For those considering forming an insurer domiciled in California, a key question arises: “What is an Organizational Securities Permit Application, and how do I draft it?”  This Article provides an overview of the Application along with some drafting and regulatory considerations related to the same.  Of course, this Article does not contain an exhaustive list of such considerations, and any initiative to form an insurer should be aided by regulatory counsel.

1. What Is an Organizational Securities Permit Application?

The California Department of Insurance states on its Certificate of Authority Instructions webpage: “Please Note: To organize a California domestic insurer, the first step is to apply for an organizational security permit. This permit authorizes the sale of stock to obtain the initial capital and surplus. For information on this process please review the security permit regulations at Title 10, Cal Code of Regs. Sec. 2600 et seq . . .” The cited regulations, along with a Departmental checklist (originally drafted in the context of underwritten title companies) provide details regarding how to obtain an organizational securities permit (the “Permit”) via application to the Department for the same (the “Application”).

2. Preliminary Regulatory Contacts

Once resolved to form a California insurer, Applicants should consider telegraphing their intent to the Department via counsel or other regulatory or government affairs personnel.  Further, Applicants must undertake various preliminary corporate formation steps, including seeking name approval from the Department, reserving the approved name with the Secretary of State, drafting articles of incorporation, bylaws, and organizational resolutions and actions.

3. Drafting the Application

3.A Purpose

The Applicant should draft a statement of the purpose of the Application, as specifically attuned to the Applicant.  In other words, the Application should explain the necessity of obtaining the Permit, and describe the persons to which securities of the nascent insurer will be issued.

3.B Certificate of Incorporation and Name Approval, Bylaws, Address

The Application should include a description of the Applicant’s formation, and should enclose Articles of Incorporation reflecting the same.  A name approval certificate reflecting the Department’s approval of the proposed insurer’s name should also be enclosed, along with draft Bylaws. Further, a description of the Applicant’s proposed statutory, administrative, and mailing addresses (as applicable) should be included.

3.C Officers and Directors

The names and addresses of the Applicant’s officers and directors should be included.  The Applicant should prepare and submit biographical affidavits on Departmentally-approved forms in connection with the Application, and a general description of that submission within this section is likely advisable. The listing of officers and directors in this section should be set forth in alphabetical order.

3.D Securities to Be Issued

A detailed description of the securities to be issued should be included, incorporating: the number and par value of shares the Applicant is authorized to issue, the number of shares proposed to be issued to relevant persons, and a description of a voided specimen stock certificate (to be enclosed).  Further, copies of the Applicant’s organizational resolutions authorizing the issuance of such stock, the act of applying for the Permit, and the act of applying for an insurance license should be described and enclosed.

3.E Request for Waiver of Impound

If applicable, the Applicant and/or persons to which securities are proposed to be issued, should submit an informed written consent for waiver of impound requirements and a formal request for waiver of the same.  Such consents and requests are relevant pursuant to Cal Code Regs. tit. 10, § 2606.01.

3.F Restrictions on Transfer and Sale of Stock

The Applicant should affirm that certain restrictions, pursuant to Cal. Code Regs. tit. 10, § 2613.08, will be in effect regarding the sale, transfer, or encumbrance of any shares of the Applicant.  Further, the Applicant should enclose a restrictions on transfer and sale of stock agreement to be executed by the Applicant and persons to which securities will be issued.

3.G Organizational Information

The Applicant should include a properly completed and verified organizational affidavit for the Applicant and a description of the same, along with an organizational chart of the Applicant showing the Applicant’s proposed situation within the proposed insurance holding company structure (if/as applicable).  This section also provides the Applicant with the opportunity to discuss the organizational structure, affiliated entities, and ultimate controlling persons in greater detail.

3.H Financial Condition

The Applicant should prepare and submit a three-year financial projection with the Application.  Further, the Applicant should describe in relative detail, within the body of the Application, the start-up costs associated with the formation and licensure of the proposed insurer.

3.I Plan of Operation

The Applicant should include its draft plan of operation (the “Plan”) for the proposed insurer, enclosed with the Application.  In drafting a description of the same, the Applicant should consider whether there are any particular elements of the Plan that merit additional detail at this time, such as proposed rates, forms, or reinsurance.

4. Related Regulatory Initiatives

Following the Department’s review of the Application, in the case that it is approved, the Applicant will be required to submit an application for a certificate of authority to transact the business of insurance in California.  Many of the components of the certificate of authority application will be similar to those submitted with the Organizational Securities Permit Application (amended or modified if/as applicable or required/requested by the Department). Of course, there are many other regulatory, corporate, and transactional elements to be considered in the formation of an insurer, and Applicants should consult with their regulatory counsel in respect of the same.

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