New York Department of Financial Services (DFS) announced that the Department has fined Berkshire Hathaway owned Applied Underwriters $3 million for offering workers’ compensation insurance bundled with side agreements called “Reinsurance Participation Agreements,” which were not filed with or approved by the Department. Under these side agreements many employers, including small businesses, paid substantially more than what would have been paid under similar workers’ compensation plans.

Applied offered workers compensation insurance products from as early as January 2010, to late 2016, in New York under multiple names, including “SolutionOne” and “EquityComp.” The products included guaranteed-cost workers’ compensation policies issued by Applied subsidiary Continental Indemnity Company, on forms and rates approved by DFS along with a side agreement titled a “Reinsurance Participation Agreement” that employers were also required to enter into as part of the bundle. However, the side agreement, or RPA, was not filed with DFS, and as a result the RPA and the Program as a whole were not reviewed or approved by the Department.

Back in 2016 the California Department of Insurance announced its decision against a Berkshire Hathaway owned workers’ compensation insurer that it said used a complex insurance scheme involving EquityComp to circumvent regulatory review of its rates and policy terms to the disadvantage of small and medium sized businesses. At the time the companies involved also used side agreements that were not approved by the CDI.

DFS’s investigation found that the formula by which the RPAs calculated costs was complex and the way in which it was presented to employers was misleading. Under the formula, policy fees could rise rapidly with the first few claims to levels substantially higher than what would have been paid under a typical linear retrospective model. Many New York employers paid more for coverage than they would have paid under the workers’ compensation policies alone, with many paying significantly more.

The DFS investigation found that Applied’s offering was misleading in how it represented potential costs, required employers to wait three years, or in some cases up to seven years, for advertised “profit distributions” and often resulted in fees that were higher than the rates in the filed and approved insurance policy.

DFS’s Consent Order states that Applied has ceased offering the bundle in New York, will not offer any equivalent side agreements going forward, and will file any future products with the Department for approval. Additionally, Applied will not enforce any arbitration provisions under contracts agreed to in New York or with New York employers.

Berkshire Hathaway agreed this year to sell Applied Underwriters, to Bahamas-based United Insurance Co.,