A class-action lawsuit against purported Berkshire Hathaway Inc. units that alleges breach of contract and unjust enrichment in a workers compensation scheme will be allowed to move forward after a federal judge denied parts of a motion to dismiss the lawsuit.

The plaintiffs allege that Continental Insurance, California Insurance and Applied Underwriters Captive Risk Assurance Co., all of which have a principal place of business in Nebraska, are members of companies purportedly operating under Omaha, Nebraska-based Berkshire Hathaway and affiliated with each other.

Continental Insurance and California Insurance are both wholly owned subsidiaries of North American Casualty Company, which itself is a wholly-owned subsidiary of Applied Underwriters. The plaintiffs allege that the companies used their corporate structure and affiliation with each other to get around New York insurance laws, according to the ruling issued last week by Judge John G. Koeltl of the U.S. District Court for the Southern District of New York in White Plains.

Continental Insurance and California Insurance operated as licensed insurers in New York and sold one-year, guaranteed-cost workers comp policies targeted at small and medium-sized businesses. The policies were conditioned upon the insured companies entering a profit-sharing plan that included a reinsurance participation agreement issued by Applied Underwriters that modified the terms of the comp policy, plaintiffs say. Among other things, the reinsurance participation agreement changed the effective period of the original policy from one to three years, superseded fixed-cost premium rates and imposed failure-to-renew costs, the plaintiffs allege.

In a patent application filed by Applied Underwriters and referenced in the lawsuit, the company said many states require insurance companies to offer small and medium-sized companies guaranteed cost plans without the option for a retrospective plan. “The reinsurance-based approach provides non-linear retrospective premium plans that may not be a direct option,” the patent says.

"The defendants' insurance scheme was so inventive and novel that it has been patented," the ruling reads. "In spite of the patent, the scheme has drawn the scrutiny of the insurance regulators of at least three states — California, Wisconsin and Vermont — which have each found that the scheme did in fact violate the insurance laws of those states."

When plaintiffs began receiving bills for higher premiums, many refused to pay and their policies were canceled, according to court documents.

Judge Koeltl considered a motion to dismiss claims in five areas and denied four, including claims of breach of contract, unjust enrichment and deceptive business practices. A motion to dismiss a claim of violation of general business regulations was granted because the plaintiffs exceeded a statute of limitations to file, the ruling says.

The California Department of Insurance issued cease-and-desist orders to California Insurance and Applied Underwriters in a similar case last year. 

California Insurance sold a guaranteed-cost workers comp policy to a California linen supplier, which was submitted to the California Department of Insurance for review as state law required, according to insurance department records. But the department said Applied Underwriters sold the business a retroactive nonlinear insurance policy called EquityComp, which hadn't been submitted for review.