As Federal Case Crumbles…

Applied Seeks To Delay New Mexico Penalty Hearing

Applied Underwriters is asking the New Mexico Office of the Superintendent of Insurance (OSI) to delay a hearing that could cost California Insurance Company-New Mexico its certificate of authority to write insurance in the state. The company is asking for more time as it pursues litigation in federal court to dismiss the conservation of California Insurance Company while at the same time negotiates with the California conservator for assets to fulfill New Mexico’s demands.

Left unsaid in Applied Underwriters’ filing was the fact that a federal court in Sacramento last week granted the California Department of Insurance’s motion to dismiss Applied Underwriters’ attempt to end the CIC conservation. The same judge is set to review a similar motion next month in a separate action filed by California Insurance Company-New Mexico.

“Plaintiffs’ own allegations describe efforts by CIC and plaintiffs to create a New Mexico Company, CIC II, in to which CIC could merge its assets to avoid California’s regulatory process,” Judge William Shubb notes in his order dismissing Applied’s complaint. “Because plaintiffs’ own allegations provide a valid basis for the Conservation, and because defendants’ actions have received repeated authorization from state courts, this court cannot find that the state proceeding lacks ‘[any] legitimate purpose,’ and instead must find that plaintiffs have failed to prove the existence of bad faith in this case.”

In a 40-page decision, Judge Shubb folded up, stepped on, and handed Applied back its hat. A copy of the decision is linked at the end of this story.

Applied filed its motion to delay the New Mexico hearing a day after Shubb’s ruling dismissing its complaint, thereby allowing California’s conservation to continue.

The parties expect that Applied – in its usual ‘scorched earth’ style of litigation – will appeal Judge Shubb’s decision.

New Mexico Action

Early this year, the New Mexico OSI threatened financial penalties and the new carrier’s certificate after Applied failed to operationalize the company. CIC II, aka CIC-New Mexico or CIC-NM, that was formed in a matter of days in the fall of 2019 as Applied looked for ways to escape California’s regulatory authority. Its management at the time was seeking to consummate the buy-back of the company from Berkshire Hathaway.

New Mexico superintendent Russell Toal ordered CIC-New Mexico in January to show cause as to why it should not be penalized financially and have its certificate revoked. Toal noted that CIC-New Mexico received its certificate of authority to write insurance in the state 14 months prior. But it had yet to keep its promise to “establish and maintain a principal place of business in the state.  It has failed to keep its original books, records, documents, accounts, vouchers and other assets within New Mexico.”

Applied responded with a request for a hearing and blamed the delay in transferring its books and capital to New Mexico on the California conservation. New Mexico’s OSI set the hearing for later this month, but now Applied wants to push it back by months.

 Deflect, Deny, Delay

“CIC-NM respectfully requests that the hearing now set for April 22, 2021, be continued to a date to be determined and that the Notice be stayed to a date to be determined based on the CIC-NM Litigation and/or the Conservator Correspondence,” Applied Underwriters’ general counsel and stockholder Jeffrey Silver says in the request. “CIC will file an update as to any developments in the CIC-NM Litigation no later than June 17, 2021, and advise what amount of capital and surplus the Conservator agrees to allow to be transferred to CIC-NM.”

California officials, however, confirm there is no deal to allow Applied to take any assets out of the state.

“The documents speak for themselves. There is no agreement to allow a transfer of assets,” Joe Holloway of the Conservation and Liquidation Office tells Workers’ Comp Executive. In earlier correspondence with Applied Underwriters, Holloway rejected Applied’s request to move half of California Insurance Company’s assets out of California and request to move CIC’s original books to New Mexico. He noted that CIC-New Mexico could seek capital from another affiliate in the North American Casualty group other than California Insurance Company. CIC-New Mexico could establish and maintain its own set of books.

It was an intelligent move by California, court watchers agree.

CIC-New Mexico’s federal complaint against the California Department of Insurance and Insurance Commissioner Ricardo Lara is also subject to a motion to dismiss. Judge Shubb will hear that motion in a matter of weeks.

“The present lawsuit – the second in this Court by CIC affiliates – is based on a demonstrably false legal premise: That CIC II has merged with and absorbed CIC,” the Department notes in a filing. “None of that is true. Under California law, a merger of a domestic corporation is not effective until articles of merger are filed with the California Secretary of State and, if the merging corporation is a California-domestic insurer, until approved by the California Insurance Commissioner. Neither of those events has occurred.” The Department is urging Shubb to deny the second complaint and allow the California conservation to proceed.

Click here for a copy of Federal Judge Shubb’s detailed decision denying Applied’s motion.