Tuesday, April 19, 2016

Too Good for Truth

So much of what we talk about in work comp is related to claims, but we forget that before claims there has to be a policy covering those claims, and those policies are strictly regulated because workers' compensation insurance is a captive market.

Since coverage is compulsory and the business of insurance is complex, California regulations require that anything remotely close to an insurance policy be first filed with the Workers' Compensation Insurance Rating Bureau and the Department of Insurance for review prior to implementation and sale.

Lately Applied Underwriters through its EquityComp program has drawn fire for violating these regulations and is the subject of regulatory review as well as a number of civil lawsuits, including one class action lawsuit.

The allegations are complex, but when we strip away the technical jargon, what Applied is accused of is making promises it didn't, or wouldn't fulfill; i.e .misrepresentation. It might have gotten away with it too except that the carrier came back to the complaining employers to demand more money than they had already paid.

If there's one thing that pisses people off is not delivering what was promised, then demanding even more money for that failed promise.

The employers suing Applied say they were quoted minimum and maximum program costs that didn’t resemble what was actually charged. They claim that they entered into the EquityComp program, then were required to also sign off on reinsurance participation agreements that included provisions that allowed Applied to continue assessments after policies expired - years after policy expiration, like a revolving line of credit with no end.

In other words, the employers ended up paying far more for their work comp coverage than they thought they would be responsible for.

Shasta Linen is one of the complainants. In its lawsuit it says quoted annual costs were to be between $107,541 to $322,623. From 2010 to 2012, the company paid $934,366 - obviously on the high side of the quote. But when the policy expired in December 2012, Applied sent Shasta a bill for $77,592 and another bill in January 2013 for $166,619.

Pet Food Express signed up for EquityComp in 2009. According to its class action lawsuit, the company had actual losses of $724,231 over the three-year coverage period, which meant its premium should have been about $1.2 million according to a program summary it relied on.

Instead, the company said it has paid more than $1.6 million in premiums.

Pet Food Express also alleges other Insurance Code violations such as out of territory arbitration and enforcement of policy disputes; neither the original Request to Bind Coverage and Services nor the reinsurance participation agreement Pet Food Express claims was foisted upon it after coverage started included a notice that dispute-resolution procedures are negotiable, as required by Insurance Code Section 11658.5.

Pet Food Express also argues the reinsurance participation agreement allocates risks in an “unreasonable and unexpected manner,” rendering the agreement unconscionable and void under California Civil Code Section 1670.5. That section allows a court to refuse to enforce an unconscionable contract.

Mike Rose’s Auto Body in Concord, CA on April 11 filed a complaint with the U.S. District Court for Northern California accusing Applied Underwriters Captive Risk Assurance Co. Inc. of fraud, breach of contract and unfair business practices.

According to the complaint, the body shop in September 2009 was told it would pay between $308,796 and $1.15 million over the three-year term of coverage through EquityComp. When the three-year coverage period ended in September 2012, the company says it paid more than $800,000 for $269,075 in claims.

Mike Rose’s Auto Body said it should have about $70,000 remaining in its account, but Applied has refused to return that money.

You'd think that would give the executives at the body shop pause ... Nope, the company re-enrolled in EquityComp in September 2012 based on a quote projecting costs of $403,553 to $1.52 million.

Applied sent the body shop a statement on Oct. 7, 2015, showing the company paid a total of $1.53 million during the latest three-year coverage period. According to the complaint, the statement said the body shop owed $1.44 million, so it had overpaid by about $91,000.

However, after applying provisions contained in the reinsurance participation agreement, Applied determined Mike Rose’s owed another $70,000 in premiums, and on Nov. 9 Applied sent a new statement with $290,452 in “new charges” bringing the balance to $361,000.

Whether Applied engaged in intentional or negligent misrepresentation, the heart of the matter is that expectations were established, and then violated. If the complaints are to be taken at face value, employers thought they were buying one thing, and then were sold another.

The cycle of money in workers' compensation should be straight forward. Employer pays money to carrier, which then uses that money for various expenses and then sets some aside in case a work injury occurs; if the carrier is astute the money sitting on the side lines will generate investment returns sufficient for a profit, and if the carrier's investment savvy is lacking then it loses money.

At the end of the day, the employer should have a reasonable expectation of what its costs will be, and the injured worker should have a reasonable expectation of what his/her benefits will be.

Failing one or the other creates mistrust, disputes, lawsuits, costs and expenses. Failing both causes a fundamental breakdown of the system.

The reason we have laws mandating filing and review of insurance documents is because even the most sophisticated purchaser of insurance products can get duped.

If it sounds too good to be true, it is.

Applied would not comment for this morning's WorkCompCentral story on the cases. The company is a division of Berkshire Hathaway.

Here's a blog from one of Applied's very frustrated customers: (http://www.coyoteblog.com/coyote_blog/2015/04/beware-applied-underwriters-workers-compensation-insurance.html) - he explains how he got into this mess and why he's upset - it's pretty simple. He felt backed into a corner and signed documents he didn't understand...

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