California Insurance Commissioner’s Applied Underwriters Decision Challenged over Campaign Contributions

August 7, 2019 by

A pair of companies has filed to overturn decisions by California Insurance Commissioner Ricardo Lara in cases involving workers’ comp provider Applied Underwriters, alleging the decisions by Lara were swayed by contributions to his campaign from people affiliated with Applied.

A writ of administrative mandamus was filed on Monday in San Francisco Superior Court by Oceanside Laundry LLC and RDR Builders Inc. seeking judicial review of the commissioner’s actions in two cases in which the companies claim he violated their rights.

Santa Cruz-based Oceanside wants a review of a July 11 administrative appeal decision involving California Insurance Co., an Applied subsidiary. RDR Builders in San Juaquin County wants a review of a July 22 appeal decision also involving CIC.

Both companies were participants in the EquityComp workers’ comp insurance program, a three-year reinsurance-based, loss-sensitive workers’ comp program offered by Applied, a Berkshire Hathaway subsidiary, and its affiliates. The program typically includes a reinsurance participation agreement, or RPA.

California has previously taken the stance that the RPAs used in these programs were illegal because there were no rate fillings for them. Lara upheld the RPAs as illegal, but decided that companies must pay the rates of a standard policy instead of the higher rates under the EquityComp program.

Applied contends Lara’s decisions didn’t benefit the company, because the commissioner still upheld the RPAs are illegal.

Applied also plans to contest Lara’s decisions. The company emailed the following statement from Applied Underwriters General Counsel Jeffrey Silver:

“Applied Underwriters plans to file two writ proceedings in Los Angeles Superior Court against Commissioner Lara in the two cases at issue with insured parties.”

He didn’t comment on what arguments are made by the Applied writs.

Larry J. Lichtenegger, with The Lichtenegger Law Office in Carmel, Calif., who represents Oceanside Laundry LLC and RDR Builders, contends his clients have overpaid “the reasonable cost” of the loss sensitive policies because a standard retrospective plan would have cost a lot less.

Lichtenegger, who has been the legal representative for 49 different Applied insureds in similar cases, said if Lara’s order is left in place his clients each would be forced to pay out hundreds of thousands of dollars that they expected as a profit return from the loss sensitive policies they purchased.

“These two clients together have about a million dollars at stake,” Lichtenegger said.

Lichtenegger has argued in legal proceedings that the commissioner cannot judge a contract claim, that the policies cannot be enforced for other reasons and that the companies eventually want the court to decide on the reasonable cost using other standards.

The writ from Oceanside Laundry LLC and RDR Builders seeks the court to order Lara to properly fulfill his official duties and correct an abuse of discretion.

The EquityComp program and the RPA have received some scrutiny in California and other states, such as New York, where Applied was fined $3 million a few weeks ago and ordered to halt the selling of the program.

In June 2016, then California Commissioner Dave Jones issued an administrative decision in the matter of Shasta Linen Supply Inc., concluding that EquityComp and the RPA violated California insurance laws and was void because Applied failed to file the RPA with the commissioner in accordance with state insurance code.

Both Oceanside and RDR Builders brought administrative appeals arguing that the EquityComp program and its RPA were unlawfully sold to them.

The RDR Builders appeal was heard on Nov. 16, 2018, and the Oceanside appeal was heard on Dec. 20, 2018, by an administrative law judge, who sided with Oceanside and RDR Builders and forwarded his decision to the commissioner on April 4.

Lara made an initial ruling, but then later revisited that decision after an alleged meeting with people tied to Applied, the writ alleges.

“Petitioners allege that on or about April 17, 2019, the Commissioner received campaign contributions totaling $53,000 from associates of Respondents intended to influence his decisions in matters effecting Respondents ongoing litigation before the Commissioner,” the writ states.

The writ alleges that on or about May 6, Lara met with Steve Menzies, the president of Applied Underwriters, Inc., Underwriters Captive Risk Assurance Company Inc., and CIC.

Menzies could not be immediately reached for comment.

The writ also alleges that not only is Menzies attempting to influence Lara’s actions in these administrative appeals, but notes that he is also in the process of buying the Applied Underwriters’ family of companies back from Berkshire-Hathaway so he can move them to the Cayman Islands, and he needs the approval of the commissioner’s approval.

The California Department of Insurance has confirmed it is reviewing the Applied sale. Applied is reportedly 81% owned by Berkshire, and a reported sale of Applied to United Insurance in the Cayman Islands is part of a larger transaction, according to an Applied spokesman.

Lara has been under fire recently for how he’s handled his campaign contributions.

Santa Monica, Calif.-based Consumer Watchdog recently demanded he produce public records related to meetings with insurance industry representatives who reportedly gave him campaign contributions.

The Consumer Watchdog request stems from an article in the San Diego Union-Tribune last month that showed Lara received $54,300 in campaign donations for his 2022 reelection campaign from people linked to two insurance companies, Applied Underwriters and Independence Holding Co.

In some instances, Lara received large checks from the relatives of insurance industry executives with business pending before the commissioner, according to Consumer Watchdog.

Lara has since agreed to give the money back.

A spokesman for Lara and the California Department of Insurance declined to speak for this article, but offered the following statement via email:

“The Department of Insurance cannot comment on the specific claims in pending litigation. We look forward to an impartial review of the facts by a superior court.”

The writ filed on Monday alleges Lara was influenced in his decisions in the Oceanside Laundry and RDR Builders cases by after he met with Menzies in May.

The timeline for when Lara made and then reversed his decisions in the Oceanside and RDR Builders cases and the date when he allegedly met Menzies is fuzzy and doesn’t seem to clearly indicate whether Lara’s decision was swayed by the meeting.

In the Oceanside appeal, Lara reportedly adopted the ALJ’s decision and mailed it on May 9. Then on June 7, Applied attorneys filed a petition for reconsideration. Lara then issued an order of stay based on Applied’s petition for reconsideration, invited the parties to brief him on whether he should reconsider the decision, and on July 11 he issued an amended decision modifying the recommendation of the ALJ and adopting the request of Applied attorneys, the writ states.

In the RDR Builders appeal, Lara adopted the ALJ’s proposed decision and mailed it on May 17. Then on June 21, he issued an order of stay and again invited both parties to brief whether he should reconsider his decision. Only July 22, Lara issued his amended decisions, modifying the recommendation of the ALJ and adopting the request of the respondents that the petitioners be ordered to pay the CIC policies.

Lichtenegger couldn’t explain why, if Lara was motivated by a campaign contribution or an alleged visit from Menzies sometime around May, he didn’t just find for Applied in his initial May decisions but instead later reversed those decisions after Applied’s petition for reconsideration.

“It looks to me like Menzies and Lara met, and Lara said, ‘We’ll have you file a petition for reconsideration,'” Lichtenegger said.

Lichtenegger theorized that one possible explanation as to why Lara made and signed the initial decision after the alleged meeting with Menzies, and then reversed it in favor of Applied at a later date, is that “it took Lara a little longer to understand what he was signing.”

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