The Applied Underwriters’ Saga Continues ….

NY, Connecticut Want In On The CIC Rehabilitation Plan

Comes now insurance regulators for the states of Connecticut and New York are asking the California court to expand coverage of the proposed California Insurance Company rehabilitation plan to include policyholders in their states.

The regulators maintain that allowing the proposed Applied Underwriters redomestication of CIC to New Mexico via a merger with a hastily created subsidiary would disrupt CIC’s ability to administer workers’ comp claims in their states.

The two states will not allow CIC to escape their states, with an end run as it attempted in California, without the standard withdrawal applications, which those states must approve.

Both states support the rehabilitation plan’s proposal to have an authorized insurer reinsure and assume all California Insurance Company’s in-force policies and other liabilities, duties, and obligations under the CIC policies. They want the same applied to the CIC policies in their states, and New York says in other states.

As Conservator of the CIC rehabilitation, the California Department of Insurance informed the San Mateo Superior Court of the request in a filing late last year. “The Conservator recognizes the legitimate concerns raised by Connecticut and New York regulators that CIC should not be allowed to surrender its California certificate of authority and redomesticate until provisions have been made for all of its policies [in all states] to be assumed by an authorized insurer,” the Department notes in the filing.

Connecticut and New York’s concerns align with California’s – that policyholders in their states could be left with policies from an unlicensed insurer. They point out that CIC’s certificate of authority under which it wrote and administered policies would be revoked by operation of law if the redomestication happens because the New Mexico subsidiary does not have a certificate of authority to write or administer policies in their states.

“CIC presently holds certificates of authority in numerous other states, which rely in part on California regulation of CIC as its domiciliary state. The Conservator notes that it is common for conservations to resolve an estate’s rights and liabilities wherever arising,” the California Department of Insurance notes, maintaining that the issue can be considered at the upcoming hearing on the rehabilitation plan. “The Conservator believes these concerns have raised serious issues that warrant further consideration and briefing.”

Connecticut’s Position

Jack Broccoli, assistant deputy commissioner for financial analysis at the Connecticut Insurance Department (CID), outlined CID’s concerns in a letter. “CID supports implementation of the Plan and the Reinsurance agreement. However, for the protection of Connecticut policyholders we need to call to the Court’s attention an issue for Connecticut and, potentially, other states,” he maintains.

“As of June 30, 2022, CIC reported Connecticut Direct Losses Unpaid of $5.4 million. CIC II, into which CIC is to be merged, is not licensed in Connecticut. Thus, as of the date of the merger, CIC policyholders in Connecticut would be left with policies of an unlicensed insurer,” Broccoli says, noting that during the three-plus years of the conservation, CIC II has never filed for a Connecticut certificate of authority.

“We express no views on whether such an application, if made, would be approved, but we cannot assume that an application would be approved or disapproved, and we cannot predict how long it would take for us to reach a decision on such an application,” he maintains. “The possibility that CIC II would maintain in-force insurance policies in Connecticut when it cannot lawfully transact the business of insurance represents a potential risk to its policyholders and their employees.”

CID’s Broccoli asks the Court and the CDI conservator to amend the reinsurance provision of the rehabilitation plan to include coverage for non-California CIC policies. “Such an amendment would be fair and reasonable to both California and non-California policyholders, would treat all CIC policyholders without discrimination and would fully conform with applicable law,” says Broccoli in the letter.

New York’s Request

New York’s Department of Financial Services echoes the concerns expressed by Connecticut of policyholders being left with an unlicensed carrier. As of June 30, 2022, CIC had approximately $11 million in direct New York workers’ comp reserve liabilities, according to John Finston, executive deputy superintendent at New York’s DFS. CIC II does not hold a New York certificate.

Finston is a former deputy commissioner and general counsel for the California Department of Insurance.

“If CIC II were to service the New York claim liabilities, CIC II would be doing an insurance business without a license in violation of New York Insurance Law section 1102,” he notes. “In addition, any person who assists with the servicing of these claims on behalf of CIC II, such as a third-part administrator, would be aiding an unauthorized insurer in violation of New York Insurance Law section 2117.”

Finston also points out that as an unauthorized insurer, CIC II would be unable to appear before the New York Workers’ Compensation Board. “Thus, CIC II administration of the New York liabilities would put New York workers’ compensation claimants at risk and, more likely, cause the statutorily mandated flow of benefits to New York’s injured workers to grind to a halt,” he warned.

In addition to asking for CIC’s direct New York liabilities to be novated to an authorized insurer or reinsured by an authorized reinsurer, Finston says DFS wants the CIC rehabilitation plan and agreement to be amended to:

Require CIC to comply with the withdrawal requirements of [all] states in which CIC is authorized to do insurance business, including New York, similar to the withdrawal requirement set forth in item 3 of recital D of the Plan, and

Include, as beneficiaries of section 2.6 and schedule 2.6 of the Plan, New York claimants under policies issued or delivered in New York, to the same extent as California employees covered by California policies.

Section 2.6 and Schedule 2.6 pertain to the settlement options for resolving disputes over the reinsurance participation agreement (RPA) in the EquityComp and SolutionOne programs. Schedule 2.6 proposes three settlement scenarios that include paying the premiums under the guaranteed cost policy or getting a refund if there was an overpayment.

It is a de rigueur for the state where an insurer is domiciled to handle conservation matters for all other states to avoid multiple conservation hearings countrywide. It works much like one where a state’s Guarantee Fund handles the matter for all states in the event of insolvency.

Of course, CIC Opposes

CIC openly admits there is considerable litigation with policyholders in many states and that it is presently licensed in some ‘two dozen’ additional states. But attorneys for California Insurance Company are asking the Court for leave to file additional briefs in opposition to the rehabilitation plan noting the revelation of the requests by Connecticut and New York. CIC maintains that the demands by the two states are both untimely and barred by the conservation notice.

“The Conservator’s suggestion that opening up the Plan to out-of-state regulators and policies can be addressed with simple briefing is neither reasonable nor plausible,” the carrier notes. “The Court cannot be asked to consider, and CIC cannot be asked to respond to, an eleventh-hour theoretical amended Plan that is not actually before the Court, let alone one that would involve insurance policies in two dozen additional states and numerous additional litigation claims.”

CIC argues again that there is no need for an outside reinsurer to take over its policies in California or elsewhere. “The clear solution is for CIC’s affiliate, Continental Indemnity Company, to act as the reinsurer for CIC’s policies in California and elsewhere to ensure continuity of coverage while also preserving the business and assets of CIC within its affiliate group,” says attorney Shand Stephens of DLA Piper, noting that Continental is also licensed in California and the other states where CIC operates.

There is considerable opposition to another Applied Underwriters’ carrier taking over the CIC policies and liabilities, given the Department’s experience in this case.

Judge Danny Chou has not ruled on CIC’s request for supplemental briefing. The hearing to approve the rehabilitation plan was pushed back a month to early March.

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.