By Jeff McDonald, THE SAN DIEGO UNION-TRIBUNE

July 4, 2021

https://www.sandiegouniontribune.com/news/watchdog/story/2021-07-04/lob…

A contract dispute being waged in a Northern California courtroom is complicating the re-election plans for state Insurance Commissioner Ricardo Lara, who two years ago suspended all fundraising amid a campaign finance scandal uncovered by The San Diego Union-Tribune.

The lawsuit involves Lara’s one-time boss and political mentor, former California Assembly Speaker Fabian Nunez. It also includes Rusty Areias, another former state lawmaker who now works as a Sacramento lobbyist.

Mercury Public Affairs, where Nunez is a partner, and Areias are plaintiffs in a case demanding $2 million in lobbying and consulting fees from Applied Underwriters.

Applied Underwriters is the workers’ compensation insurer at the heart of the political crisis that led Lara to publicly apologize in 2019 for breaking his campaign pledge not to accept donations from people with business interests before the California Department of Insurance. Lara’s campaign had received and later returned tens of thousands of dollars to donors linked to Applied Underwriters and other insurance companies. 

According to a lawsuit filed earlier this year, Nunez and Areias helped make sure San Francisco investor Steven Menzies did not forfeit a $50 million deposit he paid to Berkshire Hathaway to acquire full control of Applied.

Menzies and his partners were so desperate to secure the California Department of Insurance’s approval of the sale that they agreed to boost the deposit by $10 million, to $60 million, to extend the deadline and they agreed to double the initial $1 million lobbying fee, the lawsuit said.

Just before Menzies was due to lose the $60 million deposit, California regulators agreed not to oppose the sale plan, which was to merge an Applied subsidiary with a newly created company in New Mexico, the suit said. 

Nunez and Areias quickly sought payment but their fee was not forthcoming.

More than 1 million people have found a way to speak out through Our Health California.

“Rusty, there is a saying on Wall Street that the bears do well, and the bulls do well, but the pigs get slaughtered,” co-defendant and Allied partner Alan Quasha wrote in an email to Areias, according to the complaint.

“Please send the correct bill without the ‘supplement’,” he added. “We would like to work together in the future, but not if trust gets damaged.”

Neither Nunez nor Areias responded to requests for comment about the litigation or their contacts with Lara’s office in 2019, as Applied sought approval for the Berkshire Hathaway transaction.

But their attorney issued a statement saying his clients did the job they were hired to do.

“We were successful helping avoid (Applied’s) forfeiture of their $60 million deposit,” attorney David Millstein said by email. “The ($2 million fee) is reasonable because, among other things, they agreed to take on a difficult matter for no fees unless they were successful.”

While California regulators did not oppose the application to launch a new company in New Mexico and merge the California policies into the new venture, they did move to take over control of the Applied subsidiary in California, known as California Insurance Co.

A San Mateo County judge approved the motion. The California Department of Insurance now controls the California Insurance Co.

A spokesman for Lara said the department could not comment on the Applied litigation because the cases are ongoing. 

“As you know, in 2019, the California Department of Insurance took action against CIC to stop a merger that violated California law,” the department said in a statement. “As such, we cannot comment on pending litigation.” 

An Applied attorney said the insurer does not comment on ongoing legal claims.

‘No communications’

The breach-of-contract lawsuit Areias and Mercury filed against Applied is pending in federal court in San Francisco.

The case is important because campaign records show Lara accepted tens of thousands of dollars in political contributions from donors associated with Applied.

Soon after the Union-Tribune reported the contributions, Lara publicly announced he would return the donations. He also pledged to avoid any future involvement in regulatory decisions affecting Applied. 

Millstein said his clients did not discuss the Applied sale directly with the commissioner.

“My clients had no communications with Mr. Lara concerning the matter after he recused himself,” he wrote. “They spoke only with staff at (the California Department of Insurance).”

Applied Underwriters is a national workers’ compensation insurer based in Nebraska. It has compiled an extensive regulatory record in multiple states, including California. 

One of its chief products, a policy for small- and medium-sized employers marketed as EquityComp, has been the subject of dozens of complaints to regulators, including those in Sacramento.

One of Lara’s predecessors called EquityComp a “bait-and-switch” product. Regulators in New York fined the company $3 million for selling the policies, which they called illegal.

Lara, a graduate of San Diego State University, worked as a district director for Nunez before winning a seat in the state Assembly in 2010. Lara was later elected to the state Senate and narrowly won the race for insurance commissioner in 2018.

Additional reporting by the Union-Tribune in 2019 showed that Lara’s office intervened to Applied’s benefit in at least four cases before Department of Insurance judges. The judges are supposed to rule independently in administrative complaints.

The newspaper also connected more than $270,000 in additional donations from various insurance interests to Lara’s re-election campaign and disclosed a series of private meetings between Lara and Menzies and others with business pending before insurance regulators.

In early September 2019, Lara suspended all political fundraising and pledged full transparency going forward.

“Even though no laws or rules were broken — and these interactions did not affect or influence my official actions in any way — I must hold myself to a higher standard,” he wrote in an open letter. “I can and will do better.”

Withholding records

While Lara stopped accepting contributions to his 2022 re-election campaign, the insurance commissioner has been slow in responding to requests for documents filed under the California Public Records Act.

The public interest nonprofit group Consumer Watchdog filed a lawsuit against Lara early last year, alleging that he failed to turn over appointment calendars, meeting information, emails and other requested communications.

The complaint, which also accused the Department of Insurance of creating records for public release that omitted specific information Lara did not want disseminated, is still pending in Los Angeles Superior Court.

Department of Insurance lawyers said they turned over all responsive records but noted that more than 100 documents related to Applied Underwriters are privileged and thus not required to be released.

“We responded to Consumer Watchdog’s PRA requests, disclosing all relevant records in accordance with California law,” the department statement said.

An attorney for Consumer Watchdog said the department has refused to search for, let alone disclose, all of its records of meetings and emailed communications with people who represented Applied.

“Commissioner Lara is not being transparent if his office is unwilling to search for meetings and messages he had with Fabian Nunez, when we know Nunez represented Applied Underwriters,” Consumer Watchdog lawyer Jerry Flanagan said.

In May, Los Angeles Superior Court Judge Mitchell Beckloff issued an order directing the department to do more to comply with the Consumer Watchdog records request but stopped short of allowing immediate depositions.

“The court notes many of the deposition topics may be resolved or clarified by less intrusive and less burdensome discovery means, including the document demands and interrogatories,” the judge ruled.

Since the May 12 court order, the Department of Insurance revealed that it was withholding approximately 400 internal emails and records of 21 meetings with Lara’s top political and legal advisers discussing how to respond to the records requests, Flanagan said.

He added that those communications are improper because senior officials are not supposed to be involved in fulfilling public records requests.

“Providing records to the public is a purely ministerial duty to be performed by disinterested government officials, not debated at length by top political advisers,” Flanagan said.

The next hearing is scheduled for Nov. 12.

Lara, who faces re-election in 2022, largely honored his pledge to suspend campaign fundraising.

Campaign reports show he collected few political contributions through most of 2020. At the end of last year, he reported $36,000 in donations — most of it from committees run by real estate interests and the United Food and Commercial Workers union.

The re-election fundraising has picked up in recent weeks, records show.

While the latest periodic filing is not due until later this summer, interim disclosures that must be filed for larger donations show Lara accepting tens of thousands of dollars from political action committees, investment firms and other interests.