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October 2011

Aurora S.A. v. Steve Poizner ? Commissioner's Decision to Deny Purchase of California Insurance Company Upheld

California's Insurance Commissioner did not abuse discretion by denying purchase of a California insurance company during litigation

(August 8, 2011) ___ Cal.App.4th ___; 11 C.D.O.S. 11484

The California Court of Appeal, First Appellate District, upheld the actions taken by former California Insurance Commissioner Steve Poizner when he denied the application for Reassure America Life Insurance Company ("REALIC") to buy Aurora National Life Assurance Company a California life insurance company.

In 1991, the Executive Life Insurance Company ("ELIC") failed.  California's Insurance Commissioner was appointed the conservator of the ELIC estate and oversaw the sale of estate assets.  A consortium of French and Swiss insurers submitted the winning bid to control the assets.

The consortium transferred the ELIC insurance policies to a new insurance company, Aurora National.  In 1992, the California Department of Insurance issued a certificate allowing Aurora National to operate as a life insurance company in California.

However, Aurora National was secretly run by the consortium, an entity controlled by the French Government, in violation of state law prohibiting foreign governments from owning insurance companies in California.  The consortium conspired to evade those restrictions and repeatedly submitted documentation to the DOI that contained false and misleading information.

In 1999, the Commissioner learned of the conspiracy and sued the consortium.  After years of litigation and a nine-week jury trial, the jurors awarded the Commissioner $700 million in punitive damages.  While claims against other defendants were pending, REALIC applied to the Commissioner for approval of Aurora National's purchase from the consortium.  The consortium planned to place 50% of the sale proceeds in escrow that could be used to pay any further judgment the Commissioner might obtain in the ongoing litigation.

Shortly after filing the application, the consortium's attorney called the Commissioner's attorney and stated that if the Commissioner would not agree to the consortium's proposal, a lawsuit would be filed against the DOI to compel the transaction without escrow.  If the action were successful, the attorney threatened, the complicated corporate structure of the consortium, along with the difficulties of enforcing an American judgment in France, would make it virtually impossible for the Commissioner to recover the judgment.

In turn, the Commissioner demanded that 100% of the sale proceeds be placed in escrow pending completion of litigation.  When the consortium balked, the Commissioner denied REALIC's request to purchase Aurora National.

The consortium sued alleging the Commissioner abused his discretion when he denied REALIC's application.  The appellate court upheld the trial court's determination the Commissioner did not abuse his discretion.

According to the Commissioner, virtually all of Aurora National's current policyholders are former ELIC policyholders and the majority of those would benefit from any damages that might be awarded in the ELIC litigation.  By choosing to go forward with the transaction when it did, REALIC put the interests of the Aurora policyholders in serious jeopardy because the sale proceeds could be moved to France where they would be difficult, if not impossible, to reach.

The appellate court held the Commissioner reasonably concluded that by choosing to go forward with its purchase of Aurora National when it did, and by putting its own interests ahead of the ELIC policyholders whom it hoped to represent, REALIC lacked the integrity necessary to operate an insurance company in California.

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This opinion is not final.  It may be modified on rehearing or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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