Could Trouble with Comp Products from Berkshire Affiliates Land in Brokers’ Laps?

By and | September 26, 2016

  • September 27, 2016 at 11:16 am
    mr opinion says:
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    It’s a loss sensitive WC product insured by a captive with Berkshire as the fronting paper. This is done every single day in NY as well as other states. Captives are (almost) never AM Best rated. The only problem here, is that insureds were buying into a captive without any idea what that means. That doesn’t make it a scheme. Captives are often thought of as “investments” the same way cash-value life insurance can. They aren’t sold that way, but it’s a component of the product. There is nothing wrong with an insurance broker selling an insurance product with an “investment” component as long as they are not selling the investment itself. If they did some craziness to avoid the regulations and capitalization requirements of captives…ok. This is the first time I have heard that about this case. Investigate that. The rest of this sounds like an attempt to manipulate politicians into influencing the outcome of a civil case in order to extort a deal.

  • September 27, 2016 at 11:17 am
    CO_yeti says:
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    Well… shouldn’t those brokers be held accountable for selling their clients an illegal policy? Brokering insurance is a professional business and they should have a duty to know what they were suggesting their clients purchase. Either they gave poor advice or weren’t savvy enough to understand the product. Doesn’t matter much, it was a breach of duty on their part and at minimum they should lose the account. I’m always amazed when these brokers/agents find out there is more to their job than cashing commission checks and playing golf.

    • September 27, 2016 at 11:30 am
      mr opinion says:
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      They should, however…It hasn’t been declared an illegal policy yet. The plaintiffs lawyers are “claiming” that it is. With the countless rules, insurance departments, lawyers and other regulators, not to mention the backing of Berkshire, could a broker really be reasonably expected to know that this is illegal if the Insurance department has even made a determination yet? It’s ok to hold brokers to a higher standard, we should hold ourselves to a higher standard, but Brokers are not lawyers or regulators, and should be allowed to rely on those that are. As for recommending a policy they didn’t understand…that is a problem for these brokers, no question. The E&O carriers planning to deny them coverage on the basis of the policy being with an unlicensed carrier (Berkshire is licensed) or being an “investment” (it’s not, the captive Berkshire was fronting is) is total BS.

      • September 27, 2016 at 11:54 am
        CO_yeti says:
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        I agree this is complex and still ongoing. I believe California has already ruled these illegal which doesn’t bode well for the NY case and of course the civil courts will determine any damages. However I take issue with that “Brokers aren’t lawyers” argument. If the risk is large enough or complex enough as the broker you either do hire a lawyer or you error on the side of caution and avoid the “non-traditional/complex” WC scheme. Also Berkshire is the ultimate parent company, but again you don’t have any business selling WC (or for that matter any commercial policy) if you aren’t aware these companies sell policies through a multitude of other companies that have a huge impact on what the final product is. The products in question are all Applied Something Something’s, and I assume that was clear on the proposals.

        Basically it’s a tough situation, but my view is as a professionals these brokers should have a better understanding of risk. They didn’t and it will most likely come back to bite them financially.

  • September 27, 2016 at 1:39 pm
    NY Broker says:
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    If this “scheme” is illegal, then all risksharing mechanisms using a segregated cell captive are illegal. These types of products are marketed to smaller businesses as a way of getting some of the same tax advantages as Fortune 1000 companies get with their own captives.

    There are billions of dollars in these type of arrangements. Good luck unwinding all of that if the regulators and trial attorneys prevail.

  • September 27, 2016 at 1:59 pm
    vox sanitus says:
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    Logically speaking, there is no such thing as a “Reverse Ponzi Scheme”. That term is an oxymoron, if there ever was one. It just goes to show that lawyers, including those who work for the state, can and will say anything to advance their case, including conceptual impossibilities given a catchy name. Maybe there was skullduggery going on but it was not a Reverse Ponzi Scheme.

  • September 27, 2016 at 2:32 pm
    Mr. Bill says:
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    Heaven forbid a company try and find a way to reduce WC premiums for smaller businesses while still paying claims and operating with solvency.

    If regulators were so concerned about level playing fields and competitive advantage they would look to all the state run Work Comp programs that get to play by different rules when it comes to premium taxes (or lack thereof) and loss reserves. Funny that NY and CA are front and center in this fight; probably feel their self created monopolies on the market are being threatened…

    • September 28, 2016 at 2:30 pm
      GoldC says:
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      Well said, especially since NYSIF designates classes against the advice of the Rating Board. If an insured isn’t savvy enough or good representation to have an inspection done and a reassignment of class forced by the Rating Board, the State Fund gets away with it – nine times out of ten. NYSIF sent me an email today stating “the Rating Board has no jurisdiction since there is no coverage for workers compensation” regarding a policy in the application in the application stage when they misclassified the work being done.

      They don’t collect enough money not paying commissions; and underwriters, supervisors, and audit supervisors never being available. A total governmental bureaucratic operation (a very redundant double negative).

  • September 28, 2016 at 2:24 pm
    GoldC says:
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    Here is the “incriminating language” from the contract signed by clients:

    APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC.
    PARTICIPANT NO. ZZZZZZZ
    REINSURANCE PARTICIPATION AGREEMENT
    This reinsurance participation agreement (this “Agreement”) is made and entered into by and between
    Applied Underwriters Captive Risk Assurance Company, Inc., a company organized and existing under the laws of
    the State of Iowa (“Company”) as of
    Company and Participant are each a “Party” and sometimes collectively referred to as “Parties”.
    Whereas, Participant is desirous of participating in the Company’s segregated protected cell reinsurance
    program designated Segregated Account No.
    Whereas, the Company has entered into a Reinsurance Treaty (hereinafter referred to as the “Treaty”)
    with California Insurance Company (NAIC No. 0031-38865) and, through its pooling arrangement, with other affiliates
    of Applied Underwriters, Inc., including, but not limited to Continental Indemnity Company (NAIC No. 0031-
    28258) and Illinois Insurance Company (NAIC No. 0031-35246) (collectively the “Issuing Insurers”); and
    Whereas, the Participant desires the Company to establish a segregated protected cell whereby the Participant
    may share in the underwriting results of the Workers’ Compensation policies of insurance issued for the
    benefit of the Participant by the Issuing Insurers (the “Policies”); and
    Whereas the Company will allocate a portion of the premium and losses under this Agreement to the
    Participant’s segregated protected cell,
    Now, therefore, in consideration of the mutual promises and undertakings set forth herein the Parties do
    hereby agree as follows:
    1. Participant agrees to participate in the Company’s segregated protected cell reinsurance program
    in accordance with Schedule 1 attached hereto and incorporated herein by reference and additional Schedules as
    may be executed from time to time on a prospective basis only by the Parties (“Additional Schedules”).
    2. Participant’s interest in the Company is solely as a segregated protected “cell” with segregation of
    the Company’s assets and liabilities among the segregated accounts (known as “cells”) established by the Company.
    There is no “joint and several” liability. The cells of the Company are not liable for the debts and obligations
    and are not bound with respect to contracts entered into by another cell. Participant further acknowledges and
    agrees that Participant: (1) will look solely to the assets of Participant’s cell for satisfaction of the Company’s
    liabilities hereunder; (2) has had the opportunity to consult with legal counsel, insurance advisers and financial
    advisers as to the applicability, operation, obligations and effect of this Agreement; (3) irrevocably waives any
    right, substantive or procedural, which Participant may have to challenge the effectiveness and the Company’s
    ability and right to segregate assets among the cells; and (4) covenants not to sue, attach, pursue or make any
    claim against or with respect to any asset, property or right of the Company which is not an asset, property or right
    of Participant’s segregated protected cell.
    3. Participant is participating in this Agreement for purposes of investment only. The Participation
    has not been registered under the United States Securities Act of 1933, as amended or any state securities laws.
    The Participation shall not be sold, transferred, hypothecated, pledged or otherwise assigned or encumbered and
    Participant acknowledges the following:
    “This Participation has not been registered under the Securities Act of 1933, as amended or qualified under any
    state securities law. This Participation has been acquired for investment and may not be sold, transferred, hypothecated,
    pledged or otherwise assigned or encumbered in the absence of registration or an exemption therefrom
    under such act and such laws.”

    The policy is issued by Continental Indemnity Company, which has an AM Best rating and an NAIC assignment:

    Continental Indemnity Company
    A.M. Best #: 013065 NAIC #: 28258 FEIN #: 311191023
    Mailing Address
    P.O. Box 3646
    Omaha, NE 68103-0646

    Applied Underwriters does the underwriting, as an MGA, and sets up the payroll/tax/premium payments. The policies are on a pay-as-you-go basis.

    Someone with knowledge should please explain whether my client is insured or invested; and whether there’s potential of E&O here?

    Thank you.

  • October 14, 2016 at 12:53 pm
    Jestr says:
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    A lot of divisive comments from some educated and experienced insurance people. California DOI should have nipped this in the bud in the first place. Instead we get lip service on alleged unlicensed, unrated insurance companies. Unlike health insurance carriers, companies are allowed to cross state lines with some questionable and some revolutionary products in all other lines of insurance. This being said doesn’t mean they are all bad products that will put your client in a compromising position. There is a long history of admitted insurers with A+ ratings who misrepresented their reserves and were unable to pay claims.
    The DOI becomes reactive when some policyholders with losses under the contract life of a captive start complaining about higher premiums. Many business owner complaints are unwarranted as under most captives the rates are still cheaper even when their loss ratio has increased. Those sour grapes have become the mantra upon DOI’s speculation and investigation of Applied Underwriters. Along with the larger wholesale and retail insurance brokerage firms who complain once the competition becomes heated and their business is threatened. Many of them have pull with state legislators, sit on insurance committees, or have an ear to the Insurance Commissioner. Consequently, these snakes don’t want to be on a level playing field with agents who are only trying to find coverage and make a living. They will slander you through farmer’s associations and contractor labor trainers who have no business critiquing or making any comments as to acceptable insurance products by certain agents whether put in the normal market or captives.
    Many will prevent you from submitting through their programs because you don’t belong to their clique or premium doesn’t generate $10,000 or more. They come on television touting their risk management skills and how transparent and honest they are. Yet consistently they undercut the laborious work of small agents by blocking and denying access to markets or use the backhanded, lazy broker of record tactic.
    The bottom line is this alternative work comp (employee benefit) market is a result of convenience and good business sense by clients. This situation was created as many work comp carriers tout loss control services, yet roll over and pay claims, reserve high, to the carrier’s benefit and to the detriment of the client who suffers the higher ex-modification. Yes, we have made strides in work comp lowering rates, but the carriers are not implementing the lower rates instead they increase debit surcharges rather than credits. It’s a posturing game on their part, so let’s not kid ourselves. The California DOI is quick to jump on complaints and rightfully so, but let’s remember due process. What ever happened to the insurance diversity initiative of 2011?



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