The First District Court of Appeal is expected to hold oral arguments later this spring in Applied Underwriters’ appeal of the state’s rehabilitation plan for its California Insurance Company. The appeal is now fully briefed, and attorneys for both Applied and the California Department of Insurance have requested oral arguments.
Applied filed the appeal last year after the San Mateo Superior Court approved the state’s rehabilitation plan in the five-year-old conservation of CIC. Judge Susan Greenberg signed the order last April approving the plan to usher CIC out of the state.
Judge Nina Shapirshteyn is now handling the ongoing proceedings in the San Mateo court, which retains jurisdiction over the rehabilitation plan.
The California Department of Insurance maintains that CIC’s appeal of the San Mateo court’s order is improper and should be handled via a writ petition.
“The Commissioner respectfully request that review proceed by writ because it would be inconsistent with conservation law to permit conserved companies to establish appellate jurisdiction during pending conservations merely by filing a notice of appeal,” attorney Michael Strumwasser notes in his brief for the Department. “The Superior Court’s supervision of the conservation is ongoing, and CIC’s pre-conservation management is actively engaged in those proceedings. Appellate review of orders arising from the conservation is via writ, not direct appeal, under the governing statutes and settled precedent.”
The rehabilitation plan envisions an auction to allow an admitted, unaffiliated insurer to acquire CIC’s in-force California policies and to reinsure the liabilities under the expired California policies.
The plan also gives policyholders three options to resolve the ongoing litigation from Applied’s EquityComp program. When the sale is complete, and the litigation is resolved, CIC will surrender its California certificate of authority and complete the planned merger with a New Mexico-domiciled alter-ego that prompted the conservation action.
CDI obtained the conservation order on November 4, 2019, as CIC management attempted to merge the carrier with the shell company domiciled in New Mexico. Applied Underwriters ownership had previously closed on a deal to buy back CIC’s outstanding shares from Berkshire Hathaway without the consent of the California Department of Insurance.
CIC Argues
The carrier contends that the forced sale of its California operations under section 2.2 of the rehabilitation plan and the litigation settlement provisions in schedule 2.6 are unlawful and stem from an unlawfully initiated conservation proceeding. It also challenges the state’s contention that California Insurance Company’s management lacks integrity, necessitating either the sale of the operations to an unaffiliated carrier or an independent third-party administrator to handle claims if the operations are sold to an affiliate.
“CDI did not initiate and has not maintained the conservation because it was needed to prevent an unapproved merger, which never occurred,” says attorney Maxwell Pritt on behalf of CIC and Applied. “It was done so to force its own resolution to the private RPA litigation, and to effectively strip CIC management of its company, all without the scrutiny and due process that would have made these results impossible outside of conservation.”
Applied also argues that the proposed remedies under the rehabilitation plan are far more favorable than what policyholders could win if the litigation continued.
Department Says CIC Lacks Integrity
The Department argues that the courts have validated its concerns about the integrity of the carrier’s management team.
“The Superior Court recounted the voluminous record in which it found substantial evidence supporting the commissioner’s concerns regarding the integrity of CIC management and CIC’s failure to treat policyholders fairly,” Strumwasser noted in the filing. “CIC argues that these are all problems of the Commissioner’s doing, that there would be no Plan without the conservation, that CIC was willing to stipulate to an injunction in lieu of conservation, and that the Commissioner could simply grant CIC-II a certificate of authority to transact insurance in California as a foreign carrier. But that would require the Commissioner to find CIC eligible to engage in the business of insurance notwithstanding his well-founded concerns about management’s lack of integrity and its history of noncompliance with the law.”
The Department also notes that CIC has raised these same arguments against the conservation and rehabilitation plan in multiple courts in the past, and the efforts have been rejected. CIC initially filed an application to vacate the conservation order, but the Superior Court denied the application, and the First District denied the subsequent writ petition.
Applied Underwriters also took the issue to federal court, as did the shell corporation in New Mexico. The District Court dismissed those cases; later, the Ninth Circuit upheld the action.
Overall, the courts have consistently backed the Department’s position.
“In the 42 months from the Commissioner’s Plan Application to the Court’s final Decision, CIC pursued its unsuccessful writ petition to this court and litigated its unsuccessful federal court attempts to terminate the conservation, pursued written and testimonial discovery, and brought an unsuccessful anti-SLAPP motion,” Strumwasser notes. “The parties extensively briefed the Plan Application. The Cour held oral argument over two days, and following seven months of further briefing, approved the Plan in the April 3, 2024, Final Statement and Decision.”