The California Insurance Commissioner approved an order agreed to by California Insurance Company (CIC) and Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA), under which they will stop selling workers’ compensation policies that the two Berkshire Hathaway companies used without filing key addendums to the policies (called EquityComp) with the Department of Insurance for the commissioner’s review and approval, and will work with the department’s actuaries to agree upon fair terms for calculating future claims that would apply to existing EquityComp policies.

The agreement to submit to a cease and desist order was in response to the commissioner’s June 28, 2016 notice that a hearing would be held to decide whether CIC and AUCRA should be ordered to cease and desist from issuing new unapproved EquityComp policies.

The order halts the issuance of new EquityComp policies unless and until the commissioner approves them. The order also provides substantial relief under existing EquityComp policies, which includes eliminating punitive requirements for posting collateral, and specifying new, appropriate loss development factors. The order does not affect the ability of any employer to challenge the legality of the EquityComp policies.

Commissioner Jones’ action stemmed from his precedential decision that a complex insurance scheme in the Shasta Linen case circumvented regulatory review and cannot be sold in California unless it is filed and approved. Shasta Linen, a small employer, purchased an EquityComp policy from CIC and AUCRA. Shasta Linen brought a case before the commissioner, challenging the legality of the policies.

The commissioner found that the insurance companies issued the policies and rates without his approval, as is required by law. The commissioner also ruled that the companies designed the unusual and complex program with the intent of avoiding the review of insurance regulators.

Among the most troubling features of the EquityComp policy was the imposition of unexpected and greatly excessive collateral requirements upon termination of the employers’ policies. The collateral requirements had serious and unexpected consequences for many employers.

The policies also forced an employer who disputed the insurers’ decisions to arbitrate their disputes in Tortola, British Virgin Islands, or in other locations outside of California. The expense of a remote arbitration made it unreasonably difficult for employers to challenge the insurers’ decisions. The commissioner’s order requires CIC/AUCRA to arbitrate disputes with the policyholders in California.

“Insurance companies are required to file rates and terms so we can make sure they are complying with the law,” said Commissioner Jones. “These filing requirements were put in place to protect businesses from insurers seeking to take advantage of their market power – for example, the unfiled insurance scheme sold to small business Shasta Linen shifted the risk back to Shasta Linen, had prohibitively expensive renewal and cancellation penalties, and required disputes to be arbitrated in the British Virgin Islands.”