Sacramento, CA (WorkersCompensation.com) – It’s not often – if ever – you hear of state regulators taking over an insurance company that is not insolvent. Yet, that’s what the California Insurance Department did this month.
“On Monday, November 4, the San Mateo County Superior Court issued an order appointing the California Department of Insurance’s Conservation and Liquidation Office as conservator of California Insurance Company (CIC) and directing the conservator to take immediate possession of the workers’ compensation insurer in response to the company’s willful violation of state law and established pattern of continually flouting California’s regulatory processes,” the CDI said in a press release. “The Department of Insurance sought the order after company officials unilaterally and illegally attempted to merge its business with a New Mexico-based insurer without first securing the Department’s prior approval.”
You may recall last month’s announced sale of Applied Underwriters to its founder and a private equity firm. The deal, worth an estimated $920 million included the buyout of all shareholders, including 81 percent of the company stock held by Berkshire Hathaway
That deal occurred as a merger was taking place that involved CIC, a subsidiary of Applied Underwriters. New Mexico authorities had received an application to form CIC II and merge CIC into it.
The problem, according to California regulators is that they never gave approval for the sale, even though CIC is domiciled in California, they said. Applied Underwriters said CIC was now domiciled in New Mexico, where the sale had been approved.
The court order “blocks the attempted merger, which seeks to divest California of its regulatory oversight over this entity,” the CDI said. “If CIC is permitted to consummate this illegal transfer, CIC employer policyholders, employees with serious work-related injuries and other claimants entitled to vital and necessary insurance benefits, will be left holding policies of a non-admitted insurer not qualified to transact insurance in California.
“Effective immediately, the Department of Insurance’s Conservation and Liquidation Office will serve as conservator to protect the company’s existing policyholders and covered workers from an insurer attempting to operate without the approval and authority to continue to transact insurance in California,” the statement continued.
The regulators said the court order was issued under a part of California law that allows it to act as conservator for a company that “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.”
Applied Underwriters did not respond to a request for comment by press time. However, attorney Jeffrey Silver, a company attorney was quoted in the Wall Street Journal as saying the CDI’s actions amounted to “unprecedented, unnecessary regulatory overreach,” and that they were “bad news” for carriers and residents who will ultimately pay for the legal defense of “this illogical, vindictive action.”
Meanwhile, CDI cited what it said were part of a pattern of “illegal actions, misrepresentations, and willful disregard for the authority of the Department of Insurance and other states’ regulators.” Specifically, the CDI said:
- In 2016, the CDI issued a precedential decision In the Matter of the Appeal of Shasta Linen Supply, Inc. stating that CIC “created a product to circumvent California’s statutory and regulatory requirement; a product that ultimately enriched CIC at the expense of California employers.”
- The CDI subsequently served CIC officials with a Cease and Desist Order for selling unapproved workers’ compensation policies to unsuspecting business owners in what amounted to a “bait and switch” scheme.
- Other states including Vermont, Wisconsin, New York, and New Jersey have also taken regulatory actions against the same company officials’ affiliated companies for engaging in similar unapproved transactions within those states.