New Mexico is Threatening Applied Underwriters’ New Carrier

The New Mexico Office of the Superintendent of Insurance (OSI) is threatening to cancel the certificate of authority issued to a corporation that Applied Underwriters hastily created in 2019. The New Mexico-based iteration of California Insurance Company was formed in a matter of days as Applied sought to escape California’s regulatory authority. The certificate was issued amid questions of impropriety regarding current or former officials in New Mexico.

Now, New Mexico is threatening financial penalties and the revocation of its certificate unless Applied can show good cause why it has “failed to establish and maintain a principal place of business” in the state.

The California licensed iteration of the carrier was seized by California and is currently under partial control of the California Department of Insurance and the Courts. It is operated under a conservation order in what CDI says is an effort to protect current and former policyholders. As settlement nears, one element is that it will lose its California certificate to operate.

“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” –– New Mexico Office of the Superintendent of Insurance

“CIC New Mexico is ordered to show cause, within thirty (30) days from the date of this Notice, why it should not be fined…and why its certificate of authority should not be suspended or revoked for its continued violation,” of state law, New Mexico Superintendent Russell Toal wrote in a January 5 letter to the carrier. Toal says a failure to comply will result “in a final order fining CIC New Mexico and revoking its certificate of authority to transact the business of insurance in the state of New Mexico.”

Officials from the New Mexico Office of the Superintendent did not respond to requests for comment on the action.

“It has been over 14 months since OSI authorized CIC New Mexico to transact the business of insurance in the state of New Mexico as a domestic insurer,” Toal noted in the notice to show cause. “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” in the state.

The New Mexico Superintendent’s quarterly filings show that CIC New Mexico reported some $1.6 million in surplus — $650,146 in bonds and $1,009,863 in cash. The filing shows no written premiums in the state.

Applied Underwriters’ created CIC New Mexico in a matter of days as CEO Steve Menzies raced a deadline to complete a deal to buy the carrier back from Berkshire Hathaway along with other assets. As a California-domiciled carrier, the sale required Insurance Commissioner Ricardo Lara’s approval of its Form A filing in order to complete the sale. The Form A review process was still ongoing when Applied created the New Mexico corporation and asserted that it merged the California operations into the newly formed New Mexico corporation.

CDI says it was an effort by Applied Underwriters’ management to avoid California regulation and move assets out of the state.

Conservation Order

CDI sought and received a conservation order to preserve the original California Insurance Company’s assets and prevent the merger’s consummation. Department officials maintained that allowing the merger to proceed would invalidate CIC’s California certificate and leave its insureds in the state with coverage by a non-admitted carrier.

Under Labor Code section 3700, California employers must be either legally self-insured or have coverage from an admitted carrier. Failing to do so exposes employers to stop work orders and penalties from the state and eliminates protection under the workers’ comp act’s exclusivity provision.

New CIC Lawsuit

The New Mexico superintendent’s stern warning prompted the carrier to file a lawsuit against Commissioner Lara and the Department in federal court in California. The lawsuit also names staffers at the Department, including Deputy Commissioners Kenneth Schnoll and Bryant Henley.

“Plaintiff has been unable to obtain any assets of CIC or build its business in New Mexico and other states.” –– California Insurance Company New Mexico

The federal lawsuit is the second by Applied seeking to overturn the state’s conservation of the original California Insurance Company. Both cases are pending the in Eastern District of California and may be consolidated.

The latest lawsuit – another in a string – alleges violations of the commerce clause, due process rights, and the constitutional protection from unlawful takings. The lawsuit rehashes many of the allegations Applied has raised unsuccessfully in the past, including claims that the California Department of Insurance actually approved the CIC merger, a claim the CDI unequivocally denies. Officials have described Applied’s litigation strategy as “scorched earth.”

“Defendants have continued to wage a bad faith campaign to harm Plaintiff and prevent Plaintiff from establishing its business in New Mexico and other states,” the carrier argues in the lawsuit. “Despite Plaintiff’s best efforts, and despite the New Mexico Secretary of State order finalizing the merger, Plaintiff has been unable to obtain any assets of CIC or build its business in New Mexico and other states.”

In a related federal action, Applied amended its original complaint last month. California Department of Insurance moved to dismiss the initial lawsuit but dropped that motion after Applied filed the amended complaint. Its response to the amended complaint is due by the end of the month.