Stamford- based General Reinsurance Corp., a reinsurance company owned by billionaire Warren Buffet’s Berkshire Hathaway Inc., is under legal fire for its alleged role in the collapse of five companies.
An Alabama law firm this week filed a 62-page, 11-count complaint in the U.S. District Court of Tennessee on behalf of state Insurance Commissioner Paula Flowers.
The complaint weaves a complex tale of corporate shells, secret side agreements, loans and money transfers between General Re and the former executives of the now-defunct malpractice insurer Reciprocal of America.
The civil suit accuses General Re, one of the biggest property and casualty reinsures in the United States, of helping to cook the books in order to limit its risk exposure and keep the true financial state of Reciprocal from regulators.
“We don’t make public comments on active litigation, but we don’t believe either General Re or its employees have done anything wrong,” said Richard McCarty, General Re’s vice president and assistant general counsel.
There are eight civil suits, including several class actions, filed against General Re, four General Re executives and other defendants including accounting firm PricewaterhouseCoopers, the actuary firm Milliman USA, Inc., Wachovia Bank and J. William “Bill” crews, who led Reciprocal.
It was their actions, the suits alleges that are responsible for the collapse of two Virginia companies, Reciprocal of American and The Reciprocal Group, and three Tennessee companies, Doctor’s Insurance Reciprocal, The Reciprocal Alliance and American National Lawyer’s Insurance Reciprocal.
The companies’ collapse left 50,000 physician, hospitals and lawyers with $200 millions worth of claims and no malpractice insurance.
Tennessee’s complaint centers on an alleged series of undisclosed “side letters” or “side agreements” entered into between the corporate officers of the companies and General Re, said Dee Miles, an attorney with Beasley, Allen, Crow, Methvin, Portis & Miles, the Alabama law firm hired by Tennessee’s insurance commissioner.
The suit alleges that General Re publicly agreed to back up to 70 percent of Reciprocal’s reinsurance coverage. But in side agreements not revealed to regulators or policy holders, executives of both companies began limiting General Re’s risk exposure.
Reciprocal began filtering money from an offshore insurance company it had set up, depleting the company’s reserves. Because the agreements were “secret” regulators were not monitoring the situation and companies became underfunded, says the suit.
“These side agreements are nothing but a tool of deception used to dance around required public disclosure of a company’s true financial condition,” Miles said.
The complaint alleges common law fraud, violations of the Racketeer Influences and Corrupt Organizations Act, unjust enrichment, misappropriation of funds and negligence.
General Re and other defendants are seeking to have the eight cases consolidated into one federal court in Tennessee. That decision is pending before a federal multi-district litigation panel.
General Re has not been required to answer any of the complaints yet, and had not done do, McCarty said.