New Mexico AG Wants In…

Commissioner Lara v Applied Underwriters Back In Court

Insurance Commissioner Ricardo Lara and the California Department of Insurance will be in federal Court next week asking the Court to dismiss yet another attempt by entities related to Applied Underwriters and California Insurance Company to end the state’s conservatorship of CIC.

And, in yet another twist, the New Mexico Attorney General is attempting to intervene – on Applied Underwriters’ / California Insurance Company’s behalf.

The carrier continues its multifaceted scorched Earth legal attacks to prevent a hearing on a rehabilitation plan. The plan could ultimately usher CIC out of the state and introduce a strategy for resolving litigation over its EquityComp and SolutionOne programs.

Commissioner Lara is asking the Court to dismiss the federal complaint filed by California Insurance Company New Mexico (or CIC II) – the planned successor to the California Insurance Company domiciled in California. CIC New Mexico was the hastily created corporation that Applied Underwriters’ used as an end-run around California regulators. AU attempted to merge California Insurance Company into the New Mexico CIC II when it could not win CDI’s consent for Steve Menzies to buy the company from Berkshire Hathaway.

Federal courts earlier rejected nearly identical arguments filed directly by Applied Underwriters’ and Applied Risk Services. The Court there held that the San Mateo Superior Court overseeing the conservation of California Insurance Company has jurisdiction over the dispute. Further, the Court abjectly rejected Applied’s allegations that the Department has been acting in bad faith.

“Plaintiffs’ own allegations describe efforts by CIC and plaintiffs to create a New Mexico Company, CIC II, in to which CIC could merge its assets to avoid California’s regulatory process,” Federal Judge William Shubb noted in his order dismissing Applied’s complaint. “Because plaintiffs’ own allegations provide a valid basis for the Conservation, and because defendants’ actions have received repeated authorization from state courts, this court cannot find that the state proceeding lacks ‘[any] legitimate purpose,’ and instead must find that plaintiffs have failed to prove the existence of bad faith in this case.”

Applied has an appeal pending with the Ninth Circuit Court of Appeal. It asked the Court for an expedited hearing but was rejected. In that filing, Applied revealed how much is at stake in the proceedings. “Adoption of [CDI’s] rehabilitation plan will, in turn, force the settlement of dozens of lawsuits and arbitrations on unfavorable terms, and force divestment of assets that will cost Appellants an estimated $100 million in lost profits,” the company wrote.

Latest Action

Up for hearing next week in federal district court in Sacramento is the Department’s motion to dismiss CIC New Mexico’s complaint. CIC New Mexico claims the Department is using the conservation proceeding “to strip CIC and Plaintiff of assets and deprive them of their constitutional right of access to the courts.”

This case, too, will be heard by Judge Shubb.

“Plaintiffs’ own allegations describe efforts by CIC and plaintiffs to create a New Mexico Company, CIC II, in to which CIC could merge its assets to avoid California’s regulatory process”  ––Federal Judge William Shubb

“Despite this Court’s Applied Underwriters decision, Plaintiff filed an amended complaint — materially identical to the one this Court dismissed in Applied Underwriters. As with that case, CIC II asks this Court to declare unconstitutional conservation proceedings that were initiated by the State of California following CIC and Plaintiff’s attempted end-run around the requisite regulatory approval for a $700 million acquisition of CIC’s parent company,” the Department notes in its motion to dismiss. “In addition to sharing the same defects that led to dismissal in the Applied Underwriters decision, the present lawsuit suffers from its reliance on an additional, false legal premise: That CIC’s assets, policies, and injuries belong to CIC II by virtue of an order by the New Mexico Superintendent of Insurance approving a merger of CIC and CIC II.”

The Department maintains that CIC II’s claims are based on the legal rights and interests held by California Insurance Company and are not the New Mexico corporation’s to assert. California Insurance Company is currently seeking to enforce its rights in the San Mateo state court proceeding, and CDI maintains that the state court retains jurisdiction.

Sorry Judge

In opposition to the motion to dismiss, CIC New Mexico maintains that Judge Shubb wrongly dismissed the earlier case filed by Applied Underwriters and Applied Risk Services.

“In submitting this opposition, Plaintiff is mindful of the Court’s recent opinion in Applied Underwriters, Inc. v. Insurance Commissioner of the State of California based on the prior exclusive jurisdiction rule and Younger abstention,” the carrier wrote in opposition to the motion to dismiss. “Neither of those doctrines deprive this Court of jurisdiction, and there is no basis to dismiss any of Plaintiff’s claims.”

CIC New Mexico argues that the conservation action is unprecedented. “California insurance conservations are designed to address private insurers that are insolvent or face the threat of insolvency,” it says, arguing instead that here the conservation and proposed rehabilitation plan is being used as a means of punishment.

The state’s proposed rehabilitation plan is slated to be heard in late July. However, expectations are that this hearing will be delayed as Applied Underwriters pursues various avenues of discovery in the case.

In addition to the ongoing conservation in California, Applied Underwriters’ New Mexico corporation is facing potential penalties in its adopted state. In January, the New Mexico Office of Superintendent Insurance (OSI) issued an order to show cause why CIC New Mexico shouldn’t be fined or lose its certificate of authority for failing to operationalize the New Mexico carrier. However, the New Mexico Department later agreed to hold off on those actions in light of the ongoing legal actions in California.

New Mexico AG

The NM Department agreed to hold off on its action against CIC II in light of the ongoing legal actions in California

In addition to the motion to dismiss, the Federal Court is being asked to allow New Mexico Attorney General Hector Balderas to file an amicus brief supporting the carrier – CIC New Mexico.

Through a private law firm, the Attorney General makes the same arguments Applied, and CIC has made before. The question is why is – and what made – the Attorney General of New Mexico, an elected official, attempting to intervene in a California Regulatory action.

Officials in the New Mexico insurance department say that they did not ask the attorney general to file the brief or to intercede in the California action but did not comment further. The New Mexico Attorney General’s office had not responded to Workers’ Comp Executives’ questions.

“The pending conservation over CIC is preventing the merger of CIC with CIC II and its reincorporation in New Mexico. The uncertainty generated by the conservation – including its lengthy and indefinite duration – harms New Mexico’s interest in permitting the consummation of a merger that has been approved by the State’s Superintendent of Insurance,” the proposed amicus brief states. “Instead, CIC II’s creation remains in limbo, with CIC II unable to establish a business in New Mexico and write policies for the State’s market.”

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.