California Insurance Company and the California Department of Insurance appear to be back at the negotiating table. The new development comes after the Applied Underwriters’ affiliate lost a crucial court fight and, per a tentative ruling, was about to lose another.
Officials at the Conservation and Liquidation Office say Applied/CIC executives broke off negotiations in May. New court filings indicate that the parties have resumed discussions to develop a “consensual” rehabilitation plan.
Why? Because CDI was about to make public a “cram down” rehabilitation plan and Applied /CIC is trying to prevent it.
The renewed interest in negotiations follows the San Mateo County Superior Court’s approval of the public release of a rehabilitation plan that CLO has been developing on its own (for past coverage see Court Approves…). The second blow to CIC’s case came yesterday when Judge George Miram issued a tentative order denying the carrier’s attempt to vacate the conservation order.
“Respondents attempted to take CIC and its assets out of California via a merger without adequate protection of policyholders and the public. The Conservatorship was ordered on those grounds,” Judge Miram noted in the tentative order. “Respondents have failed to demonstrate that the conditions necessitating conservation no longer exist.”
Applied Underwriters’ executives have a reputation for litigation litigation litigation – also known as a scorched earth strategy. It tends to appeal every adverse decision to the Nth degree.
The development is seen as a positive for employers tied up in litigation with Applied. These private actions have been stayed pending resolution of the conservation order, which may now be in the offing.
“Now that Shand Stephens, who represents Applied, has had two crushing defeats in the past week, he finally realizes that it’s in his company’s interests to try to get out of the deal the best terms he can get,” says attorney Larry Lichtenegger. “I don’t blame Mr. Stephens because that’s an attorney’s job. It is also attorney Michael Strumwasser’s job to represent the interests of the Commissioner and the insureds. I’m hoping they will be able to come to a resolution as it is in everyone’s interest to put this litigation to an end.”
Past Actions
Applied’s argument for vacating the conservation order was that the Department obtained it under false pretenses. It also argued enjoining it from consummating the merger would suffice and told the Court that it would consent to such.
But Judge Miram was having none of it: “In light of Respondent’s prior conduct, the Conservation Order ensures that Respondents do not again attempt to take CIC and its assets out of California,” Miram wrote in the tentative order. “While Respondents argue that an injunction is sufficient, the Commissioner may conserve a company that has ‘attempted to transfer, substantially its entire property or business or, without consent, has entered into any transaction the effect of which is to merge, consolidate, or reinsure substantially its entire property or business in or with the property or business of any other person.’”
The Court notes that the Commissioner has his choice of enforcement tools under Insurance Code sections 1011 or 1215.2. “[T]he Commissioner’s preference to purse a Rehabilitation Plan is reasonable and sufficient under the circumstances,” Judge Miram wrote.
To give time for the renewed negotiations, both parties asked the Court to push back all planned hearings and briefing deadlines on the Court’s calendar by two weeks to give time for the talks to develop. The new target for filing a rehabilitation plan – “consensual” or otherwise – is now mid-September instead of the end of August.
There is always the question of a good-faith negotiation particularly, as the Judge pointed out, in light of the attempt by Applied/CIC to remove itself from the jurisdiction of California regulators.
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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.