The San Mateo Superior Court judge in the [Applied Underwriters’] California Insurance Company conservation case gave the state the nod to write the order implementing its proposed rehabilitation plan. The judge is allowing Applied Underwriters to comment on the draft order before the court takes it under submission. Judge Susan Greenberg took the action after issuing a tentative decision in favor of the California Department and hearing two days of presentations for and against the plan, including input from policyholder representatives.
A final, signed order is still months away. Nothing in Judge Greenberg’s comments during the proceedings seemed to indicate that she would deviate from the state’s plan to settle the EquityComp litigation or prevent CIC from settling cases, turning over its remaining book of business and then unceremoniously ushering it out of California.
“I anticipate that it will be long and comprehensive,” Judge Greenberg said from the bench, ordering the state to draft the proposed final order to approve the rehabilitation plan. “I want something that delineates all the facts, the cases…I want all of that to be contained in this order.”
Greenberg’s command came a day after she issued a tentative order finding that “the arguments raised and evidence cited in by CIC” failed to show that the state’s plan was unreasonable, arbitrary, or contrary to state statute. Nothing in Greenberg’s comments following oral arguments contradicted this finding.
In allowing Applied Underwriters to “redline” the proposed final order that attorney Michael Strumwasser is writing on behalf of the state’s conservator, Greenberg told CIC’s attorney Shand Stephens of DLA Piper that this “was not an opportunity for further argument.” The court will not take the issue under submission until it has the proposed order from Strumwasser and the redlined copy from Applied Underwriters.
The court gave each side over a month to prepare the documents. Strumwasser is due to produce a copy of the proposed final order by October 6th. Greenberg gave Stephens and Applied Underwriters until November 17th to deliver their redlined comments and for the court to take the case under submission.
Judge Greenberg raised few questions during the proceedings and essentially allowed the parties to present their respective arguments undisturbed. One observer noted that the judge was allowing Applied Underwriters to make its record for what is viewed as an inevitable appeal.
Key Provisions
The two major points of contention during the oral argument were sections 2.2 and 2.6 and its accompanying schedule. The sections are the heart of the rehabilitation plan, and nothing that Judge Greenberg said during the proceeding would seem to change the thrust of the provisions.
The former ushers California Insurance Company out of the state, while the latter sets the provisions for resolving the pending litigation stemming from the EquityComp workers’ comp program’s reinsurance participation agreement (RPA). More than 50 cases are pending that have been stayed throughout the conservation proceedings.
Section 2.2 calls for an open bidding process to find a qualified insurer to reinsure CIC’s California book, allow CIC to complete its merger with its New Mexico-based alter ego, surrender its California certificate of insurance, and exit the state. The carrier protested that the plan does not give Applied a right of first refusal to have another of its California-licensed affiliates take over the CIC book. It also opposed the section’s requirement that a third-party administrator (TPA) be brought in to handle claims if an Applied affiliate does have the highest bid. A TPA is not required if an unaffiliated carrier takes over the book.
Strumwasser noted during the arguments that the TPA provision is necessary because of concerns about Applied Underwriters management’s ability to run an insurance company in a manner that is fair to policyholders. The same concerns applied to the right of first refusal.
Section 2.6 and an accompanying schedule include three scenarios for settling the pending RPA litigation. The alternatives are to:
Pay the premiums under the existing guaranteed cost policy issued by CIC or get a refund if there was an overpayment,
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
Enforce what Applied proposed under its solicitation document, ‘ Program Summary and Scenarios,’ or receive a refund for overpayment.
Strumwasser noted that including the settlement provisions in the rehabilitation plan allows any disputes to be resolved by the San Mateo court, which will have continuing jurisdiction. The section also allows policyholders to opt out of section 2.6 and continue litigating their claims, but he says only one or two policyholders are expected to go this route.
Policyholder Comments
Two attorneys representing policyholders in the stayed RPA litigation proceedings gave comments to the court either in writing or at the hearing. Both asked the court to grant a higher interest rate for awards and to include a provision for policyholders to recoup attorney fees and costs.
“The interest rate of 2.6% is too low,” attorney Phil Walker told the court, representing the janitorial firm Environmental Control. He noted that the standard rate for cases in California courts is 10%, and even the Fed’s rate would be 5%. “The proposed rate is unreasonable,” he maintained, adding that to be made whole, policyholders should also be reimbursed for their attorney fees. Walker notes that the rehab plan is silent on the issue of attorney fees.
Attorney Eric Larson, representing Star Concrete, echoed these sentiments, noting that Star has spent over six figures fighting Applied for over eight years. “There must be a provision in the plan that an insured may, short of opting out entirely, prove up and recover attorneys’ fees and costs incurred (with interest) in fighting this scheme,” he noted in a letter to the court. “Applied created and administered the EquityComp program in bad faith; indeed, Applied patented the feature that it would not seek approval of the RPA from state regulators. The ability of an insured to recover its attorneys’ fees from an insurer acting in bad faith is, of course, firmly rooted in California law.”
Attorney Larry Lichtenegger, who represents most of the litigants in the RPA litigation, supports a higher interest rate on the awards. But he opines that adding an attorney fees component will just perpetuate more litigation.
Judge Greenberg noted that she also wanted Strumwasser to address the comments the policyholders’ attorneys made to the court in his proposed final order. Licthenegger adds that while the Judge’s approach of having the primary attorneys prepare the initial draft of the final order might take a little more time, “I thought it was rather sensible,” he says, noting that the proposed final order is likely to be over 100 pages when it is done.
Once the case is finally submitted in November – more than four years after the conservation proceeding began – Judge Greenberg says she has no intention of signing the order electronically. “I will take over the file, then print and sign the old-fashioned way,” she told the parties.
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.