When an RPA and Workers’ Compensation are Jointly Issued they become an Integrated Insurance Contract
Creative people create creative schemes to save customers money when dealing with insurance. When the scheme did not work and premiums increased exponentially the insurer attempted to enforce the higher premiums by arbitration and the insured tried to avoid the contracts requirements because of a state statute that prohibits arbitration relating to insurance contracts. Litigation ensued seriously and went up to the Fourth Circuit twice.
In Minnieland Private Day School, Inc., a Virginia corporation v. Applied Underwriters Captive Risk Assurance Company, Inc., No. 17-2385, United States Court Of Appeals For The Fourth Circuit (January 14, 2019) Applied Underwriters Captive Risk Assurance Company, Inc. (“AUCRA”) appealed to the Fourth Circuit the district court’s determination that a Reinsurance Participation Agreement (“RPA”) executed by it and Minnieland Private Day School is an insurance contract under Virginia law. Minnieland asserted that the RPA is an insurance contract which, by state statute that renders void arbitration clauses contained in insurance contracts. The district court held that the RPA is an insurance contract and that the RPA’s arbitration clause is void as a matter of law.
This case involves a workers’ compensation insurance program that Minnieland purchased from AUCRA and its affiliated entities. Applied Underwriters, Inc.’s EquityComp program, is an innovative program of workers’ compensation insurance that offers small and mid-sized employers the benefits of both a guaranteed cost policy and a retrospective rating plan in one insurance program. The program is so novel that it has been patented.
The pooled companies provide workers’ compensation insurance coverage to employers and also mutually reinsure each other’s insurance business. Minnieland was unable to reap the benefit of the program.
Minnieland bought into the EquityComp program. At the same time, Minnieland executed an RPA. The RPA had a term of three years and provided that one or more “Issuing Insurers”—all of which were entities affiliated with Applied Underwriters, Inc.—would issue workers’ compensation insurance policies to Minnieland. The RPA also established that Minnieland would share in the profits and losses associated with its policies through its “segregated protected cell.”
For the first 33 of the 36 months during which the RPA was active, AUCRA charged, and Minnieland paid, an average of $58,810 per month in premiums. In November 2015, however, the premium charged to Minnieland increased drastically to $471,213, a 1167% increase from the October 2015 premium and a 801% increase over the first 33 months’ average.
Minnieland filed suit against AUCRA in the Eastern District of Virginia. Minnieland alleged that AUCRA is not authorized or licensed to act as an insurance company under Virginia law; that the RPA is an “insurance contract” and not a “reinsurance” agreement; and that AUCRA misrepresented the EquityComp program, and the RPA specifically, to circumvent Virginia insurance and workers’ compensation laws. Minnieland sought (1) a declaration that the RPA constitutes an insurance contract and is void because of AUCRA’s failure to comply with Virginia law; (2) a declaration of the amount, if any, that Minnieland owes under the RPA; and (3) a declaration that the premiums, deposits, and charges assessed to Minnieland by AUCRA were excessive. Minnieland also sought damages for fraud and breach of contract.
The district court ruled in an oral opinion that the RPA is an insurance contract.
In determining whether a dispute is arbitrable, the Fourth Circuit must apply ordinary state-law principles that govern the formation of contracts and the federal substantive law of arbitrability. Because this matter involves the question of whether the RPA is an insurance contract for purposes of the Virginia Code, the Fourth Circuit applied Virginia law.
Under Virginia law, where two papers are executed at the same time or contemporaneously between the same parties, in reference to the same subject matter, they must be regarded as parts of one transaction, and receive the same construction as if their several provisions were in one and the same instrument. To construe two instruments as one, reference in one instrument to the other need not be explicit; ‘it is sufficient if it is fairly traceable.
The Virginia Supreme Court held that multiple documents constitute a single transaction despite the fact that each of the contracts was not signed by all three parties because all the parties knew about the agreements and executed them at the same time as part of a single transaction to accomplish an agreed purpose. The court was also persuaded by the fact that some of the agreements contained explicit references to the other agreements.
Both the RPA and the first CNI policy went into effect on the same day, one day after Minnieland executed the Binder and RPA. Issuance of the policy was expressly conditioned on Minnieland’s prior execution of the RPA. Therefore, as contemplated by the parties, execution of the RPA would temporally precede issuance of the insurance policy. The subject matter of the documents is also the same: the workers’ compensation insurance issued to Minnieland, including the manner in which the payroll, premiums, and losses in connection with the insurance coverage would be calculated and how the risk would be distributed. The RPA also discusses the insurance coverage; it notes that workers’ compensation insurance coverage “will be provided” to Minnieland by “one or more of the Issuing Insurers,” defined as affiliates of Applied Underwriters, Inc.
The documents also internally reference each other and set forth each other’s terms. The RPA and insurance policies are linked. The RPA provides that its early cancellation terms apply if any one of the insurance policies is cancelled prior to the end of the RPA’s three-year term. The RPA also provides that Minnieland and AUCRA’s obligations under the RPA survive the active term of the RPA “and shall be extinguished only when [AUCRA] no longer has any potential or actual liability to the Issuing Insurers with respect to the [workers’ compensation insurance] Policies.”
The explicit internal references, interrelated terms, and shared subject matter are strong evidence that the parties intended these documents to be part of one integrated transaction. To be sure, the documents were not executed by the same parties. The Binder was signed by Minnieland as an acceptance of the EquityComp program proposal apparently drafted by ARS, a subsidiary of Applied Underwriters, Inc., to whom the EquityComp trademark is registered. The RPA was executed between Minnieland and AUCRA, another subsidiary of Applied Underwriters, Inc. and the insurance policies were produced by Applied Risk Services, Inc., another subsidiary of Applied Underwriters, Inc., with CNI, yet another Applied Underwriters, Inc. subsidiary, as the insuring entity.
The EquityComp program is promoted and sold as “[o]ne unified program for your business needs across all states” provided by Applied Underwriters, Inc., “a premier financial services group of companies with leading experience in the casualty insurance, reinsurance and business services disciplines.” (emphases added).
In sum, the documents, considered together, show that the purpose of the Binder, RPA, and CNI policies was one: to provide Minnieland with workers’ compensation insurance coverage while allowing Minnieland the opportunity to keep its insurance costs low by sharing in the underwriting risk. We need not determine specifically whether the RPA constitutes a policy endorsement or rider. Regardless of the label that may attach, the RPA and insurance policies constitute an integrated transaction and must be read as one contract.
The general consensus across the country has consistently been that the RPA is subject to insurance regulations. We join that consensus in holding that the RPA at issue here is an insurance contract under Virginia law. Because arbitration provisions in insurance contracts are void under Virginia law, Va. Code § 38.2-312, AUCRA must face Minnieland’s claims in court.
The parties, working in Virginia knew, or should have known, about the statute prohibiting arbitration with regard to an insurance contract. The integrated agreements contained such an agreement and, as a result of Virginia statutory law the group of contracts were all part of an integrated insurance contract and, as a result, the arbitration clause is void. An insurer, working together with other insurers, to create an insurance contract – whether in a single document or in a group of integrated contracts – is an insurance contract and any arbitration clause in such a group of contracts is unenforceable.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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