Applied Underwriters’ CIC Rehabilitation Delayed But A Decision Is Coming

Attorneys representing the California Department of Insurance and those representing Applied Underwriters’ conserved California Insurance Company were back in court battling to outline their arguments for and against the proposed rehabilitation plan. The plan would protect policyholders, see that former policyholders with lawsuits get paid, and finally kick the carrier out of the state.

The hearing was to present arguments to and answer any questions from Judge Susan Greenberg, who took over the case this spring – over three years into the conservation proceeding – and on the eve of a final hearing on the rehabilitation plan.

The case had been in the hands of Judge Danny Chou, but he was appointed to associate justice for the First District Court of Appeal. The appointment came less than two weeks before he was scheduled to hold a hearing on approving the Department’s rehabilitation plan.

The latest hearing presented little in the way of new arguments.

Presenting on behalf of the Conservation and Liquidation Office and the Commissioner was Michael Strumwasser, who has handled the court proceedings for the state from the outset. DLA Piper’s Shand Stephens handled the response for California Insurance Company. Also found at the respondent’s table was Jeffrey Silver, executive vice president, and general counsel for Applied Underwriters.

Support Renewed

The parties essentially restated their positions for Judge Greenberg’s benefit with a few PowerPoint slides. All final briefs were filed before the case was reassigned to Greenberg. Other attorneys representing the Commissioner and employers engaged in ongoing litigation with Applied listened to the proceedings remotely but did not address the court or the issues presented.

As the moving party for the Department’s rehabilitation plan, Strumwasser went first and presented a list of ten reasons that he says form the rational basis for the conservation and the adoption of the rehabilitation plan. He pointed out that they were in court only because of CIC’s “brazen attempt” to avoid California jurisdiction and regulation as Applied’s management team sought to buy back the company’s assets from Berkshire Hathaway. The buyback deal ultimately closed without the California Commissioner’s approval.

The other half of the attempted circumvention was Applied’s plan to merge CIC with its hastily organized subsidiary in New Mexico. Strumwasser maintained that the conservatorship was a direct response to this “obvious attempt” to avoid California’s regulatory authority. He noted that these actions and others during CIC’s tenure in California created concerns for the Commissioner about the fitness of CIC’s management to hold a certificate of authority.

Strumwasser notes that the rehabilitation plan will allow CIC to fulfill its desire to leave the state and merge with its New Mexico-based alter ego, but only after its California business is transferred to another licensed carrier and its certificate surrendered. The rehabilitation plan also includes a process for resolving the four to five dozen cases that are in litigation over the reinsurance participation agreement (RPA).

Opposition Outlined

Stephens presented the overview of CIC’s arguments opposing the rehabilitation plan. He maintains that the plan does not address the underlying grounds for the conservation, which was the attempted merger without the Commissioner’s approval. “The grounds is the merger,” he told the court.

As such, Stephens says that Section 2.6 of the rehabilitation plan, which outlines the provisions for resolving the RPA litigation, “must be deleted from the plan.” He maintains that the section does not address the grounds of the conservation order and is arbitrary. Applied and its management, however, have a reputation as scorched earth litigators, including the case at hand. The California Department wants the cases settled before the carrier escapes California regulation.

Stephens also planned to address the company’s opposition to Section 2.2 of the proposed rehabilitation plan that outlines the plans for transferring CIC’s California assets to another carrier. The hearing, however, ran long, and Stephens will have to continue his presentation when the hearing continues later this month.

In addition to presenting an overview of the arguments for and against the rehabilitation plan, the hearing was also billed as an opportunity for the parties to answer questions from the court, but there were none of substance.

The other order of the day was rescheduling the second half of the hearing. The original schedule had the hearing continuing this week, but it conflicted with another case on the judge’s calendar. The parties ultimately settled on a two-week delay, at which time Judge Greenburg is expected to rule on the Department’s application for approval of the rehabilitation plan.

 

Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.