Applied Underwriters’ Prevented From Pulling Assets Out of California

The California Department of Insurance denied a request from Applied Underwriters to transfer over half of California Insurance Company’s assets to an out-of-state entity. CDI demands the controversial carrier first resolve the ongoing conservation in California. Applied sought to transfer roughly $600 million to its New Mexico entity while leaving $500 million in California to resolve its legal obligations here.

The action comes as Applied’s New Mexico affiliate California Insurance Company-New Mexico faces sanctions and potential loss of its certificate of insurance. The New Mexico regulator is threatening the action due to Applied’s failure to actually establish a business in the state despite being given the authorization to do so over 14 months ago. CIC requested a hearing with the New Mexico regulator to contest the action, but no hearing is scheduled as of this publication’s deadline.

“CIC New Mexico has failed to establish and maintain a principal place of business in this state and has failed to keep its original books, records, documents, accounts, vouchers and other assets within New Mexico,” Superintendent Russell Toal wrote last month. Toal gave CIC-NM 30 days to come into compliance or to show why it shouldn’t be sanctioned.

Applied’s defense is simple – blame others.  It blames the California Department of Insurance’s ongoing conservation of its California-domiciled California Insurance Company. “Consistent with New Mexico law, CIC-NM desires to have the assets, books, and records of CIC-CA transferred to CIC-NM as soon as possible. The delay is due solely to the actions of the CDI…” That’s what Applied argues in its response to the New Mexico Superintendent’s order to show cause.

CDI conservation manager Joe Holloway does not dispute that the Department is blocking any transfer of money or assets at this time but lays the blame for Applied’s failure to establish a business in New Mexico on the carrier itself. “Nothing in the New Mexico Office of Superintendent of Insurance Notice to Show Cause indicates that CIC’s assets or books and records must be transferred to CIC II in order for CIC II to be in compliance with New Mexico law,” Holloway notes in a letter denying Applied’s request for the funds and assets.

By Its Own Admissions

“Since by your own admissions to various courts, the merger of CIC and CIC II was not consummated, the companies and their assets remain separate,” Holloway writes. “To the extent CIC II requires capital to operate in New Mexico, I presume it can obtain that capital from a North American Casualty Company affiliate other than CIC, or elsewhere.”

The answer was the same as Applied’s request for CIC’s original books and documents. Holloway points out that the New Mexico law requires CIC-NM to keep its original books, records, documents, accounts, and vouchers at its principal place of business in the state.

“Accordingly, since CIC and CIC II remain two separate, non-merged entities, there is no need under the statute or otherwise to transfer CIC’s books, records or other documents from CIC to CIC II. CIC II can establish and maintain its own,” he writes, noting that the attempt to obtain the funds and documents is another attempt to circumvent CDI’s oversight. “If you determine that CIC II requires copies of information from CIC in order to establish CIC II’s original books, records, documents, accounts or vouchers, in order to comply with the law please provide me with details of what is specifically required and why.”

Arguing Both Sides

In filings and letters, Applied argues that CDI’s conservation order is void due to the New Mexico Superintendent’s October 9, 2019, order approving the merger of CIC into CIC II. “As a result thereof, the legal existence of CIC ended as a matter of law and was subsumed into CIC II including all of CIC’s assets and liabilities,” Applied’s general counsel Jeffrey Silver maintains.

However, CDI’s Holloway points out that Applied takes just the opposite position in numerous court filings – including its failed efforts to vacate the CIC conservation order. “[Y]our position that ‘the legal existence of CIC ended as a matter of law and was subsumed into CIC II including all of CIC’s assets and liabilities,’ is contrary not only to the aforementioned court decisions, but also to your own representations to the San Mateo Superior Court, the California Court of Appeal, and the Federal Court in Sacramento, that CIC consented to an injunction to stay consummation of the merger,” he says, referencing numerous court filings to this point.

“Clearly, if the merger has not been consummated, CIC must still exist. And, as the two aforementioned court decisions have confirmed, CIC and its assets remain in conservation.”

Cease and Desist

The latest filings also disclose that the Department took issue with Applied Underwriters messaging to CIC policyholders during the conservation.

Workers’ Comp Executive revealed that Applied Underwriter’s officials were contacting brokers for CIC policyholders and were telling them the policies would be moving to another Applied Underwriters affiliated carrier – Continental Indemnity Company.

As a result, CDI’s Holloway sent a cease-and-desist letter demanding Applied withdraw the letters sent to CIC policyholders. “As I mentioned in that letter, your actions violated paragraphs 7, 15, and 26 of the San Mateo Superior Court’s November 4, 2019 Conservation Order because you did not obtain written authorization from the Conservator prior to issuing the letters,” he says, noting that it was another attempt to circumvent the conservator’s authority.

Earlier disclosures revealed that CIC lent $20 million to affiliates during the conservation without seeking authorization from the Department for the transfer.