Glacier Gen. Assur. Co. v. Cas. Indem. Exchange, Civ. No. 75-4-M.
Decision Date | 11 August 1977 |
Docket Number | Civ. No. 75-4-M. |
Citation | 435 F. Supp. 855 |
Parties | GLACIER GENERAL ASSURANCE COMPANY, a Montana Corporation, Plaintiff, v. CASUALTY INDEMNITY EXCHANGE, a Missouri multiple line reciprocal insurer, et al., Defendants. |
Court | U.S. District Court — District of Montana |
Dexter L. Delaney, Mulroney, Delaney, Dalby & Mudd, Missoula, Mont., for plaintiff.
Sherman V. Lohn, Garlington, Lohn & Robinson, Missoula, Mont., for defendants.
The opinion in this case filed March 2, 1977, is withdrawn, and the judgment entered May 2, 1977, is vacated.
By a motion to amend the judgment, plaintiff strenuously asserts a right to rescission of a loss fund agreement, and in support of its right to rescind, states that the money judgment heretofore awarded is inadequate relief because the defendants are insolvent.
Plaintiff is entitled to monetary relief and is not entitled to a rescission.
The facts are:
Plaintiff, Glacier General Assurance Company (Glacier), is a multiple-line insurance company. John Hayden (Hayden) is its president and chief executive officer.
Casualty Indemnity Exchange (CIE) is an insurance exchange owned by its policyholders but managed by Manlin Service Corporation (Manlin), as attorney-in-fact. Manlin was owned by a firm of insurance brokers, Pritchard & Baird, until 1973 when it was sold to Vipont Chemical Company (Vipont) by Charles H. Pritchard and William G. Pritchard, in exchange for 609,000 shares of the stock of Vipont.
During the years 1969 through 1974 CIE sold medical malpractice insurance policies to doctors. It retained some part of the coverage but reinsured with excess carriers, one of which was Glacier. Pritchard & Baird acted as brokers in the placement of the excess coverage.
In the years 1970, 1971, and 1972, and in the first part of 1973, Glacier received notice of relatively few claims. In late 1973 and early 1974 Glacier was deluged with claims. At about the same time Hayden discovered that Pritchard & Baird, contrary to the agreements made with Glacier, had reinsured with Glacier portions of the excess CIE coverage for which other excess carriers were liable. This had the effect of pyramiding Glacier's coverage on the CIE malpractice book of insurance.
On May 13, 1974, Hayden and Glacier's attorney went to Denver to examine the CIE files. Their principal concern was the late reporting, and they did confirm that the reporting had been seriously delayed.
In late May 1974 Glacier received from another reinsurer the Von Gunten report (Ex. 2). The report cast serious doubts on the solvency of CIE and indicated that CIE had seriously delayed in reporting its losses and had arbitrarily reduced its loss reserves and had back-dated the changes. At the trial, two witnesses, former underwriters for CIE, testified that in 1974 they had, at the direction of the CIE president, Rickard, gone through the files and arbitrarily reduced the loss reserves by 32% and in an amount of approximately $4,000,000 and had back-dated the changes to December 1973. These altered reserve figures appear in the 1973 annual statement. I find this to be true.
In June 1974 Glacier filed an action in this court (CV 74-68-M), naming Pritchard & Baird, Manlin, and CIE as parties, in which it sought actual and punitive damages and a judgment that Glacier be held harmless on any losses resulting from the reinsurance placed by Pritchard & Baird. The complaint alleged the late reporting and the excess coverage pyramidings as grounds for relief. At or about the same time Glacier ceased paying the reinsurance claims made by CIE.
In the meantime, the regulatory bodies in Missouri and California had been looking at CIE, and in March 1974 the Missouri Division of Insurance and the California Department of Insurance commenced an audit of CIE for the years 1971, 1972, and 1973. A preliminary report of the audit was completed in April of 1974. According to the audit, CIE was insolvent and the reserves had been arbitrarily adjusted without regard to the facts of the particular cases involved. Atwood, a qualified actuary from the California department, developed the formula by which the deficiency in reserves was determined. As a result of this audit CIE was placed in charge of a conservator in May 1974.
Because of the Glacier lawsuit and complaints from other excess carriers, Pritchard & Baird made efforts to effect a solution of the problem, and in the course of those efforts proposed to Glacier that it take over CIE's liability and some of the reinsurance liability in exchange for a cash consideration and the dismissal of Glacier's pending lawsuit. The proposal contained a series of calculations as follows:
C.I.E. Net case loss reserves $ 2,107,300 Net unpaid loss adjustment expense 1,542,950 ___________ $ 3,650,250 less savings on Net (see Begos letter) -1,825,125 ___________ Subtotal $ 1,825,125 Plus C.I.E. net IBNR 1,200,000 ___________ Total Net $ 3,025,125 Excess loss reserves $ 6,393,479 less savings on Excess (see Begos letter) -2,924,452 ___________ Subtotal $ 3,469,027 Plus Excess IBNR (Begos estimate) 2,500,000 ___________ Total Excess $ 5,969,027 (Ex. 3)
These figures were in turn based on what was referred to in the evidence as the Begos Report. Begos was a lawyer said to be expert in medical malpractice matters who had been employed by CIE to report on the adequacy of the CIE loss reserves. He reported that CIE was over-reserved in the amount of $600,000. The Pritchard & Baird proposal figures were based on the CIE determinations of its loss reserves.
William Pritchard and Pritchard & Baird were the agents of CIE in all of the negotiations leading to the execution of the loss fund agreement.
On July 25, 1974, the California Department of Insurance held a hearing to determine whether a cease-and-desist order should be entered as to CIE. Hayden appeared at the hearing as the representative of Glacier. At the hearing Atwood expressed his opinion, in accordance with his report, that deficiencies existed in the loss reserves in the amount of $3,251,219. CIE submitted evidence that CIE was over-reserved in the amount of $600,000. At the hearing the Pritchard & Baird proposal to Glacier was described by Hayden, who said that he had intimate knowledge of some 600 claim files, that he had read the Begos Report and the Von Gunten Report, that he had reviewed claims in the offices of CIE. When asked the question:
You're satisfied in your own mind that you have sufficient knowledge about both reported and unreported claims of CIE to establish an opinion in your own mind as to whether or not this is a reasonable treaty to enter into?
Hayden answered "yes." (Insurance hearing, July 25, 1974, p. 91.)
At the conclusion of the hearing, the hearing officer, Lawrence Baker, orally found that CIE was in a "hazardous condition" and had engaged in practices which, under the provisions of the insurance code, would constitute fraud.
After the hearing, Baker discussed the Pritchard & Baird proposals and expressed surprise that Glacier would undertake the risks outlined in them for a then contemplated cash consideration of $9,233,000. Baker was interested in the financial capacity of whoever should take over the CIE malpractice risks. He wanted Glacier to be fully informed as to the size of the risk before it accepted the Pritchard & Baird proposals. For that reason he asked Atwood, the actuary, to talk to Hayden. Atwood discussed his report with Hayden. The report fixed the expected gross liability of CIE and its excess carriers at $32,058,315, of which, under the proposal, Glacier would assume $23,044,850. The actual cost to Glacier, considering a 9% interest rate on money invested, was expected to be $16,000,000. Hayden told Atwood that, because Glacier would be settling claims in the name of CIE, known to be in trouble, the claims could be settled more cheaply.
On July 31, 1974, Glacier and CIE signed a loss fund agreement which by its terms was to be effective only when approved by the insurance departments of Missouri and California. CIE had difficulty in providing funds, and Glacier, on September 23, advised all concerned that, unless the agreement was performed by October 1, 1974, Glacier's offers would be withdrawn. However, on October 10, Glacier and CIE petitioned the Director of the Division of Insurance of Missouri, the Commissioner of Insurance of California, and the Commissioner of Insurance of Montana, pursuant to Revised Statutes of Missouri 1969 § 375.241, to approve the agreement. The petition was set for hearing before representatives from each of the three concerned insurance departments, and a hearing was held on October 23, resulting in an order approving the loss fund agreement (with some upward adjustment of the amounts to be paid to compensate Glacier for its losses incurred by the delay). By October 31, 1974, the necessary funds were collected and the necessary documents signed, and the loss fund agreement became fully effective. The fund, in the total sum of $11,428,658.74, with which payment was made to Glacier, was composed of contributions made by CIE and a large number of reinsurers. For this cash consideration Glacier assumed the liabilities expressed in the loss fund agreement. The reinsurers (including Glacier, whose liabilities under their reinsurance treaties were very substantial) were, with some...
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