Turbulence in the Mississippi Windpool – a stumbled – upon stunner of a lawsuit now under the Big Top with a jury at the Southern District Federal Court, Hattiesburg – was the Saturday night special here on SLABBED – causing one reader to ask what most everyone had to be thinking: where has this information been hiding for 3+ years?
The greatest insurance show on earth Association Casualty Ins. Co., et. al. v. Allstate Ins. Co., et. al appears to have been right before our very eyes but hiding behind a veil of silence.
The lawsuit was filed September 15, 2006.
Reinsurance Focus… September 19, 2007…a district court allowed a case against Directors of Mississippi Windstorm Underwriters Association (MWUA) to proceed on the theory that the directors breached a fiduciary duty to their members by failing to secure sufficient reinsurance to cover the 2004 and 2005 hurricane seasons.
Recently, the same court denied plaintiffs’ motion for class certification. Plaintiffs sought certification of a class of over 100 insurance company members and alleged claims for breach of fiduciary duty, negligence, and declaratory judgment. As the court explained, the “lynchpin of the plaintiffs’ argument for class certification is that the Board’s decision regarding the amount of reinsurance to purchase allegedly was tainted by self-dealing, in that the Board members had a financial incentive to under-reinsure the MWUA’s risks.” The defendants responded by stating that the plaintiffs’ self-dealing theory was based on their erroneous assertion of how the costs of reinsurance were charged to the MWUA’s members. The defendants contended that most of the defendant companies bore none of the costs of reinsurance and therefore had no incentive to under-reinsure…
The Reinsurance Focus blog post (above) is one of only a handful of articles about the lawsuit – none from Mississippi newspapers or other media in the state could be found. A February 2009 story in the Insurance Journal provides more background but neither the article or the Commissioner’s press release mentions the lawsuit although there is a direct connection between the case and the Order issued by the Commissioner.
Mississippi Insurance Commissioner Mike Chaney has upheld the efforts of the state’s wind insurance pool to collect millions of dollars in past assessments from six insurance companies.
The insurers had claimed that the Mississippi Windpool Underwriting Association was wrong to deny them credits that would have reduced their assessments dating back to 2004…
MWUA is a pool supported by assessments against all property insurers writing in the state. Insurers can receive credits against their assessments for voluntary writings. In 2006, pool administrators discovered that some insurance carriers had not taken advantage of the credits for 2004 and gave them an opportunity to submit so-called “true-up” corrected reports.
Let’s take a quick look at the Commissioner’s Consolidated Windpool Order and get grounded in the events leading to and following the filing of the lawsuit.
On August 31, 2005, MWUA made its first Hurricane Katrina assessment…On December 2, 2005, the MWUA sent out a second round of assessments to member companies related to Hurricane Katrina claims… On April 17, 2006, MWUA made a third assessment to cover the then $545,000,000.00 in Katrina losses.
That, SLABBED readers, is when the circus came to town – and AIG was on the tightrope!
One of the member companies had argued that the assessment process was flawed because of an alleged “secret deal with AIG” under which that insurer was allowed to submit an earlier amended report. AIG had in fact advanced MWUA funds to cover the entire $545 million Katrina bill and its amended report had to do with that loan, according to the findings in Chaney’s report.
[Another]… appealing their assessment to MID claimed AIG had been allowed to make corrections in the report filed with the Windpool outside the usual process.
Audubon Insurance Company, a subsidiary of AIG (hereinafter, “Audubon”), was the “servicing carrier” for the MWUA, meaning that Audubon handled the administrative tasks such as printing the policies issued by MWUA, keeping up with the data processing, calculating premium taxes on the MWUA policies, keeping up with the MWUA losses by policy year, etc.
Audubon did not underwrite the losses on the MWUA policies, did not accept the risk for policies written by the MWUA, and had nothing to do with the allocation of reinsurance proceeds. MWUA alone was responsible for those policies, leading ultimately to the assessments at issue.
What the evidence ultimately showed was that Audubon had inadvertently included MWUA policies with its own policies when it reported its total premiums to the MWUA, resulting in an assessment to Audubon of over $33,000,000.00. [The appealing member of the windpool]… alleges that, “…unlike all the other members, AIG’s percentages were reduced on January 26,2006, before the other members numbers were due, and on January 27, MWUA paid a $31 million refund to AIG.”
Further, the January 11,2006 Executive Board Minutes show that “Greg Copeland was authorized [by the MWUA Board of Directors] to negotiate with AIG concerning their assessment adjustment and deferral of payments and interest charges by both MWUA and AIG to each other.” These allegations are true, but they do not have the nefarious underpil1l1ings as suggested by Homesite’s (and other companies’)
There is nothing in the record to indicate that Audubon was given special treatment or allowed to do anything that any other member company would not have been able to do had the same error occurred. All corrections were made within the same “true-up” period given to all member companies.
Speaking of records, they’re not all that easy to find. The docket for Association Casualty Ins. Co., et. al. v. Allstate Ins. Co., et. al, in fact, has more seals than a circus.
MWUA Board membership is an issue at the heart of the lawsuit; but, if there is an easily accessible list of the the members, I didn’t find it. What I found instead the 2004 Exam of the Windpool conducted by MID, an unsealed exhibit supporting one of the motions on the case docket. In the Exam, however, I found information on the Board composition and membership in the section titled, “Management and Control”.
The Plan of Operation vests the administration of the business affairs and activities of the Association with its Board of Directors, subject to the review of the Commissioner. The Board of directors (“Board”) consists of five (5) representatives of the member companies of the Association and three (3) licensed Mississippi agents from the Coast area. The duly appointed insurers and agencies having representatives sitting on the Board at December 31, 2004, are as follows:
Allstate Insurance Company; St. Paul Travelers Companies; Mississippi Farm Bureau Mutual Insurance Company; Nationwide Insurance Companies;State Farm Fire & Casualty Company
Fox-Everett, Inc.; Stewart Sneed Hewes, Inc.; Treutel Insurance Agency, Inc.; Moss Point Insurance Agency (Agent Alternate)
A member of the Commissioner’s staff serves as a non-voting member of the Board.
The· Plan of Operations requires the Board of Directors to elect a Chairperson, Vice-Chairperson, Secretary-Treasurer and a Manager.
Those duly elected by the Board and servicing at December 31, 2004, were as follows:
Chairperson: Lorrie K. Brouse (Allstate Insurance Company)
Vice-Chairperson: Brad Little (St. Paul Travelers Companies)
Secretary-Treasurer: Bobby Portwood (Fox-Everett, Inc)
Manager:Albert Parks (Mississippi State Rating Bureau)
Board membership, or rather the conduct of certain Board members is at the center of the lawsuit and succinctly stated in Plaintiffs’ amended Complaint – and, in this circus of seals and tight rope walkers, it’s time to bring in the clowns.
Defendants are members of the MWUA Board and were responsible for purchasing reasonable and appropriate reinsurance to protect the MWUA members, including Plaintiffs… As described more fully in this…Complaint, Defendants acted out of self-interest in making reinsurance decisions for MWUA, breached their fiduciary duties to all members…and otherwise engaged in wrongful conduct, thereby causing Plaintiffs and all members… to suffer hundreds of millions of dollars in unreinsured losses.
Companies selling property insurance in the state are required to be a member of Mississippi’s windpool, not just those who provide property coverage in the six coastal counties. In the event of a loss, the members are assessed a proportional share using a two-part formula for calculation.
The first 10% of a member’s share of the loss is calculated by the percent based on the member’s market share. The remaining 90% is based on a company’s share of the coverage provided in the coastal counties. As an incentive to make coverage available in this high risk area, companies are given “credits” against their 90% share assessment for covering the risk.
The Mississippi windpool’s uninsured losses from Hurricane Katrina – meaning not covered by reinsurance – totaled $545,000,000, according to the Commissioner’s recent Order. The percentage below applied to that total will indicate the amount of each company’s assessment.
With the total loss exceeding half a billion dollars, a small percentage increase can easily translate to a great deal of money.
The Plaintiffs contend the Defendants had access to the information needed to reduce the loss if not to prevent it entirely.
…Defendants did not bring to bear their internal expertise and resources relating to catastrophe modeling, risk assessment, reinsurance strategies and options and related topics for any determinations or deliberations by Defendants and their representatives as Board members in relation to the 2005 hurricane season.
The MWUA Board, including Defendants, ultimately procured only $175 million in reinsurance for the hurricane season in 2005, at a time when the total insured values for MWUA had grown to $1.7 billion and more, in contrast to the $200 million in reinsurance that the MWUA Board had procured for the 1998 and 1999 seasons, for example, when the total insured values had been about half of what they would be in 2005, or about $800-900 million.
In fact, had the MWUA Board, including Defendants, procured timely and appropriate catastrophe modeling for the 2005 hurricane season, that modeling would have shown the’ need for reinsurance to a level of about $450 million for a SOO-year event. Had the MWUA Board evaluated the changing total insured values, revenues and other information available, Defendants would have recognized the fact that funds were available to procure vastly more reinsurance than the MWUA Board, including Defendants, had elected to procure during its 2004 decisions. Had the MWUA Board, including Defendants, determined to acquire the reinsurance that was needed, either the MWUA could have paid for such reinsurance’ out of growing MWUA revenues or the MWUA Board, including Defendants, could have directed the MWUA to assess members.
Not only did the Board unnecessarily expose the members of the Windpool to risk, the poorest state in the nation had to cover a 10% share.
The United States Department of Housing and Urban Development has granted the Mississippi wind pool $30 million to help reduce property insurance rates. The Mississippi wind pool – officially called the Mississippi Windstorm Underwriting Association – provides state-sponsored homeowners insurance as a last resort for residents who can’t find coverage in the private market.
Homeowners insurance is expensive in Mississippi – even if obtained from the wind pool. After Hurricane Katrina, the average rate rose by 268%. With the $30 million Federal grant and $20 million in state funding, the wind pool can cut rates to 142% above the previous average.
“142 percent is still an extremely high rate… but it’s beginning to buy us some time,” Insurance Commissioner George Dale said.
In light of other allegations made in the Amended Complaint, it seems only fair to ask if that’s a “we-us” or a “them-us” who were “beginning to buy…some time”.
In recent briefing, argument, and pretrial submissions to the Court, Defendants have argued that the fact they wrote policies on the Gulf Coast should insulate them from liability for their various breaches of the duties of care and loyalty.The Court should deny Defendants’ motion because they have argued that their practices with respect to voluntary writings were consistent with legislative purpose or Plaintiffs’ were not. Plaintiffs generally agree that Defendants’ practices with respect to voluntary writings are irrelevant to the question of whether Defendants breached the duties of care and loyalty in connection with the purchase of reinsurance on behalf of the members. But Defendants have repeatedly insisted on making those practices relevant. They have done so, for instance, by arguing that Defendants “d[id] our duty, paid our fair share and insured people on the Gulf Coast” while Plaintiffs “didn’t go down to the Gulf Coast and write their fair share of insurance.”
…It is, of course, a basic principle of evidence that “[w]hen a party opens the door to a topic, the admission of rebuttal evidence on that topic becomes permissible.” … The Court should permit Plaintiffs to submit appropriate rebuttal evidence here.
If Defendants choose to argue to the jury that their practices with respect to voluntary writings were consistent with legislative intent or are otherwise relevant to their liability in the matter, Plaintiffs should be permitted to challenge this claim in any persuasive fashion allowed by the evidence. The fact that such disputed or denied claims have been the subject of numerous investigations, including federal grand jury investigations, and the findings of those investigations are relevant and probative as to whether Defendants, indeed, did the “fair share” that they claim.
It hardly serves any legislative purpose for Defendants to avoid participation in 90% of the MWUA’s losses by voluntarily writing insurance in the Coast Area—but then improperly refusing to pay claims on those voluntary policies. If Defendants open the door by arguing that their voluntary writing credits were consistent with legislative intent, the Court should permit Plaintiffs appropriate latitude to rebut or impeach those claims or any others for which rebuttal or impeachment proves necessary at trial.
When they reach their verdict, who will be riding the pony and who will be the clown?
You can learn to swallow swords
But it hurts so much more
Swallowing your pride
On a three-ring circus ride