State insurance commissioner sued for placing company under receivership

Insurance Commissioner Ricardo Lara abused his authority and "capriciously" harming an underwriter's business by putting a financially sound California partner under receivership, according to a complaint filed by Boies Schiller Flexner LLP.

Tuesday's filing is the latest salvo in an ongoing dispute between Lara and the Omaha, Nebraska-based workers' compensation insurance provider. Applied Underwriters Inc. v. Insurance Commissioner of the State of California, 2:20-cv-02096-KJM-AC (E.D. Cal., filed Oct. 20, 2020).

The plaintiff offers insurance through multiple affiliated companies around the nation. The complex dispute also involves a company partnered with Applied Underwriters Inc. to provide workers' compensation insurance in the state, California Insurance Co.

It is a former subsidiary of Applied. The two companies have many ongoing contractual arrangements to provide workers' compensation insurance in California.

Lara put Capital Insurance under conservatorship last fall.

The complaint signed by Maxwell V. Pritt, a Boies Schiller partner in San Francisco, stated this action harmed Applied and ignored California Insurance's sound financial standing.

"The commissioner imposed and has held a fully solvent company in conservation for a year without good cause, and is now threatening to sell off the company's assets and force it and parties not in conservation to relinquish their rights to litigate not only existing but future third-party claims regarding an unrelated insurance product," Pritt told the Daily Journal by email on Wednesday.

The complaint makes five claims against Lara, including violations of due process and equal protection under the 14th Amendment, the takings clause of the Constitution and the First Amendment. Applied is seeking to vacate Lara's conservatorship.

The complaint states the action appears to be part of a bid to force a sale of California Insurance as part of a vendetta against both companies because of past litigation. It also states Lara's actions harmed Applied's finances and reputation, and appear to be an effort to force Applied to relinquish its legal rights and settle several court cases with clients.

Lara's office declined to comment on the record. But a spokesperson shared documents related to the court case that resulted in California Insurance being placed under conservatorship. Insurance Commissioner of California v. California Insurance Company, 19-CIV-06531 (San Mateo Super. Ct., filed Nov. 4, 2019).

The Department of Insurance's filings in the case argue it had ample reasons for the conservatorship: that the company broke many state insurance laws, misled policyholders, and sought to "overwhelm policyholders in lengthy and costly litigation" when they fought back in court.

The case grew in part out of Lara's refusal to approve California Insurance's sale by its owner, Berkshire-Hathaway Inc., to Steven Menzies, co-founder of Applied and the CEO of California Insurance.

Lara's office cited several ongoing cases involving California Insurance's clients as its reason for blocking the sale. His office also said it is trying to block the company from moving to New Mexico.

In the complaint, Pritt argues Lara's office had the opportunity to object to the move during regulatory approval hearings, but never did. Instead, he wrote, Lara's attorneys used the bid to locate in New Mexico to convince the court to grant control over the company.

"Without CIC present to contest the application, defendants obtained the conservatorship under false pretenses," Pritt wrote.

The complaint also claimed the attempted move followed a bad faith effort by Lara's office to block the proposed sale. It claimed the Department of Insurance waited until three days before a Sept. 30, 2019 contractual deadline to inform the parties it would not approve the sale.

The two Department of Insurance attorneys involved in the approval were then unreachable for the next several days, the complaint alleged. This made it impossible to address the department's concerns and put Menzies at risk of forfeiting a $50 million breakup fee called for in his contract with Berkshire Hathaway, Pritt wrote.