Department of Insurance attorneys overseeing the conservation of Applied Underwriters’ California Insurance Company say a court-approved rehabilitation plan is being implemented. The CIC conservator says an independent consultant has been hired to help settle litigation between CIC and six dozen policyholders, while movement is afoot to find an insurer to take over CIC’s remaining California policies, assets, and liabilities.
“Now that all avenues of review of the Court’s Rehabilitation Order have been exhausted, the Conservator has begun the implementation of the Plan, commencing with Section 2.6 of the Plan, empowering the Conservator to resolve policyholder litigation and claims based on unlawful Reinsurance Participation Agreements (‘RPAs’) issued by CIC prior to conservation,” attorney Cynthia Larsen noted in a status report to the San Mateo Superior Court.
California employers who sued the carrier have waited years to reach a settlement. And the wait continues.
“The Conservator is also commencing preparations for the full implementation of Section 2.2 of the Plan, which contemplates a public bid solicitation process for the selection of a reinsurer to reinsure CIC’s California policies. After that, CIC will surrender its certificate of authority to transact the business of insurance in California and will be permitted to redomesticate to New Mexico without its California policies.”
The status report notes that the time period for CIC to file a petition for certiorari with the United States Supreme Court expired in early February, clearing the way for implementation of the rehabilitation plan. The San Mateo Superior Court approved the plan in April 2024, but CIC’s repeated appeals delayed implementation. The Court of Appeal upheld the Insurance Commissioner’s authority and affirmed the rehabilitation plan 15 months later. CIC then sought review by the California Supreme Court, but its petition was rejected last November – just eight days after the sixth anniversary of the initial conservation order. CIC could have petitioned SCOTUS, but opted not to. Each of its petitions has failed.
Independent Consultant
The Conservation and Liquidation Office issued a request for proposals (RFP) last fall seeking bidders to serve as an independent consultant to handle the RPA litigation. The rehabilitation plan provides three options for settling the litigation:
- Pay the premiums under the existing guaranteed cost policy issued by CIC, or get a refund if there was an overpayment, or
- Pay a premium under what is determined to be a standard Retrospective Rating Plan based on California’s ‘CalRetro Plan’ or receive a refund for overpayment, or
- Enforce what Applied proposed under its solicitation document, the “Program Summary and Scenarios,” or receive a refund for overpayment.
The CLO says it has contracted with Baker Tilly Advisory Group to perform the Independent Consultant role contemplated by the rehabilitation plan. Baker Tilly is an advisory and consulting firm. Baker Tilly is a private equity-backed accounting firm that is actively acquiring CPA firms across the country.
“Under Schedule 2.6 of the Plan, approximately 72 CIC policyholders will be offered the opportunity to settle their claims before the transfer of CIC’s policies to the new reinsurer, through a process involving the presentation to claimants of settlement proposals containing the three options for settlement outlined in the Plan,” says Larsen in the filing. The filing states that Baker Tilly is expected to complete its work in 8 to 10 months.
Reinsurer Search
The conservator is expected to begin its search for a reinsurer to take over CIC’s California policies. Schedule 2.2 of the rehabilitation plan calls for an open bidding process for the assets. The plan anticipates the assets going to an independent carrier. Still, if no unaffiliated reinsurer submits an acceptable bid, the plan allows a transfer to an affiliated carrier, with a caveat: the legacy claims would have to be handled by an independent third-party administrator.
Larsen notes in the filing that the selection of a reinsurer and its assumption of CIC’s policies is expected to occur within the next “nine to twelve months.” At that point, CIC is expected to surrender its California certificate of authority and complete its planned merger with its New Mexico-domiciled alter ego.
While Schedules 2.6 and 2.2 are being implemented, Larsen says the original injunction in the conservation order enjoining lawsuits against CIC and the Conservator will remain in place. CIC policyholders “who expressly decline a written offer of settlement under Schedule 2.6 or fail to act on such an offer within the prescribed time, may continue to litigate or otherwise pursue their claims against the company, its affiliates, or successors in interest, after the termination of the conservation or such earlier date as the Conservator may specify,” Larsen says in the filing.
Conservation Fees
The San Mateo Superior Court overseeing the conservation proceeding recently approved another set of payments to cover the cost of the conservation. The court approved the transfer of $1,120,749 to the conservator to cover the costs, fees, and expenses incurred by the conservator from September 1, 2024, through May 31, 2025. The costs are paid out of CIC’s assets.
The payment brings the total cost of the conservation to well over $14 million dollars. The high costs are largely due to the scorched-earth litigation tactics Applied Underwriters has employed throughout the conservation proceedings.
“Pre-conservation management vigorously contested the conservation and the Conservator’s proposed Plan by, among other things: filing an Application to Vacate the Conservation; petitioning the Court of Appeal for writ review of that decision; filing an Anti-SLAPP motion against the Conservator; filing a voluminous opposition and several supplemental briefs opposing the Rehabilitation Plan application; and filing a 50-page alternative order to the Conservator’s proposed Plan Order for CIC,” Larsen noted in the status update. “All of the foregoing requests for relief were denied by the Conservation Court or the Court of Appeal. In addition, two CIC affiliates initiated separate lawsuits in the United States District Court for the Eastern District of California in an unsuccessful attempt to obtain a federal-court order to terminate the conservatorship.”