Applied Underwriters Sues California Over ‘Bad Faith’ Insurer Conservatorship Plan

By | October 21, 2020

Workers’ compensation specialist Applied Underwriters is suing California Insurance Department officials to halt a state plan its says would force its workers’ compensation partner California Insurance Co. (CIC) to stop doing business in the state and would damage Applied Underwriters’ own business and reputation.

Applied Underwriters says actions taken by CDI and Insurance Commissioner Ricardo Lara amount to an “unlawful and bad faith campaign” that is being waged under false pretenses. Applied Underwriters maintains that through its proceedings against CIC, the CDI is trying to force Applied Underwriters to relinquish its rights.

The suit, filed in U.S. District Court for the Eastern District of California by Applied Underwriters and its affiliate Applied Risk Services, further alleges that the CDI is acting out of regulatory grudges and not because of any financial problems at the insurers.

CDI got approval last year to place CIC in conservatorship and this week CDI filed a follow-up rehabilitation plan that would force CIC to sell its California business to another insurer. This lawsuit seeks to enjoin the state from continuing the conservatorship.

Applied Underwriters maintains that CDI’s alleged “vendetta” appears to be fueled by CDI’s issues with its EquityComp product.

“The California Department of Insurance has held CIC hostage in a conservatorship for over a year, despite the fact that CIC is fully solvent, has an “A” rating, and remains fully committed to its California customers,” said Alan Quasha, chairman of Applied. “Despite many good faith efforts to resolve these issues, the Department unfortunately seems intent on wasting state resources, harming consumers, and attacking businesses that provide essential services to consumers in California and around the country. It is time to put an end the Department’s abusive behavior and hold it accountable for the harms it has caused.”

Separate Issues

Applied Underwriters, based in Nebraska, argues that it is not a California corporation and thus should not be subject to the conservatorship or any of the proceedings involving CIC. While Applied is no longer formally affiliated with CIC, its income stream and value remained dependent on providing policy and payroll services to CIC policyholders, according to the complaint.

The lawsuit is the latest salvo in a long-running dispute between the insurers and CDI that began last year with Applied Systems founder and CEO Steven Menzies seeking to buy Applied Underwriters from Berkshire Hathaway. After Lara’s office would not approve the sale in a timely manner last fall, Menzies decided to expedite it by redomesticating the subsidiary CIC to New Mexico. Menzies was joined in the $920 million acquisition by the Quasha Group led by Quadrant Management.

California maintained that the deal needed its sign-off because CIC, one of Applied’s subsidiaries at the time, was domiciled in the state.

In addition to delaying a ruling on the sale, CDI also balked at CIC’s move to New Mexico without its consent, threatening to pull CIC’s certificate of authority to do business in California, according to the complaint.

Last November, after the New Mexico move, CDI succeeded in obtaining court approval for a conservatorship for CIC based on a section of law that authorizes conservatorship where an entity, “without first obtaining the consent in writing of the commissioner, has transferred, or 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.”

According to Applied Underwriters, this conservatorship order has caused it significant financial and reputational harm.

In addition, Applied and its officials maintain that CDI’s “vendetta” against them appears to be fueled by a belief that courts have “made incorrect rulings in separate litigation” over the CIC and Applied Underwriters product, EquityComp. Courts have found that the EquityComp policyholder litigation is not suitable for class treatment and rejected policyholders’ claims that the product’s reinsurance provision is void as a matter of law, according to the complaint.

According to Applied Underwriters, the rehabilitation plan “effectively eliminates CIC’s business in California, and other states, requires CIC to transfer its business to a new insurer of the Commissioner’s choosing, and leaves just a shell CIC.”

Applied Underwriters argues that the EquityComp matter should not have anything to do with CIC’s conservatorship.

Rehabilitation Plan

In the year long period that CIC has been in conservation, Applied Underwriters claims the CDI has “refused to resolve matters in good faith,” and has instead demanded that Applied “subject itself to jurisdiction, give up its right to bring this and other lawsuits, and bind itself to other onerous terms.”

The complaint says that up until this week, Lara and his representatives continued to “propose unfair and preposterous terms under the constant threat that if Applied and others did not agree, they would seek court approval for a rehabilitation plan that would be ‘even worse.'”

That rehabilitation plan, originally due in August, was filed October 19.

According to Applied Underwriters, the rehabilitation plan “effectively eliminates CIC’s business in California, and other states, requires CIC to transfer its business to a new insurer of the Commissioner’s choosing, and leaves just a shell CIC with all of its obligations to other reinsurers and affiliates under its contracts and no source of revenue to meet its obligations.”

The complaint says the plan “lacks any reasonable basis or legitimate regulatory purpose and is an abuse of the commissioner’s power without any due process to Applied.” The state’s application acknowledges that “CIC’s financial status has remained stable” and that “CIC’s AM Best credit rating remains at its pre-conservation A (Excellent) level,” according to Applied’s complaint.

Applied Underwriters accuses the CDI of using its control over CIC to coerce Applied into agreeing to the rehabilitation plan, which would require giving up “economically valuable rights to defend pending and future litigation” and deprive Applied of the value of its contracts with CIC in California.

Applied Underwriters accuses the CDI of using its control over CIC to coerce Applied into agreeing to the rehabilitation plan.

Applied alleges that the rehab plan specifically seeks to harm its business and would have “disastrous consequences.” Forcing the transfer of CIC’s California business to another insurer would cause Applied to lose “millions of dollars in anticipated revenue” from those agreements.

CDI has gone even further, Applied claims, by vowing to end the conservation and control of CIC “only if CIC and Applied agree to resolve all claims—existing and potential” involving programs, primarily EquityComp, that include CIC workers’ compensation insurance policies.

Applied, noting there are currently dozens of pending legal cases involving EquityComp around the country over various issues, says there is “no precedent or possible regulatory purpose” for this demand.

Applied contends that the state’s actions have caused “significant confusion in the market” including causing brokers, potential clients and policyholders to wrongly assume that the conservation of CIC was financially motivated. “This reputational damage continues and compounds each day the Conservation Order stays in place and is now further exacerbated by the Rehabilitation Plan,” the complaint says.

The state’s interference with CIC’s reputation in the marketplace has reduced its renewals and new business, which in turn reduces Applied’s revenue, the suits adds.

Applied alleges that the CDI has used the commissioner’s powers in “bad faith, arbitrarily and capriciously, and in such a way that lacks any reasonable basis or legitimate regulatory purpose. This is an abuse of power in violation of Plaintiffs’ rights under the U.S. Constitution and federal law.”

The CDI has not responded to a request for comment on the lawsuit.

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Latest Comments

  • October 22, 2020 at 3:36 pm
    Michigan Agent says:
    We have followed this because we had clients impacted by this carrier. They have a "reinsurance agreement" that is not presented or signed until AFTER binding coverage. It has... read more
  • October 22, 2020 at 2:35 pm
    InsurNerd says:
    With insurance non-renewals surging due to fires and insurers pulling out of the state, who is going to be left? Seems like the CDI should be trying to keep insurers instead o... read more
  • October 22, 2020 at 10:44 am
    Observor says:
    Hi California: Thank you for the further explanation. I think that selling captive policies to relatively small businesses can be dangerous in that your pulling people in the ... read more

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