The Saga Applied Underwriters’ – Veracity or Verbosity…

Flash Report: Applied CIC – Admitted or Not? Are In-force Polices In-Force?

By Workers’ Comp Executive

State regulation of insurance was dealt a sharp blow this week. No, it wasn’t because of any action in Congress or a pronouncement from the Federal Insurance Office. It was because of a press release. Essentially, California Insurance Company, a subsidiary of Applied Underwriters, stated that because the California Department of Insurance (CDI) didn’t agree, in its timeframe, to the change in ownership of Applied Underwriters from Berkshire Hathaway to Steve Menzies, they were going to do it anyway and, well, that’s just too bad.

The idea was bolstered a little while ago with a news release from the New Mexico Department, which said it approved the merger because California didn’t object. It didn’t object in a hastily called hearing it attended telephonically and by a person from the financial surveillance division without authority to object.

There is now a California Insurance Company domiciled in New Mexico, the Land of Enchantment, that used to be California Insurance Company domiciled in California. New Mexico approved a new carrier, a merger, and a deal in a matter of a couple of days.

Depending on how you read the various comments in regulatory filings in New Mexico or Applied’s press release, it was either (a) a merger into the New Mexico California Insurance Company, (b) a redomestication of California Insurance Company from California to New Mexico, or (c) a withdrawal from California.

As has been the penchant of Applied in its various regulatory entanglements in California, New Jersey, New York, Vermont, and Wisconsin, whatever anyone thinks happened Applied says, no, something else happened. Iowa approved the sale and gave the organization one year to leave the state. Remember, their now infamous EquityComp program was initially conceived not to be an insurance product and specifically to get around state regulators. That’s where this sordid mess all started – that and a policyholder named Shasta Linen.

One thing is clear – There are no actions taken by Applied, including the merger, that didn’t require the approval of the California Department of Insurance. New Mexico says California didn’t object to the merger when asked.

 “the competence, experience, and integrity of the persons who would control California Insurance Company after the change of control is not in the best interest of its policyholders or the public, — CDI News Release

But California absolutely denied the application to sell the carrier saying – and we quote the California Department here – “…the competence, experience, and integrity of the persons who would control California Insurance Company after the change of control is not in the best interest of its policyholders or the public.”

The Insurance Code has protections built in for policyholders whose insurers are leaving the state to ensure the coverage they bargained for will still be there.

There is also the requirement in the Labor Code that says an employer (policyholder) can legally only secure its obligations under the workers’ compensation laws by self-insuring or having insurance from an admitted insurer in California. As of today, there are a number of California Insurance Company policyholders that may now be left holding the bag and are illegally uninsured.

Policyholder Questions

We don’t know about employers who have Applied Underwriters Jumbo GC policies. We don’t know about employers who are in the Solution One program (and whose payroll Applied processes). We don’t know if it can even answer the lawsuits naming California Insurance Company without a bond at this point. We don’t know if contractors insured by CIC and who must have in-force insurance for their license to be valid have valid licenses, let alone any lawsuits that may develop during this time. What about employers who have filed certificates of insurance showing California Insurance Company?

Anyway, well, too bad. Applied is sorry that it is no longer able to do business in California because, well, it was really a hassle to get the Department of Insurance to roll over and play dead for us, so have a nice day. It has stopped quoting and binding new and renewal business. What will become of “in-force” policyholders is a question the California Department has not answered. Workers’ Comp Executive can’t help wondering what the hell the California Department is actually doing.

Then there is rating agency A.M. Best. As far as it is concerned, none of this regulatory non-compliance gets in the way of giving the new California Insurance Company an “A” rating. That undoubtedly will be of comfort for those who are going to get offered Applied products in markets other than California.

These actions are, however, another nail into the coffin of the McCarran-Ferguson Act – the law the makes insurers largely immune from anti-trust laws if there is active state supervision of their activities. That enables carriers to do things like share data and develop common policy forms. If there is no consequence for regulatory non-compliance, other than, perhaps, a hefty fine and an approved exit strategy, then there is no effective state regulation of insurance. And if there isn’t state regulation, well, welcome to the Sherman Anti-Trust Act.

We cannot wait for the Commissioner to articulate the next action from the Department because he recused himself from this issue due to well-documented fundraising activities with people associated with Applied. The failure to take immediate action is a stunning regulatory failure. We call upon the Department to act – and to act now.

The Attorney General and the Labor Commissioner, in the absence of Department action, should have already stepped in to take action, but to date, they are silent. The Assembly and Senate Insurance Committees in Sacramento should also be concerned about this.

We’re waiting for some answers and some actions. But, like Applied, not indefinitely.

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