Scorching the Earth …

Applied Underwriters Gets A Win In Discovery Dispute

Applied Underwriters received a green light from the San Mateo Superior Court to depose several California Department of Insurance officials in its ongoing battle against California’s conservation and rehabilitation of California Insurance Company.

The depositions will include the CDI attorney who verified the ex parte conservation application that placed CIC under state control, as well as the person most knowledgeable about the creation of the proposed rehabilitation plan that is up for approval later this year.

The decision will delay further any resolution of the conservation of California Insurance Company as it sets the stage for numerous discovery battles that will have to be resolved by the court. It enhances Applied Underwriters’ ability for its scorched earth strategy.

CDI attorney Michael Strumwasser opposed some but not all of the discovery requests. He maintained that discovery in the case is governed by Insurance Code sections 1010 to 1062 and that the court’s own order creating the conservatorship enjoined Applied from attempting to compel discovery. But Judge Danny Chou held that the Civil Discovery Act holds sway and that with court approval, the discovery could proceed.

“[T]he Act applies unless there is a statutory exemption. But none appears to exist here,” Chou wrote in granting the motion for leave to conduct discovery. “The Insurance Code is silent as to discovery rights, and nothing in that Code appears to exempt this conservator proceeding from the purview of the Act.”

The court order clears Applied to serve deposition notices for three individuals who filed declarations in support of the rehabilitation plan – conservation manager Joseph Holloway, CDI actuary Giovanni Muzzarelli, and private attorney Larry Lichtenegger who represents policyholders. Applied was also cleared to file a deposition notice for Deputy Insurance Commissioner and special counsel Bryant Henley and the person most knowledgeable (PMK) about the decision to file the ex parte application and the development of the rehabilitation plan.

Applied is also poised to seek reams of documents related to the conservation order the rehabilitation plan.

Discovery War

Strumwasser did not challenge the depositions of those who filed declarations supporting the rehabilitation plan but maintained the document requests, and the depositions of Henley and the PMK were overly broad. “There can be no serious doubt that the kind of paper drive envisioned by Respondent would burden and interfere with the work of the Conservator. There also can be no serious doubt that it would require a substantial delay in the July hearing on the [rehabilitation] Plan,” Strumwasser argued. “It is precisely the kind of demand that often comprises the opening salvo of a years-long discovery war in civil litigation. It is neither contemplated by the conservation laws nor compatible with the conservation task.”

Judge Chou, however, found the requests reasonable and pertinent to the dispute. Chou points out that depositions of Henley and the PMK will shed light on the conservation order and the rehabilitation plan. He notes that the rehabilitation plan must be related to the grounds for the conservatorship. But the court’s ruling is not without limits and must link to “whether the Rehabilitation Plan in ‘reasonably related to the public interest’ and not ‘arbitrary or improperly discriminatory.’”

The Commissioner will still be able to assert recognized privileges such as deliberative process, attorney-client communication, and attorney work-product to prevent the discovery of certain documents, but this will have to be done after the requests are served. Hence Strumwasser’s warning of a “substantial delay” in the case and the “discovery war” to come.

Copies of Judge Chou’s order in the case are available in our Resources section or by clicking here.