New Jersey Court Upholds State Regulator in Dispute With Applied Underwriters

The New Jersey insurance commissioner does not have to rely upon the state’s attorney general to bring a lawsuit against out-of-state insurers and their affiliates that it believes are violating state laws. Rather, the insurance department can bring an administrative action against them on its own, a New Jersey appeals court has ruled in a challenge brought by insurer Applied Underwriters and its affiliates.

Applied Underwriters had contended that the state’s Non-Admitted Insurers Act requires the attorney general to act on the matters raised by Commissioner Marlene Caride of the New Jersey Department of Banking and Insurance (DOBI) over its EquityComp, SolutionOne and PremierExclusive workers’ compensation programs.

Applied argued that all claims of violations by non-admitted foreign insurance companies must go to the Superior Court, and that the state’s non-admitted insurers law disallows the commissioner from bringing an administrative action against them.

But the Superior Court has found that is not the case under the act passed in 1968, siding with DOBI.

“Based on the text, legislative history, and public policies of the statute as a whole, as well as principles of primary jurisdiction, the Commissioner has the authority to choose to pursue an administrative complaint against the companies instead of a lawsuit brought by the Attorney General,” the appellate court stated.

The court said the insurance commissioner has wide latitude to act on her own in regulating the insurance industry and is not constrained by any need to first get the attorney general to sue. The court agreed with DOBI that filing a lawsuit is optional, and that she also has the power to choose instead to proceed against the companies administratively in the Office of Administrative Law (OAL).

The Superior Court remanded the matter to DOBI and directed that a previously stayed OAL hearing into Applied’s workers’ compensation programs be reactivated.

Applied vowed to appeal the ruling which it says is the result of a dispute caused by “regulatory overreach” by the insurance regulator.

The jurisdictional dispute arose after the DOBI ordered Applied to “make whole” all New Jersey businesses that the regulator alleged had been harmed by its workers’ compensation programs, and do so by “unwinding” their existing contracts.

The DOBI cited four affiliated companies involved in the workers’ compensation programs. Applied Underwriters, Inc. is a Nebraska financial services corporation and parent of the three other companies in this case. Applied underwrites workers’ compensation for small and medium sized employers. Applied is not an authorized or admitted insurer in New Jersey.

Another participant is Applied Underwriters Captive Risk Assurance Co., Inc. (AUCRA), an insurer incorporated in Iowa with its principal place of business in Nebraska, which acts as a reinsurer for Applied and its affiliates. AUCRA is also not an authorized or admitted insurer in New Jersey.

The two other affiliates are Applied Risk Services, Inc. (ARS), Applied’s billing agent, a licensed insurance producer in New Jersey, and Continental Indemnity Co., an Iowa insurer admitted in New Jersey for workers’ compensation. Continental issued the policies in this case.

According to the court, starting in 2008, the companies sold their EquityComp, SolutionOne, and PremierExclusive programs to at least 300 New Jersey employers. These programs combine a guaranteed-cost workers’ compensation policy sold by Continental and another non-party affiliate, with what is known as an RPA (a reinsurance participation agreement) sold by AUCRA.

The combination of the guaranteed-cost policy and the RPA had the effect of creating a policy with a retrospective rating. Instead of fixed premiums, the premiums could fluctuate during the policy period, depending on the actual cost of any claims filed.

In June 2012, Applied’s general counsel met with the staff of the Compensation Rating and Inspection Bureau (CRIB) to discuss how Applied’s programs operate. According to DOBI, that meeting did not result in any formal regulatory approval of the programs.

DOBI said it eventually began to receive complaints about high premium amounts from New Jersey insureds under the programs and met again with Applied in August 2017. In May 2018, the DOBI alerted the company that after an investigation, it had determined the programs were not in accordance with CRIB’s rating system, and therefore were not permissible.

DOBI said it was concerned that RPAs had the potential to lead to higher and unpredictable assessments against an insured. In DOBI’s view, those assessments materially altered the guaranteed-cost workers’ compensation policy that had been filed with CRIB. In addition, the DOBI expressed concern that employers often owed premiums that exceeded CRIB’s approved rates.

DOBI demanded Applied “make whole” all New Jersey businesses that had been harmed by its programs and do so by “unwinding” their existing contracts. If Applied did not take such measures, the DOBI said it would seek “formal enforcement actions” against the firms.

Initially, in 2019, Applied petitioned to have the dispute moved to the OAL as a “contested case” under the Administrative Procedure Act. That request was denied by DOBI, which then proceeded to ask Applied to show cause why the firms’ authority to transact business in New Jersey should not be suspended and they be required to cease and desist their activities. After that escalation, DOBI said the matter would be assigned to an administrative law judge to give them full opportunity to respond, but the AOL hearing was delayed to accommodate settlement discussions, which failed.

Next, according to court documents, despite having earlier demanded a hearing in the OAL, Applied and its companies filed a complaint alleging that DOBI does not have jurisdiction over the them. Applied asked the trial court to require the DOBI to pursue the matter in a judicial, rather than an administrative, forum.

The trial court transferred the matter to the appellate court to determine where jurisdiction would properly lay.

Applied continued to insist that the Superior Court is the sole forum that has jurisdiction over the dispute, whereas DOBI argued it has concurrent jurisdiction to address the dispute administratively.

The judges decided that the jurisdictional disagreement hinges upon the meaning, history and wording of the Non-Admitted Insurers Act, which the court said was enacted to address a perceived gap in regulating insurance by expressly authorizing the commissioner to regulate the activities of non-admitted foreign insurance companies. At the time it was developed, there were particular concerns over non-admitted insurers selling life insurance policies of “questionable value.” However, the court continued, DOBI’s regulatory authority extends to workers’ compensation insurance and, in fact, the court added, “Regardless of its foreign or domestic status, a company engaged in the insurance business in New Jersey is subject to the ‘strict regulatory control’ of DOBI.”

The court further noted that a part of the Non-Admitted Insurers Act declares that it is “remedial legislation” devoted to protecting the health and welfare of the people of the state. “To carry out those remedial objectives, the Commissioner should have wide discretion to apply her Department’s expertise in the most expeditious manner suited for a particular situation,” the court stated. “We doubt the Legislature instead wanted to confine the Commissioner to a ‘lawsuit-only’ jurisdictional straitjacket.”

Rather, the court added, the commissioner may be able to achieve a result administratively, without the formality and limitations of court actions. “The Commissioner is allowed to make that choice of forum, consistent with the remedial purposes of the statute and the legislative mandate to construe it liberally,” the opinion states.

Applied has said it will appeal the ruling.

“We will take our case all the way to the New Jersey Supreme Court to set this right,” Jeffrey Silver, general counsel of Applied Underwriters, said in a written statement.

Silver likened Applied’s product to a captive, which New Jersey permits, maintaining that “the essence” of the dispute is whether Continental’s clients “may participate in captives to retain risk in the placement of their workers’ compensation coverages.” The insurer maintains the arrangements “were fronted fully by admitted insurance policies” and approved by the CRIB.

Applied said that CRIB confirmed that the structure of the EquityComp captive program did not need to be filed as long as the underlying policy and forms were approved, which, Applied claims, they were.

The insurer further alleges that the administrative hearings are a “waste of taxpayer monies, as well as the time and energy of the parties, and are just a delay tactic.”

Topics Underwriting New Jersey