Oct. 21--The California Department of Insurance announced Monday it has denied an application to approve the sale of an insurance company whose executives previously donated tens of thousands of dollars to Commissioner Ricardo Lara.
The rejection means the California Insurance Co., which is a subsidiary of Applied Underwriters, cannot sell insurance in California--for now at least. Applied Underwriters is at the center of a political scandal involving the elected state insurance commissioner.
California Insurance last week incorporated in New Mexico, after California regulators delayed approving an application to transfer ownership.
California regulators "had been in the process for several months of extensively reviewing the application for sale of the company when applicants abruptly changed plans and failed to seek the required prior approval," the department said in a statement.
"In addition... the competence, experience and integrity of the persons who would control California Insurance Co. after the change of control is not in the best interest of its policyholders or the public," the department said.
Michael Soller, a department spokesman, declined to discuss the decision beyond the prepared statement while the deparment is "exploring additional enforcement remedies."
A spokesman for Applied Underwriters did not immediately respond Monday to requests for comment.
The announcement appears to be a significant setback for Steven Menzies, a Northern California insurance executive of Applied Underwriters.
Menzies met with Lara at least twice before filing an application for approval to transfer company ownership on May 30. Also his associates had donated more than $46, 000 to Lara's 2022 re-election campaign.
Before his election last year, Lara promised voters he would not accept campaign contributions from insurers, to avoid conflicts of interest. In July he returned $83, 000 in donations from insurers after The San Diego Union-Tribune reported on the contributions.
Lara also pledged to recuse himself from any decisions involving Applied Underwriters.
His senior deputy intervened in department proceedings at least five times to the benefit of the company.
Menzies founded Applied Underwriters in the 1980s but sold a majority of its stock in 2005. Last week, Menzies announced he had re-acquired Applied Underwriters from Berkshire Hathaway for $920 million.
If its subsdiary, California Insurance Co., is no longer permitted to sell insurance policies in California, the biggest share of its market would be off limits.
"Of the $302.9 million in direct premiums written, approximately 86.4 % was written in California, with the remaining 13.6 % written in the other 25 licensed states," said a Department of Insurance review of the company's 2017 portfolio released in May.
More than 95 percent of the company's policies are workers' compensation plans, dozens of which have become the subject of complaints to regulators and civil lawsuits.
Consumer advocates said Monday that the Department of Insurance decision to reject the sale application is a win for ratepayers.
"The Department of Insurance, with the commissioner recused, did the right thing in taking this company's license when it went out of state to avoid its jurisdiction," said Jamie Court of Consumer Watchdog, the Los Angeles advocacy group whose 1988 ballot initiative created the elected insurance commissioner position.
"It shows the staff at the department is willing to fight to protect the integrity of the regulatory process and send a signal to other companies that they can't run to New Mexico if they want to sell insurance in California."
Carmel attorney Larry Lichtenegger, who represents more than 40 companies that bought Applied Underwriters policies and complained about changes to the cost of their premiums, called the department decision an "about-face" from previous positions.
"We thought (Lara) had the image that he was going to do whatever Steve Menzies wanted him to do, and that's not this," he said, referring to the announcement. "This is not a good statement for Steve Menzies."
Lichtenegger said it is not immediately clear how the cases he has pending before the Department of Insurance may be affected.
"That becomes a really big question," he said.
While the application rejection was announced Monday, regulators apparently reached their decision Friday, the day the Union-Tribune reported that Applied Underwriters had been sold without permission from the state.
In a sharply worded letter to the California Insurance Co. dated Friday, state regulators laid out their reasons for rejecting the transfer.
Among other things, the Department of Insurance chastised California Insurance Co. for incorporating in another state without notifying California regulators or securing their permission.
"Any attempt to transfer the domicile of a California domestic insurer to another state in which it is admitted may only be effected upon the prior approval of the California Insurance Commissioner," the letter stated.
Out-of-state insurance companies are allowed to sell policies within California--if they receive what's called a certificate of authority.
According to the department, if the sale goes through, California Insurance Co.'s current certificate of authority "will terminate by operation of law and the surviving entity will not be qualified to transact insurance in California."
The insurance department said that even if this occurs, existing policyholders will not lose coverage and the department will take steps to protect coverage for employers and injured workers, "including pursuing additional enforcement remedies to the fullest extent of the law."
(c)2019 The San Diego Union-Tribune
Visit The San Diego Union-Tribune at www.sandiegouniontribune.com
Distributed by Tribune Content Agency, LLC.