Federal Appeals Court Rules Against Applied in California Department of Insurance Case

Federal Appeals Court Rules Against Applied in California Department of Insurance Case

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The U.S. Court of Appeals for the Ninth Circuit has affirmed a district court’s dismissal of federal actions in a lawsuit that Applied Underwriters and the California Insurance Co. filed against the California Department of Insurance.

This is the latest decision in what has become an exceedingly complex and long-running case, involving a conservatorship of an insurance carrier, a battle between the CDI and the New Mexico’s insurance department that drew New Mexico’s attorney general into the fray, and questions over campaign contributions made to California Insurance Commissioner Ricardo Lara.

The court also ruled that a conservatorship of CIC by California Department of Insurance was “brought for a legitimate reason,” and called a merger of CIC during ongoing conservatorship efforts “an obvious attempt to avoid the California insurance regulatory regime.”

A California federal court declined to get involved with the lawsuitlast year. Judge William Shubb of the U.S. District court for Eastern District of California in a 42-page ruling dated March 30, 2021 granted the CDI’s motion to dismiss Applied Underwriters’ bid to halt its efforts to take control of CIC. Shubb found that neither bad faith nor exceptional circumstances exceptions apply to justify the federal court enjoining the state court proceeding.

California Insurance Company of New Mexico filed suit in federal court in January to enjoin the CDI from continuing to take what the suit asserts are illegal, actions to block the approved redomestication of CIC and to undermine a financially sound insurer by instituting a conservatorship to gain control of CIC.

The suit came after the Office of the Superintendent of Insurance in New Mexico ordered CIC either to comply immediately with all regulations required under its approved redomestication to New Mexico or face financial penalties and possible revocation of the Company’s Certificate of Authority. CDI got approval to place CIC in conservatorship and the CDI filed a follow-up rehabilitation plan that would force CIC to sell its California business to another insurer.

CIC charges Lara and the other officials named with “unlawful” and “bad faith” action in imposing an arbitrary, illogical and illegal conservatorship of CIC to obstruct its New Mexico redomestication, after that move was approved by several states.

The suit asserts the CDI has continued to wage a bad faith campaign to harm CIC by prohibiting the company from transferring its assets and its business to New Mexico in compliance with the approved redomestication and the Order of New Mexico’s Superintendent of Insurance in October of 2019.

The suit also asserts that CDI filed an application for approval of a non-consensual rehabilitation plan in California State Court that would impose severe punitive measures on CIC for failure to comply with the conservatorship, but presented no rationale for the imposition in the first place.

Among other things, the CDI seeks to require CIC to transfer and reinsure its entire “book of California business” to an unaffiliated competitor, and to force CIC to settle more than 40 separate civil legal proceedings on arbitrary terms dictated by the commissioner, in which the company has valid defenses and an unqualified right to defend.

California Insurance Code requires that the commissioner approve any sale of controlling interest of an admitted insurer. Menzies attempted to get that approval in 2019, but it became clear the agreement would not be approved in time to avoid a $50 million breakup fee attached to the deal. Menzies then sought a merger between CIC and a newly formed New Mexico corporation, CIC II, which was not subject to California insurance regulations.

Also in 2019, Consumer Watchdog based group requested Lara’s calendar and other documents after it was discovered he took campaign contributions from the insurance industry despite his pledge not to do so. Lara has received $54,300 in campaign donations for his 2022 reelection campaign from people linked to two insurance companies, Applied Underwriters and Independence Holding Co. A Sacramento Bee story at the time also detailed meetings Lara had with Menzies.

Judge Carlos T. Bea wrote the opinion in the latest ruling, noting that Menzies, Applied Underwriters CEO and CIC’s president, “made a $50 million bet with Berkshire Hathaway” that he complete the purchase of Berkshire’s controlling interest in CIC before time ran out. He lost when the deal couldn’t be completed in time and the CDI failed to approve the sale.

“In business, as in life, it is necessary to take risks,” the judge stated. “Indeed, fortune favors the bold. Sometimes you win, sometimes you lose. And when you lose, the loss should be paid.”

Jeffrey Silver, counsel for Applied Underwriters, has been reached out to for comment. A representative for Menzies has also been reached out to for comment.

A CDI spokesman provided the following statement on the ruling:

“State and federal courts have all upheld the Department of Insurance’s action to protect policyholders by preventing Applied Underwriters from completing a merger in violation of California law. Every court that has issued a decision on this case has dismissed Applied Underwriters’ claims.”

Applied Underwriters is headquartered in in Omaha, Neb. California Insurance Co. holds an A.M. Best Rating of “A.” The case is Applied Underwriters, Inc., a Nebraska Corporation; Applied Risk Services, Inc., A Nebraska Corporation V. RICARDO LARA, Insurance Commissioner for the State of California, in his official capacity.



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