NU Online News Service, June 15, 3:09 p.m. EDT
California Insurance Commissioner Steve Poizner has announced a settlement of four lawsuits that provides the liquidation estate of failed workers' compensation insurer Fremont Indemnity Company with up to $37.3 million.
The arrangement, disclosed Friday, will permit four former directors and officers, who were sued by the California Insurance Department over actions that allegedly led to Fremont's collapse, to pursue claims for retirement monies.
Those covered include former Fremont President Louis J. Rampino, Chairman James A. McIntyre, and directors William R. Bailey and Raymond J. Meyers. An action brought by former California Insurance Commissioner John Garamendi had accused them and others of breaching their fiduciary duties with a risky underwriting scheme.
Commissioner Poizner said in a statement he was "very pleased to have obtained this significant recovery--worth tens of millions of dollars--for Fremont's policyholders, injured worker claimants and creditors, particularly from a bankrupt enterprise like Fremont General."
Fremont, placed in liquidation in 2003, was a national concern, writing more than $800 million in premiums in its final year of full operations. After Fremont was placed into liquidation in 2003, a departmental investigation resulted in four lawsuits being filed to recover money for the benefit of policyholders, injured worker claimants, and other creditors of Fremont.
Actions were filed against Fremont's parent companies, Fremont Compensation Insurance Group (an intermediate holding company) and Fremont General Corporation, Fremont's ultimate parent company, over tax sharing arrangements among the companies
The suit against former directors and officers alleged they engaged in a practice known as "net line underwriting" which was intended to benefit Fremont at the expense of its reinsurers. The lawsuit alleged that the scheme resulted in the reinsurers asserting claims for rescission of multiple valuable reinsurance treaties, which ultimately had to be settled at a loss to Fremont.
Another suit involved a dispute over the ownership of a corporate fine art collection, including prints by noted nature photographer Ansel Adams, valued at more than $4 million.
In addition to its failed insurance company operations, Fremont General was also the owner of a subprime mortgage lender, Fremont Investment & Loan (now known as Fremont Restructuring Corporation).
The department, in a statement, said failure of Fremont Investment & Loan in 2008 resulted in Fremont General filing for bankruptcy protection in June 2008.
As a result of the settlement, the department said there will be:
o Immediate cash payment of $5 million from Fremont Restructuring Corporation.
o Immediate receipt of $4.1 million in proceeds from the sale of the art collection.
o Control over the equity interest in Fremont Life Insurance Company, currently valued at approximately $1.2 million.
o Two allowed general creditor claims against the Fremont General bankruptcy estate in the total face amount of $40 million, on which the Fremont liquidation estate is entitled to receive up to, and expects to receive prior to the end of the year, distributions of $27 million.
The settlement also provides for the preservation of more than $600 million in beneficial tax attributes (so called "net operating loss carry forwards" or "NOLs") for the benefit of Fremont. This will assist the commissioner in protecting Fremont from exposure to federal income tax liabilities for the duration of the liquidation process, the department said.
The settlement agreement resolves employment and retirement benefit plan claims against Fremont General by the directors and officers.
According to the commissioner's statement, this portion of the settlement had no negative impact on the amount of recovery of benefits due to Fremont.
Federal ERISA law shields the assets of retirement benefit plans from being seized as part of an insurance liquidation proceeding, like the Fremont liquidation. Disputes over the retirement plan benefits are strictly between Fremont General (as the plan sponsor) and the individual participants, said Mr. Poizner.