Applied Underwriters Inc. and the State of California continue their battle over California Insurance Co., a subsidiary of Applied that allegedly tried to move its domicile to New Mexico without approval after Berkshire Hathaway Inc. sold off the workers compensation insurer.

On Tuesday, Applied Underwriters filed a lawsuit against the State of California and its insurance commissioner — one day after the state’s department of insurance filed a memo with the San Mateo Superior Court seeking approval of its rehabilitation plan for the beleaguered CIC.

Omaha, Nebraska-based Applied Underwriters has had a tumultuous year, beginning with the Oct. 16 announcement by Berkshire Hathaway of its sale to Applied’s founder and president, Steve Menzies, and a private equity investment firm in a transaction valued at $920 million. 

Days later, the California Department of Insurance declined to approve the sale of CIC on the basis that Applied attempted to re-domicile CIC in New Mexico without approval and in violation of California law. Applied said in a statement that its move to New Mexico was a result of California insurance department’s “ineffective review process” spanning eight months, and that CDI had failed to approve or disapprove the Applied transaction until after the deadline had passed.

On Nov. 4, 2019, CDI was appointed conservator of CIC by a San Mateo Superior Court judge.

In Applied Underwriter’s complaint, filed in the U.S. District Court for the Eastern District of California, the insurer alleges that Insurance Commissioner Ricardo Lara and others placed CIC into a conservatorship under false pretenses and claims that the CDI has a “vendetta” against Applied and has “unlawfully sought to obtain and wield power over CIC as a means to override the court’s decisions and punish CIC” after it attempted to re-domesticate in New Mexico. The complaint further claims that there’s no valid basis for conservatorship of CIC since the proposed merger presented no risk to California policyholders … because of CIC’s considerable capital, surplus and deposits.

The lawsuit seeks an order declaring the insurance commissioner’s actions unlawful and an order vacating CDI’s conservatorship of CIC. 

Both Applied Underwriters and CDI said they made good-faith efforts to negotiate a pre-conservation rehabilitation plan but were unsuccessful in coming to an agreement.

In his declaration in support of the rehabilitation plan, Joseph Holloway, the conservator appointed to oversee the day-to-day operations of CIC by the CDI in November, the insurer violated the terms of the court’s conservation order in March 2020 when it made a $20 million non-collateralized loan to Applied Underwriters without notice and authorization from CDI or himself. 

Mr. Holloway’s rehabilitation plan would require CIC to transfer its book of business to another California-admitted insurer and provide policyholders a reasonable opportunity to resolve their claims related to Applied’s SolutionsOne and EquityComp programs.

While the plan would permit CIC affiliate Continental Indemnity Co., a California-admitted insurer, to assume its portfolio, Mr. Holloway said that given CIC’s “regulatory violations related to the conservation proceeding” that Continental would not be in the best interest of policyholders unless the insurer agreed to contract for claims administration with an independent third-party administrator appointed by the conservator. Upon completion of the plan’s terms, CIC would then surrender its certificate of authority to transact business in California and will merge into a New Mexico affiliate, according to the court document.

The hearing over the rehabilitation plan is scheduled in San Mateo Superior Court on March 4, 2021.

This fight with California is not Applied’s first. In 2017, CDI accused CIC and another Applied subsidiary, Applied Underwriters Captive Risk Assurance Co., of using “bait and switch” marketing tactics for workers compensation coverage. The insurer has also been involved in disputes in New Jersey, New York and Vermont, with insurance regulators accursing the insurer of selling unapproved workers compensation programs.