Lawsuit: Berkshire Comp Program a 'Reverse Ponzi' Scheme

Wednesday, September 14, 2016 | 2

A guaranteed-cost workers’ compensation program sold and administered by affiliates of Berkshire Hathaway was a “reverse Ponzi” scheme that used unfiled side agreements to trick businesses into thinking they had insurance coverage when they were actually on the hook for all claim costs, according to a lawsuit filed in New York.

Breakaway Courier Corp. says in the complaint filed Friday that it was “induced” into signing a “reinsurance participation agreement” and a “request to bind” when signing up for a program called Premier Exclusive. Neither documents were filed with regulators in New York, as the lawsuit says is required by law.

The delivery company said the policies it purchased had the effect of shifting claim liability back onto itself, said Raymond Dowd, an attorney with Dunnington Bartholow & Miller in New York, who is representing Breakaway Courier Corp.

“If you read the fine print on the way it works, all the loss remains with the insured, all the risk,” Dowd said. “That’s how Berkshire is interpreting it. You cover all claims.”

He said it’s reminiscent of the pyramid scheme cooked up by Charles Ponzi to use money from new “investors” to pay off previous “investors.”

“We’re calling it a reverse Ponzi,” he said. “Ponzi got other people’s money and used it to paid off investors. They all thought they had investments because they saw profits. Here, everybody thinks they have insurance.”

Breakaway in 2009 sought to purchase coverage under the Premier Exclusive plan administered by Applied Underwriters. In order to do so, it was forced to enter what the complaint calls an “illegal ‘reinsurance’ scheme” and also agree to a three-year coverage commitment contained in a “request to bind.”

The complaint says the three-year coverage commitment in the request to bind was illegal and void because it modifies coverage terms, and was not filed with state regulators as required by law.

Breakaway says it was quoted a maximum cost for the three-year coverage period of $403,161, but it ended up paying $863,048.

When the policy expired in June 2012, Applied offered Breakaway the option to renew the Premier Exclusive policy on a yearly basis or sign up for a three-year program called “Solution One.” The company decided to sign up for Solution One.

Solution One required Breakaway to use Berkshire’s payroll management service as a condition of getting a discount on work comp premiums, the complaint says. But under New York law, it is illegal to require an insured to buy payroll management services to get a discount on comp premiums, according to the complaint.

Despite being told that the maximum cost of the program would be $104,750, Breakaway was charged $163,410 in premiums in the first nine months after signing up for Solution One, according to the complaint.

Applied used “loss pick containment factors” to calculate reserves on claims that are filed against an insured, according to the complaint. Those factors are not included in any of the documents provided to policyholders when they sign up.

The complaint alleges that the containment factors are manipulated “to artificially inflate premiums based on small claims and losses.”

Breakaway also claims that while it thought it was buying a “profit-sharing” policy that would allow it to recover premiums that it paid if claim costs were low, that never happened.

The lawsuit was filed three days after Berkshire’s affiliates California Insurance Co. and Applied Underwriters Captive Risk Assurance Co. agreed to stop selling unapproved comp policies in California. The California Department of Insurance said the affiliates illegally used unfiled documents to alter coverage terms for their EquityComp program. 

The agreement to stop selling policies is contingent upon the outcome of a lawsuit in Los Angeles challenging an administrative order from the Insurance Department declaring that the unfiled side agreements voided a policy sold to an employer in Northern California.

California regulators aren’t the only ones who have clamped down on these policies being sold by Berkshire’s affiliates. In February 2016, Applied Underwriters agreed to pay $700,000 in restitution and penalties for overcharging small businesses in Vermont on Solution One premiums.

In June 2015, regulators in Wisconsin ordered Applied Risk Services Inc. and Continental Indemnity Co. — also affiliates of Berkshire — to stop marketing and selling both Solution One and EquityComp programs. 

But they apparently didn’t abide the order. In January 2016, Applied and Continental agreed to pay $140,000 to the state for renewing at least seven EquityComp or Solution One policies.

Berkshire Hathaway did not immediately return a call for comments about the lawsuit on Tuesday.