Applied Underwriters’ / California Insurance Company

CDI TRASHES MANAGEMENT BEHAVIOR
ARRANGES TO SETTLE LITIGATION
KICKS THEM OUT OF THE STATE

The California Department of Insurance’s Conservation and Liquidation Office has a plan to resolve the state’s takeover of California Insurance Company. It calls for the Applied Underwriters-affiliated company to leave California and surrender its Certificate of Authority.

In a devastating filing, CDI laid out the former operations of the Applied Underwriters affiliate. In point after point, CDI describes Applied/CIC’s operations, scorched earth litigation strategies, and other operations. CDI makes it crystal clear that it has lost all faith in CIC’s pre-conservation management team – owner Steve Menzies and chief counsel Jeffrey Silver.

In so many words, CDI says the management cannot be trusted to do the right thing. It evidenced such examples as the attempted end-run around Insurance Commissioner Ricardo Lara’s oversight authority by merging CIC into a New Mexico affiliate, lending affiliates $20m during the conservation without informing Department and a longer list.

The duo also orchestrated the use of the illegal reinsurance participation agreement (RPA) in its EquityComp program that created this costly mess.

The Department is calling for the sale of CIC’s portfolio to another carrier. It intends to establish a litigation resolution process that gives policyholders three options to end the disputes and avoid Applied’s “scorched earth” litigation tactics. Individual litigation will be allowed at the policyholder’s discretion. But CDI has the authority to settle.

Backing up its concerns, the Department notes that CIC is continuing a litigation strategy that seeks to enforce portions of RPA that has been deemed illegal in its entirety multiple times over. It also initiated litigation in federal court against a policyholder when the conservation order stayed litigation by policyholders.

“The Conservator remains concerned whether CIC and its affiliates’ common management can be trusted to operate its business in compliance with the Conservation Order, California law, and this Court’s orders,” the conservator notes in a recent filing. “Coming on the heels of the attempt to evade California jurisdiction with the unapproved merger and CIC’s track record of deliberately ignoring the regulatory review process for its insurance product, these events reinforce the Conservator’s concerns about the candor and reliability of the Menzies organization and its treatment of policyholders.”

The filings document a litany of abuses against California law and policyholders committed by Applied Underwriters and its executive leadership team during its tenure in California – a practice that continued into CIC’s conservation. The allegations have been extensively covered over the years in numerous articles in the Workers’ Comp Executive, a listing of which is available by clicking here.

Asset Sale

The ultimate outcome contemplated under the rehabilitation plan is to “complete CIC’s exit from the state on terms that protect the Company, policyholders, and the public.” This would be accomplished through an “Assumption Reinsurance and Administration Agreement” with an admitted insurer authorized to write workers’ comp in California. “CIC will then be permitted to merge with its out-of-state affiliate, CIC II, and will surrender its certificate of authority to write insurance in California without diminishing the rights of policyholders,” the Conservator says in the filing.

CLO envisions inviting qualified insurers to bid to acquire the in-force CIC policies and liabilities incurred under expired policies. The acquirer will also be assigned CIC’s rights under third-party reinsurance agreements. “[I]f the successful applicant offers additional consideration, it would go to CIC; and if the winning applicant requires additional funds, those funds would come from CIC,” the Conservator says.

Suppose there is no interest on the open market. In that case, CLO says it would consider a deal with CIC-affiliated Continental Insurance Company, which is also licensed to write workers’ comp in California, but with specific conditions to protect policyholders.

“The Conservator would allow this, but because of the history of CIC’s prior management’s sale of an illegal RPA, multiple attempts to evade regulatory authority, and the closing of the illegal acquisition of CIC and certain affiliates from Berkshire by Menzies, the Conservator has determined that it cannot protect California policyholders by simply shifting existing policies from CIC to another company with a different name run by the same officers,” the filing notes. “The Conservator, therefore, would require that if the successful applicant is an affiliate of CIC, it must contract for claims administration with an independent third-party administrator appointed by the Conservator.”

Three Pronged Settlements

The rehabilitation plan’s key is a proposed solution for resolving existing and potential litigation between policyholders, Applied Underwriters, and its affiliates. The plan includes three settlement formulas to resolve disputes but also allows policyholders to opt-out and pursue litigation if they so choose.

“Since I have been practicing law, I have never previously encountered opposing counsel so determined to bury my clients in multiple litigation in California and other jurisdictions of the same issues, voluminous discovery paperwork and motions, repeatedly litigating issues that have already been resolved against them (such as the illegality of the RPA), and generally spending more on lawyering than policyholders can usually afford to spend to defend themselves,” says attorney Larry Lichtenegger in a filed declaration.

Beyond the scorched earth litigation tactics, Lichtenegger’s declaration notes numerous alleged claims handling abuses that drove up his clients’ costs to the benefit of Applied. Examples include refusing to settle open claims to prevent the closing of the RPA and failing to pursue subrogation to minimize policyholders’ financial impact.

The proposed rehabilitation plan includes provisions for reviewing CIC’s claim handling and reserving practice to resolve those issues as part of a settlement. Policyholders that accept a settlement under the proposed plan would be prohibited from seeking punitive damages.

The settlement provisions offer policyholders three options for resolving its claims against CIC and any claims by CIC. The options would be available to those in active litigation with CIC, as well as policyholders who believe they have a claim under the RPA but are not currently in litigation. Workers’ Comp Executive will be outlining the settlement options shortly.

CDI senior actuary Giovanni Muzzarelli says the rehabilitation plan includes the specific formulas to calculate how much is owed under each option – either to the policyholder or to CIC. An independent consultant appointed by the Conservator will oversee the calculations and review any concerns about paid losses or reserves.

“At the conclusion of the tasks enumerated in the Plan, including selection of the assumption reinsurer, transfer of the CIC policies to the reinsurer, and completion of the Schedule 2.6 [settlement] process, the Conservator expects to apply to the Court to close the conservation, permitting CIC to merge into CIC II and surrender its certificate of authority, its policyholders and the public having been protected,” the Conservator writes.

Applied Underwriters and policyholders will have the opportunity to comment on the rehabilitation plan’s specifics later this fall. The court currently contemplates a hearing on the rehabilitation plan itself in early March.

Many questions remain, including the effect these filings will have on the AM Best ratings of all the carriers under control of this management, and potentially the decisions other state’s insurance departments will have to make.

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