Bloomberg) -- Applied Underwriters, a workers’ compensation insurer owned by Warren Buffett’s Berkshire Hathaway Inc., agreed to provide additional disclosure to customers about a product in California after a state review of potential abuses.

The deal requires Applied Underwriters “to stop the bait-and-switch marketing tactics used to sell a workers’ compensation insurance product, which led to numerous complaints from employers caught up in the costly and complicated policies,” the California Department of Insurance said Thursday in a statement.

Wave of litigation

Applied is facing a wave of litigation over products where the costs to employers could vary based on their claims. Dozens of businesses allege the insurer peddled plans that regulators hadn’t approved. They also complain about being surprised by large bills based on formulas that stacked the deck in Applied’s favor. Regulators in Vermont and Wisconsin have outlawed some of the company’s plans.

The insurer has said its coverage saves employers money and that customers were aware of the terms. Companies that are litigating account for only about one in 400 policies sold, Jeffrey Silver, Applied’s lawyer, told Bloomberg News for a story published in November. The plans didn’t work out in their favor because they had claims that caused costs to go up, he said. They’re now “taking advantage of a regulatory situation” to avoid paying what they owe, according to the lawyer. About 90% percent of employers renew, Silver said.

Applied’s troubles in California stemmed from a complaint that one of its customers, Shasta Linen Supply, made to the insurance regulator in 2014. The Sacramento-based linen-rental company got a quote from the insurer in 2009 and signed up for a three-year plan. When it came to a close, the bills didn’t stop, even though the company, which employed about 60 people, had already paid more than $900,000 for coverage. Applied wanted an additional $244,213. Shasta refused to pay, arguing that the additional fees exceeded its obligations under its state-approved policy and weren’t fully explained.

Circumvented regulatory oversight

California Insurance Commissioner Dave Jones sided with the small business last year. In a 70-page decision, he laid out how Applied had circumvented regulatory oversight to boost its profit. The insurer, he added, fundamentally changed the terms on a state-approved workers’ comp plan, putting the burden of claims back on the employer.

Applied asked a state judge in July to overturn that decision. The insurer said the commissioner and administrative law judge presiding over the Shasta case “acted in excess of their powers” and didn’t give the company a fair trial. Applied also argued its coverage fell into a category of plans that aren’t subject to rate and filing requirements and that the regulator hadn’t raised any objections about the plans during multiple examinations.

The settlement announced Thursday resolves that litigation. Silver didn’t immediately respond to a an email on Jones’s announcement Thursday.

Special Reports /

Berkshire settles California's `bait-and-switch' workers' comp insurance case

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