Resolution of the conservatorship of a California workers' compensation insurer remains in doubt eight months into the process, as the company and the state's department of insurance tell competing stories as to why negotiations have stalled.
California Insurance Co., a subsidiary of Applied Underwriters Inc., has been at the center of a monthslong regulatory dispute that spans state borders.
The dispute started when Applied Underwriters CEO Steve Menzies attempted to buy back CIC, a company he founded, and found a way to do so without the approval of California regulators, which traditionally would have been required. Amid disagreements over the rights and obligations of both parties, California ultimately sought to place the company into conservatorship in a step that has resulted in protracted litigation.
CIC had previously been in confidential communications with the California regulator over the status of the conservatorship, but new court filings indicate that the two sides have not spoken for months.
In a filing submitted July 17, Shand Stephens, counsel for the pre-conservatorship management of CIC, wrote that the California Department of Insurance first sent a rehabilitation plan on Dec. 13, 2019, to which CIC had "promptly" responded with certain points of negotiation. The department in March then put forward a revised plan, which Stephens said was "considerably more onerous" than the previous version. He also claimed it did not address any concerns or counterproposals that CIC had raised.
Stephens said a six-hour meeting was subsequently held between attorneys and representatives of CIC and the California Department of Insurance, and that the regulator did not offer a newly revised plan until May 14. In the filing, Stephens said the May plan was "again more intrusive" than the previous version.
According to Stephens, that plan was offered on a "take it or leave it" basis by counsel for the department and included the "forced settlement" of more than 50 pieces of litigation, as well as future litigation and "unsubstantiated claims of improper claims handling practices and other violations of the law."
CIC management submitted a filing asking the court to deny the California insurance commissioner's motion for an order that would set a briefing schedule, hearing date and procedures for application for an order approving the rehabilitation plan for CIC, calling it "premature" until the court determines whether the conservation should remain in place.
In a status report submitted to the court, the conservator said it has "sought to conduct the conservation in such a way as to allow the normal operations of CIC to proceed without undue interruption," and that CIC's financial status has remained "stable" since the conservation order was issued.
The status report also says communication between the two parties stopped after the conservator provided CIC's pre-conservation management and its counsel with a proposed plan of rehabilitation that would "successfully rehabilitate" CIC if implemented.
Stephens
A spokesperson for the California Department of Insurance told S&P Global Market Intelligence that the goal of the conservation is to "rectify several regulatory concerns" that originated in Applied Underwriters' "failure to obtain" the department's prior approval before gaining control of CIC, among other "related regulatory issues."
"Under the current draft Rehabilitation Plan, CIC will no longer maintain any California policies or California policy liabilities," the spokesperson said in an email. Those policies and liabilities would be then transferred to a CIC affiliate that is licensed to transact workers' compensation insurance in the Golden State after the rehabilitation plan closes.
The entire conflict started when the California Department of Insurance indicated it would not respond to a filing regarding a change in control of the insurer by the final deadline. So Menzies opted for a workaround by merging the California subsidiary with a newly created New Mexico-based insurer and then telling the California regulator that he no longer needed approval for the deal.
A state court then issued an order to place CIC into conservatorship in an attempt to block its merger with the New Mexico-based insurer. The New Mexico Office of Superintendent of Insurance has disputed the legitimacy of the order, and both regulators have given differing versions of the events involved in the controversial sale.
The California regulator has previously warned that CIC would lose its license to do business in the state if the merger closed.
About one-third of Applied Underwriters' direct premiums for the first quarter came from policies in California.
