Applied Underwriters is raising new arguments against the inclusion of settlement provisions in the California Department of Insurance’s proposed rehabilitation plan for California Insurance Company. The settlement provisions provide three options for ending the litigation between the controversial carrier and employers over Applied’s reinsurance participation agreements (RPAs).
The carrier maintains that comments from a California Department of Insurance official during deposition prove the RPA litigation settlement provisions do not need to be part of the rehabilitation plan. In its latest filing, Applied argues that CDI actuary Giovanni Muzzarelli conducted an actuarial review of the pending RPA litigation shortly after California Insurance Company went into conservation and found no threat to its solvency. The analysis was in conjunction with Applied’s request to pull $122.4 million out of CIC.
In his deposition, CDI’s Muzarelli states that the companies “have plenty of surplus in addition to the [$122.4 million in] excess deposits.” Applied argues that these “conclusions make clear that there is and never was any actuarial or financial concern with respect to the RPA litigation, and that the Conservator knew at least as of November 2020 that CIC was readily able to satisfy any judgments that might arise from the remaining 50 cases then-pending.”
The brief maintains that with roughly $600 million in surplus, CIC has more than enough money to absorb the RPA litigation cost. Muzzarelli’s analysis found that Applied’s potential exposure in the 50 RPA litigation claims pending at the time CIC was conserved was no more than $30 million overall.
Those connected with the RPA litigation say the $30 million estimate is likely in the ballpark for those 50 cases. However, they note that it fails to consider the unknown liabilities from lawsuits that could still be filed in California and elsewhere. New York and Connecticut recently petitioned the court to be covered by the rehabilitation plan, with New York asking for it to apply to all the states where CIC operates.
Moreover, CIC scorched earth litigation habits and the fact that the California Department is acting to protect California employers by holding control of the carrier until the lawsuits are resolved.
Court Review
The San Mateo Superior Court overseeing the conservation proceeding will hold a hearing next month to review the Department’s plan. The RPA litigation settlement provisions are covered in Section 2.6 of the proposal and provide employers with three options for settling disputes. Currently, there are around 50 active lawsuits over the EquityComp and SolutionOne RPAs that have been stayed pending the conservation proceedings. The proposed settlement provisions would cover these cases and any others that might be filed.
Section 2.6 and its accompanying schedule propose three settlement scenarios for the RPA litigation. The alternatives are to:
- Pay any outstanding premiums under the existing guaranteed cost policy issued by CIC or get a refund if there was an overpayment,
- Pay a premium under what is determined to be a standard Retrospective Rating Plan based on California’s ‘Cal-Retro Plan’ or receive a refund for overpayment, or
- Enforce what Applied proposed under its solicitation document called its ‘Program Summary and Scenarios,’ or receive a refund for overpayment.
Employers can still file claims in the conservation regarding policies.
Attorney Larry Lichtenegger, who fought and won many employer’s cases against Applied, was asked by the Department about his experience resolving some twenty cases. The Department used his expertise to help develop the three settlement scenarios.
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.