Trial Materials: WARWICK AMUSEMENTS CORPORATION, ET AL VS. APPLIED UNDERWRITERS, INC., A NEBRASKA CORPORATION ET AL

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                                Larry J. Lichtenegger, Esq. [CSB #048206]
The Lichtenegger Law Office

3850 Rio Road, #58

Carmel, CA 93923

Telephone: (831) 626-2801

Facsimile: (831) 886-1639
lawyer@mbay.net

Attorneys for Plaintiffs

ELECTRONICALLY

FILED

Superior Court of California,
County of San Francisco

07/09/2018

Clerk of the Court

BY: KALENE APOLONIO
Deputy Clerk

IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN AND FOR THE COUNTY OF SAN FRANCISCO

WARWICK CALIFORNIA
CORPORATION, a California corporation,
WSF BEVERAGE CORPORATION, a
California corporation,

Plaintiffs,
v.

APPLIED UNDERWRITERS, INC., a
Nebraska corporation, APPLIED
UNDERWRITERS CAPTIVE

RISK ASSURANCE COMPANY, INC.,
an lowa corporation, CALIFORNIA
INSURANCE COMPANY, a California
corporation, CONTINENTAL
INDEMINTY COMPANY, an Iowa
Corporation; APPLIED RISK SERVICES,
INC., a New York corporation and DOES I
through 50, inclusive,

Defendants.

APPLIED UNDERWRITERS, INC., et. al.

Cross-Complainants,
v.

WARWICK CALIFORNIA
CORPORATION, a California corporation,
WSF BEVERAGE CORPORATION, a
California corporation,

Cross-Defendants.

Case No. GCG-16-551614

PLAINTIFFS’ POST-TRIAL
REPLY BRIEF

Date: May 21, 2018
Time: 9:30 a.m.
Dept: Dept. 306TABLE OF CONTENTS

INTRODUCTION ...

APPLIED’S ANALYSIS OF THE EVIDENCE 0.0.0.0... ccc ces cee tsetse teeter teeter rereenaneee 1
ARGUMENT ....... ccc csecceesccs see ceneeeseneceseeeseeeseseeeaee esas eeesseeseneetaeneeaeeeseneeeennesaa ne 3
A CTOSS-C ARMS slot alatalattn as odie ehalsletlodsletala pal oedalctalsdals dnt aladalodalahalaletalectglehale ata ectalodlatala bal 3

1. Applied’s Claim For Recovery Under the RPA Against the CA Entities ...........3

(a) Procedural Justice .......... 0000 ccece cee eee eec ee eeeeeeesceeeeeseeeee estan eeeeens 4
(b) The Joint and Several Issue 1.0.0... e cece eee e eee eee see eeeeeeeee ee 4
2. CIC’s Claim for Recovery Under its Policies .
B. Warwick CA’s Claims «1.0.0.0... ..ccceccee cee eeeeee cece eee eeeeees ees eeetesseeseneeeseseuenaneesens 8
1. Applied Alleges There is No Breach of Contract ......0....00.ccceeeeeeeeseeeeeeeeees 8
2. Warwick CA makes no claim for Bad Faith .....0.......0. cece eee ssceeeeee sees ea reeeee 9

3. Warwich CA makes a Fraud Claim for Concealment under Ins. Code §330-334 .9
4. Warwick CA does make a UCL Claim ...............000cece eee eseeeeeeee see eeetnene ree 11
(a) Applied’s Claim that Warwick has Suffered No Injury ............0...0. ll
(b) Applied’s Claim that the Use of An Unfiled Rate is Not Unlawful ....... 12
5. Applied’s Contention that Warwick is Not Entitled to Declaratory Relief ........ 13

6. Applied’s Contention that Warwick has failed to Establish a

Basis for Rescission ...............cceececcecscceeecee cee seeeeeesseueeeeeeeeenaeeeeseenage 13
7. Applied’s Contention that Warwick has failed to Support a Conversion .......... 13
HHT E yey eee eee eee ence TT et teed deelalctalatelalel alclaltaltedahedahatadahel sl 14TABLE OF AUTHORITIES

Cases:
Cohen v. Penn Mut. Life Ins. Co. (1957) 48 Cal. 2d 720.0... cccee cece eee eeeeeeeeeeeee nena neers 10
Gates v. General Casualty Co. (9m Cir. 1941) 120 F.2d 925 o.oo. eee eee eeee rane 10

Lance Camper Manufacturing Corp. v. Republic Indemnity Co.(1996) 44 Cal.App.4" 194 ......4

Larwin-Southern California, Inc. v. JGB Investment Co.(1979) 101 Cal. App. 3d 626 «0.0.0.0... 5
Merchants Fire Assurance Corp. v. Lattimore (9th Cir. 1959) 263 F.2d 232 .....00....e cece 11

Newman vy. Firemen's Ins. Co. (1944) 67 Cal. App. 2d 386

Samson vy. Trans America Ins. Co. (1981) 30 Cal.3d 220...

Stevens v. Superior Court, 75 Cal.App.4" 594, 603-604 (1999) .....ccccessecsecssseeseessesseessees 12
Stop Youth Addiction, Inc. v. Lucky Stores, Inc. 17 Cal.4th 553 (1998) .........ceccceeeeee sees eens 12
Telford v. New York Life Ins. Co., 9 Cal.2d 103 [69 P.2d 835 0.00... cceceeececeeeeeeeceneeena eens 11
Tenet Healthsystem Desert, Inc. v. Blue Cross of Cal., 245 Cal. App. 4th 821 (2016) ........... 10

Statutes & Regulations:
Business & Professions Code §§ 17200 et seg. (UCL) ......... ccc c cece cece eee eee eee eeeeeeeeeee 11, 12
Civ. Code § 1588 ....

PIV Code S15 89 aaa cte et gi teee gee teat tetas atte pt ele egetae teed ah palate eet ee peng ee aelet at pa beeeee rate 7
iv @ode $165 9 sai sttda tsar etale td etated slat slatlatt a galetaletdakde aie tala vakv a eaaletvatdatialed slat vata atdate 4
IV IO OdeTST OOF leh tek t dh balehdehdaleddhbale hehe teh tdohdaleddeddabdlehdeldatdehdaldelndsleddodetelebela 4
Ins. Code §330-334 oo... cic cecece cece cece cee ee eee cee eee ene see eeeteeeesaeeseneeeeesnereeeeees 9,10, 14
Tis COde 633 eee taal sel ted lelaatleletledalstaletdaledaled-sletebaletsletdetdaletal 11
Ins. Code § 1861,03(a) ..ccscscecscscsescsesesvscececsevsvsvscscseseseussensseseavsesseesevssvavseeesesees 12

Ins. Code §11658 ..

Mins COG GUL TSS aise ea cle cle rala gata ete eget delete ce tteadale let te tdusialetaetde tees teatalstvebee eda stetelet 13
Mis COME SUIS 7a ttehdotdclebdahdebdaleddehaendahdalalalshdebdahdaldaatdehdaldehtalehdetdahdahdebdahtaletaeiteld 13
10 Cal. Code Reg. §2268 .0....0...0cc ieee cece ccc ec ee ese eeee nee eee essen eeseeeeaeeseeeeeteeeeenee 11, 13INTRODUCTION

Plaintiffs Warwick California and WSF Beverage Corporations reply to Defendants and
Cross Complainants’ Opening Brief by pointing out that there is nothing new or extraordinary in
the Briefing. Instead, it continues to act as if its EquityComp program is legal, beneficial to all
insureds and is completely opaque. In all of these points, it is in error, and for the sake of brevity,
Warwick limits its Reply to refuting Applied’s claims and not stating its case in chief over again.

APPLIED’S ANALYSIS OF THE EVIDENCE

In Section I, Applied seems to think that pre-contract negotiations make a difference in
analyzing whether the RPA is a legal contract. However, there is nothing about the negotiations in|
the sale of the program that overcome the fact that Applied did not obtain the approval of the
California Insurance Commissioner to sell this program, and consequently, it cannot recover its
claims against the CA Entities under the illegal EquityComp program [See, the analysis in
Plaintiffs’ Opening Brief].

Applied summarizes its view of this evidence with the following concluding statement:

“The benefits and costs of the Program were explained in detail through proposal papers,
the Sample Plan Analysis, the RPA and discussions with Warwick and its broker.
Warwick and its broker generally understood the Program and understood that it could
perform well if claims were low.” [Brief, page 8, Il. 19-22]

Instead of a line-by-line disagreement with Applied recitation of the evidence (of which
there are many), Warwick looks at whether the above “summation” has any substance.

First, a “general understanding” does not amount to a complete understanding how this
program actually worked, and it is obvious that neither Mr. Steers nor Mr. Sheh had that full
appreciation of the EquityComp program at the time of the sale [an example of Mr. Sheh’s
understand can be found at Tx: p. 446:20-448:12; 242:18-432:25]. What is equally obvious is that
if one really tried to understand the calculations under the program, even using the nationwide
analysis, Mr. Sheh would still have come away with a completely different idea than what
Applied is currently attempting to collect from Warwick.

The following table is taken from the RPA’s Table B, applying Warwick’s nationwide

ultimate cost of paid claims and using the analogous loss ratios to calculate Applied’s Base Feefor that loss ratio. To the Base Fee is added the paid claims cost. It shows that Warwick should
actually have achieved a very different result than what Applied currently wants to collect from
the CA Entities, as in its Brief Applied claims a total right to $5,276,532.89 (the total of existing
payments of $3,292,760.72 and the payment of another $1,983,772.17 [Brief, 6:24-26]:

% of Warwick

Applied Base Claim oe Payments Used
I ced Applied Annually i
Loss Fee Losses’ Retention for Base Fee
Ratio | EGAF 7 and Losses
10% | 1.2936 | $1,511,138 | $343,578 | $1,854,715 | $648,501.90 62.66%
20% 1.2881 $1,504,713 $687,156 | $2,191,868 | $766,387.52 74.05%
30% | 1.2289 | $1,435,557 | $1,030,733 | $2,466,291 | $862,339.43 83.32%
40% 1.1694 $1,366,052 | $1,374,311 | $2,740,363 | $958,168.81 92.58%

50% | 1.0903 | $1,273,650 | $1,717,889 | $2,991,539 | $1,045,992.58 101.07%

54% | 1.0507 | $1,227,390 | $1,855,465 | $3,082,855 | $1,077,921.49| — 104.15%

60% | 1.0111 | $1,181,131 | $2,061,467 | $3,242,598 | $1,133,775.51 109.55%

70% | 0.9716 | $1,134,989 | $2,405,045 | $3,540,033 | $1,237,773.86 119.60%

80% | 1.5027 | $1,755,401 | $2,748,622 | $4,504,023 | $1,574,833.30 152.17%

90% | 1.8029 $2,106,084 | $3,092,200 | $5,198,284 | $1,817,581.82 175.62%

100% | 1.5267 $1,783,437 | $3,435,778 | $5,219,215 | $1,824,900.27 176.33%

While this difference is obvious, Applied’s current claim is also patently different from
the Table in the Scenarios [Exhibit D133, page 6] when one applies Warwick’s nationwide loss
claims of $1,855,465 (or 54% of the Loss Pick Containment Amount on page 3 of Exhibit D173)
as costing somewhere between $2,902,995 and $3,009,600, and not the $5,276,532.89 total
program costs Applied is now claiming [Brief, 9:9-11]. The fact that Ms. Gardiner testified that
an insured would always be able to rely on this table to show what its obligations would be [Tx:
129:11-18; 244:20-245:7], supports the misleading character of the Scenarios.

In addition to the misleading character of Table B of the RPA as well as the Scenario’s
Table, the 0.70 “Pay-In-Factor” represented in the Proposal, page 4 [Exhibit D132], if relied on

by an insured, is also misleading as an insured would have to maintain a less than 20% loss ratio

' The EGAFs in the table are taken from Table B in the RPA, the Base Fee is a multiplication of
the Allocation Factor on Table B times the applicable EGAF for that loss ratio times the loss pick
containment amount taken from page 3 of Exhibit 173.

~ Claim Losses are a multiplication of the loss pick containment amount taken from page 3 of
Exhibit 173 times the loss ratio in the first column.to achieve better than that 0.70 Pay-In Factor (using the Table above). What is misleading is that
the Pay-In-Factor is supposed to represent an initial loss ratio where if the loss ratio is lower, the
0.70 Factor goes down and the insured gets more money back [Gardiner Tx: 243:23-245:7].
While her referenced testimony states that the 0.70 could go all the way down to the Allocation
Factor (for Warwick, 0.35), the above table shows that is not true. However, the bottom line in
that in that transcript location is that Ms. Gardiner admits that page 4 of the Proposal is to be
ignored by the insured as not representing what will happen to an insured. She recommended that
an insured could always look at the table on page six of the Scenarios to calculate what future
payments would be. But, the above analysis shows that is not true either. What could be more
misleading than putting out documents with representations that have no meaning.

Applied’s attempt to summarize the “understanding of Warwick as it did above is an
entire misstatement. The above table and references reveal the lack of “benefit” to an insured
under the EquityComp program, the confusing nature of the sales documents used by Applied
(the Proposal and Scenarios), and the resultant breaches of those representations by Applied. An
insured would have to sustain, over a three-year period, an almost impossible loss ratio to receive
anything decent under this program.

In reality, the program is actually set up by Applied to make sure it not only keeps most of
the money, but charges much more than what is called for in its documents.

It is a fraud when Applied promises a profit share when an insured is able to keep its
losses low, but the promised benefit is never realized. An insured can never really achieve a
significant benefit from this program.

ARGUMENT
A. Cross-Claims

1. Applied’s Claim For Recovery Under the RPA Against the CA Entities.

Plaintiffs and Applied are arguing two different arguments here, Plaintiffs seeking
damages for Applied’s breach of contract as to them and Applied attempting to collect on the
contract that includes the out-of-state entities under a contract in which the out-of-state entities

are not allowed to cross-claim.(a) Procedural Justice.

Before getting into the joint and several issue, Warwick objects to this court considering
Applied’s claims against the out-of-state entities. Warwick tried to prevent that by its Motion in
Limine to exclude the cross-claims of Applied against the non-California entities.

This unusual situation was brought about by Applied and their decision to file a motion to
stay the right of the non-California entities to have their issues aired in this case. Applied did not
want to have to address the claims of the non-California entities in this court, and moved to
remove them. Their motion was granted, and now Applied does not want to reap what it sowed.
(although it should), and insists on litigating its claims against the non-California entities without
allowing the non-California issues against them being litigated as well. The result is that the non-
California entities cannot make claims against Applied for the mishandling of their case, such as
their claim of bad faith claims handling as allowed under Lance Camper Manufacturing Corp. v.
Republic Indemnity Co.(1996) 44 Cal.App.4” 194, which is currently being litigated in Nebraska.

It is truly remarkable that Applied now contends it can recover amounts it claims are due
it from the non-California entities by alleging the California entities owe those sums, all without
having to defend against the claims of those non-California entities. That is what it is attempting
to do here, an effort that we believed was denied them when the court granted Warwick’s Motion
in Limine, but then allowed all the evidence in regarding the non-California entities. The non-
California entities were not allowed to present their counter claims, and for that reason Applied’s
claims against them should not be allowed. Applied should be forced to reap what it sowed from
filing its stay motion.

(b) The Joint and Several Issue.

Fortunately, Applied recognizes that it has the burden of proof as well as the burden of
persuasion to establish that the RPA is a joint and several obligation. It does so by relying on the
evidentiary presumption in Civ. Code §1659 and §1669 [Brief, p. 9:19-24]. Remarkably, Applied
even admits that the presumption only controls “in the absence of evidence showing a contrary
intention” [Brief, p. 10:25-11:5]. This is consistent with Warwick’s argument in its Opening Brief|

that the presumption is a rebuttable one and is “the weakest form of evidence”. As the weakest
-4.form of evidence, the presumption does not take much to overcome. Warwick has done so by
presenting evidence that Warwick wanted each hotel to be invoiced separately. Standing in the
way was Applied’s desire to ACH only one account instead of four separate accounts. So, it was
established that Applied would ACH only one account but would provide to Warwick the
allocation of the amounts due from each hotel so each hotel would be able pay back into the ACH
account the amount each hotel was responsible for [Tx: 39:21-40:2; 42:18-43:1; 100:1-101:9;
438:10-439:25; Exhibit P21].

This evidence alone is sufficient to overcome the presumption notwithstanding Applied’s
argument that the account was priced and sold as a national account [Brief, p. 10:6-22]. That was
as much for Applied’s benefit as it was for Warwick’s as Applied may not have even gotten the
Warwick account had it not priced it as it was priced. So, this fact has little to do with the
understanding between the parties that Warwick required, and was given, the allocation factors so
that each hotel would be able to pay its own way.

2. CIC’s Claim for Recovery Under its Policies

This is a rather nefarious claim. What is patently missing from CIC’s evidentiary

presentation is proof of the required contractual element of mutuality.

“Tn a bilateral contract, the promisor and promisee must exchange promises representing
binding legal obligations to render the contract enforceable. The requirement that binding
legal obligations underlie a contract is generally referred to as the doctrine of mutuality of
obligation. In essence, mutuality of obligation must exist where the exchange of promises
between promisor and promisee is meant to represent the contract's consideration. (See,
e.g., | Witkin, Summary of Cal. Law (8th ed. 1973) § 170, p. 162.)” [Quoting Larwin-
Southern California, Inc. v. JGB Investment Co.(1979) 101 Cal. App. 3d 626, 637]

CIC claims the following in support of its claim at page 11:14-28:

“(a) As it was required by law, Warwick CA was obligated to maintain workers’
compensation insurance coverage for its employees.

(b) Copies of CIC Policies were in fact delivered to Warwick and if it had any
objections to the rates therein, those objections could have been made. None were
made to the CIC Policies and its terms.

(c) In accepting the benefits of the W/C insurance coverage provided under the CIC
Policies, Warwick CA cannot now purport to dispute the consideration required
for such coverage.”

However, what the evidence does not show is that Cross-Defendants approved and agreed

to pay the premiums under the policies. In fact, these policies were sent to Warwick without any
5.negotiations or discussions as to the rates and factors in them [Sheh Tx May 24: p. 43:10-50:22].
CIC’s claim under the policies is only a last ditch wish of Applied Underwriters as it knows the
possibility of the RPA being declared illegal and unenforceable by this Court. However, Cross-
Defendants were never obligated to pay the CIC premiums and should not be required to do so
now. Applied does not even attempt to prove that there was such an agreement, as it could not as
the documents in evidence are also inconsistent with such an allegation.

The last two paragraphs of page 3 of the Proposal [Exhibit D132] specifies that the
payment requirements are based on the amounts due under the RPA and not that under the CIC
policies: “Your actual, final net cost will be determined using the ultimate costs of your claims
along with the factors and tables set forth in your Reinsurance Participation Agreement ...”. Page
4 of the Proposal specifies how the payment requirements are calculated under the RPA and not
under the CIC policies: “Experience modifiers and other guaranteed cost policy modification or
differential factors are not components of the Profit Sharing Plan ...”. Last and most important,
the first paragraph of Schedule 1 of the RPA [Exhibit D136] states that “[t]his Schedule (which
sets forth the payment calculation under the EquityComp program) applies as of the Effective
Date to all payroll, premium and losses occurring under the policies ...”. Nothing could be more
clear that Applied required Warwick to pay the amounts due under the RPA and Warwick was
never invoiced, billed, nor required to pay the premiums under the CIC “fronting” policies [Tx
May 29: p. 7:8-12:10; Exhibit P11].

The reason for requiring proof of mutuality is apparent from the evidence claimed by CIC
to establish a payment obligation. An “agreement” is necessary as to the terms of the CIC
policies as a guaranteed cost policy premium is a mathematical calculation comprised of
“Payroll” times a “Class Code Rate” times an “Experience Modification” (an “X-Mod”) times a
“Schedule Modification” times a “Loss Rating Factor”. [See, Exhibits D137, D139 & D141,
“Extension of Information Page”).

While the Payroll is determined by the actual payroll of the employer and the X-Mod is
dictated by the Workers’ Compensation Insurance Rating Bureau, all of the other factors are

subject to the approval of the insured. Even if the Class Code Rates used by CIC are its filed
-6-rates, those Class Code Rates are affected by an agreement between the insurer and the insured on
the applicable Schedule Modifiers and the Loss Rating Factors inherent in any guaranteed cost
policy. These modifiers alter the effect of the Class Code Rate and are subject to negotiation.®
The references above and below to Mr. Sheh’s testimony reveals that Mr. Sheh received these
policies substantially AFTER entering into the program and would never have approved the
modifiers in these policies as they virtually doubled the premium calculations. However, Mr.
Sheh’s trial testimony also establishes that he paid no attention to the policies as he was never
invoiced for those premiums and only paid the amounts due under the RPA.

Without a proven agreement that BEFORE policies were issued that these policies were
approved by Warwick and Warwick agreed to pay them (which would only occur, according to
Applied, if the RPA is found unenforceable), there is no mutuality. This proposal by Applied
shows its absurdity as it would have never written into the agreement that Warwick would pay the
CIC policies only if the payment requirements under the RPA are unenforceable.

Instead, Applied relies solely on legal principals [Brief, p. 11:14-28], none of which apply
here. They first suggest that Civ. Code § 1588, dealing with subsequent consent, would apply.
But where is the evidence that Warwick ever consented to pay the CIC policies. In fact, Mr. Sheh
testified that he received these policies only after he bound into the program, and never discussed
the rates or factors with anyone in advance nor was ever required to pay the premiums under the
policies [Tx May 29: p. 7:8-12:10; Exhibit P11]. Since that doesn’t work, Applied then suggests
Civ. Code § 1589, dealing with the voluntary acceptance of a benefit, would apply. However, this
contention ignores a fundamental reality.

The CIC policies were not what Warwick purchased — it purchased the Profit Sharing Plan
in the RPA. The one and only reason for the CIC policies to exist was to make the EquityComp
program look legal to the Department of Insurance. Thus, the benefit was one way — in favor of
Applied’s effort to make the program look legal. Warwick did not need the CIC policies for any

purpose of its own, as it knew its claims payments were coming out of its funds in the protected

3 Warwick admits that the Proposal, Exhibit D132 reveals the Schedule Modifiers and Loss
Rating Factor for the first year, but notably does not reveal the class code rates, and these rates
and modifiers are changed for the second and third years without any consultation with Warwick.cell. There was no need for a guaranteed cost policy insurer to exist in this program from
Warwick’s standpoint especially since any claims CIC actually issued a check for was funded not
from its own funds but from the protected cell containing Warwick’s money being managed by
AUCRA. If the CIC’s policies exist for any reason, they exist only because Applied needs to have
a filed policy to back up its EquityComp program, and not for any “benefit” of Plaintiffs.

The bottom line is that there is no proof that these class code rates and modifiers were
“agreed” upon between Warwick and CIC and thus no mutuality exists as to the obligation to pay
the premiums. This “alternative” claim should fail.

B. Warwick CA’s Claims

Although from Warwick’s perspective somewhat cumbersome, we deal with Applied’s

briefing issues in the same order presented.

1. Applied Alleges There is No Breach of Contract.

Here, Applied simply contends that since it can enforce the nationwide aspect of the RPA
against the CA Entities, and by its calculations more is still owed, the CA Entities have no right to
claim Applied has breached the RPA. However, this “mis-appreciates” the effect of their own
seed they sowed when it forced the non-California entities from this case.

The CA Entities claim to a breach of contract is well set forth in its Opening Brief, that its
claim is based on the contract documents, and there should be annual true-ups which would return
the CA Entities their rightful return.

Applied also “mis-appreciates” Plaintiffs pointing out the terms of the RRPA as part of an
“equitable” result. If Plaintiffs’ straight claim for breach of contract is rejected, Plaintiffs claim
that the RPA is ambiguous as well as illegal and unenforceable. In the event of either of those
findings, this court would have to determine an equitable consequence of that determination.
Plaintiff contend the equitable result would be to give to each party what it bargained for, but
instead of enforcing the old RPA’s terms, look to the approved RRPA as a fair and equitable way
in which to wind down this program. After all, it is a product of Applied’s effort to obtain
approval of its program from the Commissioner, and what could be more fair.

Apparently, Applied does not even like what the Commissioner forced them to approve in
-8-the RRPA and wants to back-slide.

The RRPA provides for enforcement of annual true-ups based on incurred losses and is
the best evidence of what the somewhat ambiguous RPA in meant to say, but secondly, is a useful
reference for enforcement of equitable principals because the RPA is illegal in the first instance.
Using the RRPA is just another way to perform equity. It is an example right out of Applied own
now-approved program. How can they complain about that?

2. Warwick CA makes no claim for Bad Faith.

Bad faith claims handling is not an issue for the Warwick CA entities, although it
certainly was one that was going to be pursued by the NY entity in this action until its claims
were removed from this litigation. That is now being litigated in the Nebraska action.

3. Warwich CA makes a Fraud Claim for Concealment under Ins. Code §330-334

Applied’s approach here is interesting. It claims that since the varying and unknown
formula for determining the “Total Pay-In We are Requiring” is less than the “Total Pay-In
Amount Due Under Your Contract”, there can be no concealment [Brief, p. 14:3-21]. But even
the formula for determining the “Total Pay-In Amount Due Under Your Contract” cannot even be
calculated by the insured as the EGAFs which are part of that formulation are proprietary. [See,
Gardiner Tx: 256:11-258:3]

Applied’s argument ignores the need of an insured to know what is coming down the pike,
which it can’t do as Ms. Gardiner also admits that the formula for the “Total Pay-In We are
Requiring” is also proprietary [Tx 258:5-259:4]

This is not an issue of not knowing what the claims are, as the insured would know what
claims have arisen in the last month. Knowing that as well as its payroll (the only two variables),
it should be able to compute its monthly obligation. However, Applied has variables other than
payroll and losses built into the “Total Pay-In We are Requiring” calculation, the factors of which

were revealed by Ms. Gardiner at Tx 262:11-18:

“The factors we consider are the timeliness of reporting payroll, the timeliness that

they pay their bills, where they are in the plan, either the first -- towards the beginning of
the plan or towards the end of the plan, where they are in relation to the total aggregate of
the plan, the overall loss ratio and any -- and the amounts needed to pay claims.”

-9-However, knowing those “factors” does not equate to knowing how to put them together.
An insured should have the right to check on the billing practices of the insurer, and Applied’s
concealment of this information is a breach of the Insurance Code giving rise to Warwick’s right
to cancellation.

Last, Applied’s citation to Tenet Healthsystem Desert, Inc. v. Blue Cross of Cal., 245 Cal.
App. 4th 821, 844 (2016) [Brief, p. 14:26-15:1] in the context of the principal for which it was
cited is misleading. As well, it is inapplicable under the facts of this case.

Tenet is a case of ordinary fraud not involving Ins. Code §330, et. seq. The difference
between ordinary fraud and insurance fraud is that neither knowledge of a concealment nor an
intent to conceal is relevant under Ins. Code §330. Thus, fraudulent concealment in insurance
does not have the same criteria as a standard fraud allegation. Concealment of material facts are
themselves actionable, because “[i]nsurance policies are traditionally contracts uberrimae fidei
and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes
the contract voidable at the insurer's option”. Gates v. General Casualty Co. (9m Cir. 1941) 120

F.2d 925, 927. The 9m Circuit court then went on to say:

“With regard to the court's finding that the concealment was "fraudulently" made, we
regard it as surplusage, for under the California law " * * * a concealment of fact whether
intentional or unintentional, which is material to the risk vitiates the policy. The presence
of an intent to deceive is not essential. Telford y. New York Life Ins. Co., 9 Cal.2d 103,
105, 69 P.2d 835, 837.” [emphasis added]

This court applied the same rule in Strangio v. Consolidated Indemnity & Ins. Co., supra,
66 F.2d 336, where it said: "Under the California statute, quoted above, the failure to
disclose to the insurer that an accident had happened authorized the cancellation of the
policy, notwithstanding the fact that Strangio Bros. were not guilty of any intentional

wrong in not making the disclosure to the insurance company before the policy was
issued."

The California Supreme Court adopted the ruling in Gafes in the case of Cohen v. Penn
Mut. Life Ins. Co. (1957) 48 Cal. 2d 720, where it distinguished between the requirements of
actual fraud and concealment under Section 332. There, the plaintiff had pled actual fraud and
even contended that at trial, but submitted a jury instruction stating that the "presence of an intent
to deceive is not essential”. In ruling that plaintiff was correct and the elements of actual fraud are

irrelevant in a case for concealment under Section 332, it said: “But such added factor in
-10-defendant's alleged ground for avoiding the insurance policy does not militate against its right to
prevail, as a matter of law, on its claim that concealment of a material fact, whether intentional or
unintentional, vitiates an insurance policy.” [/d. P. 729-730]

These principals are supported by other case law, e.g.: Newman v. Firemen's Ins. Co.
(1944) 67 Cal. App. 2d 386, 392 [“The record is devoid of any evidence from which there might
be inferred an intent on the part of appellant to practice deception, either with respect to
appellant's identity or with respect to the identity of appellant's property. However, an intent to
deceive is not essential in such cases.”] (Telford v. New York Life Ins. Co., 9 Cal.2d 103 [69 P.2d
835].) “The matter of concealment of material facts in applying for a policy of insurance is
governed by the provisions of article I of chapter 3, part 1, division 1, of the Insurance Code.”]

Thus, the only issue is whether the facts alleged by Plaintiff to have been concealed were
material to its decision to enter into the EquityComp program. In that regard, Section 332 places
upon [the insurer] the duty to communicate material facts to appellant regardless of whether its or
its salesman believed them to be material. “This is made clear by the disjunctive 'or' in the phrase
of § 332 reading '... which are or which he believes to be material to the contract ...' (Emphasis
supplied.)” Merchants Fire Assurance Corp. v. Lattimore (9t Cir. 1959) 263 F.2d 232, at 241.

Merchants Fire also opined that California courts are required to adopt a materiality test
based on whether the particular individual insured regarded the undisclosed facts as material to

the contract. This test looks only to the evidence concerning the attitude of the insured involved in

the suit, not that of the insurer. [/d. p. 241] The overall analysis in this Reply Brief not only show
the confusing and complicated solicitation documents but establish that the RPA conceals the
methodology used by Applied to calculate obligations under the program.

4. Warwick CA does make a UCL Claim.

(a) Applied’s Claim that Warwick has Suffered No Injury

Again, Applied misses the point here. Warwick alleges that Applied has engaged in unfair
business practices by selling an insurance policy in violation of Ins. Code §11658 and Reg.
§2268. And there is no issue that Warwick can raise the illegality of the RPA under the UCL.

California has long permitted private actions so long as the regulatory statute does not bar private
-ll-causes of action. In Stop Youth Addiction, Inc. v. Lucky Stores, Inc. 17 Cal.4th 553 (1998), the
California Supreme Court held that California’s unfair competition act (Business & Professions
Code §§ 17200 et seq.) permits a private right of action for violation of regulatory statutes, so
long as the regulatory statute in question does not bar private causes of action. (17 Cal.4" 553,
562, fn. 5.) Similarly, see Stevens v. Superior Court, 75 Cal.App.4" 594, 603-604 (1999), where

the court explained:

“The Supreme Court repeatedly teaches that the UCA allows a private plaintiff to proceed
under it to seek redress for conduct which violates any predicate statute, unless the
defendant is privileged, immunized by another statute, or the predicate statute expressly
bars its enforcement under the UCA. (citations omitted).” [Id. 603-604]

By statute, the insurance business is subject to the unfair business practices laws (Ins.
Code § 1861.03(a)), which include the unfair competition law. As the Insurance Commissioner is!
not given exclusive rights in the statute to enforce Insurance Code § 11658, a private right of]
action is readily cognizable under Business and Professions Code § 17200.

If Warwick CA cannot enforce the true-up provisions that it reads into the contract
documents (as laid out in its Opening Brief), it will have been damaged by the failure to receive
annual true-ups and the return of its overpayments into the program.

That violation will result in this court determining a proper equitable restitution, and as
laid out in Warwick’s Opening Brief, we turn to the approved RRPA’s provision for annual true-
ups to determine the equitable remedy.

(b) Applied’s Claim that the Use of An Unfiled Rate is Not Unlawful

These arguments are totally disingenuous and repeat arguments most of which were
dismissed by the Court of Appeal in Nielsen v. Applied Underwriters.

Applied’s first argument here makes no sense. Whether Mr. Sheh was in Denver,
Colorado or not when he signed the RPA, or because of the existence of a forum selection clause
[Brief, p. 16:2-8], is irrelevant. All insurance sold in this state is governed by California’s
Insurance Code. See, Ins. Code §41: “All insurance in this state is governed by the provisions of
this code.” “When insurance coverage is required by law,” as is the case with workers’

compensation insurance in California [Labor Code §3700], “the statutory provisions are
-12-incorporated into the insurance contract” and “the obligations...under the policy are measured and
defined by the pertinent statutes, and the two together form the insurance contract. Samson v.
Trans America Ins. Co. (1981) 30 Cal.3d 220. Even Nebraska would have to analyze the form
filing requirements under California law as Nebraska’s laws have no relevance to the sale of a
policy of insurance in California.

Second, Applied’s contention that the RPA does not modify the payment obligations of
the insured [Brief, p. 16:9-24] is belied by its own briefing. Compare the monthly CIC premium
calculations for the CA Entities totaling $557,166.07 [Brief, p. 11:9-12; Exhibit D152] with the
amounts Applied alleges CA Entities have paid under the Plan Analysis calculations as computed
under the RPA as stated in the Briefing in the same paragraph at $452,862. There is no issue that
the RPA changes the payment obligations of Warwick California of what would otherwise be due
under the policies.

Third, Applied’s claim that this is a rate filing issue [Brief, p. 15:25-16:1; 16:25-17:9] is
misplaced. Warwick’s claims are not based on a failure to file the class code rates and the
supplementary rate information (the Schedule Modifiers and Loss Rating Factors) under Ins.
Code 11735 and 11737, but Applied’s failure to file the form revealing HOW the rates are used in
the retrospective rating plan which is the RPA. Ins. Code §11658 and Reg. §2268 cover these
form filing requirements, not §11735 nor §11737. These are totally different issues.

5. Applied’s Contention that Warwick is Not Entitled to Declaratory Relief

This is not an issue for the CA Entities. This was made on behalf of the now dismissed
non-California entities.

6. Applied’s Contention that Warwick has failed to Establish a Basis for Rescission

We disagree. As we pointed out in our Opening Brief, rescission is not to be denied when
the victim is unable to restore the benefit which it received, but the court can determine what has
to be returned by finding an equitable result.

7. Applied’s Contention that Warwick has failed to Support a Conversion

This is not an issue for the CA Entities. This was made on behalf of the now dismissed

non-California entities.THE REMEDY

Assuming this is a Reply, Applied makes no comment regarding Warwick CA’s claims
for a recovery of its overpayment for claims, but only contends Warwick should either pay the
amounts due under the RPA or it should pay to CIC the premiums calculated under the Policies
(we say “calculated” because they were never “due”).

Warwick requests the following from this Court:

qd) A determination that Applied cannot recover against Warwick California
Corporation and WSF Beverage Corporation the amounts claimed by Applied that are due from
the non-California Entities because (1) the action against the non-California Entities has been.
stayed, (3) because Applied has failed to establish that the liability of the non-California Entities
is joint and several with the CA Entities, (3) because the RPA on which Applied makes its claims
is void and unenforceable against the CA Entities because it was not filed for approval with the
California Insurance Commissioner, and/or (4) because the Applied Defendants concealed a
material fact in violation of Ins. Code §§330, et. seq.;

(2) A determination that Applied cannot recover against Warwick California
Corporation and WSF Beverage Corporation the amounts claimed by Applied that are due
directly from them because (1) because the RPA on which Applied makes its claims is void and
unenforceable against the CA Entities because it was not filed for approval with the California
Insurance Commissioner, and/or (2) because the Applied Defendants concealed a material fact in
violation of Ins. Code §§330, ef. seq.;

(3) A determination that the Applied Defendants have breached their contracts with
Warwick California Corporation and WSF Beverage Corporation, or alternatively, that as a
consequence of either the illegality of the RPA or the concealment of a material fact, Plaintiff are
entitled to equitable rescission.

(4) A determination that Warwick California Corporation and WSF Beverage
Corporation are entitled to recover, either for breach of contract or in equity, from the Applied
Defendants, and each of them, the excess deposits they have made into the protected cell in the

amount of $270,031 as shown on Exhibit P8;
-14-(5) A determination that Warwick California Corporation and WSF Beverage
Corporation are the prevailing parties and are entitled to recover under the attorneys fee provision
in the RPA their attorney fees and costs.

Each party has stated their case for recovery. Warwick believes its case is better stated and

should result in the award requested in its Opening Brief.

Dated: July 5, 2018

Larry J. Lichtenegger
Attorney for Plaintiffs/Cross-Defendants

-15-PROOF OF SERVICE
STATE OF CALIFORNIA _ )
2 ss
COUNTY OF MONTEREY )
I, the undersigned, declare that I am employed in the County of Monterey, State of|

California; | am over the age of 18 years and not a party to the within action; my business address
is 3850 Rio Road, #58, Carmel, California 93923.

On July 9, 2018, [served PLAINTIFFS’ REPLY POST-TRIAL BRIEF on the parties
in this action by:

personal service on the below-named party(ies) at the address(es) given.

Xx E-Mail by agreement. The e-mail address I used is indicated below the name of the
person served.

placing a true copy thereof enclosed in a postage prepaid and sealed envelope for|
deposit, collection and mailing on the date and at the place shown above following
this firm’s ordinary business practices. I am readily familiar with this firm’s
business practice for collecting and processing correspondence for mailing. On
the same day that the correspondence is placed for collection and mailing, it is
deposited in the ordinary course of business with the United States Postal Service
at Monterey, California, and it was addressed as follows:

SPENCER Y. KOOK (SBN 205304) TRAVIS WALL (SBN 191662)
skook@hinshawlaw.com twall@hinshawlaw.com

HINSHAW & CULBERTSON LLP HINSHAW & CULBERTSON LLP

633 West 5th Street, 47th Floor One California Street, 18th Floor San Francisco,
Los Angeles, CA 90071-2043 CA 94111

Telephone: 213-680-2800 Telephone: 415-362-6000

Facsimile: 213-614-7399 Facsimile: 415-834-9070

I declare under penalty of perjury that the foregoing is true and correct and that this|
declaration was executed in Carmel, California, on the date written above.

Larry J . Lichtenegger