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SPENCER Y. KOOK (SBN 205304)
skook@mail.hinshawlaw.com
HINSHAW & CULBERTSON LLP
633 West Sth Street, 47th Floor ELECTRONICALLY
Los Angeles, CA 90071-2043 FILED
Telephone: 213-680-2800 Superior Court of California,
Facsimile: 213-614-7399 Coun Of San arene
08/11/2016
TRAVIS WALL (SBN 191662) Clerk orate cout
twall@mail.hinshawlaw.com Deputy Clerk
JARED W. MATHESON (SBN 275459)
jmatheson@hinshawlaw.com
HINSHAW & CULBERTSON LLP
One California Street, 18th Floor
San Francisco, CA 94111
Telephone: 415-362-6000
Facsimile: 415-834-9070
Attorneys for Defendants APPLIED UNDERWRITERS, INC., APPLIED UNDERWRITERS
CAPTIVE RISK ASSURANCE COMPANY, INC., CALIFORNIA INSURANCE COMPANY,
CONTINENTAL INDEMNITY COMPANY and APPLIED RISK SERVICES, INC.
SUPERIOR COURT OF THE STATE OF CALIFORNIA.
FOR THE COUNTY OF SAN FRANCISCO.
UNLIMITED JURISDICTION
WARWICK AMUSEMENTS CORPORATION, a
Delaware corporation, WARWICK CALIFORNIA
CORPORATION, a California corporation,
Case No. CGC-16-551614
DEFENDANTS APPLIED
WARWICK DENVER CORPORATION, a
Delaware corporation, WSF BEVERAGE
CORPORATION, a California corporation,
WARWICK MELROSE DALLAS
CORPORATION, a Delaware corporation,
SILVER AUTUMN HOTEL (N.Y.)
CORPORATION, LTD., a Delaware corporation,
Plaintiffs,
VS.
APPLIED UNDERWRITERS, INC., a Nebraska
corporation, APPLIED UNDERWRITERS
CAPTIVE RISK ASSURANCE COMPANY,
INC., an Iowa corporation, CALIFORNIA
INSURANCE COMPANY, a California
corporation, CONTINENTAL INDEMNITY
UNDERWRITERS, INC., APPLIED
UNDERWRITERS CAPTIVE RISK
ASSURANCE COMPANY, INC.,
CALIFORNIA INSURANCE
COMPANY, CONTINENTAL
INDEMNITY COMPANY AND
APPLIED RISK SERVICES, INC.’S
SUPPLEMENTAL REQUEST FOR
JUDICIAL NOTICE IN SUPPORT OF
OPPOSITION TO MOTION TO STAY
BASED ON INCONVENIENT
FORUM
First Amended Complaint Filed:
May 19, 2016
COMPANY, an Iowa corporation, APPLIED RISK
SERVICES, INC., a New York corporation, and
DOES | through 50, inclusive,
Defendants.
Date: August 18, 2016
Time: 9:30 a.m.
Department: 302
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} Reservation No. 06270727-18
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DEFENDANTS’ SUPPLEMENTAL RJN ISO MOTION TO STAY,
Case No. CGC-16-551614REQUEST FOR JUDICIAL NOTICE
Pursuant to Evidence Code sections 450 and 452(a), (d), Defendants Applied Underwriters
Captive Risk Assurance Company, Inc., Applied Underwriters, Inc., California Insurance Company,
Continental Indemnity Company, and Applied Risk Services, Inc, (“Defendants”) request that the
Court take judicial notice of the following matters. A court may take judicial notice of records of
“any court of record of the United States.” Evid. Code § 452(d)(2); People v. Harbolt, 61 Cal. App.
4th 123, 126-7 (1997).
lL. Attached as Exhibit Q is a true and correct copy of Applied Underwriters Captive
Risk Assurance Company and California Insurance Company’s Verified Petition For A Peremptory
Writ of Mandate and Complaint for Declaratory and Injunctive Relief in California Insurance
Company v. Jones, Los Angeles County Superior Court Case No. BS163243.
Dated: August 11, 2016 HINSHAW & CULBERTSON LLP
By:
SPENCER Y. KOOK
TRAVIS WALL
JARED W. MATHESON
Attorneys for Defendants APPLIED
UNDERWRITERS, INC., APPLIED
UNDERWRITERS CAPTIVE RISK
ASSURANCE COMPANY, INC.,
CALIFORNIA INSURANCE COMPANY,
CONTINENTAL INDEMNITY COMPANY
and APPLIED RISK SERVICES, INC.
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DEFENDANTS’ SUPPLEMENTAL RJN ISO MOTION TO STAY,
Case No. CGC-16-551614EXHIBIT “Q”Noe
oOo YN A HA BR WwW
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HINSHAW & CULBERTSON
899 Wen th Sia, 47h Piso
‘Law Angoies, CA 9007-2043
sab:
280
‘ > COPY
SPENCER Y. KOOK (SBN 205304)
skook@mail.hinshawlaw.com
RICHARD DE LA MORA (SBN 122587)
rdelamora@mail.hinshawlaw.com
HINSHAW & CULBERTSON LLP
633 West 5th Street, 47th Floor
Los Angeles, CA 90071-2043 DePTes CONFORMED COPY
Telephone: 213-680-2800 s~ ORIGINAL FILED
Facsimile: 213-614-7309 arn > C- Superior Court of California
TRAVIS R. WALL (SBN 191662) C44g°UF APT — ui 01 206
twall@mail-hinshawlaw.com
eee eee ee Ebot Sherri R. Carter, Executive Obteer/Clerk
San Francisco, CA 94111 ay seal tates
Telephone: 415-362-6000
Facsimile: 415-834-9070
Attorneys for Petitioners and Plaintiffs
CALIFORNIA INSURANCE COMPANY
and APPLIED UNDERWRITERS CAPTIVE
RISK ASSURANCE COMPANY, INC.
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
UNLIMITED JURISDICTION
CALIFORNIA INSURANCE COMPANY and | Case No. BS 168 2 4 3
APPLIED UNDERWRITERS CAPTIVE RISK
ASSURANCE COMPANY, INC., VERIFIED PETITION FOR A
PEREMPTORY WRIT OF MANDATE
Petitioners and Plaintiffs, AND COMPLAINT FOR
DECLARATORY RELIEF AND
vs. INJUNCTIVE RELIEF
DAVE JONES, in his capacity as Insurance CAL, CIV, PROC. § 1094.5;
Commissioner of the State of California, 10 C.C.R. § 2509.76
Respondent and Defendant. [REQUEST FOR STAY]
SHASTA LINEN SUPPLY, INC.,
Real Party in Interest.
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VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
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1 Petitioners and Plaintiffs California Insurance Company ("CIC") and Applied
2|| Underwriters Captive Risk Assurance Company, Inc. ("AUCRA") petition this Court for a writ
3| | of administrative mandamus under Section 1094.5 of the California Code of Civil Procedure and
4|| Section 2509.76 of Title 10 of the California Code of Regulations to seek judicial review of
§ || California Insurance Commissioner’s ("Commissioner") June 20, 2016 Decision and Order (the
6||"Order") arising out of a private-party administrative appeal initiated by a company, Shasta
7|| Linen Supply Company, Inc. ("Shasta"), styled In the Matter of the Appeal of Shasta Linen, Inc.
8 || [A true and correct copy of the Order is attached hereto as Exhibit A.] Petitioners and Plaintiffs
9|| also seek a declaration concerning the Commissioner's powers and jurisdiction as they concern
10 || the regulation of workers' compensation rate and forms under Sections 11658 and 11735 of the
11 || California Insurance Code and Section 2268 of Title 10 of the California Code of Regulations.
12 By this verified Petition and Complaint, CIC and AUCRA allege as follows:
13 I INTRODUCTION
14 1. CIC is a licensed property and casualty insurance company domiciled in
15|| California. CIC offers workers' compensation insurance to customers in California through a
16|| standard workers' compensation insurance policy. Under a standard workers’ compensation
17|| insurance policy, the insurer charges a premium that is based upon the payroll and rates
18 || applicable to the classes of employees working for that customer. The premium is not impacted
19 || by loss experience on the claims made under a standard workers’ compensation insurance policy.
20 2. Relevant here, CIC provided coverage through a standard workers' compensation
21]| insurance policy to customers in connection with a "loss-sensitive" workers’ compensation
22 || program called the EquityComp® Program (the "Program"). A "loss sensitive" program is one
23]| in which the ultimate out-of-pocket costs to the customer of the program can vary based upon
24 || cost of claims incurred under a standard workers’ compensation policy. Such a program can be
25 || structured in various forms, such as small and large deductible plans, retro-plans, self-retention,
26 || and dividend plans, Still another form —at issue here — are loss-sensitive plans that are based on
27}| the use of a captive arrangement.
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213-680-2800, 36172044V1 096378728
INSHAW & CULBERTSON
13 West Sth Strest, 471 Foor
(8 Angeles, CA G0071-2043
"213-680-7800
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3. The Program is a loss-sensitive workers' compensation program consisting of
three separate contractual arrangements: (1) a standard workers’ compensation policy workers!
compensation insurance policy (without deductibles or similar features) provided to Shasta by
CIC; (2) a separate reinsurance agreement between CIC and AUCRA, an Iowa insurance
company, which was filed with and approved by the CDI and the Iowa Division of Insurance as
an inter-affiliate agreement; and (3) a separate Reinsurance Participation Agreement (“RPA”)
between AUCRA and Shasta. By executing the RPA, the participant-insured participates in the
captive reinsurance of the workers' compensation policies by receiving an "allocation" of a
portion of the reinsurance premium and losses of AUCRA, acting as a captive reinsurer. In other
words, the RPA is a captive-insurance arrangement with AUCRA, in which AUCRA acts as a
captive reinsurer and Shasta is the economic owner of the captive vis-a-vis this reinsurance
arrangement (i.c., a “rent-a-captive” arrangement). AUCRA is not party to the workers’
compensation insurance policy issued by CIC to Shasta.
4, The standard workers' compensation insurance policies issued by CIC, the
reinsurance agreement, and the RPA are each separate agreements with separate obligations
between different parties. The failure to comply with any agreement with AUCRA under the
RPA did not relieve and/or impact CIC's obligations under the standard workers’ compensation
insurance policy, including CIC’s duty to pay claims to employees of Shasta.
5. The Program uses a "segregated-cell" captive arrangement, meaning a separate
underwriting account is kept for each participant. AUCRA is a sponsored captive, sometimes
called a rental captive, meaning it is owned and controlled by parties unrelated to the
insured/reinsured. AUCRA is regulated by the Iowa Division of Insurance, which has granted it
a permitted practice to establish and account for these protected cells.
6. In 2009, Shasta, employing its own insurance broker, decided to enroll in the
Program. Like any traditional captive arrangement, a standard workers' compensation insurance
policy was issued by CIC to Shasta. This standard workers’ compensation insurance policy
satisfied Shasta's legal obligation to provide workers' compensation insurance for its employees
pursuant to California Labor Code § 3700. CIC charged and was paid premiums in accordance
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VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
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NSHAW & CULBERTSON
'3 Wes! Sih Stree, 47% Foor
(08 Angeles, CA 90071-2043
213-680-2800
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with its filed and approved rates, and claims were made to and paid by CIC. Further, like any
traditional captive arrangement, a portion of premiums and losses were forwarded ("ceded") by
CIC through a reinsurance agreement with CIC to AUCRA as the reinsurer. AUCRA's
reinsurance agreement with CIC — which discussed the nature of AUCRA's involvement in
facilitating the Program, including the maintenance of segregated cells and the customer-
participant's agreement to make deposits into cells — was filed with, reviewed by and deemed
approved by the CDI. Finally, like any traditional captive arrangement, Shasta entered into a
separate agreement (here, the RPA) with AUCRA in which Shasta agreed to capitalize the
captive protected cell in exchange for a share in the potential profits if its claims experience
turned out favorable. This kind of "fronting" arrangement, in which a "fronting" insurer
admitted to write a line of business in a state, issues a policy to a policyholder, and then reinsures
the risks of that policy to a captive reinsurer affiliated with, or linked to, the insured is common
in the insurance industry.
7. After participating in the Program for three years, Shasta became dissatisfied with
the Program costs. Shasta filed a private-party administrative appeal (the “Appeal”) under
Insurance Code section 11737(f) ("Section 11737(f)"), which permits an insured to file an appeal
with the Commissioner seeking review of a workers' compensation insurance carrier's response
to a "request to review the manner in which the rating system has been applied in connection
with the insurance afforded or offered." Ins. Code § 11737(f) (emph. added).
8. Despite the limited scope of a Section 11737(f) proceeding, Shasta sought to
challenge the overall legality of the Program rather than the premium charged to it by CIC and
address issues beyond any "rating system" issue.
9. Captive arrangements have long been used approvingly throughout California and
the United States. Risk agreements in such captive arrangements — like the RPA — are not
subject to California rate and/or form filing requirements applicable to workers' compensation
insurance, Such risk sharing agreements would not be subject to such form or rate filing
requirements as these non-insurance agreements between the insured and the reinsurer do not
provide any insurance coverage to the insured and do not change the duties and obligations
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INSHAW & CULBERTSON
13 West Sth Street 4718 Flot
(0s Angeles, CA 96071-2043
213680-2800
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arising out of the standard workers’ compensation policy between the insured and insurer, in this
case, Shasta and CIC.
10. The nature of the Program and the RPA were expressly reviewed by the CDI in
connection with multiple financial examinations (in 2006, 2009, and 2013) and in a rating and
underwriting market conduct examination issued in December, 2014. In those examinations, the
CDI described the Program, including the risk sharing features provided by the reinsurer in the
RPA. In those examinations, the CDI never took issue with the fact that the RPA was not filed as
workers' compensation insurance policy form or workers' compensation insurance rate, much
less conclude that that the Program was unlawful or the RPA void. There was absolute
transparency in those examinations. As a matter of fact, the CDI examination noted as of
December 31, 2013 issued on December 15, 2014 stated that:
The cooperation and assistance by the officers and employees of the
Company [CIC] during the examination is hereby acknowledged.
11. Despite the above and the limited scope of the Appeal, the Commissioner issued
the Order in which it determined that the RPA purportedly altered the rates charged for and
added other obligations not otherwise set forth in the standard workers' compensation insurance
policies issued by CIC (the "CIC Policies"). Based upon these incorrect determinations the
Commissioner concluded that the Program and the RPA constituted a misapplication of CIC's
filed rates in violation of Insurance Code section 11737 and that the RPA constituted a
"collateral agreement" under California Code of Regulations, title 10, section 2268 ("Section
2268"), which was allegedly required to be filed under Insurance Code section 11658.
12. The Order should be vacated on each of the following grounds: (1) the
Commissioner and ALJ in the underlying proceeding acted in excess of their powers and
jurisdiction in addressing issues and issuing the remedy imposed in the Order; (2) CIC and
AUCRA were deprived of a fair trial; (3) the Order is unsupported by the findings; (4) the
findings are unsupported by evidence; (5) the Order is contrary to law; and (6) the Order is so
inconsistent with the prior determinations of the Commissioner as to be arbitrary and capricious.
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VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V1 0963787N
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INSHAW & CULBERTSON
3West 5th Street, 47th Floor
(t Angeles, CA 9007-2043
"213-880-2000
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13. Importantly, the powers of a governmental agency are limited by statute and
attempts to act beyond those limits are void. See Terhune v. Sup. Ct., 65 Cal. App. 4th 864, 872-
873 (1998) ("To be valid, administrative action must be within the scope of authority conferred
by the enabling statutes."), Despite this clearly defined limit, the Commissioner addressed issues
well beyond the limited scope of the Appeal and imposed a remedy that is reserved for courts
and is beyond the scope of his statutory powers.
14. By way of example, the AHB is not a court of unlimited jurisdiction. Only
matters specially permitted by statute may be heard by the AHB. Despite the fact that the
underlying Appeal only permitted an appeal by an insured concerning a review of an insurer's
"rating system," both the ALJ and the Commissioner addressed issues and made determinations
concerning non-rate issues, such as the RPA's arbitration agreement and the applicability of
certain "form" filing laws (i.e., Ins. Code § 11658 and Title 10 Section 2268). In addressing
these issues in this limited Appeal, the Commissioner acted in excess of his jurisdiction and
acted in a manner contrary to law. On this ground alone, the Order must be vacated.
15. As another example, the Commissioner voided a contract (the RPA) and required
the payment of monies though the law provides no such power to the Commissioner and though
the RPA at issue concerned an entity (AUCRA) that was not party to and never appeared in the
administrative proceeding. See Shernoff v. Sup. Ct., 44 Cal. App. 3d 406, 409 (1975)
(distinguishing between the powers of the Commissioner and the courts stating, "The
commissioner's disciplinary authority is limited to restraint of future illegal conduct by real
parties in interest, and he possesses no authority to enter money judgment for past injuries. This
latter authority remains in the courts . .."). On this ground alone, the Order must be vacated.
16. As another example, the Commissioner determined that an unfiled rate is
unlawful and the Commissioner voided ab initio the RPA on that basis. This was wrong as a
matter of law. An unfiled rate is not an unlawful rate. An unfiled rate may be lawfully used
unless and until the Commissioner exercises his discretion to disapprove of that rate on the
grounds that it should have been filed. Ins. Code § 11737(a). Even then, a rate may only be
disapproved on a prospective basis and only after the Commissioner himself issues a notice of
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intent to disapprove of that rate and initiates a rate disapproval proceeding. Ins. Code §11737(d)
& (g). Here, the Commissioner retroactively disapproved the RPA as an unfiled rate. Further, the
Commissioner never issued a notice of intent to disapprove of the RPA under Ins. Code
§11737(d) and (g). Finally, the Commissioner never initiated a rate disapproval proceeding. In
voiding the RPA's payment obligations on the ground that it is an unfiled rate, the Commissioner
acted in excess of his powers and jurisdiction and failed to act in accordance with the law.
17. The Commissioner also erred as a matter of law and fact in determining that the
RPA is a "collateral agreement." Insurance regulations define “collateral agreements” as those
that “modif[y] the obligation of either the insured or the insurer.” 10 C.C.R. §2268. The RPA
does not qualify. The RPA is separate from the CIC standard workers’ compensation insurance
policies; involves a different party than the insurer (e.g., AUCRA instead of CIC); and does not
include any provisions that modify any provisions in the CIC standard workers’ compensation
insurance policy (e.g., no provisions specifying that they supersede the CIC Policies). All claims
under the CIC standard workers’ compensation policies are adjusted and paid exclusively by
CIC. The RPA would not satisfy Shasta’s obligation under Labor Code §3700.
18. On further grounds alleged below and to be raised in due course of this action in
briefing and hearing on the Petition, the Order must also be vacated because there was a
prejudicial abuse of discretion in light of the Commissioner's failure to act in accordance with the
law, the Order is unsupported by the findings, the findings are unsupported by the evidence and
the Order is contrary to law. Further, as reflected by the underlying proceedings and evidentiary
record, CIC has also been deprived of a fair trial, which also requires vacation of the Order.
19. For the reasons alleged below and those to be discussed in briefing to the Court,
CIC petitions this Court for a peremptory writ of mandate under Section 1094.5 of the California
Code of Civil Procedure and Section 2509.76 of Title 10 of the California Code of Regulations
to seek judicial review and a judgment vacating the June 20, 2016 Decision and Order.
I. PARTIES AND REAL PARTY IN INTEREST
20. Petitioner and Plaintiff CIC is a California insurance company with its principal
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place of business in Nebraska and a statutory home office in Foster City, California. At all
relevant times, CIC has been authorized to transact insurance in California by the CDI,
including, but not limited to workers’ compensation insurance.
21. Petitioner and Plaintiff AUCRA is an Iowa insurance corporation with its
principal place of business in Omaha, Nebraska, licensed as an insurance company in Iowa, and
holding a Certificate of Authority from the CDI to act as a reinsurer in California.
22. Respondent and Defendant Insurance Commissioner of the State of California
Dave Jones, is named in his official capacity as Insurance Commissioner of the State of
California, The Commissioner is required to follow and apply the California Insurance Code and
the implementing regulations in a consistent and reasonable manner, to abide by the California
Government Code, and to otherwise discharge his duties according to the law, including the
California and United States Constitutions.
23. Real party in interest Shasta is a California corporation with its principal place of
business in Sacramento, California.
I. JURISDICTION AND VENUE
24. CIC has a right to judicial review of the Order pursuant to Section 1094.5 of the
California Code of Civil Procedure and Section 2509.76 of Title 10 of the California Code of
Regulations. CIC has exhausted all administrative remedies. The Court has jurisdiction over
this action seeking a Writ of Administrative Mandamus pursuant to California Code of Civil
Procedure section 1094.5 and Regulation 2509.76.
25. Venue is proper in this Court pursuant to Code of Civil Procedure section 401 in
that this case is being prosecuted against a department of the State of California, and the
Attorney General of California maintains an office in the County of Los Angeles. Venue is also
proper in this Court pursuant to Insurance Code section 12905 in that the Commissioner
maintains an office in the County of Los Angeles.
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VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
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3 West Sin Street, 47th Floor
‘Angeles, CA 90071-2043
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IV. FACTUAL ALLEGATIONS
A. The EquityComp® Program
26. The EquityComp® program (the "Program") is a loss sensitive workers’
compensation insurance program. Under the Program participants can obtain fully insured
workers’ compensation insurance coverage that employers are legally required to carry while also
providing those same employers with the benefits that participants can obtain through the use of
a traditional captive reinsurance company. These types of loss sensitive programs have a long
history of being used throughout the United States and California.
27. To participate, Shasta through its broker submitted an Acord Workers’
Compensation Application (the “Acord”) reflecting an estimated annual payroll of $2,843,319.
28. Based on the Acord application, an EquityComp® Proposal was submitted to
Shasta and its broker which identified two “separate” contractual components of the Program (i)
a “standard workers’ compensation policy” covering the employers’ workers’ compensation
coverage obligation issued by CIC, and (ii) a “Profit Sharing Plan” issued by AUCRA as
reinsurer acting as a captive. The Risk Sharing Plan was described in the Proposal as follows:
Profit Sharing Plan. This Profit Sharing Plan is a reinsurance
transaction separate from the guaranteed cost policies, Your risk
retention is created by your participation in, and cession of
allocated premiums and losses to our facultative reinsurance
facility, Applied Underwriters Captive Risk Assurance Company
(AUCRA). AUCRA is a subsidiary of Applied Underwriters, Inc.,
a member of Berkshire Hathaway Inc. Your retention is held in a
segregated, protected cell which is not liable for the debts and
liabilities of any other AUCRA cell. This Profit Sharing Plan is not
a filed retrospective rating plan or dividend plan, and nothing
contained herein is to be so construed. This Profit Sharing Plan
requires a minimum three year contractual commitment from you
with significant penalties for early cancellation.
The Order ‘did not discuss this language or Shasta’s estimated annual payroll of $2,843,319.00.
29. CIC, a licensed California insurer, issues standard workers' compensation
insurance policies to participants, such as Shasta. The policy forms and rates used by CIC are
filed with and approved by the CDI and the Workers' Compensation Insurance Rating Bureau
("WCIRB"). As demonstrated by evidence submitted in the administrative record, CIC charges
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and is paid premium and assessments in accordance with its filed and approved rates and state
required assessments. The obligations assumed by CIC under the standard workers’
compensation policy are not affected by or contingent on any contractual or other form of
obligation owed by Shasta to any third party, including AUCRA under the RPA.
30. The CIC Policy and the RPA are separate contracts between different parties, The
CIC Policy and the RPA set forth different obligations between different parties. Where the CIC
Policy sets forth the obligations between CIC and Shasta relating to the workers' compensation
insurance coverage provided to Shasta, the RPA sets forth the deposit obligations necessary to
fund losses under the Program and the formula for determining the return of capital and profit-
sharing distribution Shasta receives during and at the end of the Program. In other words, the
RPA sets out the terms of Shasta’s participation in AUCRA’s captive reinsurance of CIC. The
breach of one agreement does not result in the breach of another. CIC must continue to pay
claims under the CIC Policy even if Shasta were to fail to comply with its obligations under the
RPA. In fact, that is what occurred here, as Shasta has failed to comply with its contractual duty
to provide AUCRA with those capital contributions required under the RPA. Despite this fact,
CIC has continued to administer and pay for claims as required under the separate terms of the
standard workers’ compensation policy it issued to Shasta.
31. To initiate the Program, a Request To Bind Coverages and Services was executed
by Shasta’s president and owner, which provides in part:
The initial term of the Agreements will be for three (3) years,
beginning on the Proposed Effective Date. Additional fees apply in
the event of early cancellation. Applicant along with Applicant’s
insurance agent was offered for review a Workers’ Compensation
Program Summary and Scenarios worksheet (the “Summary”) and
was offered the opportunity to participate in a conference call with
Applied’s technical representatives to answer any questions about
the Proposal and Summary. Applicant understands the Proposal
and has had sufficient time to review all of the terms, conditions
and stipulations regarding the Proposal with Applicant’s advisers
including Applicant’s insurance agent. Any and all questions
concerning the Proposal have been answered to Applicant’s full
satisfaction. Applicant accepts the Proposal including all of its
terms, conditions and stipulations. (emphasis supplied)
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The Order did not discuss this disclosure language.
32, As expressly set forth in proposal papers provided prior the execution of any
agreements, monthly Program charges are used to pay premiums owed under the CIC Policies as
well as other fees and/or deposits that may be required to be paid under the RPA.
33. Participants-insureds, like Shasta, after executing the Request To Bind execute the
RPA, in which it agrees to make deposits into the segregated cell in exchange for participation in
AUCRA’s captive reinsurance of CIC and resulting profits or losses. The funds in each cell are
solely for the benefit of each Participant’s account. Thereafter, CIC issues its standard workers!
compensation insurance policies to the insured.
34. Applied Risk Services, Inc. ("ARS"), a corporate affiliate of CIC, acts as the
billing agent for the Program. ARS receives Program charge payments from Shasta and
allocates those payments to premiums due to CIC and deposits due to AUCRA.
35. A portion of premiums paid to CIC under the Program are ceded to AUCRA and
then attributed to Shasta’s segregated cell under the RPA. A share of claims are also ceded to
AUCRA under a reinsurance agreement and attributed to Shasta’s captive segregated cell under
the RPA. Such ceded premiums, along with any deposits that Shasta may be required to pay, are
used to pay Shasta’s ceded claims up to a specified limit. Monthly Program charges vary
depending upon Shasta’s actual claims experience, subject to minimum and maximum limits set
forth in the RPA. Depending upon actual claims experience, the final net Program costs could be
more or less than the total premiums due under standard CIC Policies.
36. As set forth in the RPA, a participant’s final net Program cost is dependent on its
claims experience, and ranges from a minimum to a maximum amount, each of which is fully
disclosed to the participant in the Proposal delivered before the Program is put into place. If the
participant ultimately incurs no claims, then it will pay the minimum. A maximum also caps the
participant's potential net costs under the Program regardless of the number and extent of its
claims.
u
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V1 096378728
WSHAW & CULBERTSON
13 West Sth Street, 470h Floor
(0 Angeles, CA 90071-2043
"213-880-7800
ww ~
37. The Program provides a participant with cost-savings while also creating certainty
for a participant-insured over its maximum out-of-pocket costs relating to the standard workers’
compensation insurance coverage and providing the possible benefit of a capital return.
B. Shasta and Its Decision to Participate in the Program
38. Shasta is a laundry and dry cleaning services company that focuses on the linen
rental business. Shasta contracted with other businesses to pick up and deliver linens and
garments, which Shasta washes and irons for re-use. Shasta's target’ customers include
restaurants, hospitality, hotels and certain medical providers.
39. During the relevant period, Shasta had a staff of more than 60 employees.
Shasta’s annual payroll was in the millions of dollars. Shasta was not a small business.
40. At the time the Program was issued to Shasta, its president and part owner was
Thomas Hammer. Mr. Hammer was also a lawyer, a graduate of Boalt Law School, and a former
law partner of Chief Justice of the United States Supreme Court, Earl Warren. During his many
years operating Shasta, Mr. Hammer held a significant number of leadership and board of
director positions outside of Shasta. He was an experienced commercial lawyer and sophisticated
business person.
41. | Mr. Hammer was responsible for the finance side of Shasta's operations and
oversaw all financial arrangements, bank loans, and equipment purchases. Mr. Hammer was also
principally responsible for assessing all of Shasta's insurance needs, including workers’
compensation insurance. Mr. Hammer reviewed Shasta’s workers' compensation insurance
proposals from the 1960s until his passing in 2014.
42. In 2009, Shasta began its search for workers' compensation insurance coverage
for the year 2010. Mr. Hammer was assisted by Shasta's broker, Jeff Chenu of Pan American
Insurance Services. Mr. Chenu and his agency had served as Shasta's insurance broker for many
years in seeking insurance coverage, including workers' compensation coverage.
43. In December 2009, Mr. Chenu had a meeting with Mr. Hammer to discuss various
options. Mr. Chenu presented five different options, one of which was the Program. Proposals
were also presented by State Compensation Insurance Fund (“SCIF”), Zenith Insurance
12
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044 V1 096378728
UNSHAW & CULBERTBON
8 West Sh Sret, 47th Floor
(05 Angelas, CA 96071-2043
"213-680-2800
ww ~
Company (“Zenith”), Insurance Company of the West (“ICW”) and Majestic Insurance
Company. The most expensive option was Zenith, with an annual premium of $446,541. The
least expensive option was ICW with an annual premium of $301,091. The proposal for the
Program presented a range of costs that could be paid — the low end of the range made the
Program less expensive than ICW, and the Program’s high end was less expensive than the
Zenith quote.
44. — In 2009, Shasta anticipated an increase in its experience modification factor (a
rating mechanism promulgated by the California Workers’ Compensation Rating Bureau based
on claims experience of similarly situated employers) in the following years due to recent poor
claims experience. All else being equal, an increase in an insured's experience modification
factor will mean an increase in that insured's workers' compensation insurance costs. This was a
significant concern for Mr. Hammer.
45. Coupled with the uncertainty of rate volatility in the California workers’
compensation marketplace, the Program provided the ability to a participant, such as Shasta, to
have some certainty over its maximum out-of-pocket workers' compensation costs for the
following three years. By way of example, in the case of Shasta, the Program provided a
maximum net cost that effectively approximated the premiums it would have had to pay under
standard CIC Policies for three years, while also providing the potential upside of being out of
pocket less depending on Shasta’s claims experience.!
46. | The Program presented a good deal for Shasta to address its concern about the
effect of its increasing experience modification factor on its workers’ compensation costs. This
fact was confirmed by Shasta's own expert witness, who testified that Shasta chose the Program
because "there was little or no downside because there was a maximum cost that was
' By way of comparison, the estimated cost of workers’ compensation insurance for the 2010 year for Zenith was
$446,541. Assuming the same payroll, rates and factors over the following years, the estimated cost of workers'
compensation insurance coverage for three years from Zenith would be $1,339,623, which is in excess of the
ultimate out-of-pocket costs of approximately $1,010,000 that would have been bore by Shasta under the Program
had it paid all Program charges and after a final profit-sharing distribution under the RPA after the Program closed.
13
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044 V1 0963787Cem YN KH WH FF WN
28
INBHAW & CULBERTSON
18 Wea th iret, 47th Floor
0% Angeles, CA 90071-2043,
"213-680-2800
Nw ~
approximately the same as what a guaranteed cost program would run, and there was some
potential for getting some money back."
47. Shasta opted to participate in the Program effective January 1, 2010. The decision
to participate in the Program was made by Mr. Hammer in consultation with Shasta's broker. Mr.
Hammer executed the Program’s contracts including the Request To Bind and RPA.
48. CIC issued Shasta the standard workers’ compensation policy and has complied
fully with all claims payment and other obligations stated in that policy. AUCRA has complied
with the RPA and all funding and other requirements stated therein.
c. Shasta Linen's Experience under the Program
49, As of December 2012, the total cost of the Program as calculated under the RPA
and due and payable by Shasta was $1,224,991 (This amount is higher than the initial estimated
maximum due to Shasta’s higher payroll). Shasta has not paid this full amount. Instead, Shasta
has paid only $930,000 in Program charges. Despite Shasta’s failure to comply with its duties
under the RPA, CIC has continued to perform all duties required of it under the CIC Policies.
50. As demonstrated by evidence presented (but rejected by the ALJ), due to the
closure of all claims, Shasta's capital deposit obligations under the Program decreased. Had
Shasta paid the entire $1,224,991 when due and the Program was closed, Shasta would have
received a return of capital in the past and/or a final profit sharing distribution totaling at least
$209,000. In other words, Shasta's ultimate net cost under the Program for three years of
workers’ compensation coverage, if all payments were made, would have been approximately
$1,010,000.
51. Assuming Shasta had never entered into the RPA and/or its profit-sharing aspects
were simply ignored, the total amount owed by Shasta under the standard workers’ compensation
CIC Policies would be $1,167,489 — approximately $150,000 more than what Shasta's ultimate
out-of-pocket costs would have been had it complied with its contractually agreed to payment
obligations under the Program.
D. Shasta's Administrative Appeal to the Commissioner under Section 11737(f)
52. On August 27, 2014, Shasta initiated an appeal with the Commissioner's AHB
14
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V 1 096378728
NSHAW & CULBERTSON
13. Wost Sth Street, 4724 Flor
(6 Angeles, CA 96071-2043
"213-880-2800
ow w
pursuant only to California Insurance Code section 11737(f).
53. In the administrative appeal, Shasta challenged the RPA's legality and the
payments due under the RPA. Shasta argued that the RPA was a collateral agreement pursuant to
California Code of Regulations, Title 10, section 2268, and that CIC's failure to file and secure
approval of the RPA violated Insurance Code sections 11735 and 11658. Shasta contended that
it should not have to pay any Program charges.
54. CIC argued that the AHB lacked jurisdiction to hear the appeal as Shasta was not
challenging the CIC Policy or rates but Shasta’s obligations under the RPA — a separate
agreement with a different entity that was not a party to the Appeal. CIC also contended that,
under the Insurance Code, the Commissioner may only invalidate an unfiled rate prospectively
and only in a specially noticed proceeding brought by the Commissioner himself under Insurance
Code section 11737(d) which was not the basis for Shasta’s appeal to the AHB.
55. The ALJ submitted a proposed decision on November 20, 2015 and recommended
its adoption as a decision of the Commissioner. In the proposed decision, the ALJ concluded
that the RPA was an unfiled and unapproved collateral agreement that modified the terms of the
CIC standard workers’ compensation insurance policies and was therefore void. The ALJ also
determined that Shasta was responsible for additional premiums and fees owed to CIC under its
standard workers' compensation insurance policies which totaled approximately $230,000.00,
which was in addition to the approximately $930,000.00 already paid. Ironically, this is in
excess of what Shasta would have paid under the program if it had paid what it owed.
56. On January 21, 2016, the Commissioner issued an "Order Adopting Proposed
Decision" in which the Commissioner adopted the November 20, 2105 Proposed Decision.
57. On February 5, 2016, CIC filed a Petition for Reconsideration with the
Commissioner addressing the jurisdictional defects in the Proposed Decision and seeking
vacation of the January 21, 2016 Order and rejection of the Proposed Decision.
58. | On February 17, 2016, Shasta filed its own Petition for Reconsideration with the
Commissioner in which it sought a modification of the Proposed Decision and Order requiring it
to pay premiums and assessments owed under the CIC Policies.
15
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V1 0963787So em IND HW FW ND
RB NR
15
28
UINSHAW & CULBERTSON
‘3 Wast Sth Sire, 47th Floor
‘os Angeles, CA 96071-2043
"213-880-7800,
Nw ww
59. On March 22, 2016, the Commissioner issued an Order Granting Reconsideration
& Notice of Non-Adoption of Proposed Decision in which he granted reconsideration and stated
that he would not adopt the Proposed Decision and that he would issue a new decision.
60. On June 20, 2016, the Commissioner issued the Order (attached as Exhibit A).
61. In the Order, the Commissioner determined that the Program constituted a
misapplication of CIC's filed rates in violation of Insurance Code section 11737 and that the
RPA constituted a collateral agreement that modified the rates and obligations of the insured or
insurer under Section 2268 and was required to be filed as a form under Insurance Code section
11658, and was therefore void. Petitioners have requested that the administrative record be
prepared and delivered.
Vv. FIRST CAUSE OF ACTION
(Writ of Mandamus: C.C.P § 1094.5 and 10 C.C.R. §2509.76)
62. CIC and AUCRA reallege and incorporate paragraphs 1 through 61 herein by
reference.
63. Pursuant to California Code of Civil Procedure section 1094.5(b), in mandamus
proceedings seeking review of administrative orders, the Court will inquire into whether:
. the respondent agency has proceeded without, or in excess of jurisdiction;
° there was a fair trial; or
. there was any prejudicial abuse of discretion.
64. Under section 1094.5(b), “abuse of discretion is established if the respondent
[agency] has not proceeded in the manner required by law, the order or decision is not supported
by the findings, or the findings are not supported by the evidence.”
65. | The Order must be vacated as the Commissioner has acted without and in excess
of his jurisdiction and powers as provided by the Insurance Code. Further, the Commissioner
has prejudicially abused his discretion in failing to proceed in a manner required by law, by
issuing an order that is not supported by the findings, and by making findings that are not
supported by the weight of the evidence, and which is contrary to law all as more particularly
16
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V1 096378728
INNSHAW & CULBERTSON
ww ww
alleged herein. The Commissioner’s Order was also so inconsistent with prior examinations and
actions as to be arbitrary and capricious.
A. The Commissioner Acted Contrary to the Law and in Excess of His
Jurisdiction by Voiding a Contract - a Remedy Unavailable to the
Commissioner
66. | The Commissioner must act within the powers conferred upon it by law and may
not act in excess of those powers.
67. ‘In the Order, the Commissioner declared the RPA void on the grounds that it
constituted a misapplication of rates under Insurance Code section 11737, that it was a collateral
agreement and, therefore, was subject to Insurance Code section 11658's filing requirements.
68. No statute or regulation permits the Commissioner to declare a contract void on
the ground that it is unfiled under Section 11658, or is a collateral agreement under Section 2268,
or under Section 11737. To the contrary, as made clear by the Commissioner's newly revised
Title 10, Section 2268, a violation of that section gives rise to only certain administrative
proceedings that have not been initiated here and none of which provide the Commissioner with
the authority to void an agreement that purportedly violates Title 10, Section 2268 or Insurance
Code section 11658.
69. Because the Commissioner lacks authority to void a contract on the ground that it
is an unfiled policy form or agreement in violation of the requirements of Section 11658 or
Section 2268, the Commissioner acted in excess of the law in his Order. On this ground alone,
the Order must be vacated.
B. The Commissioner Acted Contrary to the Law and in Excess of His
Jurisdiction by Extinguishing the Rights of a Non-Party to the Underlying
Administrative Proceeding
70. | While CIC was a party to the underlying administrative Appeal, AUCRA was not.
In fact, AUCRA was not named as a party to the Appeal, AUCRA was not joined as a party to
17
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V1 096378728
SHAW & CULBERTSON
{3 Woe St Streot, 47th Floor
‘os Angeles, CA 90071-2043,
7213-680-2800
ew w
the Appeal, AUCRA did not appear in the Appeal, and AUCRA was not represented in the
Appeal. The Order nonetheless purports to rule on the validity and enforceability of the RPA. In
doing so, the Order violates AUCRA’s right to due process and constitutes an act in excess and
abuse of the Commissioner’s authority.
71. A Section 11737(f) appeal only permits an appeal of the decision of an insured’s
"insurer" to review the manner in which that "insurer" applied its "rating system" to determine
premium for workers' compensation insurance coverage offered to the insured.
72. Here, AUCRA is not Shasta's insurer. The RPA is not an insurance policy. It
provides no insurance coverage to Shasta and certainly would not have satisfied Shasta’s
obligation under Labor Code §3700. Instead, Shasta's appeal arose from a decision by CIC and
the Appeal only names CIC as the respondent. Further, Shasta's appeal was served only upon
CIC, not AUCRA. See 10 C.C.R. § 2509.49 (requiring service of copy of the appeal "on the
office designated by each respondent named in the appeal").
73. Because AUCRA was not (and, in fact, could not be) a party to the underlying
Section 11737(f) Appeal and/or did not fall within the jurisdiction of the AHB or the
Commissioner in such an Appeal, the Commissioner acted beyond the limits of his role and his
jurisdiction by issuing the Order impacting the rights of this non-party and depriving AUCRA of
fundamental due process. In seeking to address the rights of AUCRA in a proceeding to which it
was not party, to which it was provided no formal notice and to which it was not subject to in the
first instance constituted a violation of AUCRA's due process and deprivation of a fair trial.
Cc. The Commissioner Acted Contrary to the Law and in Excess of His
Jurisdiction by Failing to Provide a Notice of Intent to Disapprove the RPA
as an Unfiled Rate and Failing to Initiate a Rate Disapproval Proceeding
74. The Commissioner may disapprove a workers' compensation rate that does not
comply with the rate filing requirements of the California Insurance Code. Ins. Code § 11737(a).
18
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V1 0963787we
a
28
SHAW & CULBERTSON
3 West Sth Set 47th Floor
‘9 Angeles, CA 80071-2043,
21380-2800
w w
75. If the Commissioner decides to exercise his discretion to disapprove of an unfiled
rate, the Commissioner "shall serve notice on the insurer of the intent to disapprove and shall
schedule a hearing to commence within 60 days of the date of the notice." Ins. Code § 11737(d).
76. | The Commissioner provided no notice of an intent to disapprove the RPA as an
unfiled rate or schedule and prosecute a hearing to disapprove of any purported unfiled rate.
Instead, the underlying administrative proceeding was initiated by a private party — Shasta —
pursuant to the limited "appeal" process provided under Section 11737(f) and improperly
morphed into a “disapproval” proceeding, without any notice.
77. In limiting the right to initiate a hearing to disapprove of an unfiled rate with the
Commissioner, the California legislature clearly intended to leave the exclusive power to initiate
an unfiled rate disapproval proceeding within the sound discretion of the Commissioner. Unless
and until the Commissioner issues notice of intent to disapprove an unfiled rate and then issues a
disapproval order following a noticed proceeding, an unfiled rate is not an unlawful rate. This
process is intended to provide notice to the insurer and afford the insurer with the ability to
defend its position.
78. Because the Commissioner has not provided notice of an intent to disapprove of
the RPA as an unfiled rate or prosecute a Section 11737(d) proceeding to disapprove the RPA as
an unfiled rate, the Commissioner acted in excess of the law and his powers by issuing his Order
and again depriving CIC and AUCRA of their fundamental due process rights by conducting a
hearing on a matter not noticed.
D. The Commissioner Acted Contrary to the Law and in Excess of His
Jurisdiction by Retroactively Disapproving the RPA's Payment Obligations
79. Even if the Commissioner had issued a notice of intent to disapprove the RPA as
an unfiled rate, the Insurance Code only permits the disapproval of that rate on a going-forward
prospective basis for policies issued or renewed after any disapproval order. Ins. Code §
11737(g).
19
VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT
36172044V1 0963787om ND WH BF BN
N YN NY NR NN NY Bee we Be ew Be eB Be eH
QI A AF YBN fF SO we RADHA FB YW NH KF OO
28
INSHAW & CULBERTSON
15 West Stn Steet, 47h Floor
1 Angeles, CA 96071-2043,
13-8802800
we ~
80. Even if the Commissioner had provided a notice of intent to disapprove of the
RPA's payment obligations as an unfiled rate and initiated a rate disapproval proceeding — none
of which has happened — the Commissioner had no authority to render unlawful the use of those
payment obligations with r
Preview
SPENCER Y. KOOK (SBN 205304) skook@mail.hinshawlaw.com HINSHAW & CULBERTSON LLP 633 West Sth Street, 47th Floor ELECTRONICALLY Los Angeles, CA 90071-2043 FILED Telephone: 213-680-2800 Superior Court of California, Facsimile: 213-614-7399 Coun Of San arene 08/11/2016 TRAVIS WALL (SBN 191662) Clerk orate cout twall@mail.hinshawlaw.com Deputy Clerk JARED W. MATHESON (SBN 275459) jmatheson@hinshawlaw.com HINSHAW & CULBERTSON LLP One California Street, 18th Floor San Francisco, CA 94111 Telephone: 415-362-6000 Facsimile: 415-834-9070 Attorneys for Defendants APPLIED UNDERWRITERS, INC., APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., CALIFORNIA INSURANCE COMPANY, CONTINENTAL INDEMNITY COMPANY and APPLIED RISK SERVICES, INC. SUPERIOR COURT OF THE STATE OF CALIFORNIA. FOR THE COUNTY OF SAN FRANCISCO. UNLIMITED JURISDICTION WARWICK AMUSEMENTS CORPORATION, a Delaware corporation, WARWICK CALIFORNIA CORPORATION, a California corporation, Case No. CGC-16-551614 DEFENDANTS APPLIED WARWICK DENVER CORPORATION, a Delaware corporation, WSF BEVERAGE CORPORATION, a California corporation, WARWICK MELROSE DALLAS CORPORATION, a Delaware corporation, SILVER AUTUMN HOTEL (N.Y.) CORPORATION, LTD., a Delaware corporation, Plaintiffs, VS. APPLIED UNDERWRITERS, INC., a Nebraska corporation, APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., an Iowa corporation, CALIFORNIA INSURANCE COMPANY, a California corporation, CONTINENTAL INDEMNITY UNDERWRITERS, INC., APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., CALIFORNIA INSURANCE COMPANY, CONTINENTAL INDEMNITY COMPANY AND APPLIED RISK SERVICES, INC.’S SUPPLEMENTAL REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF OPPOSITION TO MOTION TO STAY BASED ON INCONVENIENT FORUM First Amended Complaint Filed: May 19, 2016 COMPANY, an Iowa corporation, APPLIED RISK SERVICES, INC., a New York corporation, and DOES | through 50, inclusive, Defendants. Date: August 18, 2016 Time: 9:30 a.m. Department: 302 ) ) ) ) ) ) ) ) ) ) ; REPLY TO PLAINTIFFS’ ) ) ) ) ) ) ) ) } Reservation No. 06270727-18 ) DEFENDANTS’ SUPPLEMENTAL RJN ISO MOTION TO STAY, Case No. CGC-16-551614REQUEST FOR JUDICIAL NOTICE Pursuant to Evidence Code sections 450 and 452(a), (d), Defendants Applied Underwriters Captive Risk Assurance Company, Inc., Applied Underwriters, Inc., California Insurance Company, Continental Indemnity Company, and Applied Risk Services, Inc, (“Defendants”) request that the Court take judicial notice of the following matters. A court may take judicial notice of records of “any court of record of the United States.” Evid. Code § 452(d)(2); People v. Harbolt, 61 Cal. App. 4th 123, 126-7 (1997). lL. Attached as Exhibit Q is a true and correct copy of Applied Underwriters Captive Risk Assurance Company and California Insurance Company’s Verified Petition For A Peremptory Writ of Mandate and Complaint for Declaratory and Injunctive Relief in California Insurance Company v. Jones, Los Angeles County Superior Court Case No. BS163243. Dated: August 11, 2016 HINSHAW & CULBERTSON LLP By: SPENCER Y. KOOK TRAVIS WALL JARED W. MATHESON Attorneys for Defendants APPLIED UNDERWRITERS, INC., APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., CALIFORNIA INSURANCE COMPANY, CONTINENTAL INDEMNITY COMPANY and APPLIED RISK SERVICES, INC. 2 DEFENDANTS’ SUPPLEMENTAL RJN ISO MOTION TO STAY, Case No. CGC-16-551614EXHIBIT “Q”Noe oOo YN A HA BR WwW 10 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 HINSHAW & CULBERTSON 899 Wen th Sia, 47h Piso ‘Law Angoies, CA 9007-2043 sab: 280 ‘ > COPY SPENCER Y. KOOK (SBN 205304) skook@mail.hinshawlaw.com RICHARD DE LA MORA (SBN 122587) rdelamora@mail.hinshawlaw.com HINSHAW & CULBERTSON LLP 633 West 5th Street, 47th Floor Los Angeles, CA 90071-2043 DePTes CONFORMED COPY Telephone: 213-680-2800 s~ ORIGINAL FILED Facsimile: 213-614-7309 arn > C- Superior Court of California TRAVIS R. WALL (SBN 191662) C44g°UF APT — ui 01 206 twall@mail-hinshawlaw.com eee eee ee Ebot Sherri R. Carter, Executive Obteer/Clerk San Francisco, CA 94111 ay seal tates Telephone: 415-362-6000 Facsimile: 415-834-9070 Attorneys for Petitioners and Plaintiffs CALIFORNIA INSURANCE COMPANY and APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC. SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES UNLIMITED JURISDICTION CALIFORNIA INSURANCE COMPANY and | Case No. BS 168 2 4 3 APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE Petitioners and Plaintiffs, AND COMPLAINT FOR DECLARATORY RELIEF AND vs. INJUNCTIVE RELIEF DAVE JONES, in his capacity as Insurance CAL, CIV, PROC. § 1094.5; Commissioner of the State of California, 10 C.C.R. § 2509.76 Respondent and Defendant. [REQUEST FOR STAY] SHASTA LINEN SUPPLY, INC., Real Party in Interest. 1 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787ow w 1 Petitioners and Plaintiffs California Insurance Company ("CIC") and Applied 2|| Underwriters Captive Risk Assurance Company, Inc. ("AUCRA") petition this Court for a writ 3| | of administrative mandamus under Section 1094.5 of the California Code of Civil Procedure and 4|| Section 2509.76 of Title 10 of the California Code of Regulations to seek judicial review of § || California Insurance Commissioner’s ("Commissioner") June 20, 2016 Decision and Order (the 6||"Order") arising out of a private-party administrative appeal initiated by a company, Shasta 7|| Linen Supply Company, Inc. ("Shasta"), styled In the Matter of the Appeal of Shasta Linen, Inc. 8 || [A true and correct copy of the Order is attached hereto as Exhibit A.] Petitioners and Plaintiffs 9|| also seek a declaration concerning the Commissioner's powers and jurisdiction as they concern 10 || the regulation of workers' compensation rate and forms under Sections 11658 and 11735 of the 11 || California Insurance Code and Section 2268 of Title 10 of the California Code of Regulations. 12 By this verified Petition and Complaint, CIC and AUCRA allege as follows: 13 I INTRODUCTION 14 1. CIC is a licensed property and casualty insurance company domiciled in 15|| California. CIC offers workers' compensation insurance to customers in California through a 16|| standard workers' compensation insurance policy. Under a standard workers’ compensation 17|| insurance policy, the insurer charges a premium that is based upon the payroll and rates 18 || applicable to the classes of employees working for that customer. The premium is not impacted 19 || by loss experience on the claims made under a standard workers’ compensation insurance policy. 20 2. Relevant here, CIC provided coverage through a standard workers' compensation 21]| insurance policy to customers in connection with a "loss-sensitive" workers’ compensation 22 || program called the EquityComp® Program (the "Program"). A "loss sensitive" program is one 23]| in which the ultimate out-of-pocket costs to the customer of the program can vary based upon 24 || cost of claims incurred under a standard workers’ compensation policy. Such a program can be 25 || structured in various forms, such as small and large deductible plans, retro-plans, self-retention, 26 || and dividend plans, Still another form —at issue here — are loss-sensitive plans that are based on 27}| the use of a captive arrangement. 28 any cusenraon 2 ce Argel, CR SE071 2003 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 213-680-2800, 36172044V1 096378728 INSHAW & CULBERTSON 13 West Sth Strest, 471 Foor (8 Angeles, CA G0071-2043 "213-680-7800 ‘ww w 3. The Program is a loss-sensitive workers' compensation program consisting of three separate contractual arrangements: (1) a standard workers’ compensation policy workers! compensation insurance policy (without deductibles or similar features) provided to Shasta by CIC; (2) a separate reinsurance agreement between CIC and AUCRA, an Iowa insurance company, which was filed with and approved by the CDI and the Iowa Division of Insurance as an inter-affiliate agreement; and (3) a separate Reinsurance Participation Agreement (“RPA”) between AUCRA and Shasta. By executing the RPA, the participant-insured participates in the captive reinsurance of the workers' compensation policies by receiving an "allocation" of a portion of the reinsurance premium and losses of AUCRA, acting as a captive reinsurer. In other words, the RPA is a captive-insurance arrangement with AUCRA, in which AUCRA acts as a captive reinsurer and Shasta is the economic owner of the captive vis-a-vis this reinsurance arrangement (i.c., a “rent-a-captive” arrangement). AUCRA is not party to the workers’ compensation insurance policy issued by CIC to Shasta. 4, The standard workers' compensation insurance policies issued by CIC, the reinsurance agreement, and the RPA are each separate agreements with separate obligations between different parties. The failure to comply with any agreement with AUCRA under the RPA did not relieve and/or impact CIC's obligations under the standard workers’ compensation insurance policy, including CIC’s duty to pay claims to employees of Shasta. 5. The Program uses a "segregated-cell" captive arrangement, meaning a separate underwriting account is kept for each participant. AUCRA is a sponsored captive, sometimes called a rental captive, meaning it is owned and controlled by parties unrelated to the insured/reinsured. AUCRA is regulated by the Iowa Division of Insurance, which has granted it a permitted practice to establish and account for these protected cells. 6. In 2009, Shasta, employing its own insurance broker, decided to enroll in the Program. Like any traditional captive arrangement, a standard workers' compensation insurance policy was issued by CIC to Shasta. This standard workers’ compensation insurance policy satisfied Shasta's legal obligation to provide workers' compensation insurance for its employees pursuant to California Labor Code § 3700. CIC charged and was paid premiums in accordance 3 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 096378728 NSHAW & CULBERTSON '3 Wes! Sih Stree, 47% Foor (08 Angeles, CA 90071-2043 213-680-2800 ‘ow ww with its filed and approved rates, and claims were made to and paid by CIC. Further, like any traditional captive arrangement, a portion of premiums and losses were forwarded ("ceded") by CIC through a reinsurance agreement with CIC to AUCRA as the reinsurer. AUCRA's reinsurance agreement with CIC — which discussed the nature of AUCRA's involvement in facilitating the Program, including the maintenance of segregated cells and the customer- participant's agreement to make deposits into cells — was filed with, reviewed by and deemed approved by the CDI. Finally, like any traditional captive arrangement, Shasta entered into a separate agreement (here, the RPA) with AUCRA in which Shasta agreed to capitalize the captive protected cell in exchange for a share in the potential profits if its claims experience turned out favorable. This kind of "fronting" arrangement, in which a "fronting" insurer admitted to write a line of business in a state, issues a policy to a policyholder, and then reinsures the risks of that policy to a captive reinsurer affiliated with, or linked to, the insured is common in the insurance industry. 7. After participating in the Program for three years, Shasta became dissatisfied with the Program costs. Shasta filed a private-party administrative appeal (the “Appeal”) under Insurance Code section 11737(f) ("Section 11737(f)"), which permits an insured to file an appeal with the Commissioner seeking review of a workers' compensation insurance carrier's response to a "request to review the manner in which the rating system has been applied in connection with the insurance afforded or offered." Ins. Code § 11737(f) (emph. added). 8. Despite the limited scope of a Section 11737(f) proceeding, Shasta sought to challenge the overall legality of the Program rather than the premium charged to it by CIC and address issues beyond any "rating system" issue. 9. Captive arrangements have long been used approvingly throughout California and the United States. Risk agreements in such captive arrangements — like the RPA — are not subject to California rate and/or form filing requirements applicable to workers' compensation insurance, Such risk sharing agreements would not be subject to such form or rate filing requirements as these non-insurance agreements between the insured and the reinsurer do not provide any insurance coverage to the insured and do not change the duties and obligations 4 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787w 28 INSHAW & CULBERTSON 13 West Sth Street 4718 Flot (0s Angeles, CA 96071-2043 213680-2800 wr w arising out of the standard workers’ compensation policy between the insured and insurer, in this case, Shasta and CIC. 10. The nature of the Program and the RPA were expressly reviewed by the CDI in connection with multiple financial examinations (in 2006, 2009, and 2013) and in a rating and underwriting market conduct examination issued in December, 2014. In those examinations, the CDI described the Program, including the risk sharing features provided by the reinsurer in the RPA. In those examinations, the CDI never took issue with the fact that the RPA was not filed as workers' compensation insurance policy form or workers' compensation insurance rate, much less conclude that that the Program was unlawful or the RPA void. There was absolute transparency in those examinations. As a matter of fact, the CDI examination noted as of December 31, 2013 issued on December 15, 2014 stated that: The cooperation and assistance by the officers and employees of the Company [CIC] during the examination is hereby acknowledged. 11. Despite the above and the limited scope of the Appeal, the Commissioner issued the Order in which it determined that the RPA purportedly altered the rates charged for and added other obligations not otherwise set forth in the standard workers' compensation insurance policies issued by CIC (the "CIC Policies"). Based upon these incorrect determinations the Commissioner concluded that the Program and the RPA constituted a misapplication of CIC's filed rates in violation of Insurance Code section 11737 and that the RPA constituted a "collateral agreement" under California Code of Regulations, title 10, section 2268 ("Section 2268"), which was allegedly required to be filed under Insurance Code section 11658. 12. The Order should be vacated on each of the following grounds: (1) the Commissioner and ALJ in the underlying proceeding acted in excess of their powers and jurisdiction in addressing issues and issuing the remedy imposed in the Order; (2) CIC and AUCRA were deprived of a fair trial; (3) the Order is unsupported by the findings; (4) the findings are unsupported by evidence; (5) the Order is contrary to law; and (6) the Order is so inconsistent with the prior determinations of the Commissioner as to be arbitrary and capricious. 5 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787N oD mW ND HD Bw NNN NY NY NY NY KY Bee we ewe we eB eB eB ee YI A A FF BWwNH F SO MA DA BwWwN 28 INSHAW & CULBERTSON 3West 5th Street, 47th Floor (t Angeles, CA 9007-2043 "213-880-2000 ww w 13. Importantly, the powers of a governmental agency are limited by statute and attempts to act beyond those limits are void. See Terhune v. Sup. Ct., 65 Cal. App. 4th 864, 872- 873 (1998) ("To be valid, administrative action must be within the scope of authority conferred by the enabling statutes."), Despite this clearly defined limit, the Commissioner addressed issues well beyond the limited scope of the Appeal and imposed a remedy that is reserved for courts and is beyond the scope of his statutory powers. 14. By way of example, the AHB is not a court of unlimited jurisdiction. Only matters specially permitted by statute may be heard by the AHB. Despite the fact that the underlying Appeal only permitted an appeal by an insured concerning a review of an insurer's "rating system," both the ALJ and the Commissioner addressed issues and made determinations concerning non-rate issues, such as the RPA's arbitration agreement and the applicability of certain "form" filing laws (i.e., Ins. Code § 11658 and Title 10 Section 2268). In addressing these issues in this limited Appeal, the Commissioner acted in excess of his jurisdiction and acted in a manner contrary to law. On this ground alone, the Order must be vacated. 15. As another example, the Commissioner voided a contract (the RPA) and required the payment of monies though the law provides no such power to the Commissioner and though the RPA at issue concerned an entity (AUCRA) that was not party to and never appeared in the administrative proceeding. See Shernoff v. Sup. Ct., 44 Cal. App. 3d 406, 409 (1975) (distinguishing between the powers of the Commissioner and the courts stating, "The commissioner's disciplinary authority is limited to restraint of future illegal conduct by real parties in interest, and he possesses no authority to enter money judgment for past injuries. This latter authority remains in the courts . .."). On this ground alone, the Order must be vacated. 16. As another example, the Commissioner determined that an unfiled rate is unlawful and the Commissioner voided ab initio the RPA on that basis. This was wrong as a matter of law. An unfiled rate is not an unlawful rate. An unfiled rate may be lawfully used unless and until the Commissioner exercises his discretion to disapprove of that rate on the grounds that it should have been filed. Ins. Code § 11737(a). Even then, a rate may only be disapproved on a prospective basis and only after the Commissioner himself issues a notice of 6 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787ow w intent to disapprove of that rate and initiates a rate disapproval proceeding. Ins. Code §11737(d) & (g). Here, the Commissioner retroactively disapproved the RPA as an unfiled rate. Further, the Commissioner never issued a notice of intent to disapprove of the RPA under Ins. Code §11737(d) and (g). Finally, the Commissioner never initiated a rate disapproval proceeding. In voiding the RPA's payment obligations on the ground that it is an unfiled rate, the Commissioner acted in excess of his powers and jurisdiction and failed to act in accordance with the law. 17. The Commissioner also erred as a matter of law and fact in determining that the RPA is a "collateral agreement." Insurance regulations define “collateral agreements” as those that “modif[y] the obligation of either the insured or the insurer.” 10 C.C.R. §2268. The RPA does not qualify. The RPA is separate from the CIC standard workers’ compensation insurance policies; involves a different party than the insurer (e.g., AUCRA instead of CIC); and does not include any provisions that modify any provisions in the CIC standard workers’ compensation insurance policy (e.g., no provisions specifying that they supersede the CIC Policies). All claims under the CIC standard workers’ compensation policies are adjusted and paid exclusively by CIC. The RPA would not satisfy Shasta’s obligation under Labor Code §3700. 18. On further grounds alleged below and to be raised in due course of this action in briefing and hearing on the Petition, the Order must also be vacated because there was a prejudicial abuse of discretion in light of the Commissioner's failure to act in accordance with the law, the Order is unsupported by the findings, the findings are unsupported by the evidence and the Order is contrary to law. Further, as reflected by the underlying proceedings and evidentiary record, CIC has also been deprived of a fair trial, which also requires vacation of the Order. 19. For the reasons alleged below and those to be discussed in briefing to the Court, CIC petitions this Court for a peremptory writ of mandate under Section 1094.5 of the California Code of Civil Procedure and Section 2509.76 of Title 10 of the California Code of Regulations to seek judicial review and a judgment vacating the June 20, 2016 Decision and Order. I. PARTIES AND REAL PARTY IN INTEREST 20. Petitioner and Plaintiff CIC is a California insurance company with its principal 7 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 096378728 IINSHAW & CULBERTSON i w place of business in Nebraska and a statutory home office in Foster City, California. At all relevant times, CIC has been authorized to transact insurance in California by the CDI, including, but not limited to workers’ compensation insurance. 21. Petitioner and Plaintiff AUCRA is an Iowa insurance corporation with its principal place of business in Omaha, Nebraska, licensed as an insurance company in Iowa, and holding a Certificate of Authority from the CDI to act as a reinsurer in California. 22. Respondent and Defendant Insurance Commissioner of the State of California Dave Jones, is named in his official capacity as Insurance Commissioner of the State of California, The Commissioner is required to follow and apply the California Insurance Code and the implementing regulations in a consistent and reasonable manner, to abide by the California Government Code, and to otherwise discharge his duties according to the law, including the California and United States Constitutions. 23. Real party in interest Shasta is a California corporation with its principal place of business in Sacramento, California. I. JURISDICTION AND VENUE 24. CIC has a right to judicial review of the Order pursuant to Section 1094.5 of the California Code of Civil Procedure and Section 2509.76 of Title 10 of the California Code of Regulations. CIC has exhausted all administrative remedies. The Court has jurisdiction over this action seeking a Writ of Administrative Mandamus pursuant to California Code of Civil Procedure section 1094.5 and Regulation 2509.76. 25. Venue is proper in this Court pursuant to Code of Civil Procedure section 401 in that this case is being prosecuted against a department of the State of California, and the Attorney General of California maintains an office in the County of Los Angeles. Venue is also proper in this Court pursuant to Insurance Code section 12905 in that the Commissioner maintains an office in the County of Los Angeles. 8 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 096378728 NSHAW 2. CULBERTSON 3 West Sin Street, 47th Floor ‘Angeles, CA 90071-2043 "233-880-7800 ow w IV. FACTUAL ALLEGATIONS A. The EquityComp® Program 26. The EquityComp® program (the "Program") is a loss sensitive workers’ compensation insurance program. Under the Program participants can obtain fully insured workers’ compensation insurance coverage that employers are legally required to carry while also providing those same employers with the benefits that participants can obtain through the use of a traditional captive reinsurance company. These types of loss sensitive programs have a long history of being used throughout the United States and California. 27. To participate, Shasta through its broker submitted an Acord Workers’ Compensation Application (the “Acord”) reflecting an estimated annual payroll of $2,843,319. 28. Based on the Acord application, an EquityComp® Proposal was submitted to Shasta and its broker which identified two “separate” contractual components of the Program (i) a “standard workers’ compensation policy” covering the employers’ workers’ compensation coverage obligation issued by CIC, and (ii) a “Profit Sharing Plan” issued by AUCRA as reinsurer acting as a captive. The Risk Sharing Plan was described in the Proposal as follows: Profit Sharing Plan. This Profit Sharing Plan is a reinsurance transaction separate from the guaranteed cost policies, Your risk retention is created by your participation in, and cession of allocated premiums and losses to our facultative reinsurance facility, Applied Underwriters Captive Risk Assurance Company (AUCRA). AUCRA is a subsidiary of Applied Underwriters, Inc., a member of Berkshire Hathaway Inc. Your retention is held in a segregated, protected cell which is not liable for the debts and liabilities of any other AUCRA cell. This Profit Sharing Plan is not a filed retrospective rating plan or dividend plan, and nothing contained herein is to be so construed. This Profit Sharing Plan requires a minimum three year contractual commitment from you with significant penalties for early cancellation. The Order ‘did not discuss this language or Shasta’s estimated annual payroll of $2,843,319.00. 29. CIC, a licensed California insurer, issues standard workers' compensation insurance policies to participants, such as Shasta. The policy forms and rates used by CIC are filed with and approved by the CDI and the Workers' Compensation Insurance Rating Bureau ("WCIRB"). As demonstrated by evidence submitted in the administrative record, CIC charges 9 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787Co Oem YN HAY 28 INSHAW & CULBERTSON 13 West Stn Sree, 72h Floor ‘os Angeles, CA 96071-2048 "213-680-2800, w and is paid premium and assessments in accordance with its filed and approved rates and state required assessments. The obligations assumed by CIC under the standard workers’ compensation policy are not affected by or contingent on any contractual or other form of obligation owed by Shasta to any third party, including AUCRA under the RPA. 30. The CIC Policy and the RPA are separate contracts between different parties, The CIC Policy and the RPA set forth different obligations between different parties. Where the CIC Policy sets forth the obligations between CIC and Shasta relating to the workers' compensation insurance coverage provided to Shasta, the RPA sets forth the deposit obligations necessary to fund losses under the Program and the formula for determining the return of capital and profit- sharing distribution Shasta receives during and at the end of the Program. In other words, the RPA sets out the terms of Shasta’s participation in AUCRA’s captive reinsurance of CIC. The breach of one agreement does not result in the breach of another. CIC must continue to pay claims under the CIC Policy even if Shasta were to fail to comply with its obligations under the RPA. In fact, that is what occurred here, as Shasta has failed to comply with its contractual duty to provide AUCRA with those capital contributions required under the RPA. Despite this fact, CIC has continued to administer and pay for claims as required under the separate terms of the standard workers’ compensation policy it issued to Shasta. 31. To initiate the Program, a Request To Bind Coverages and Services was executed by Shasta’s president and owner, which provides in part: The initial term of the Agreements will be for three (3) years, beginning on the Proposed Effective Date. Additional fees apply in the event of early cancellation. Applicant along with Applicant’s insurance agent was offered for review a Workers’ Compensation Program Summary and Scenarios worksheet (the “Summary”) and was offered the opportunity to participate in a conference call with Applied’s technical representatives to answer any questions about the Proposal and Summary. Applicant understands the Proposal and has had sufficient time to review all of the terms, conditions and stipulations regarding the Proposal with Applicant’s advisers including Applicant’s insurance agent. Any and all questions concerning the Proposal have been answered to Applicant’s full satisfaction. Applicant accepts the Proposal including all of its terms, conditions and stipulations. (emphasis supplied) 10 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 096378728 INSHAW & CULBERTSON Nw w The Order did not discuss this disclosure language. 32, As expressly set forth in proposal papers provided prior the execution of any agreements, monthly Program charges are used to pay premiums owed under the CIC Policies as well as other fees and/or deposits that may be required to be paid under the RPA. 33. Participants-insureds, like Shasta, after executing the Request To Bind execute the RPA, in which it agrees to make deposits into the segregated cell in exchange for participation in AUCRA’s captive reinsurance of CIC and resulting profits or losses. The funds in each cell are solely for the benefit of each Participant’s account. Thereafter, CIC issues its standard workers! compensation insurance policies to the insured. 34. Applied Risk Services, Inc. ("ARS"), a corporate affiliate of CIC, acts as the billing agent for the Program. ARS receives Program charge payments from Shasta and allocates those payments to premiums due to CIC and deposits due to AUCRA. 35. A portion of premiums paid to CIC under the Program are ceded to AUCRA and then attributed to Shasta’s segregated cell under the RPA. A share of claims are also ceded to AUCRA under a reinsurance agreement and attributed to Shasta’s captive segregated cell under the RPA. Such ceded premiums, along with any deposits that Shasta may be required to pay, are used to pay Shasta’s ceded claims up to a specified limit. Monthly Program charges vary depending upon Shasta’s actual claims experience, subject to minimum and maximum limits set forth in the RPA. Depending upon actual claims experience, the final net Program costs could be more or less than the total premiums due under standard CIC Policies. 36. As set forth in the RPA, a participant’s final net Program cost is dependent on its claims experience, and ranges from a minimum to a maximum amount, each of which is fully disclosed to the participant in the Proposal delivered before the Program is put into place. If the participant ultimately incurs no claims, then it will pay the minimum. A maximum also caps the participant's potential net costs under the Program regardless of the number and extent of its claims. u VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 096378728 WSHAW & CULBERTSON 13 West Sth Street, 470h Floor (0 Angeles, CA 90071-2043 "213-880-7800 ww ~ 37. The Program provides a participant with cost-savings while also creating certainty for a participant-insured over its maximum out-of-pocket costs relating to the standard workers’ compensation insurance coverage and providing the possible benefit of a capital return. B. Shasta and Its Decision to Participate in the Program 38. Shasta is a laundry and dry cleaning services company that focuses on the linen rental business. Shasta contracted with other businesses to pick up and deliver linens and garments, which Shasta washes and irons for re-use. Shasta's target’ customers include restaurants, hospitality, hotels and certain medical providers. 39. During the relevant period, Shasta had a staff of more than 60 employees. Shasta’s annual payroll was in the millions of dollars. Shasta was not a small business. 40. At the time the Program was issued to Shasta, its president and part owner was Thomas Hammer. Mr. Hammer was also a lawyer, a graduate of Boalt Law School, and a former law partner of Chief Justice of the United States Supreme Court, Earl Warren. During his many years operating Shasta, Mr. Hammer held a significant number of leadership and board of director positions outside of Shasta. He was an experienced commercial lawyer and sophisticated business person. 41. | Mr. Hammer was responsible for the finance side of Shasta's operations and oversaw all financial arrangements, bank loans, and equipment purchases. Mr. Hammer was also principally responsible for assessing all of Shasta's insurance needs, including workers’ compensation insurance. Mr. Hammer reviewed Shasta’s workers' compensation insurance proposals from the 1960s until his passing in 2014. 42. In 2009, Shasta began its search for workers' compensation insurance coverage for the year 2010. Mr. Hammer was assisted by Shasta's broker, Jeff Chenu of Pan American Insurance Services. Mr. Chenu and his agency had served as Shasta's insurance broker for many years in seeking insurance coverage, including workers' compensation coverage. 43. In December 2009, Mr. Chenu had a meeting with Mr. Hammer to discuss various options. Mr. Chenu presented five different options, one of which was the Program. Proposals were also presented by State Compensation Insurance Fund (“SCIF”), Zenith Insurance 12 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044 V1 096378728 UNSHAW & CULBERTBON 8 West Sh Sret, 47th Floor (05 Angelas, CA 96071-2043 "213-680-2800 ww ~ Company (“Zenith”), Insurance Company of the West (“ICW”) and Majestic Insurance Company. The most expensive option was Zenith, with an annual premium of $446,541. The least expensive option was ICW with an annual premium of $301,091. The proposal for the Program presented a range of costs that could be paid — the low end of the range made the Program less expensive than ICW, and the Program’s high end was less expensive than the Zenith quote. 44. — In 2009, Shasta anticipated an increase in its experience modification factor (a rating mechanism promulgated by the California Workers’ Compensation Rating Bureau based on claims experience of similarly situated employers) in the following years due to recent poor claims experience. All else being equal, an increase in an insured's experience modification factor will mean an increase in that insured's workers' compensation insurance costs. This was a significant concern for Mr. Hammer. 45. Coupled with the uncertainty of rate volatility in the California workers’ compensation marketplace, the Program provided the ability to a participant, such as Shasta, to have some certainty over its maximum out-of-pocket workers' compensation costs for the following three years. By way of example, in the case of Shasta, the Program provided a maximum net cost that effectively approximated the premiums it would have had to pay under standard CIC Policies for three years, while also providing the potential upside of being out of pocket less depending on Shasta’s claims experience.! 46. | The Program presented a good deal for Shasta to address its concern about the effect of its increasing experience modification factor on its workers’ compensation costs. This fact was confirmed by Shasta's own expert witness, who testified that Shasta chose the Program because "there was little or no downside because there was a maximum cost that was ' By way of comparison, the estimated cost of workers’ compensation insurance for the 2010 year for Zenith was $446,541. Assuming the same payroll, rates and factors over the following years, the estimated cost of workers' compensation insurance coverage for three years from Zenith would be $1,339,623, which is in excess of the ultimate out-of-pocket costs of approximately $1,010,000 that would have been bore by Shasta under the Program had it paid all Program charges and after a final profit-sharing distribution under the RPA after the Program closed. 13 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044 V1 0963787Cem YN KH WH FF WN 28 INBHAW & CULBERTSON 18 Wea th iret, 47th Floor 0% Angeles, CA 90071-2043, "213-680-2800 Nw ~ approximately the same as what a guaranteed cost program would run, and there was some potential for getting some money back." 47. Shasta opted to participate in the Program effective January 1, 2010. The decision to participate in the Program was made by Mr. Hammer in consultation with Shasta's broker. Mr. Hammer executed the Program’s contracts including the Request To Bind and RPA. 48. CIC issued Shasta the standard workers’ compensation policy and has complied fully with all claims payment and other obligations stated in that policy. AUCRA has complied with the RPA and all funding and other requirements stated therein. c. Shasta Linen's Experience under the Program 49, As of December 2012, the total cost of the Program as calculated under the RPA and due and payable by Shasta was $1,224,991 (This amount is higher than the initial estimated maximum due to Shasta’s higher payroll). Shasta has not paid this full amount. Instead, Shasta has paid only $930,000 in Program charges. Despite Shasta’s failure to comply with its duties under the RPA, CIC has continued to perform all duties required of it under the CIC Policies. 50. As demonstrated by evidence presented (but rejected by the ALJ), due to the closure of all claims, Shasta's capital deposit obligations under the Program decreased. Had Shasta paid the entire $1,224,991 when due and the Program was closed, Shasta would have received a return of capital in the past and/or a final profit sharing distribution totaling at least $209,000. In other words, Shasta's ultimate net cost under the Program for three years of workers’ compensation coverage, if all payments were made, would have been approximately $1,010,000. 51. Assuming Shasta had never entered into the RPA and/or its profit-sharing aspects were simply ignored, the total amount owed by Shasta under the standard workers’ compensation CIC Policies would be $1,167,489 — approximately $150,000 more than what Shasta's ultimate out-of-pocket costs would have been had it complied with its contractually agreed to payment obligations under the Program. D. Shasta's Administrative Appeal to the Commissioner under Section 11737(f) 52. On August 27, 2014, Shasta initiated an appeal with the Commissioner's AHB 14 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V 1 096378728 NSHAW & CULBERTSON 13. Wost Sth Street, 4724 Flor (6 Angeles, CA 96071-2043 "213-880-2800 ow w pursuant only to California Insurance Code section 11737(f). 53. In the administrative appeal, Shasta challenged the RPA's legality and the payments due under the RPA. Shasta argued that the RPA was a collateral agreement pursuant to California Code of Regulations, Title 10, section 2268, and that CIC's failure to file and secure approval of the RPA violated Insurance Code sections 11735 and 11658. Shasta contended that it should not have to pay any Program charges. 54. CIC argued that the AHB lacked jurisdiction to hear the appeal as Shasta was not challenging the CIC Policy or rates but Shasta’s obligations under the RPA — a separate agreement with a different entity that was not a party to the Appeal. CIC also contended that, under the Insurance Code, the Commissioner may only invalidate an unfiled rate prospectively and only in a specially noticed proceeding brought by the Commissioner himself under Insurance Code section 11737(d) which was not the basis for Shasta’s appeal to the AHB. 55. The ALJ submitted a proposed decision on November 20, 2015 and recommended its adoption as a decision of the Commissioner. In the proposed decision, the ALJ concluded that the RPA was an unfiled and unapproved collateral agreement that modified the terms of the CIC standard workers’ compensation insurance policies and was therefore void. The ALJ also determined that Shasta was responsible for additional premiums and fees owed to CIC under its standard workers' compensation insurance policies which totaled approximately $230,000.00, which was in addition to the approximately $930,000.00 already paid. Ironically, this is in excess of what Shasta would have paid under the program if it had paid what it owed. 56. On January 21, 2016, the Commissioner issued an "Order Adopting Proposed Decision" in which the Commissioner adopted the November 20, 2105 Proposed Decision. 57. On February 5, 2016, CIC filed a Petition for Reconsideration with the Commissioner addressing the jurisdictional defects in the Proposed Decision and seeking vacation of the January 21, 2016 Order and rejection of the Proposed Decision. 58. | On February 17, 2016, Shasta filed its own Petition for Reconsideration with the Commissioner in which it sought a modification of the Proposed Decision and Order requiring it to pay premiums and assessments owed under the CIC Policies. 15 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787So em IND HW FW ND RB NR 15 28 UINSHAW & CULBERTSON ‘3 Wast Sth Sire, 47th Floor ‘os Angeles, CA 96071-2043 "213-880-7800, Nw ww 59. On March 22, 2016, the Commissioner issued an Order Granting Reconsideration & Notice of Non-Adoption of Proposed Decision in which he granted reconsideration and stated that he would not adopt the Proposed Decision and that he would issue a new decision. 60. On June 20, 2016, the Commissioner issued the Order (attached as Exhibit A). 61. In the Order, the Commissioner determined that the Program constituted a misapplication of CIC's filed rates in violation of Insurance Code section 11737 and that the RPA constituted a collateral agreement that modified the rates and obligations of the insured or insurer under Section 2268 and was required to be filed as a form under Insurance Code section 11658, and was therefore void. Petitioners have requested that the administrative record be prepared and delivered. Vv. FIRST CAUSE OF ACTION (Writ of Mandamus: C.C.P § 1094.5 and 10 C.C.R. §2509.76) 62. CIC and AUCRA reallege and incorporate paragraphs 1 through 61 herein by reference. 63. Pursuant to California Code of Civil Procedure section 1094.5(b), in mandamus proceedings seeking review of administrative orders, the Court will inquire into whether: . the respondent agency has proceeded without, or in excess of jurisdiction; ° there was a fair trial; or . there was any prejudicial abuse of discretion. 64. Under section 1094.5(b), “abuse of discretion is established if the respondent [agency] has not proceeded in the manner required by law, the order or decision is not supported by the findings, or the findings are not supported by the evidence.” 65. | The Order must be vacated as the Commissioner has acted without and in excess of his jurisdiction and powers as provided by the Insurance Code. Further, the Commissioner has prejudicially abused his discretion in failing to proceed in a manner required by law, by issuing an order that is not supported by the findings, and by making findings that are not supported by the weight of the evidence, and which is contrary to law all as more particularly 16 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 096378728 INNSHAW & CULBERTSON ww ww alleged herein. The Commissioner’s Order was also so inconsistent with prior examinations and actions as to be arbitrary and capricious. A. The Commissioner Acted Contrary to the Law and in Excess of His Jurisdiction by Voiding a Contract - a Remedy Unavailable to the Commissioner 66. | The Commissioner must act within the powers conferred upon it by law and may not act in excess of those powers. 67. ‘In the Order, the Commissioner declared the RPA void on the grounds that it constituted a misapplication of rates under Insurance Code section 11737, that it was a collateral agreement and, therefore, was subject to Insurance Code section 11658's filing requirements. 68. No statute or regulation permits the Commissioner to declare a contract void on the ground that it is unfiled under Section 11658, or is a collateral agreement under Section 2268, or under Section 11737. To the contrary, as made clear by the Commissioner's newly revised Title 10, Section 2268, a violation of that section gives rise to only certain administrative proceedings that have not been initiated here and none of which provide the Commissioner with the authority to void an agreement that purportedly violates Title 10, Section 2268 or Insurance Code section 11658. 69. Because the Commissioner lacks authority to void a contract on the ground that it is an unfiled policy form or agreement in violation of the requirements of Section 11658 or Section 2268, the Commissioner acted in excess of the law in his Order. On this ground alone, the Order must be vacated. B. The Commissioner Acted Contrary to the Law and in Excess of His Jurisdiction by Extinguishing the Rights of a Non-Party to the Underlying Administrative Proceeding 70. | While CIC was a party to the underlying administrative Appeal, AUCRA was not. In fact, AUCRA was not named as a party to the Appeal, AUCRA was not joined as a party to 17 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 096378728 SHAW & CULBERTSON {3 Woe St Streot, 47th Floor ‘os Angeles, CA 90071-2043, 7213-680-2800 ew w the Appeal, AUCRA did not appear in the Appeal, and AUCRA was not represented in the Appeal. The Order nonetheless purports to rule on the validity and enforceability of the RPA. In doing so, the Order violates AUCRA’s right to due process and constitutes an act in excess and abuse of the Commissioner’s authority. 71. A Section 11737(f) appeal only permits an appeal of the decision of an insured’s "insurer" to review the manner in which that "insurer" applied its "rating system" to determine premium for workers' compensation insurance coverage offered to the insured. 72. Here, AUCRA is not Shasta's insurer. The RPA is not an insurance policy. It provides no insurance coverage to Shasta and certainly would not have satisfied Shasta’s obligation under Labor Code §3700. Instead, Shasta's appeal arose from a decision by CIC and the Appeal only names CIC as the respondent. Further, Shasta's appeal was served only upon CIC, not AUCRA. See 10 C.C.R. § 2509.49 (requiring service of copy of the appeal "on the office designated by each respondent named in the appeal"). 73. Because AUCRA was not (and, in fact, could not be) a party to the underlying Section 11737(f) Appeal and/or did not fall within the jurisdiction of the AHB or the Commissioner in such an Appeal, the Commissioner acted beyond the limits of his role and his jurisdiction by issuing the Order impacting the rights of this non-party and depriving AUCRA of fundamental due process. In seeking to address the rights of AUCRA in a proceeding to which it was not party, to which it was provided no formal notice and to which it was not subject to in the first instance constituted a violation of AUCRA's due process and deprivation of a fair trial. Cc. The Commissioner Acted Contrary to the Law and in Excess of His Jurisdiction by Failing to Provide a Notice of Intent to Disapprove the RPA as an Unfiled Rate and Failing to Initiate a Rate Disapproval Proceeding 74. The Commissioner may disapprove a workers' compensation rate that does not comply with the rate filing requirements of the California Insurance Code. Ins. Code § 11737(a). 18 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787we a 28 SHAW & CULBERTSON 3 West Sth Set 47th Floor ‘9 Angeles, CA 80071-2043, 21380-2800 w w 75. If the Commissioner decides to exercise his discretion to disapprove of an unfiled rate, the Commissioner "shall serve notice on the insurer of the intent to disapprove and shall schedule a hearing to commence within 60 days of the date of the notice." Ins. Code § 11737(d). 76. | The Commissioner provided no notice of an intent to disapprove the RPA as an unfiled rate or schedule and prosecute a hearing to disapprove of any purported unfiled rate. Instead, the underlying administrative proceeding was initiated by a private party — Shasta — pursuant to the limited "appeal" process provided under Section 11737(f) and improperly morphed into a “disapproval” proceeding, without any notice. 77. In limiting the right to initiate a hearing to disapprove of an unfiled rate with the Commissioner, the California legislature clearly intended to leave the exclusive power to initiate an unfiled rate disapproval proceeding within the sound discretion of the Commissioner. Unless and until the Commissioner issues notice of intent to disapprove an unfiled rate and then issues a disapproval order following a noticed proceeding, an unfiled rate is not an unlawful rate. This process is intended to provide notice to the insurer and afford the insurer with the ability to defend its position. 78. Because the Commissioner has not provided notice of an intent to disapprove of the RPA as an unfiled rate or prosecute a Section 11737(d) proceeding to disapprove the RPA as an unfiled rate, the Commissioner acted in excess of the law and his powers by issuing his Order and again depriving CIC and AUCRA of their fundamental due process rights by conducting a hearing on a matter not noticed. D. The Commissioner Acted Contrary to the Law and in Excess of His Jurisdiction by Retroactively Disapproving the RPA's Payment Obligations 79. Even if the Commissioner had issued a notice of intent to disapprove the RPA as an unfiled rate, the Insurance Code only permits the disapproval of that rate on a going-forward prospective basis for policies issued or renewed after any disapproval order. Ins. Code § 11737(g). 19 VERIFIED PETITION FOR A PEREMPTORY WRIT OF MANDATE AND COMPLAINT 36172044V1 0963787om ND WH BF BN N YN NY NR NN NY Bee we Be ew Be eB Be eH QI A AF YBN fF SO we RADHA FB YW NH KF OO 28 INSHAW & CULBERTSON 15 West Stn Steet, 47h Floor 1 Angeles, CA 96071-2043, 13-8802800 we ~ 80. Even if the Commissioner had provided a notice of intent to disapprove of the RPA's payment obligations as an unfiled rate and initiated a rate disapproval proceeding — none of which has happened — the Commissioner had no authority to render unlawful the use of those payment obligations with r