California Insurance Company provided worker’s compensation insurance to businesses. Eighty-five percent of its business is in California. In 2011 it patented a “Reinsurance Participation Agreement” (RPA). The RPA was designed to allow an insurer to offer a retrospective rating policy to small and medium-sized companies. The RPA would accomplish this by having an employer take out a guaranteed cost policy, then the insurer would cede some of the insured risk to a reinsurer, such as a captive reinsurer, together with a portion of the premium. The reinsurer would then enter into a side agreement with the policyholder to cede some of that risk back to the policyholder. At the end of the policy period, the reinsurer would refund some of the premiums to the policyholder if the losses were lower than expected or charge the policyholder more if the losses were higher.
Under a program called EquityComp, CIC followed this template and issued guaranteed cost policies that had been submitted to the rating organization for the commissioner’s approval. CIC had its affiliate, Applied Underwriters Captive Reinsurance Assurance Company (AUCRA), reinsure some of the risk and issue the side agreements to the policyholders, which were not submitted for the commissioner’s approval.
Beginning in 2012, 68 EquityComp policyholders filed various claims or actions challenging the RPA. In a 2016 ruling in one of those challenges, the commissioner found that the RPA constituted a misapplication of CIC’s filed rates in violation of Insurance Code § 11737. (Matter of Shasta Linen Supply, Inc., Insurance Commissioner (June 22, 2016) No. AHB-WCA-14-31 (Shasta Linen).) The decision declared that CIC’s failure to file and secure approval of the RPA as required by section 11658 rendered it void as a matter of law. CIC petitioned for review of Shasta Linen in Los Angeles Superior Court, and in 2017 the parties settled their dispute. The parties agreed they had a good faith dispute about whether the RPA was void as a matter of law and the remedy authorized by the Insurance Code. A recital to the agreement stated that this dispute was “ultimately for the courts to decide.”
Litigation on the other RPA claims and actions policyholders had filed against CIC continued in California courts, federal courts, administrative proceedings before the commissioner, and in arbitration. CIC succeeded in defeating class certification motions. (E.g., National Convention Services, LLC v. Applied Underwriters Capital Risk Assurance Co. (S.D.N.Y. July 27, 2019, No. 15cv7063) 2019 WL 3409882, at *1; Shasta Linen Supply, Inc. v. Applied Underwriters, Inc. (E.D.Cal. Apr. 17, 2019, Nos. 2:16-cv-158-WBS AC, 2:16-cv-1211 WBS AC) 2019 WL 3244487, at *2.) One federal court granted CIC and its affiliates summary judgment on claims that the RPA violated the Unfair Competition Law because it was void. (Pet Food Express, Ltd. v. AUI (E.D.Cal. Sept. 12, 2019, No. 2:16-cv-01211 WBS AC) 2019 WL 4318584, at *2, *4.)
As of January 2019, Berkshire Hathaway, Inc. (Berkshire Hathaway) indirectly owned 81 percent of CIC and its affiliates. Berkshire Hathaway agreed that month to sell its shares to Steven Menzies, CIC’s president and chief operating officer, who already owned 11.5 percent of the company. The agreement allowed Berkshire Hathaway to retain a $50 million breakup fee if the transaction did not close by September 30, 2019.
In April 2019 Menzies submitted an application to the department for approval of the transaction. After the commissioner found Menzies’ first two applications insufficient Menzies submitted a third on September 7, 2019. The department informed CIC that it could neither approve nor disapprove CIC’s application by September 30. Berkshire Hathaway required $10 million for an extension of the transaction deadline until October 10, 2019.
Menzies then proposed and the New Mexico Office of the Superintendent of Insurance agreed to hold an expedited approval process to re-domesticate CIC in New Mexico by merging CIC into a newly formed New Mexico corporation, CIC II. The New Mexico superintendent approved the merger, conditioned on the stock transactions between Menzies and Berkshire Hathaway closing by October 10, 2019.
CIC II satisfied the New Mexico superintendent’s conditions for approval, so the merger of CIC with CIC II would be completed by filing a certificate of merger with the California Secretary of State. (Corp. Code, § 1108, subd. (d).) On October 22, 2019, the department asked CIC by telephone not to file the certificate of merger with the California Secretary of State so that the parties could meet and resolve their issues. CIC agreed, but the parties never met.
On November 4, 2019, without notice to CIC, the commissioner filed an ex parte application to be appointed conservator of CIC. In January 2020, CIC unsuccessfully moved to vacate the conservatorship. CIC II and an affiliate of CIC filed federal actions seeking to vacate the conservatorship and enjoin it. (Applied Underwriters, Inc. v. Lara (E.D.Cal. 2021) 530 F.Supp.3d 914; California Ins. Co. v. Lara (E.D.Cal. 2021) 547 F.Supp.3d 908.) The district courts dismissed both suits, and the Ninth Circuit Court of Appeals affirmed. (Applied Underwriters, Inc. v. Lara (9th Cir. 2022) 37 F.4th 579, 600.)
In October 2020, the commissioner filed an application for approval of a rehabilitation plan, which would end the conservatorship. CIC opposed the settlement provision in section 2.6 of the plan. The trial court approved the plan in April 2024. CIC appealed and also filed a petition for writ of mandate challenging the approval of the plan. This court summarily denied the petition in a one-paragraph order, noting that CIC had failed to demonstrate that its remedy on appeal was inadequate. (Cal. Ins. Co. v. Superior Court (June 20, 2024, A170573).)
With regard to the CIC appeal, the Court of Appeal found no merit in any of CIC’s arguments and affirmed the trial court’s order in the published case of Insurance Commissioner of the State of California v. California Insurance Company et al. – A170622 (July 2025)