Court Orders California Insurance Company Conserved in Another Round in Applied Battle

November 5, 2019

Note: This story has been updated with a response from an Applied spokesman describing the actions by the California Department of Insurance as “an unusual Draconian attempt.”

A San Mateo County Superior Court on Monday evening issued an order appointing the California Department of Insurance’s Conservation and Liquidation Office as conservator of California Insurance Co.

The court order directs the conservator to take immediate possession of the workers’ compensation insurer in response to what the CDI has argued is a willful violation of state law and established pattern of continually flouting California’s regulatory processes.

The CDI sought the order after company officials agreed merge its business with a New Mexico-based insurer without first securing the CDI’s prior approval.

This is the latest development in the growing drama behind the $920 million sale of Berkshire Hathaway-owned Applied Underwriters to its founder Steven Menzies.

The New Mexico Office of Superintendent of Insurance in late October said New Mexico facilitated the sale of Applied Underwriters by approving the creation of a new insurer and a merger of it with an existing Applied Underwriter California subsidiary in order to save jobs and protect policyholders.

The California Department of Insurance has argued that its approval of the sale is required because one of Applied’s subsidiaries, California Insurance Co., is domiciled in the state. Earlier in October, California said that it had not approved the sale of Applied Underwriters, nor had it approved the re-domestication of the California subsidiary to New Mexico.

Applied Underwriters executives followed that up earlier this week by maintaining publicly that after six months they gave up waiting for California to act on their request for approval of the sale and instead took up another state, New Mexico, on its offer to expedite the transaction by moving its California subsidiary to that state.

The order issued on Monday also blocks the attempted merger, which seeks to divest California of its regulatory oversight over this entity. If CIC is permitted to consummate this illegal transfer, CIC employer policyholders, employees with serious work-related injuries and other claimants entitled to vital and necessary insurance benefits, will be left holding policies of a non-admitted insurer not qualified to transact insurance in California, the CDI alleges.

Effective immediately, the CDI’s Conservation and Liquidation Office will serve as conservator to protect the company’s existing policyholders and covered workers from an insurer attempting to operate without the approval and authority to continue to transact insurance in California.

Spokespersons for Applied and CIC reached for comment said the company is considering options.

“The department’s clumsy, vindictive action against CIC and its press release appear to be a bold, headline driven, last ditch effort to save face; it is also a kind of implicit warning to other companies in California as more and more exit the state and leave citizens with fewer options,” reads an emailed statement the company attributed to Jeffrey Silver, CIC’s counsel.

Silver’s statement noted that every other state involved approved the purchase, while the CDI remined silent on the matter.

“Over the weeks following, we called the CDI many times to ask for a meeting to settle any problems and were met with no reply,” the statement reads. “Further, there is no apparent motive to intervene in the management or operation of the company, since it is A rated, has excellent service standards and has long enjoyed the loyalty of California policyholders. How is it suddenly a candidate for state control other than for the purely vindictive purposes of staff regulators embarrassed by their failure to act in the best interests of the insurer and its policyholders?”

The statement also alleges that that department is acting with “an unprecedented, unnecessary regulatory overreach” that may constitute tortious interference and “an unusual Draconian attempt” at taking action outside the law.

“It is bad news for insurers in the state and for the citizens who will pay, ultimately, for the legal defense of this illogical, vindictive action,” the statement reads.

The Applied deal has been under scrutiny in California over a campaign contribution controversy. Insurance Commissioner Ricardo Lara has been under fire for taking campaign contributions from the insurance industry, despite his pledge not to do so, and there have been allegations that he made first contact with an agent of Applied offering political support in conjunction with seeking approval for a change of control in the company.

Menzies was named in a writ of administrative mandamus filed in August in San Francisco Superior Court by Oceanside Laundry and RDR Builders Inc. seeking judicial review of the Lara’s actions in two cases in which the companies claim he violated their rights. The writ is part of an effort to overturn decisions by Lara in cases involving Applied Underwriters, alleging the decisions by Lara were swayed by contributions to his campaign from people affiliated with Applied.

The San Diego Union Tribune reported last month that Eric Serna, a New Mexico lobbyist who more than a decade ago retired from the position of New Mexico’s insurance commissioner while under investigation, was also in meetings with Lara and insurance executives. One of those meetings included the proposed buyer and seller of Applied Underwriters. according to the Tribune.

California Insurance Co. was purchased in 2003 by Applied Underwriters with CDI approval. In 2006, Berkshire Hathaway bought an 81% interest in Applied, which was founded in California in 1994.

The recent buyback by Menzies and The Quasha Group was agreed between Berkshire Hathaway and Applied largely to free Applied’s companies from channel competition with other Berkshire Hathaway subsidiaries, according to the company.