SACRAMENTO, Calif- Insurance Commissioner Dave Jones today announced his decision in a major insurance case pitting a small business against a Berkshire Hathaway owned workers' compensation insurer that used a complex insurance scheme to circumvent regulatory review of its rates and policy terms to the disadvantage of small and medium sized businesses.
California Insurance Company, a Berkshire Hathaway company, filed one set of rates and insurance policies with the Department of Insurance, which it then sold to Shasta Linen, a small family owned business, and then followed that by having another Berkshire Hathaway company sell Shasta Linen a second insurance policy with different rates and terms that had never been submitted to the department for review as the law requires. California Insurance Company is the seventh largest workers' compensation insurer in California by premium volume.
The lure for small businesses like Shasta Linen was seemingly attractive lower workers' compensation premiums, but that attractiveness evaporated when the small business owner realized they were on the hook to pay the cost of workers' compensation claims which eclipsed its original premium savings.
"This is a case of if it sounds too good to be true, it probably is," said Insurance Commissioner Dave Jones. "The evidence showed that California Insurance Company filed one set of rates and policies, sold it to a California business, and then had one of its affiliates sell the same business an insurance policy with another set of rates and terms which had not been filed with the department."
Shasta Linen originally purchased a guaranteed cost workers' compensation policy from California Insurance Company. Guaranteed cost insurance policies have rates based on the average historical losses of the insured business, modified by their own experience with worker injuries as compared to other businesses hiring workers' of the same type. When a business buys a guaranteed cost policy it knows what its rates will be for the duration of the policy.
The insurance company later had one of its affiliates-another Berkshire Hathaway entity-sell Shasta Linen a second insurance policy called EquityComp, which is not a traditional guaranteed cost workers' compensation insurance policy. This second insurance policy was a retroactive non-linear insurance policy, which adjusted the rates paid based on current loses and provided no experience modification of rates based on the employers' claims experience.
Under the EquityComp insurance program, the risk of claims was essentially shifted back to the small business, which would end up paying additional premiums and fees in the policy term if it suffered from increasing claims. The second insurance policy was written by another Berkshire Hathaway company-Assigned Underwriters Captive Risk Assurance ("AUCRA"), which is in the same corporate holding group as California Insurance Company and shares the same board of directors and executives.
This new EquityComp insurance program essentially left Shasta Linen self-insured, and also locked it into potentially making various ongoing payments to the insurance company for seven years, well beyond the three-year period of the policy, as well as the one-year period for the typical guaranteed cost policy.
The commissioner's decision found that in the three years before it introduced EquityComp, California Insurance Company's profits were $47 million and in the four years since introducing EquityComp the company's profits were $220 million. The net loss ratio of California Insurance Company has fallen from 77.7 percent to between 19 and 30 percent, since it started offering EquityComp, compared to an industry annual average net loss ratio of over 80 percent.
The EquityComp insurance policy not only changed the rates to be paid by Shasta Linen, it also added new, expensive cancellation and non-renewal penalties. For example, under the guaranteed cost policy a business paying $300,000 in premium that cancels its policy after 100 days is liable for $114,000, while that same business cancelling under the EquityComp policy would be liable for more than $1.1 million. Under the original guaranteed cost policy there was no non-renewal penalty, but when Shasta Linen did not renew the EquityComp policy it was sent a bill for nearly $250,000.
In addition the new EquityComp insurance policy had an additional term that sought to deprive Shasta Linen of its right to appeal to the insurance commissioner and to have its dispute decided under California law -- instead, the unfiled EquityComp insurance policy required all disputes to be governed by Nebraska law through arbitration in the British Virgin Islands.
When confronted with demands for higher payments under the EquityComp insurance policy, Shasta Linen brought the case before the insurance commissioner. The commissioner found that California Insurance Company and AUCRA failed to file the EquityComp insurance policy or its rates with the Department of Insurance, contrary to California law.
Commissioner Jones' decision also found that California Insurance Company, in applying for a patent for EquityComp, stated that its objective was to circumvent regulatory oversight. Jones concluded that the EquityComp insurance scheme was illegal and void as a matter of law, because it was not filed with the Department of Insurance for review. The Commissioner's order relieved Shasta Linen of having to make the additional payments under the EquityComp insurance policy and ordered California Insurance Company to repay any amounts paid by Shasta Linen in excess of the premium under the guaranteed cost policy.
"California employers should be able to trust that their insurance companies are doing business by the book and not exploiting them in the name of profit," Jones continued. "Unfiled rates and unfiled major policy terms are void as a matter of law."
During the hearing process, the department became aware that other state departments of insurance have also taken action to prohibit the sale of EquityComp and similar insurance programs.
As a result of this decision, Commissioner Jones has also directed the Department of Insurance to determine whether other unfiled insurance policies and rates are being sold by other Berkshire Hathaway companies and other workers' compensation insurers. The outcome of that evaluation will determine what action the commissioner takes next, ranging from market conduct examinations, financial examination, and enforcement actions with potential penalties.