American Independent Insurance Co. v. Lederman, Civil Action No. 97-4153 (E.D. Pa. 8/25/2000)
| Decision Date | 25 August 2000 |
| Docket Number | Civil Action No. 97-4153. |
| Parties | AMERICAN INDEPENDENT INSURANCE CO. and AMERICAN INDEPENDENT SERVICE CO., Plaintiffs, v. CHARLES M. LEDERMAN, INSURANCE FINANCIAL SERVICES, DOUGLAS M. BELL, DOUGLAS M. BELL & ASSOCIATES, INC., CARMEN J. COCCA, JR., PIC INSURANCE GROUP, INC., a/d/b/a PHYSICIANS INSURANCE COMPANY, CHRIS P. MAHER, FCAS, MAAA, MAHER ASSOCIATES, INC., DIANE CAPALDO, LARC INSURANCE, LTD., PRC LTD., ROCKWOOD CASUALTY INSURANCE CO., and PREMIER AUTO INSURANCE CO., Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Presently before the Court are the five individual Motions for Summary Judgment of Defendants (1) Diane Capaldo Lederman ("Capaldo"); (2) Douglas M. Bell and Douglas M. Bell & Associates, Inc. ("Bell"); (3) Carmen J. Cocca, Jr. ("Cocca"); (4) Chris P. Maher and Maher Associates, Inc. ("Maher"); and (5) Charles M. Lederman ("Lederman"), Insurance Financial Services ("IFS"), Rockwood Casualty Insurance Co. ("Rockwood"), PRC, Ltd. ("PRC"), Premier Auto Insurance Co. ("Premier"), and LARC Insurance, Ltd. ("LARC").1 In addition, the Supplemental Motion for Summary Judgment filed by Defendants Lederman, Bell, Cocca, IFS, LARC and PRC ("the RICO Defendants") is also before the Court. The Plaintiffs, American Independent Insurance Company ("AIICO") and American Independent Service Company ("AISC"), allege an on-going fraud from 1991 through 1996 by Lederman and his co-Defendants, through which the Defendants tried to force the sale of AIICO at a low price, raided the assets of AIICO, and undermined AIICO's ability to conduct business. Plaintiffs allege violations by the Defendants of The Racketeer Influenced and Corrupt Organizations Act of 1984 ("RICO") and eleven state laws. 18 U.S.C. § 1962, et seq. For the reasons that follow, the summary judgment motions are granted in part and denied in part, and the RICO Defendants' Supplemental Motion for Summary Judgment is denied.
In April, 1990, AIICO, a mutual casualty insurance company, was converted from a health insurer to an automobile insurer. AIICO is a licensed Pennsylvania personal automobile insurance writer. All AIICO policies have six month terms and policyholders are required to pay 25% of their premium upon application for insurance, with one payment twenty days later and the remainder payable over the next three months. AISC charges a service fee on each monthly bill sent to AIICO insureds.
On March 16, 1990, AIICO entered a Management Services Agreement with Insurance Financial Services ("IFS"), a consulting company owned by Lederman. Under this Management Services Agreement, Lederman, through IFS, agreed to provide all operational management services and negotiate with reinsurers.2 Lederman also agreed to oversee all AIICO and AISC matters. Lederman hired Bell to handle the day-to-day operations of AIICO and AISC. On November 30, 1993, IFS and AIICO entered into an Amended and Restated Management Services Agreement which renewed Lederman's overall management and administrative responsibility. Both Agreements contained non-compete clauses wherein IFS agreed not to compete with AIICO's automobile insurance business in Pennsylvania after the Agreements were terminated by IFS. The 1990 Agreement contained a two year non-compete clause and the 1993 Amended Agreement contained a three year non-compete provision. Both Agreements also gave Lederman the authority to negotiate and secure reinsurance on AIICO's insurance policies and prohibited IFS or Lederman from taking any brokerage fees.
Between 1990 and 1995, Lederman and Bell, on behalf of AIICO, entered into several reinsurance contracts, or treaties, which provided for a quota share arrangement between AIICO and the reinsurers.3 Lederman and Bell initially placed AIICO's reinsurance through an independent broker with an authorized reinsurer, but Plaintiffs allege that Lederman prematurely commuted, or terminated, some of these treaties, thereby increasing AIICO's risk. Plaintiffs also allege that Bell executed all treaties on behalf of AIICO at Lederman's direction.
From 1991 through 1994, without a broker, Lederman placed AIICO treaties with LARC, an undercapitalized company which was created and controlled by Lederman.4 Lederman's primary purpose in creating LARC, according to Plaintiffs, was to divert AIICO's assets and funds to the Defendants. In 1995, upon inquiry about LARC by the Pennsylvania Department of Insurance, Lederman placed AIICO's reinsurance with PRC. Neither LARC nor PRC had adequate funds to cover the obligations it had assumed from AIICO.
Plaintiffs allege the financial terms of the one-year treaties from 1990 through 1995 were favorable to the reinsurers and unfavorable to AIICO. The alleged unacceptable practices included prematurely commuting AIICO's obligations with respect to the LARC treaties for the policy years beginning January 1, 1991, January 1, 1992 and January 1, 1993, either on the date they expired or shortly after they expired. This caused a profit to LARC of several million dollars and a loss to AIICO in the same amount. AIICO also lost earnings as a result of its inability to write business based on money diverted from AIICO.
In the fall of 1993, Lederman advised the Chairman of AIICO's Board of Directors, Lewis Small, that AIICO's year-end capital and surplus would fall below minimum required levels under the National Association of Insurance Commissioners Guidelines. In November of 1993, Lederman promised to invest $1.5 million in AIICO in exchange for 16% of AIICO's stock for his investment. Before he could receive the stock, however, Lederman was required to obtain approval for the acquisition from the Pennsylvania Insurance Department. He filed an application for approval but did not disclose his affiliation with LARC. According to Plaintiffs, Lederman withdrew his application rather than make the required disclosures. He therefore never received the stock.
Effective January 1, 1994, Lederman and Bell, on behalf of AIICO, executed a reinsurance treaty with LARC which covered 90% of AIICO's personal automobile insurance premiums and provided a 32% ceding, or yielding, commission to AIICO, which represented a percentage of premiums LARC returned to AIICO in order to pay for AIICO's operating expenses. AIICO was responsible, however, for all claims within a "loss corridor" of 63% to 80% of AIICO's premiums even though LARC received 90% of the premiums less the 32% commission. In November of 1994, Lederman informed Small that AIICO needed an additional $800,000. by the end of the year to meet the National Association of Insurance Commissioners Guidelines. Small therefore examined AIICO's options to obtain the money. Lederman told Small that LARC would loan AIICO the needed funds at a substantial interest rate, but in the event of default, LARC would assume ownership of AIICO. Small rejected this idea and obtained bank financing.
Effective January 1, 1995, Lederman and Bell, on behalf of AIICO, executed a reinsurance treaty with PRC which was similar to the January 1, 1994 reinsurance treaty between AIICO and LARC. This treaty also called for AIICO to pay 90% of the personal automobile insurance premiums to PRC and AIICO was paid a ceding commission of 30%. AIICO was also responsible for all claims to the same extent as under the treaty with LARC. In February of 1995, Maher, an actuary hired by Lederman, prepared a report as part of the 1994 year-end statement to the Pennsylvania Insurance Department reporting AIICO's anticipated capital and surplus needs. In this statement, Maher and Bell certified that AIICO's reported reserves were sufficient, accurate and correct. At some point during the week of March 27, 1995, however, Lederman and Bell met with Lewis Small, AIICO's President, and his brother, Richard Small, an AIICO Director, to discuss AIICO's financial position. Lederman and Bell presented the Smalls with a Projected Financial Statement indicating that AIICO needed an additional surplus of between $1.7 and $2.0 million by year-end 1995. Maher had also reported this deficiency in his report to the Pennsylvania Insurance Department. During the meeting, Lederman and Bell persuaded the Smalls not to pursue additional capital, and endeavored to convince them that AIICO's financial situation was stable.
By letter dated April 7, 1995, Bell informed the Smalls and AIICO's other representatives that he expected AIICO's financial picture to strengthen over the subsequent two years and result in "an insurance company that is profitable and financially strong." At a breakfast meeting approximately one month later, however, Lederman and Bell advised the Smalls that Maher had changed his calculations to reflect that the company needed an additional $7.5 million capital infusion. Lederman and Bell told the Smalls that unless this additional money was immediately invested, the Pennsylvania Insurance Department would close AIICO.
A few days later, Lederman again contacted Lewis Small and arranged another breakfast meeting. At that subsequent meeting, Lederman demanded that Small either immediately raise the $7.5 million or consider selling 100% of AIICO to Lederman and his partners at PIC. He advised Small that no traditional lending institution would provide the needed financing given the immediacy of the situation, which precluded the performance of due diligence. Small ultimately consented to the sale, asking Lederman and his partners to develop an offer.
On June 16, 1995, Cocca, PIC's President, mailed an offer to purchase AIICO to Small. On June 22, 1995, Small acknowledged receipt of the offer and requested copies of PIC's financial statements. On June 26, 1995, Cocca withdrew PIC's offer to purchase AIICO. Lederman, who was also the Chief Financial Officer of PIC, asked the Smalls to contact Cocca to reconsider. On June 28, 1995, Lederman resigned from the AIICO...
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