By Jonathan Stempel

(Reuters) - California's insurance commissioner on Monday said a Berkshire Hathaway Inc insurance business evaded a state law designed to protect small businesses from unexpected workers' compensation costs.

Commissioner Dave Jones faulted Berkshire's Applied Underwriters Inc and California Insurance Co units over the sale to Shasta Linen Supply Inc of a nontraditional workers' compensation policy whose terms and rates had not been reviewed by state officials.

Jones said the policy sold by Applied essentially replaced a policy sold by California Insurance, and subjected Shasta, a family-owned employer of 63 people, to hundreds of thousands of dollars of extra costs. He ordered a refund of extra sums that Shasta paid.

"California employers should be able to trust that their insurance companies are doing business by the book and not exploiting them in the name of profit," Jones said in a statement. "Unfiled rates and unfiled major policy terms are void as a matter of law."

Berkshire had no immediate comment. Applied and a lawyer for California Insurance did not immediately respond to requests for comment. Shasta's lawyer did not immediately respond to similar requests.

Workers’ compensation insurance typically covers lost wages and medical costs for employees injured on the job. Jones said it is mandatory in California.

Monday's 70-page decision is a rare regulatory critique of Berkshire's insurance operations, which account for roughly a quarter of operating profit at the Omaha, Nebraska-based conglomerate run by Warren Buffett.

The policy in question is called EquityComp, which Berkshire has said carries a profit-sharing component and is meant for medium-sized employers.

Jones said EquityComp was launched in 2008, and now generates 80 percent of California Insurance's policy premiums.

He said it has helped the company roughly triple its profit and market share in the state, while reducing the percentage of premiums used to pay claims to well below industry norms.

"CIC knew of the review and pre-approval process and deliberately ignored that process," he wrote.

Jones said he ordered a review by the state's insurance department of whether Berkshire and its rivals are selling other unfiled workers' compensation policies.

He said the outcome will determine whether enforcement actions and penalties are justified.

(Reporting by Jonathan Stempel in New York; Editing by Marguerita Choy)