(Sacramento, CA – Insurance News and Market) – California Insurance Commissioner Dave Jones recently announced a decision in a case involving a workers’ compensation insurer owned by Berkshire Hathaway that schemed to avoid regulatory review of rates and policy terms.
The company in question, called California Insurance Company, filed a set of rates and insurance policies with the Department of Insurance and sold them to a small family-owned business called Shasta Linens; they then had an affiliate company sell the same family-owned business a second insurance policy that had different rates and terms that the state had not approved. .
The lure for small businesses like the family owned business – 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.”
The scheme — 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—Applied 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 Shasta Linen’s rates and added expensive penalties for non-renewal or cancellation. 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.
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.
Jones’ 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.
Source: California Department of Insurance.