The tenth status report for the liquidation of Spirit Commercial Auto Risk Retention Group (Spirit) was issued by Special Deputy Receiver (SDR) Cantilo & Bennett, L.L.P. on July 7, 2021. The report includes the first estimate of unpaid liabilities at Spirit. Actuarial firm Oliver Wyman set the total unpaid loss and loss adjustment expenses for Spirit at $198.7 million.
That figure may grow as the claims deadline for Spirit was May 31, 2021, and the SDR is still evaluating claims data, including those claims received after December 31, 2021. The report states that cash and invested assets at the company were approximately $41.9 million. This gives Spirit an approximate claims shortfall of more than $150 million.
If these figures hold, the Spirit failure will be one of the most significant risk retention group failures since the passage of the Liability Risk Retention Act. Spirit was licensed by the Nevada Division of Insurance in 2012 to provide commercial auto liability to truckers and trucking companies, primarily owner-operators and small fleets.
In comparison, the failure of three Tennessee risk retention groups in 2003—National Lawyers Insurance Reciprocal (Risk Retention Group), Doctors Insurance Reciprocal Risk Retention Group, and The Reciprocal Alliance—due to the failure of their reinsurer Reciprocal of America (ROA), collectively represented liabilities of $181.7 million against total collective liquid assets of $28.6 at the RRGs. (See February 2003 to May 2003 Risk Retention Reporter issues). Former President & CEO of ROA Kenneth Patterson was later sentenced to 12 and half years in prison, as per Business Insurance.
The Spirit case also entered the official briefing phase at the Nevada Supreme Court, following the filing of a writ of mandamus by Nevada Commissioner of Insurance Barbara Richardson in April 2021.
The Spirit insolvency has undergone a series of escalations since the company was first placed into receivership in February 2019. The initial receivership order followed an investigative report by the Risk Retention Reporter that unveiled an auditor’s letter alleging material misstatements at the company of at least $10 million, a loss portfolio deal surpassing $100 million, and draft examination by Nevada regulators from 2018 that alleged the company had negative equity of $14.2 million as early as December 31, 2016.
The initial investigative report by the Risk Retention Reporter also identified Thomas Mulligan as the controlling entity for Spirit. Although Mulligan does not appear on the Spirit board of directors, he was able to exercise control of the RRG through his position as the chairman and CEO of Spirit’s program manager CTC Transportation (CTC). In filings with the NAIC Mulligan sits at the top of the holding company group that includes Spirit.
In addition to CTC, Mulligan controlled other of aspects of Spirit’s operation through CTC subsidiary companies such as Criterion Claims Solutions of Omaha (Claims), Chelsea Financial (premium financing), and through his 50% ownership of Spirit’s captive manager Lexicon Insurance Management.
The Risk Retention Reporter investigative report also tied Mulligan to an earlier failed risk retention group, Delaware-domiciled Federal Motor Carriers Risk Retention Group, Inc., and to an RRG formed after Spirit, North Carolina-domiciled County Hall Risk Retention Group. County Hall saw explosive premium growth as problems at Spirit intensified, with premium increasing from $15.4 million in 2017 to $50.7 million in 2018.
County Hall experienced significant losses the following year, reporting negative net income of $11.8 million in 2019. However, regulators in North Carolina appear to have got a handle on the RRG. Premium at County Hall declined to $37.7 million in 2019 and to $13.3 million in 2020. In addition, County Hall reported negative net income of $2.0 million in 2020, a significant improvement over 2019 that suggests financials at the RRG are stabilizing.
In August 2019, the SDR alleged in the first status report for Spirit that $30 million appeared to be missing from the company—a figure that has since ballooned to more than $40 million.
Then, in December 2019, the Risk Retention Reporter reported on a forensic audit of Spirit by FTI Consulting, a firm whose portfolio includes work on the Lehman Brothers and General Motors bankruptcies and on the investigation into Bernie Madoff.
That audit identified a range of financial control issues at CTC including payments to vendors with contracts or invoices, payments to credit cards without an expense approval process, the comingling of multiple insurance carriers in the general trust account, and the payment of claims without premium (in some cases negative premium was recorded).
The FTI audit also stated that from January 2016 to May 2019 CTC made $30.7 million in transfers from the CTC general trust account to the CTC operations account, and from the CTC operations account FTI identified $33.0 million “of payments to related parties and unusual transactions.”
Those transactions included over $3 million paid towards credit cards used by Mulligan, $6.5 million to Chelsea Financial, and a $2.8 million loan to Criterion Claims solutions for operating expenses.
These events culminated in a business court complaint filed in the Nevada District Court, Clark County (District Court) by Commissioner Richardson in February 2020 that alleged that CTC Transportation and its affiliated companies conspired to defraud Spirit of tens of millions of dollars.
The Complaint identified Thomas Mulligan as the primary architect of a “vast fraudulent enterprise” encompassing companies from across the country. The complaint listed nineteen causes of action including fraud, civil conspiracy, breach of contract and fiduciary duty, and breach of the implied covenant of good faith and fair dealing.
The defendants include Mulligan, other member of the senior management at Spirit and CTC, and the companies such as CTC and Chelsea Financial, among others, that were ostensibly Spirit’s service providers.
The complaint filed by Commissioner Richardson ground to a halt when defendants CTC and Criterion successfully filed motions in District Court to compel arbitration. Following that order, the rest of the defendants successfully filed motions to stay proceedings pending the outcome of the arbitration proceedings.
In April 2021, Commissioner Richardson filed a writ with the Nevada Supreme Court argues that the decision to stay proceedings in the District Court left her in her capacity as Spirit’s receiver “without a remedy, and thus, unable to fulfill her statutory duty of marshalling the assets of Spirit for the benefit of Spirit’s policyholders and other creditors of the failed insurer.”
One of the key arguments in the writ is that the arbitration agreements between Spirit and CTC and its affiliated companies are not valid since Mulligan controlled both Spirit and CTC. The writ argues that the arbitration agreements were not “not products of bargaining between independent entities, but were tools of fraud, made amongst companies with joint control or ownership.”
“The Receiver should be permitted to proceed with Spirit’s claims against the remaining defendants, particularly the individual defendants who were the actual bad actors responsible for the corporate misconduct of CTC and Criterion,” as per the writ.
The Nevada Supreme Court issued an order directing response to the respondents, i.e., the defendants, in the case on July 14, 2021. After an extension that has been granted, the respondents will have until August 25, 2021 “serve an answer, including authorities, against the issuance of the requested writ.”
After which Commissioner Richardson in role as the petitioner of the writ, will have 14 days to file and serve any reply.