The First District Court of Appeal resoundingly rejected Applied Underwriters’ arguments for overturning the Insurance Department’s conservation of California Insurance Company and the subsequent rehabilitation plan that will pay off many employers who won lawsuits and kick the carrier out of the state. CIC’s sole victory of sorts was the court’s finding that the case could proceed as an appeal rather than as a writ proceeding, but the overall outcome remains unchanged.
The First District’s opinion confirms that the California Insurance Commissioner’s authority to put insurance carriers into conservation is not limited to cases over financial solvency concerns.
The original conservation order in this case was obtained to block the carrier’s attempt to circumvent California’s regulatory authority and evade California by merging with a hastily created alter ego in New Mexico without the Commissioner’s authorization.
The decision stems from CIC’s appeal of the San Mateo Superior Court’s April 2024 order, which approved the Department’s rehabilitation plan for the carrier, leaving all the plan’s provisions intact.
The rehabilitation plan establishes the terms for resolving pending litigation against the carrier regarding the EquityComp program and its alleged illegal reinsurance participation agreement (RPA). The rehab plan also calls for an auction of CICs’ in-force policies in California and the reinsurance of the liabilities from expired policies. If there is no interest from unaffiliated entities, then the deal requires an independent third-party administrator to handle the claims.
The latest decision is another setback for Applied Underwriters in its six-plus years of litigation with the Department over the CIC conservation. Case watchers expect the adverse decision to be appealed to the California Supreme Court. They also expect Applied/CIC to lose there.
The $50 Million Bet
Quoting from a Ninth Circuit Court of Appeals decision in another one of CIC’s failed bids to upend the conservation, the First District pointed out that the underlying case is a direct result of the $50 million bet that Steven Menzies made. The $50 million was the amount Menzies stood to lose if he didn’t get the Department’s approval to buy out Berkshire Hathaway’s controlling interest in CIC by September 30, 2019. Menzies was forced to invest an additional $10 million to secure a one-month extension, thereby avoiding forfeiture of the original $50 million.
“The deadline was not of the Commissioner’s making. Menzies lost the bet when the Commissioner failed to approve the transaction by the deadline Berkshire Hathaway set,” the court of appeal noted. “The answer, then, was for Menzies to pay his loss by forfeiting the breakup fee, not for Menzies and CIC to try to seek to complete the transaction anyway by hurriedly redomesticating CIC within less than two weeks by merging with a newly created out-of-state entity without the commissioner’s approval.”
Litigation Provisions Justified
The court states that the move shows CIC’s willingness to disregard the law for its own financial gain. Given this history, it held that the Commissioner and the trial court did not abuse their discretion in pursuing the conservation and later in setting the terms of the rehabilitation plan to end it.
A key part of the plan is the settlement provisions for pending and potential future litigation between CIC and employers who have purchased into the EquityComp program, as well as litigation involving CIC’s affiliates. The court notes that CIC and the affiliates operated the EquityComp program as a joint enterprise in a manner designed to avoid regulation.
“In these circumstances, excluding the RPA litigation from the rehabilitation plan because plaintiffs sued one of the other entities involved in the joint EquityComp program besides CIC would thwart the commissioner’s authority to remedy the problem that gave rise to the conservatorship,” the First District wrote.
No Liquidation
The court of appeal also rejected CIC’s argument that Section 2.2 of the rehabilitation plan is tantamount to a liquidation order. The section requires a reinsurer to assume CIC’s California operations.
“But liquidation entails distributing an insurer’s assets to creditors, and it is a last resort because it dissolves the company and deprives policyholders of insurance protection,” the First District wrote. “CIC, by contrast, will retain any proceeds from the reinsurance and assumption agreement, rather than distributing them to its creditors, so section 2.2 is not a liquidation. Section 2.2 also does not deprive any policyholders of insurance protection, so it need not be a last resort like liquidation.”
The appeals court also noted that the Commissioner could allow CIC to continue servicing the claims after it leaves the state, but has no obligation to do so, given the company’s repeated attempts to evade its regulatory authority.
The court also backed the requirement for an independent TPA to handle the claims if a CIC affiliate, such as Continental Indemnity Company, is the winning bidder. It found the term reasonable, given the common management between CIC and Continental, and the trial court’s findings that CIC had not treated policyholders fairly by overpaying on claims, setting higher-than-necessary reserves, and keeping claims open longer than required to enhance its profits under the EquityComp contract.
Attorney Michael Strumwasser, along with Cynthia Larson, Justin Giovannettone, Danielle Myers, Dale Larson, Caroline Chiappetti, and Julia Michel, represented the Insurance Commissioner. Attorney David Barrett handled the oral arguments for CIC. The carrier’s legal team also included attorneys Maxwell Pritt, Reed Forbush, Samuel Kaplan, Amy Neuhardt, Eric Palmer, and Benjamin Solomon-Schwartz.
Presiding Justice Tracie Brown penned the decision for the First District with Associate Justice Jon Streeter and retired Justice Peter Siggins concurring. Copies of the opinion are available in our Resources section or by clicking here.