Legal Considerations of California's Seizure of Applied Underwriters Subsidiary

Sacramento, CA (WorkersCompensation.com) - We all know that it’s important to make sure that you follow the correct legal procedure when undergoing a legal act as significant as buying a business or merging with an existing one. A story out of California shows us the problems that can happen when the wrong legal procedures are followed.

California regulators seized a subsidiary of Applied Underwriters saying it did not seek state approval for its merger. Applied Underwriters is owned by Berkshire Hathaway.

Applied Underwriters is now in receivership under a court order that was obtained by the California Department of Insurance. The Department took the action because the company allegedly engaged in a pattern of trying to disregard California’s rules. The merger between AU and California Insurance Company was supposed to create a newly formed New Mexico corporation but was halted — at least, according to California regulators — for not obtaining the Department of Insurance’s permission for the merger.

The Department of Insurance felt that it was an attempt to allow an out of state insurance carrier to transact business within California without their permission. The order also has the effect of preventing CIC from stopping any policies that were in effect at the time of the merger.

This act taken by the Department of Insurance could seem troubling to some but in fact it is authorized specifically by California insurance law. The Department of Insurance is allowed to act as a conservator for any company that attempts to engage in a merger without the consent of the department.

Under the order, all premium payments under these existing contracts have to be paid directly to the conservator appointed by the Department of Insurance. This situation can cause some confusion for claimant attorneys when they are trying to determine who the carrier is that needs to be named in a Petition for Benefits.

It should be no shock to anyone that California has more progressive and strict laws governing insurance companies than most other states. As a result, the requirements of approval of the state’s Department of Insurance may not be necessary in many other states.

Perhaps it is a good idea now to discuss the different types of mergers so carriers can know when this situation may be applicable to them. 

• First, there is a horizontal merger that occurs between two companies that are operating within the same industry.
• Next, there is a vertical merger which is a merger between companies that are in the same supply chain.
• There is also a market-extension merger where two companies that are in different markets but sell similar products or services are combined.
• There is a product-extension merger which is a merger of companies in the same markets that sell different products or services.
• Lastly, there is a conglomerate merger which is a merger between two companies in unrelated business activities.

Mergers typically require the approval of stockholders if the company is publicly traded and otherwise will likely require the approval of a majority of directors or private owners.

Given how different California's laws can be from the rest of the country, I do not believe that the actions taken by the California department of insurance is going to be something that starts a nationwide trend.

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