Judge orders state takeover of insurer at heart of Lara political controversy

A Superior Court judge in Northern California has ordered the insurance company at the heart of a political controversy enveloping the state insurance commissioner to be taken into immediate conservatorship by government regulators.

San Mateo County Judge George A. Miram issued his order late Monday, appointing the Department of Insurance's conservation and liquidation office to be in full control of the California Insurance Co., a subsidiary of Applied Underwriters.

"The California insurance commissioner is hereby appointed as the conservator of CIC," the order states.

As conservators, Insurance Commissioner Ricardo Lara and his staff have the authority "to pay or defer payment of all proper claims and obligations against CIC" and "to act in all ways and exercise all powers necessary or appropriate for the purpose of carrying out this order."

The judge's order precludes company officials from taking any actions to consummate the sale of the company, which was announced last month, or to cancel or attempt to cancel any policies. The judge also ordered the company to turn over any records requested by the conservator.

Neither the California Insurance Co. nor its parent, Applied Underwriters, responded Tuesday to requests for comment.

The ruling is the result of a petition filed Monday by the state Department of Insurance in San Mateo Superior Court. The request was submitted by Los Angeles attorney Michael Strumwasser, a public law specialist.

According to court records, the state sought permission to assume control of California Insurance, which last month announced a merger with a New Mexico company in order to expedite a sale that California regulators had yet to approve.

The state insurance department's request was significant because Lara had previously met privately with Applied Underwriters president Steven Menzies at least twice and accepted more than $46,000 in campaign donations from people associated with his insurance companies.

Lara accepted the political contributions despite promising throughout his 2018 campaign that he would not take any donations from people or companies he would be in charge of regulating.

The San Diego Union-Tribune disclosed the contributions in July. Within hours of the story's publication, Lara said he would return the money and recuse himself from any further decisions involving Applied Underwriters.

Later, the newspaper reported that Lara had accepted more than $270,000 in total in insurer-related donations and that his staff had overturned hearing officers in at least five proceedings to benefit Applied Underwriters, which has dozens of complaints pending before the Department of Insurance.

In early September, Lara issued a public apology for accepting the contributions and for meeting privately with insurers.

The former state senator from Bell Gardens also pledged to hold himself to a higher standard and announced he was suspending his fundraising activity for the balance of the year.

Applied Underwriters filed an application in May with the Department of Insurance, seeking to transfer ownership of the company back to Menzies, who founded the firm in the 1980s and later sold a majority share to Berkshire Hathaway.

A decision on it stalled with California regulators, and last month Menzies announced he had re-assumed full ownership of Applied Underwriters in a $920 million transaction. At the same time, he incorporated the California Insurance Co. in New Mexico.

The Department of Insurance called that move illegal.

"California law is unequivocal in giving the Department of Insurance the responsibility and power to review transactions of California-based insurers in order to protect policyholders and the public," the department said in a statement Tuesday. "No company can evade this authority if it wants to sell insurance in this state."

Jamie Court of the Consumer Watchdog advocacy group credited California regulators with pursuing the conservatorship and said there are more questions to be asked — and answered.

"The department has done the right thing in shutting down a renegade company," Court said. "The question is what the company thought they were buying when they donated to the commissioner."

Court, whose nonprofit sponsored the successful 1988 ballot measure that created the elected state insurance commissioner position, said prosecutors should interview Menzies and the insurer-related donors who contributed to Lara.

"This (judge's order) should prod law enforcement to question the principals in this scandal to find out where the money came from and what it was intended for," he said.

The majority of Applied Underwriters' business is selling worker's compensation insurance policies. One of the company's main products was EquityComp, a policy California regulators called a "bait-and-switch" plan before they banned its sale.

The California Insurance Co. still has $185 million in premiums written in California, the Department of Insurance said.

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