State Says Newport Insurer Is Insolvent, Seizes Control

The state Department of Insurance said Monday that it has seized control of California Benefit Life Insurance Co. in Newport Beach, contending that the small health insurer is insolvent.

The agency said it sought court approval to take over the company after an examination of California Benefit’s books showed a deficit of $2.3 million.

An Orange County Superior Court judge earlier this month granted the department’s request to transfer control of the company to Insurance Commissioner Roxani Gillespie, who was appointed conservator of California Benefit.

California Benefit strenuously disputed the department’s assessment of its financial health. The company pleaded in court that appointing a conservator could “destroy” the firm within a few weeks by driving away customers.

Another hearing on the conservatorship is scheduled next month.

California Benefit writes health insurance through groups of small employers. It also sells individual policies to supplement Medicare coverage.

The company has about 3,000 individual policyholders. The number of group health insurance customers was not available Monday.

The company will service its policies as usual while trying to replenish its cash reserves, the Insurance Department said.

If the company does not eventually shore up its financial condition to the satisfaction of the Insurance Department, the final step would be a bankruptcy filing, a department spokesman said.

President and Chief Executive Officer Joseph F. Bartholomew has denied in court papers that the company has too little money to run the business or pay claims on its policies. California Benefit is taking in $3 million a month in premiums, he said, or about $400,000 more than its expenses, including claims.

He also disputed the Insurance Department’s estimate that the company needs $2.8 million in cash to meet its capital reserve requirements under state law.

Nevertheless, Bartholomew has said an investor has already put $2.8 million into an account for the company.

But the Insurance Department disputed Bartholomew’s statements in its court filing, saying California Benefit failed in four previous bids to gain the needed financing. And, the department said, the $2.8-million deal would require giving 51% of the company’s stock to the unnamed investor.

The change in ownership would require Insurance Department approval, which the department said California Benefit had yet to request.

The department also challenged Bartholomew’s statement that the company had had no trouble paying claims on policies. The department said in court papers that it had received many complaints from policyholders about the company’s “failure to pay its claims.”

The department said its Consumer Services Division had recently received nine complaints, seven of which turned out to be valid.

It was apparently those complaints and the company’s financial statements that prompted the Insurance Department to examine the company’s books in September.

By late last year, the department said, the company had $4.7 million in assets and $7 million in liabilities, and had made “serious misstatements of income, surplus and reserve charges.”

California Benefit was founded in 1984. From the beginning, Bartholomew and his partners concentrated on niche markets too specialized for many of the industry giants.

One of those niches was selling health insurance through small employers. By banding together in what the industry calls multiple-employer trusts, small companies can get better rates for group health insurance.

California Benefit also moved into the business of selling policies to supplement Medicare coverage.

The company is now a subsidiary of CBL Group Inc., of which Los Angeles businessman James Sobieski owns the largest share, 22.6%.

What went wrong at California Benefit is not clear from the court filings, but the company has been shutting down some of its group health plans recently. Bartholomew did not return a phone call.

Asked whether the company still believes that it would close in a matter of weeks if a conservator is appointed, Jeffrey P. Thomas, the company’s attorney, responded: “We’ll have to wait another few weeks to see.”