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A workers compensation program involving a reinsurance participation agreement offered by a unit of Berkshire Hathaway Inc. that has come under fire in various states constitutes insurance and therefore is not subject to arbitration under Virginia law, a federal appeals court ruled on Monday.
In Minnieland Private Day School Inc. v. Applied Underwriters Captive Risk Assurance Company Inc., the Woodbridge, Virginia-based school purchased a workers compensation policy from Applied Underwriters Inc., an Omaha, Nebraska-based unit of Berkshire Hathaway, through its EquityComp program.
EquityComp is a hybrid between a guaranteed cost policy and a retrospective rating plan. As part of the coverage, a layer of reinsurance is provided by Applied Underwriters Captive Risk Assurance Co. Inc., of Omaha, Nebraska, with policyholders paying into a segregated account that is used to fund Applied Underwriters’ liabilities. The program has been subject to litigation in various states over its arbitration provisions and allegations that the insurer failed to adequately disclose premium structures and penalties.
The school entered into a reinsurance participation agreement on in 2013 through the EquityComp program with a three-year term limit that involved sharing in the profits and losses associated with its policies through a segregated cell arrangement.
For the first 33 months, Minnieland paid an average of $58,810 per month in premiums. However, in month 34 it was charged $471,213 and the following month a premium of $414,604. The school paid the first premium but demanded the basis for the increased premium, which was not provided, the ruling says. The school did not pay the December premium and was notified on Dec. 16, 2015, that its coverage was terminated effective Dec. 27, 2015 for nonpayment of premium.
Minnieland filed suit in federal court against Allied Underwriters alleging that it was not authorized as an insurer in Virginia and that it misrepresented the EquityComp program and that it used the reinsurance participation agreement to circumvent Virginia insurance and workers comp laws. Allied Underwriters sought to compel arbitration, but the school argued that the reinsurance participation agreement was an insurance contract exempt from arbitration and void under Virginia law. After much back and forth, the district court denied the motion to compel arbitration.
Allied Underwriters appealed the order but in 2017 the 4th U.S. Court of Appeals ultimately held that the reinsurance participation agreement was an insurance contract and that the school was not compelled to arbitrate its dispute with the insurer. However, because the parties had not had the opportunity to fully brief the issue of whether the reinsurance participation agreement was an insurance contract under Virginia law, it was remanded back to the district court, which ruled in an oral opinion that the the agreement was an insurance contract and denied the motion to compel arbitration.
The insurer appealed the decision, but on Monday the appeals court again affirmed the decision to deny the company’s motion to compel arbitration.
Although Allied Underwriters argued that the court had wrongly considered only the reinsurance participation agreement and not the contract as a whole, the court noted that its mandate was limited to the agreement because it contained the arbitration provision and that the agreement was an integrated part of the coverage contract.
The Virginia court noted that courts in Wisconsin and California had also ruled against the EquityComp program and there was a consensus that the reinsurance participation agreement is subject to insurance regulations.