Applied Underwriters Responds to California Department of Insurance Effort to Halt Sale

October 23, 2019

Applied Underwriters executives have responded to efforts by the California Department of Insurance to halt the sale of one of its subsidiaries and threaten to upend a reported $920 million deal that’s been in the works for some time.

The company said that after six months it gave up waiting for California to act on its request for approval of its sale and instead took up another state, New Mexico, on its offer to expedite the transaction by moving its California subsidiary, California Insurance Co., to that state.

Applied Underwriters said five other regulators were involved in the transaction and approved it.

On Monday, the California Department of Insurance revealed it had denied the application for approval of the sale of California Insurance Co.

But Applied Underwriters maintains that the sale to Applied Underwriters founder Steve Menzies closed on Oct. 10.

California insurance regulators are upset that the $920 million sale of Berkshire Hathaway’s Applied Underwriters workers’ compensation unit to Menzies was apparently closed without their approval.

The California department says it must sign off on the deal because one of Applied’s subsidiaries, California Insurance Co., is domiciled in the state.

However, after the Associated Press reported that Applied Underwriters said that the California Insurance Co. is now domiciled in New Mexico, which did sign off on the deal, CDI claimed that the decision to merge the entity with a New Mexico-based entity also required California’s approval.

A spokesman for the New Mexico Office of the Superintended of Insurance wasn’t immediately available for comment.

The deal was announced eight months ago with the deadline set and published for Sept. 30. On Sept. 27, one business day before the closing deadline, the CDI wrote that it could neither approve nor disapprove the transaction. Closing finally took place on October 10, according to the Applied Underwriters’ General Counsel Jeffrey Silver, who issued the following statement on Monday afternoon:

“We respect that the California Department of Insurance had a right to decide on our application, and we wish they had done so, one way or the other. Five other state and federal regulators did, and by the way all of them approved the deal, but after six months California still could not complete its homework.”

Silver said that with deadlines looming, the New Mexico Department of Insurance enabled California Insurance Co. to move to their state.

“A public regulatory hearing was convened by New Mexico, at which the California Department of Insurance participated with its top brass and a lawyer,” Silver’s statement reads. “The Hearing Officer called for objections to the plan to move the company. Anyone present could have voiced one, and if the California Department of Insurance had done so, then the company would not have moved, but they did not do so.”

The deal has been under scrutiny in California over a campaign contribution controversy. Insurance Commissioner Ricardo Lara has been under fire for taking campaign contributions from the insurance industry, despite his pledge not to do so, and there have been allegations that he made first contact with an agent of Applied offering political support in conjunction with seeking approval for a change of control in the company.

Menzies was named in a writ of administrative mandamus filed in August in San Francisco Superior Court by Oceanside Laundry and RDR Builders Inc. seeking judicial review of the Lara’s actions in two cases in which the companies claim he violated their rights. The writ is part of an effort to overturn decisions by Lara in cases involving Applied Underwriters, alleging the decisions by Lara were swayed by contributions to his campaign from people affiliated with Applied.

The San Diego Union Tribune reported last month that Eric Serna, a New Mexico lobbyist who more than a decade ago retired from the position of New Mexico’s insurance commissioner while under investigation, was also in meetings with Lara and insurance executives. One of those meetings included the proposed buyer and seller of Applied Underwriters. according to the Tribune.

California Insurance Co. was purchased in 2003 by Applied Underwriters with CDI approval. In 2006, Berkshire Hathaway bought an 81% interest in Applied, which was founded in California in 1994.

The recent buy back by Menzies and The Quasha Group was agreed between Berkshire Hathaway and Applied largely to free Applied’s companies from channel competition with other Berkshire Hathaway subsidiaries, according to the company.

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