Attorneys for Insurance Commissioner Ricardo Lara completed the draft of a 100-page proposed order to approve the Department’s rehabilitation plan for the conserved California Insurance Company. The proposal is now being reviewed by Applied Underwriters’ attorneys, who must submit their comments to the Court by mid-November. It is expected that the Court will approve the proposal.
Judge Susan Greenberg ordered attorney Michael Strumwasser to craft an order in line with the tentative ruling she issued in August. That tentative ruling held that “The Court finds the Amended Plan is ‘reasonably related to the public interest in rehabilitating the insurer and not be arbitrary or improperly discriminatory’ or ‘contrary to [a] specific statute,’ and the arguments raised, and evidence cited by CIC in its objections asserted in opposition and in surreply do not demonstrate otherwise.”
The filing is 168 pages, including the attachment of the actual rehabilitation plan and its Schedule 2.6, which lays out the three options for settling the litigation over Applied Underwriters’ reinsurance participation agreement. The filing also includes the proposed assumption reinsurance and administration agreement.
A reinsurance assumption agreement is part of the rehabilitation plan. It will allow California Insurance Company to complete its merger with its New Mexico-domiciled alter ego without impacting its California insureds. After bidding, the Conservator will select an unaffiliated reinsurer to assume CIC’s California book. CIC is required to surrender its certificate of authority to conduct insurance business in California. If no unaffiliated reinsurer is interested, the plan would allow a CIC affiliate to assume the business, but the plan would require all claims to be handled by an independent third-party administrator.
“Under the proposed Plan, regardless of the reinsurer and regardless of what percentage of its business had been in California before the conservation, CIC will emerge from conservation with the fair market value of the business reinsured pursuant to the Plan, and with its intellectual property—the talent and knowhow of its management and employees,” the proposed order notes. “As the Conservator reiterates, the purpose of the Plan was never to ‘destroy’ CIC, but to allow CIC to withdraw from California without its California policies.”
Amendments
The rehabilitation plan in the proposed order has undergone some amendments. Following its original filing, New York and Connecticut filed requests to include the CIC policies in their states in the assumption reinsurance agreement. Both states noted that the New Mexico subsidiary CIC II, into which CIC plans to merge, does not hold a certificate of insurance to transact business in their states – the same issue as with California.
“The Conservator has amended the Plan with appropriate language providing that New York and Connecticut policyholders are also reinsured under the Reinsurance Agreement and has included an explicit requirement that an assumption reinsurer of either state’s policies hold appropriate licensure,” the proposed order notes. “Given these states’ unfamiliarity with the particulars and history of this conservation, the Conservator has also amended the plan to include language clarifying who the cedants are in the assumption reinsurance transaction and that all cedants be signatories to the Reinsurance Agreement. The Court finds that these changes are appropriate.”
The proposed order, however, does not address New York’s other request. “With respect to New York’s request that the remedies of Schedule 2.6 be made available to its policyholders engaged in litigation over the RPA, given the Conservator’s oversight, the Court will not entertain that request at this time. If the Conservator wishes to propose New York’s inclusion, he may make a subsequent application for amendment of the plan, including citation of authority showing that Schedule 2.6’s remedies represent remedies available under New York law,” the proposed order states.
RPA Litigation
Schedule 2.6 of the proposed rehabilitation plan sets out policyholders’ options for resolving “any Pending Litigation or Subsequent Litigation” stemming from the reinsurance participation agreement that was part of the EquityComp and SolutionOne programs. The plan offers three scenarios for settling the pending RPA litigation claims.
The alternatives are to:
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.
Under the plan, the Conservator will appoint an independent consultant who will translate the formulas in Schedule 2.6 into a template. The consultant will then obtain each policyholder’s data from CIC to run through the template to determine the restitution available under either of the latter two options. The restitution amount can be positive or negative.
“The Independent Consultant then submits to the Conservator a written Settlement Offer with the three Settlement Amounts, which the Conservator tenders to the Claimant, who has 30 days to make an election of one of the offers or decline all of the offers,” the proposal states. “Alternatively, the Claimant may request review of the paid losses or reserves by the Independent Consultant…if the review results in a change in the losses, the Independent Consultant recalculates the Settlement Offer, from which the Claimant makes its election.”
The proposal would allow policyholders to reject the options and continue to litigate their claims, but officials say only one or two policyholders are expected to do so.
“Schedule 2.6 has been designed to reflect the respective rights of CIC and policyholders under the principal theories of recovery to which policyholders would be entitled in litigation, and to deliver the outcome more fairly, quickly, and economically than continued litigation,” the proposed order notes.
Attorneys Fees and Costs
Two attorneys representing policyholders with pending RPA litigation claims asked for the rehabilitation plan to be amended to include a provision for awarding attorney fees and reasonable costs associated with their cases. Both would be recoverable if the policyholders prevail in litigation but are not contemplated in the rehabilitation plan.
The attorneys also wanted a higher interest rate on any monies owed. The rehabilitation plan contemplates interest of 2.7% compounded annually.
Neither issue is addressed in the proposed order to adopt the rehabilitation plan. The plan still sets the interest owed at 2.7%, and there is no provision for obtaining either attorney fees or costs.
Workers’ Comp Executive will make a copy of the final approved order available as it is issued.
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.