California Insurance Company Tried Another End Run …

Motion To Vacate Applied Underwriters’ CIC Conservation Denied

Applied Underwriters’ affiliate California Insurance Company suffered a second loss in less than a week concerning its conservation by the California Department of Insurance.  The carrier lost its bid to push back a hearing in the on-going court battle over the carrier’s conservation.

The loss was its second major defeat in the case in a week after earlier failing to block the CDI’s plan to put out a proposed rehabilitation plan for public review.

“The Conservation Order simply ensures that Respondents do not again attempt to take CIC and its assets out of California without adequate protection of policyholders and the public.”  — Judge George Miram

A stipulation between CIC and the Conservation and Liquidation Office to delay the hearing so they could negotiate came to light only after San Mateo Superior Court Judge George Miram issued a tentative ruling indicating denying CIC’s motion to vacate. Observers say the prospect of a second loss drove CIC back to the bargaining table and to push back hearings in the case by two weeks.

Applied Underwriters’ CIC had refused to negotiate, or reportedly have any communication on the topic, for some weeks before the CDI took this action.

“I have no fundamental problem with the changes of the dates where they are far enough out, but you should be aware that requesting a continuance after the tentative ruling has issued will not be granted,” Miram noted in an admonishment to both parties at the hearing. “I expect you to respect the court’s calendar and time the same way I respect yours. If you’re going to request a continuance, I’m flexible, but you have to do so before all the work has been done and before the tentative ruling is issued.”

CDI Did Not Consent

CIC attorney Shand Stephens of DLA Piper argues that CDI’s failure to object to CIC’s proposed merger into a newly created New Mexico corporation was tantamount to giving its consent to the deal. The public hearing about the deal was scheduled, held, and decided in less than 24 hours.

The New Mexico deal involved Applied creating a new carrier, with the same CIC name domiciled in New Mexico, and then merging the California CIC into it to escape California regulation. The entire plan from the company’s creation to New Mexico’s approval of the deal played out in less than a week.

“The idea that the Commissioner can attend a duly noticed and lawfully convened hearing in another state, sit silent and not object to what’s going on…and then three weeks later suggest that he never consented to that because he didn’t know anything about it is baloney, pure and simple,” argued Stephens. He likened it to a court judge asking if there are any objections – if no one speaks up, there is no objection. “At the very least your Honor, your Honor has to have a hearing in which he hears these people say why they went there. No one’s ever said why they went [to the hearing],” Stephens argued.

CLO attorney Michael Strumwasser countered that the California insurance code requires the Commissioner’s consent to complete a sale or merger and maintained that CIC failed to show it ever received such approval. “These are major capital events involving the merger of major corporations. The notion that anything of legal significance could be achieved by oral consent is preposterous,” Strumwasser told the court. “And the notion that it could be achieved by failing to object is even more preposterous.”

Strumwasser also challenged Stephens’ contentions that CDI obtained the conservation order under false pretext based on concerns about CIC’s financial health. “We have consistently said that CIC is not a threat to its policyholders because it lacks enough capital,” he said, noting that the Department explained as much to A.M. Best as part of its review of CIC’s A Rating.

“The danger to policyholders is if the merger had been effected without the Commissioner’s consent, then the company’s certificate of authority to transact insurance in California is revoked as a matter of law and this is of course enormously perilous to policyholders who would then have an unadmitted insurer responsible for their claims.”

The state’s arguments held sway. Echoing his earlier findings that the California Insurance Commissioner has broad authority to oversee the conservation and rehabilitation of carriers, Judge Miram rejected CIC’s motion to vacate the original conservation order.

“[U]nder California Insurance Code 1012, a Conservation Order shall be vacated where the ground of the order does not exist or has been removed. Respondents have failed to demonstrate that the conditions necessitating conservation did not exist or have been removed,” Miram noted. “The Conservation Order simply ensures that Respondents do not again attempt to take CIC and its assets out of California without adequate protection of policyholders and the public.”

Judge Miram did grant the joint request to delay other key filing dates and hearings by two weeks. The CDI is now on track to release a public rehabilitation plan by mid-September.

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.