Collapsed liability insurers case is industry’s Enron

posted on:
February 18, 2004

author:
Richard Banks

category:
Fraud

A lawyer leading the civil prosecution of those alleged to have caused the collapse of five US liability insurers has described the case as the insurance industry’s Enron, write Richard Banks.

Earlier this month Tennessee insurance commissioner Paula Flowers launched a lawsuit against General Reinsurance Corporation, PricewaterhouseCoopers, Milliman USA, Wachovia Bank, John Crews and some 13 other defendants alleging they were responsible for the failure of two Virginia companies and three Tennessee-domiciled firms.

Montgomery, Alabama, law firm Beasley, Allen, Crow, Methvin, Portis & Miles was brought in by Ms Flowers and this week filed the 62-page, 11 count complaint in the US District Court in Memphis.

The case centers on the collapse, in January last year, of Virginia’s Reciprocal of America and The Reciprocal Group, and three Tennessee companies, Doctor’s Insurance Reciprocal, The Reciprocal Alliance, and American National Lawyer’s Insurance Reciprocal. Thousands of doctors, hospitals and lawyers were left without malpractice coverage and facing unpaid claims totaling at least $200m.

Ms Flowers and her lawyers argue that fraud and violations of the Racketeer Influenced and corrupt Organization Act, as well as unjust enrichment, misappropriation of funds and negligence contributed to the companies’ failures.

The lawsuit details a complex web of corporate shells, secret side agreements, loans and money transfers all controlled by a small groups of corporate officers and investors of Reciprocal of America, led by Richmond, Virginia, attorney, J William Crews.

In particular the Tennessee insurance department’s legal team points to an alleged series of undisclosed “side letters” or “side agreements” entered into between the corporate officers of the companies and General Re. Ms Flowers’s legal team alleges these side agreements, which it says were never disclosed to the regulators or the policyholders, limited the amount of reinsurance exposure to Gen Re by, in effect, discounting up to allegedly 70% of the reinsurance coverage pledged by Gen Re on policyholders’ contracts of the companies, a reinsurance treatise that was publicly disclosed.

Dee Miles, an attorney working on the case, said: “These side agreements are nothing but a tool of deception used to dance around required public disclosure of a company’s true financial condition.” Jere Beasley, lead counsel for the Tennessee insurance department’s team of lawyers, added: “This is Enron, the insurance industry version.” The US energy giant’s collapse was one of the biggest financial debacles of recent times.

A spokeswoman for Gen Re said the company did not comment on its involvement in court cases.

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