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A California appellate court has affirmed a trial judge’s decision not to compel arbitration based on language in workers compensation insurance side agreements issued by Berkshire Hathaway Inc. units that were not submitted for approval by the state’s insurance commissioner.
Low Desert Empire Pizza Inc. et al. v. Applied Underwriters Inc. et al. involved the intersection of California’s workers compensation insurance laws and the Federal Arbitration Act, according to the ruling issued on Friday by the Court of Appeals of California, 4th District, Division 2.
The plaintiffs, collectively referred to as Indio, California-based Desert Pizza, sued several related insurance entities — Applied Underwriters Inc., Applied Underwriters Captive Risk Assurance Co. Inc. and California Insurance Co. — challenging the legality of their EquityComp workers compensation insurance program, which consists of an insurance policy and two related side agreements. CIC and AUCRA are both wholly owned subsidiaries of Applied, which is a subsidiary of Berkshire Hathaway.
The insurance entities moved to compel arbitration based on arbitration provisions in the side agreements, and Desert Pizza countered that the provisions were unenforceable because the defendants failed to file them with California’s insurance commissioner for approval, as required by the state insurance code, according to the court decision. The trial court agreed and denied the motions, but the insurers appealed, arguing that an arbitrator, not the trial court, must determine the validity of the arbitration provisions. In the alternative, they said the code’s filing requirement does not apply to the arbitration provisions, and even if it did, voiding the provisions was an improper remedy.
This case was one of several actions in California and across the country challenging the legality of the defendants’ EquityComp program based on their failure to seek and obtain regulatory approval of side agreements to the insurance policy, according to the appellate court ruling. In addition, California’s insurance commissioner issued an administrative decision in June 2016 concluding that the appellants’ failure to file a virtually identical EquityComp side agreement under the insurance code rendered the arbitration provisions in that agreement void and unenforceable, while another California appellate court reached the same conclusion in August, according to the ruling. In June 2017, the Berkshire Hathaway units settled with California regulators by agreeing to lower rates for certain coverages and make other changes to coverage terms.
In Friday’s ruling, the court concluded the plain language of the cited section of the insurance code clearly required the insurers to file the arbitration provisions with the rating bureau and obtain approval from the insurance commissioner.
“The analysis is relatively simple,” the appellate court concluded. “The delegation clause and other arbitration provisions constitute endorsements or at the very least collateral or ancillary agreements because they materially alter the dispute resolution obligations in the commissioner-approved (California Insurance Co.) policy.”
The appellate court said it was not persuaded by the insurers’ arguments that the cited section only applied to workers comp insurance policies, that the side agreements are not policies because they do not provide insurance coverage or address indemnity obligations, and that the added arbitration provisions were not endorsements or collateral agreements.
Attorneys representing the companies could not be immediately reached for comment.
The California Department of Insurance has issued cease-and-desist orders to two Berkshire Hathaway Inc.-owned companies in the wake of last week's decision regarding Shasta Linen Supply Inc.