahamas-based United Insurance Co., which planned to acquire Berkshire’s 81% stake in the company, along with shares of the company owned by two executives. The Post cited a filing with the California Department of Insurance as the source of its information.

The Applied Underwriters spokesman said on Thursday that the Post’s report was inaccurate and incomplete, but he declined to provide information on the buyer.

A quarterly filing provided by CDI stated that Berkshire Hathaway entered into a stock purchase agreement this year with United Insurance Co. to sell its 81% interest in AU Holding Co., the parent company of Applied Underwriters, and that United had also agreed to acquire Sidney Ferenc’s 7.5% interest in AUH. The stock purchase agreements were assigned to Steven Menzies, who owns 11.5% of the company, according to the filing.

Berkshire Hathaway confirmed in February that it was selling Applied Underwriters, saying at the time that part of the reason for the sale is that AU competes with other workers’ comp insurance companies that Berkshire Hathaway fully owns. A spokesman wouldn’t comment at the time on whether controversy over Applied’s EquityComp program contributed to the decision.

Regulators in New Jersey have also been investigating Applied Underwriters, the New York Business Journal reported. Regulators allege that the company “marketed and sold an unapproved workers' compensation program with impermissible retrospective rating,” according to a New Jersey Department of Banking and Insurance filing.

Applied Underwriters declined to comment Thursday on whether states other than New York were investigating its EquityComp program, or to say in which states the company still offers the program.

The Applied Underwriters website continues to list EquityComp as one of its programs, “designed for companies with premiums in excess of $250,000 that seek flexible risk financing.”

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