The Applied Underwriters Saga Continues…

Conservation Court Confirms CDI Consequences

The San Mateo Superior Court judge handling the conservation of Applied Underwriters California Insurance Company issued a stinging rebuke of Applied Underwriters’ California Insurance Company for flaunting its indifference to the regulatory authority of the California Department of Insurance and for mistreating policyholders.

San Mateo Superior Court
San Mateo Superior Court

If adopted as drafted, which observers say is expected, the tentative decision will set in motion a process to finally end years of litigation for dozens of California employers, put control of existing policies or the claims therefrom into the hands of locals, and usher the carrier out of the state.

Judge Susan Greenberg’s statement of decision and tentative order would adopt in its entirety the Department’s plan to auction off California Insurance Company’s California operations and resolve the outstanding litigation from the Applied Underwriters EquityComp program.

The rehabilitation plan would:

  • Shield the existing workers’ comp claims from any further manipulation by Applied Underwriters’ for its benefit at the detriment of policyholders;
  • Give policyholders three options to resolve the ongoing litigation on equitable terms;
  • Require California Insurance Company to surrender its California certificate of authority and complete its merger with a New Mexico alter-ego.

Judge Greenberg inherited the case early last year after her predecessor was appointed to the appellate courts, so she was not witness to the first three years of the conservation or the years of litigation leading up to the state’s November 4, 2019, seizure of the carrier.

Her statement of decision, however, made it perfectly clear that she had seen more than enough of the tactics of Applied Underwriters’ management and its legal representatives to conclude that there is a rational basis for the Department’s rehabilitation plan and that CDI’s actions are not arbitrary. Her detailed findings are demonstrative of the review of all the preceding material.

“The record reflects the validity of [Insurance Commissioner Ricardo Lara’s] concerns regarding CIC’s management. Substantial evidence shows that CIC’s management routinely evaded the Commissioner’s regulatory authority both pre- and post-conservation,” Greenberg wrote.

She pointed out many occasions when Applied went around the Commissioner’s authority, such as by completing the buyback of CIC from Berkshire Hathaway without CDI approval, making a $20 million uncollateralized loan to an affiliate, and of course, trying to merge with an out-of-state entity without Department approval. “Moreover, in December 2020, the Commissioner learned that CIC had issued letters on behalf of itself and its affiliates to CIC policyholders, advising them that their CIC policies would be transferred to Continental in violation of the Conservation order.”

“The Court cannot find the Commissioner’s concerns about CIC’s management to be arbitrary or irrational in light of such evidence” —Judge Susan Greenberg

The court also knocked CIC for misstating evidence, misrepresenting the authority of a document to support its position, and mischaracterizing how one of the proposed settlement provisions would work.

Greenberg pointed out that even Applied’s chosen term for the document at the core of its EquityComp workers’ comp program was a misnomer. She noted that CIC conceded in the Shasta Linen litigation that the reinsurance participation agreement (RPA) was not a reinsurance agreement at all. The record shows that this was one of several nonstandard terms that CIC employed to obscure the program’s true nature.

Against this backdrop of unilateral actions in violation of both the conservation order and the Commissioner’s authority, as well as efforts to obfuscate the record, Greenberg wrote that “the Court cannot find the Commissioner’s concerns about CIC’s management to be arbitrary or irrational in light of such evidence.”

Policyholder Protections

Throughout the statement of decision, Greenburg points to the substantial evidence gathered in the case that supports the various provisions to protect CIC policyholders. In each instance, she found a rational basis for the Department’s actions.

These protections include Section 2.2’s preference for an independent reinsurer to take over CIC’s California book. Absent a winning bid by an independent reinsurer, the plan requires an independent third-party administrator to divorce Applied Underwriters from handling or administering its California claims.

Unfair Policyholder Litigation

Section 2.6 and its accompanying schedule also lay out three pathways to resolving the RPA litigation.

“Substantial evidence shows that CIC made resolving disputes excessively onerous on policyholders in a way that deterred them from actually enforcing their legal rights ” —Judge Susan Greenberg

Much of the evidence the Department and the court relied upon was presented by attorney Larry Lichtenegger, who represents the bulk of the CIC policyholders still in litigation with Applied. CIC challenged this reliance, but Greenberg found that the evidence in the case corroborates Lichtenegger’s assertions.

“Although CIC has sought to impeach Lichtenegger, this impeachment evidence does not demonstrate that the Commissioner abused his discretion or otherwise acted arbitrarily by relying on Lichtenegger’s representations of his own experience,” Greenberg says. “Nor does the Court conclude that it was an abuse of discretion, irrational, or arbitrary for the Commissioner to consider this aforementioned evidence of potentially larger and more endemic issues that demand rehabilitation.”

Lichtenegger offered extensive testimony on CIC’s use of litigation and claims management tactics to drive up costs for policyholders and delay case resolutions to its own benefit. “Policyholders engaged in RPA litigation with CIC have repeatedly noted that CIC keeps claims ‘open’ to maximize the investment returns which CIC derives on those returns,” the statement of decision notes. The Department also found that CIC’s actions inferred a policy of “over-reserving for profit.”

Lichtenegger also documented the abusive litigation tactics that made it so costly to fight Applied. That includes forcing California policyholders to litigate in distant forums.

The court points out that the RPA subjects all disputes to binding arbitration in the British Virgin Islands under Nebraska law and requires arbitration awards to be enforced in Nebraska courts. Judge Greenberg notes, however, that adjudicators have found the arbitration provision unenforceable under Nebraska law and that Applied sought arbitration even when the arbitrators found they had no jurisdiction.

“By requiring policyholders to resolve their disputes before an arbitrator, only to have the arbitration clause be found unenforceable or for the arbitrator to conclude that they cannot decide the dispute, CIC and affiliates have trapped policyholders in circular litigation at great cost,” Greenberg wrote.

The statement of decision also details how CIC regularly sued California policyholders in Nebraska despite repeated findings that the courts there lacked jurisdiction and then appealed all motions to dismiss to no avail. The court notes one policyholder was sued at least four times in Nebraska – not including an arbitration action – and Applied lost every time.

“The Court need not conclude that these Nebraska suits were filed to retaliate against policyholders, but the Court finds the Commissioner’s decision to consider this pattern rational,” Judge Green wrote. “Substantial evidence shows that CIC made resolving disputes excessively onerous on policyholders in a way that deterred them from actually enforcing their legal rights. It is consistent with the Commissioner’s duty to protect the interests of CIC’s estate, its policyholders, other beneficiaries, and the public by proposing a mechanism for settling this litigation.”

Full Value

Applied Underwriters officials condemned the court’s tentative decision in a news release. They characterized it and the Department’s actions as an unprecedented judicial and regulatory overreach. It is logical to assume that will be one of the items in their appeal.

Judge Greenberg, however, maintains the rehabilitation plan is “fair, just and reasonable to the policyholders, creditors, the shareholder of CIC, and the public.” She points out that the plan carries out the company’s goal of exiting the state but does so in a manner that follows California law.

“Under the proposed Plan, regardless of the reinsurer or the proportion of its business remaining in California, CIC will emerge from conservation with the fair market value of its business reinsured and with its intellectual property (the talent and knowledge of its management and employees),” Greenberg noted. “As the Commissioner has emphasized, the Plan is not intended to destroy CIC, but to enable CIC to withdraw from the California insurance market in a manner compliant with the Insurance Code.”

The tentative ruling does have one beneficial part for Applied Underwriters: Greenberg’s decision not to entertain New York’s request that the plan’s litigation remedies be applied to its policyholders. The benefit may be fleeting, however. The judge noted that Insurance Commissioner Ricardo Lara could make such a request in a later application to the court.

Parties have an opportunity to respond to Judge Susan Greenberg’s statement of decision and tentative order before a final order is issued. Copies of the court’s statement of decision and tentative order are available in our Resources section or by clicking here.

Workers’ Comp Executive’s extensive coverage of Applied Underwriters, CIC, and the fight over the EquityComp program dating back to 2015 can be found by clicking here.

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