The New York State Department of Financial Services (“DFS”) has fined Applied Underwriters $3 million after finding that it offered workers' compensation insurance bundled with side agreements called “Reinsurance Participation Agreements” (“RPAs”) that were not filed with or approved by the DFS.
Under these side agreements, many employers, including small businesses, paid substantially more than what they would have paid under similar workers' compensation plans, according to the DFS.
“Small businesses are the backbone of New York's economy, making up 98 percent of businesses in the state and employing more than half of our private-sector workforce,” the DFS superintendent, Linda A. Lacewell, said in a statement. She added that the DFS “is committed to protecting all consumers, including our small business owners, and today we are holding Applied Underwriters responsible for illegally operating outside of the department's oversight to sell a complex product to hundreds of New York small and medium-sized businesses. New York will continue to enforce the insurance law's licensing and filing requirements to protect employers and other consumers from surprise bills.”
The DFS explained that Applied Underwriters 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 an Applied Underwriters subsidiary, Continental Indemnity Company, on forms and rates approved by the DFS along with an RPA that employers also were required to enter into as part of the bundle. However, according to the DFS, the RPA was not filed with the DFS, and as a result the RPA and the program as a whole were not reviewed or approved by the DFS.
The DFS said that its 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, the DFS added, 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, according to the DFS.
The DFS said that its investigation found that Applied Underwriters' 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.
According to the DFS's consent order, Applied Underwriters 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 DFS for approval. Additionally, Applied Underwriters will not enforce any arbitration provisions under contracts agreed to in New York or with New York employers.
Learn more: Consent Order.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].