Woolgar v. Kingstone Cos.

• Decision Date: 10 August 2020
• Docket Number: No. 19-CV-5500 (RA),19-CV-5500 (RA)
• Citation: 477 F.Supp.3d 193
• Parties: Phillip WOOLGAR, individually and on behalf of all others similarly situated, Plaintiff, v. KINGSTONE COMPANIES, INC., Barry Goldstein, Dale A. Thatcher, Victor J. Brodsky, and Benjamin Walden, Defendants.
• Court: U.S. District Court — Southern District of New York

477 F.Supp.3d 193

Phillip WOOLGAR, individually and on behalf of all others similarly situated, Plaintiff,

v.KINGSTONE COMPANIES, INC., Barry Goldstein, Dale A. Thatcher, Victor J. Brodsky, and Benjamin Walden, Defendants.

No. 19-CV-5500 (RA)

United States District Court, S.D. New York.

Signed August 10, 2020

Lesley Frank Portnoy, Glancy Prongay & Murray LLP, Los Angeles, CA, for Plaintiff.

Scott D. Musoff, Austin Winniford, Chloe Bootstaylor, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants.

OPINION & ORDER

RONNIE ABRAMS, United States District Judge:

Lead Plaintiff Donald Fitzherbert brings this federal securities class action against Kingstone Companies, Inc. ("Kingstone" or the "Company"), as well as Kingstone's Chief Executive Officer Barry Goldstein, former Chief Executive Officer Dale Thatcher, Chief Financial Officer Victor Brodsky, and Chief Actuary Benjamin Walden (collectively, "Defendants"¹ ), alleging that, from March 14, 2018 to April 29, 2019, Defendants committed securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Specifically, Plaintiff alleges that Defendants made materially false and misleading statements with respect to the Company's loss reserve estimates, the effectiveness of its internal controls, and its underwriting, risk management, and reserving practices. Before the Court is Defendants’ motion to dismiss the Amended Class Action Complaint. For the reasons that follow, Defendants’ motion is granted.

BACKGROUND

I. Factual Background

The following facts are drawn from Plaintiff's Amended Class Action Complaint (the "CAC" or "Complaint"), Dkt. 36, and are assumed to be true for the purpose of this motion. See Stadnick v. Vivint Solar, Inc. , 861 F.3d 31, 35 (2d Cir. 2017).

A. The Parties

Defendant Kingstone is the parent and holding company of Kingstone Insurance Company ("KICO"), its wholly owned subsidiary. CAC ¶¶ 2, 22. KICO is a "property and casualty insurance company" that provides "insurance products for individuals and small to mid-size businesses in the northeast," and "distributes its insurance products through an independent agent and broker network." Id. ¶ 2. Kingstone is incorporated under the laws of the state of Delaware. Id. ¶ 22. Both Kingstone and KICO are headquartered in New York. Id. ¶ 2. Kingstone trades on the NASDAQ under the ticker symbol "KINS." Id. ¶ 22.

Defendant Barry Goldstein is Kingstone's current CEO and President, and has been since July 19, 2019. Id. ¶ 23. Goldstein also served as Kingstone's CEO and President from March 2001 to December 31, 2018. See id. In addition, Goldstein is the Executive Chairman of Kingstone's Board, as well as the CEO, President, and Chief Investment Officer of KICO, Chairman of KICO's Board, and Chairman of KICO's Executive Committee. Id. ¶¶ 23-24.

Previously, Goldstein was the Chairman of Kingstone's Board from March 2001 to December 31, 2018, Kingstone's CFO from March 2001 to November 2007, Kingstone's Treasurer from May 2001 to August 2013, KICO's CEO from January 2012 to December 31, 2018, KICO's President from January 2012 to March 2018, and KICO's Treasurer from March 2010 to September 2010. Id.

Defendant Dale Thatcher is the former President and CEO of Kingstone and KICO. Id. ¶ 25. He served as Kingstone's President and CEO and as KICO's CEO from January 1, 2019—and as KICO's President from March 2018—until his "abrupt resignation" on July 19, 2019. Id. Thatcher also served as Kingstone's Chief Operating Officer and as a board member until his July 2019 resignation. Id.

Defendant Victor Brodsky is Kingstone's CFO and Treasurer, as well as KICO's CFO, Executive Vice President, and a director of its Board. Id. ¶ 26. Previously, Brodsky was Kingstone's Chief Accounting Officer from August 2007 to July 2009, its Principal Financial Officer "for SEC reporting purposes" from November 2007 to July 2009, and its Secretary from December 2008 to August 2013. Id. Brodsky was also previously KICO's Senior Vice President from January 2012 to February 2017 and KICO's Treasurer from September 2010 to December 2011. Id.

Defendant Benjamin Walden is Kingstone's and KICO's Chief Actuary and KICO's Executive Vice President. Id. ¶ 27. He previously served as KICO's Senior Vice President from January 2015 to February 2017, and as KICO's Vice President from December 2013 to January 2015. Id.

Lead Plaintiff Donald Fitzherbert ("Plaintiff") acquired Kingstone securities during the Class Period, and allegedly did so "at artificially inflated prices" and thus suffered damages as a result of Defendants’ alleged securities violations. Id. ¶ 21. Plaintiff brings this federal securities class action on behalf of both himself and a class of "all persons who purchased or otherwise acquired Kingstone securities" between March 14, 2018 and April 29, 2019 (the "Class Period"). Id. ¶ 164.²

B. Overview of Kingstone and KICO's Business

Kingstone "offers property and casualty insurance products" through KICO, its wholly owned subsidiary. Id. ¶ 30. Its "primary source of revenue" comes from the "premiums paid to KICO" for these insurance policies. Id. ¶ 35. KICO's property insurance policies generally cover "accidental losses to home and personal property, or a business's building, inventory, and equipment," while KICO's casualty insurance policies, or "liability insurance," generally cover "legal liability relating to negligent acts or omissions." Id. Plaintiff asserts that all of KICO's insurance policies are "twelve-month policies," and that property claims are generally "settled in a short time period," while casualty claims "can take years to settle." Id.

During the Class Period, KICO's product lines included "personal, commercial liability, [and] livery physical damages" lines. Id. ¶ 36. KICO's personal line is the company's largest, and consists of "homeowners and dwelling fire multi-peril, cooperative/condominiums, renters, and personal umbrella policies." Id. KICO's commercial liability line consists primarily of "small business retail, service, and office risks with limited residential exposure," as well as "liability policies for small independent contractors" and "special multi-peril policies for larger and more specialized risks," and "umbrella policies for each of these." Id. ¶ 37. Its livery physical damage line covers "vehicle physical damage for car service vehicles and taxicabs." Id. ¶ 38. Its other policies include "canine legal liability policies and participation in the mandatory state joint underwriting associations." Id.

C. Kingstone's A.M. Best Rating

Plaintiff maintains that, for at least four years prior to the start of the Class Period, Kingstone "saw ever increasing net premiums, revenues, and net income." Id. ¶ 39. Prior to the Class Period, Kingstone also apparently "received an A.M. Best upgraded financial strength rating." See id. ¶ 103. In particular, Kingstone was upgraded to an A- rating. See id. ¶ 104; see also ¶ 32 (alleging that in April 2017, KICO "achieved its long-standing goal of becoming an A-rated carrier" when its rating was upgraded from "B++" to "A-"). According to the Company's SEC filings, "rating agencies such as A.M. Best review the financial performance and condition of insurers" on an "ongoing basis," and a "downgrade" in the Company's "financial strength rating from A.M. Best could have a material adverse effect on [its] competitiveness, the marketability of [its] product offerings and [its] ability to grow in the marketplace." See id. ¶ 103. Plaintiff alleges that, throughout the Class Period, Defendants "touted" their recently improved A.M. Best rating. See id. ¶ 104. Specifically, Plaintiff asserts, Defendant Goldstein "repeatedly boasted the import of the ‘A-’ rating on investor conference calls throughout the Class Period." Id. ¶ 32.

D. Kingstone's Loss Reserves

According to the Complaint, "[i]nsurance companies like Kingstone" are required to maintain and record loss reserves in order to "ensure adequate liquidity to pay policy claims." Id. ¶¶ 3, 40. The "loss reserve" is "an estimate of the value of claims not yet paid," which "directly impacts" a company's net income as it is "recorded as a balance sheet liability." Id. ¶ 3; see also id. ¶ 40 ("Loss reserves are balance sheet liabilities[.]"). Plaintiff alleges that Kingstone's "loss reserves directly impact income and are the largest expense on the Company's income statement." Id. ¶ 44.

Loss reserves are intended to "reflect the estimated cost of future amounts the company will be required to pay on claims for policies written at or before the balance sheet date," and are for "both known and unknown losses which have been incurred as of the financial reporting date on all previously written policies, both current and expired." Id. ¶ 40. Loss reserves fall into two categories. First, "case reserves" are reserves for "known but unpaid claims," including "reserves for the claims and [loss adjustment expenses (‘LAE’) ], expenses for settling or adjusting the claims." Id. ¶¶ 3, 41. Plaintiff asserts that when Kingstone receives an insurance claim, the "case reserve," or "estimated amount of its ultimate settlement and its estimated loss expenses," is established based on the "then-known facts about the claim," and that each reported claim may subsequently be increased or decreased based on "developing additional facts." Id. ¶ 41. According to Plaintiff, "a company's case reserves must accurately reflect the cost of known but unpaid claims." Id. ¶ 3. Second, " ‘incurred but not reported’ loss reserves," or "IBNR reserves," are reserves that consist of "the IBNR losses, loss and LAE amounts incurred but not reported and expected future development on known claims," i.e., "unknown policy claims." Id. ¶¶ 3, 42. Plaintiff avers that "a company's IBNR reserves must reflect, as reasonably as possible based on established procedures, the estimated costs of unknown claims." Id. ¶ 3. Plaintif...