No Surprise: CIC Pushes Back Against Proposed Rehab Plan

Applied Underwriters’ California Insurance Company filed its opposition to a proposed rehabilitation plan. The California Department wants to force Applied to sell off its California operations and settle pending litigation over its controversial reinsurance participation agreement (RPA). The San Mateo Superior Court handling the now three-year-old conservation proceeding will rule on the rehab plan early next year.

CIC’s opposition to the California Department of Insurance’s proposed rehabilitation plan focuses on two main areas:

  •   Section 2.6 and its schedule covers the terms for settling the 60 pending cases filed by employers and others still to be filed that involve the EquityComp program’s RPA, and
  •   Section 2.2’s provisions call for an independent third-party administrator (TPA) to adjust and manage CIC’s claims if another Applied Underwriters affiliated company reinsures CIC’s policies and claims liabilities.

CIC attorney Shand Stephens from DLA Piper argues that the proposed rehabilitation plan is “arbitrary, unsupported by a rational basis or substantial evidence, illegally discriminates against CIC and CIC affiliates and violates their constitutional rights.” He maintains that the rehab plan goes beyond the scope of the conservation order issued to address CIC’s attempt to merge with a hastily created New Mexico subsidiary without CDI’s approval.

Schedule 2.6 proposes three settlement scenarios for the RPA litigation. The alternatives are to:

  1. Pay the premiums under the existing guaranteed cost policy issued by CIC or get a refund if there was an overpayment,
  2. Pay a premium under what is determined to be a standard Retrospective Rating Plan based on California’s ‘Cal-Retro Plan’ or receive a refund for overpayment, or
  3. Enforce what Applied proposed under its solicitation document called its ‘Program Summary and Scenarios,’ or receive a refund for overpayment.

“Schedule 2.6 is an extraordinary, unprecedented interference in court litigation and deprives California’s courts of their authority to decide the merits of litigation claims and defenses,” Stephens argues in the opposition brief. “CIC objects to Schedule 2.6 because it seeks to force CIC to settle those 50 litigations and 10 new post-conservation ‘claims,’ with no or incomplete discovery, without regard to the merits of each policyholder’s claim or CIC’s defenses, and with no actual or asserted relevance to the merger-related issues that the [Rehabilitation] Plan is intended to resolve.”

But Attorney Larry Lichtenegger, who represents many of the employers with cases pending settlement, tells Workers’ Comp Executive the CIC filing is just more of the same old scorched earth arguments CIC has lost many times before.

Section 2.2

Section 2.2 provides for an open bidding process to find a qualified insurer to reinsure CIC’s California book.

“CIC generally does not object to the business being auctioned off to a qualified reinsurer, for fair market value, so it may complete its merger with CIC II and leave the state,” says Stephens, but notes that CIC does object to certain provisions in the section.

“What CIC opposes are the Plan’s arbitrary, unfounded provisions requiring the reinsure to accede all claims handling responsibility to a third-party claims administrator (‘TPA’), but only if the reinsurer that wins the bid is a CIC affiliate,” Stephens, who is fond of adjectives, maintains. “The Plan does not impose the TPA requirement on any bidding reinsurer other than a CIC affiliate.”

Stephens argues that the inability to manage the claims lessens the market value of the deal for any CIC affiliate by imposing financial and administrative burdens that other reinsurers would not bear. “The TPA requirement is arbitrary because it is not supported by any rational basis or substantial evidence, nor does it ‘rehabilitate’ any issues related to the attempted merger,” he adds.

CIC also argues that the bidding process should include a right of first refusal for its affiliates to reinsure or purchase the California business. It argues that forcing a sale to a third-party reinsurer would effectively gut CIC.

“To facilitate its exit from conservation, CIC is nevertheless willing to consider selling its California business on fair and equitable terms. Specifically, CIC submits that a bidding California-licensed CIC affiliate should have a right of first refusal if it is willing to match the highest bidder to the Conservator,” offers Stephens. “In effect, this would allow the business to remain within the CIC group and effectuate the statutory purpose of yielding control of CIC back to its officers, or at least affiliated entities and persons.”

But the California Department’s position is to remove the carrier from the state and protect the remaining policyholders from an organization with which it has had nothing but trouble or its affiliates managed by the same people.

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.