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


The United States Court of Appeals for the Ninth Circuit has upheld a district court’s dismissal of the federal actions in a lawsuit brought by Applied Underwriters and the California Insurance Co. against the California Department of Insurance.

This is the latest ruling in what has become an extremely complex and lengthy case involving the conservatorship of an insurer, a battle between CDI and the New Mexico Department of Insurance that has dragged the New Mexico Attorney General -Mexico in the fray, and questions about campaign contributions paid to California Insurance Commissioner Ricardo Lara.

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

A California federal court declined to get involved in the lawsuit last year. Judge William Shubb of the U.S. District Court for the Eastern District of California, in a 42-page decision dated March 30, 2021, granted CDI’s motion to reject Applied Underwriters’ offer to end its efforts to take control of CIC. Shubb concluded that neither bad faith nor the exceptional circumstances exceptions apply to justify the federal court barring the proceeding in state court.

The California Insurance Company of New Mexico filed a lawsuit in federal court in January to bar CDI from continuing to take what the lawsuit says is illegal, actions to block CIC’s approved redeployment and undermine a financially strong insurer. by instituting a trusteeship to take control of CIC.

The lawsuit came after the New Mexico Office of the Superintendent of Insurance ordered CIC to either immediately comply with all regulations required under its approved relocation to New Mexico or face financial penalties and to a possible revocation of the authority certificate of the company. CDI was granted approval to place CIC in conservatorship, and CDI filed a follow-on rehabilitation plan that would require CIC to sell its California operations to another insurer.

CIC accuses Lara and other named officials of ‘unlawful’ action and ‘bad faith’ in imposing arbitrary, illogical and illegal CIC trusteeship to obstruct her relocation to New Mexico, after the decision was approved by several states.

The lawsuit alleges that CDI continued to wage a bad faith campaign to harm CIC by prohibiting the company from transferring its assets and operations to New Mexico pursuant to the approved redomistication and Superintendent of Insurance’s order. of New Mexico in October 2019.

The lawsuit also alleges that CDI filed for approval of a non-consensual rehabilitation plan in California state court that would impose harsh punitive measures on CIC for non-compliance with the conservatorship, but did not presented no justification for taxation in the first place.

Among other things, CDI is seeking to compel CIC to transfer and reinsure its entire “California business book” to an unaffiliated competitor, and to force CIC to settle more than 40 separate civil lawsuits on arbitrary terms. dictated by the commissioner, in which the company has valid defenses and an absolute right of defence.

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

Also in 2019, a Consumer Watchdog-based group demanded Lara’s schedule and other documents after discovering he had taken campaign contributions from the insurance industry despite promising not to. Lara received $54,300 in campaign donations for her 2022 re-election campaign from people connected to two insurance companies, Applied Underwriters and Independence Holding Co. A Sacramento Bee story at the time also detailed the meetings Lara had with Menzies.

Judge Carlos T. Bea wrote the opinion in the latest decision, noting that Menzies, CEO of Applied Underwriters and president of CIC, “made a $50 million bet with Berkshire Hathaway” to finalize the purchase of Berkshire’s majority stake in CIC before time runs out. He lost when the transaction could not be completed in time and the CDI did not approve the sale.

“In business, as in life, you have to take risks,” the judge said. “Indeed, fortune smiles on the daring. Sometimes you win, sometimes you lose. And when you lose, the loss must be paid.

Applied Underwriters attorney Jeffrey Silver has been contacted for comment. A representative for Menzies has also been contacted for comment.

A CDI spokesperson issued the following statement on the decision:

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

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


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