This is going to be a long article—quite a bit longer than I initially imagined. However, the issues raised in the case are of importance from the perspective of both regulators and service providers. Furthermore, many of the issues raised in this case are not matters of settled law.
The case revolves around audit work Crowe LLP conducted for the now insolvent Vermont-domiciled Global Hawk Insurance Company Risk Retention Group. The case has been moved to the federal United States District Court for the District of Vermont.
As Global Hawk is domiciled in Vermont, many of the aspects of the case revolve around Vermont law. However, the contracts Crowe signed with Global Hawk were issued under Illinois law. As such, the court must consider both Vermont law and Illinois law in its opinion. The laws of different states are not always in alignment—they often are not.
When I was first reviewing the case, I initially skimmed over Latin legal phrases like in pari delicto. Turns out in pari delicto is an unresolved issue in Vermont law as it pertains to Liquidators and can have a significant impact on the capacity of the Liquidator to recover assets when fraud has occurred at an insurance company. The case also hits on what the duties of both regulators and service providers are.
The case also explores whether it matters if an insurer continues to operate in an insolvent state, even if fraud was involved, which is not a settled issue either.
There have been cases where letting an insolvent insurer continue to operate has been seemingly beneficial. New York law has allowed Physicians’ Reciprocal Insurers (PRI)—one of its largest med mal carriers—to write its way out of insolvency. In 2017, PRI had negative surplus of $311.9 million. By 2021, PRI’s financial condition had improved with a surplus deficit of $33.1 million reported.
Although not fraud, there was mismanagement at PRI. In 2017, the New York Department of Financial Services issued an order that found the PRI attorney-in-fact Administrators for the Professions, Inc., and its CEO and owner Anthony J. Bonomo, “repeatedly and consistently breached fiduciary and other duties to PRI, and mismanaged PRI, failing to adequately protect the interests of the company’s subscribers” and “disregarded sound actuarial principles when setting PRI’s loss reserves, and then tried to cover it up by seeking to silence outside auditors and employees who objected to this misconduct.”
Which goes to show that some traditional carriers struggle with the same issues as the small number of troubled RRGs. However, unlike a traditional carrier like PRI, RRGs cannot participate in state guaranty funds. In the case of PRI, a liquidation would have sent shockwaves throughout the New York insurance industry—not just in med mal—as other carriers would be required to pick up some of the shortfall.
RRGs operate more on the periphery of the insurance industry and the members bear more responsibility in the case of a failure. There are clear benefits to this set-up as members can receive dividends when the RRG performs well and have an incentive to be an engaged member—to participate in the risk management programs that the most successful RRGs provide.
However, it can also cause real problems when an individual or entity decides to take advantage of the risk retention group vehicle, as was the case in Global Hawk. Global Hawk was run by an MGA and typically the MGA has relatively little skin in the game if an RRG fails.
There are many successful MGA-driven RRGs. However, bad actors can do real harm. Insurance is serious business and ensuring that insurance companies are well-run is in the public interest. This case addresses directly what the duty is, of the industry collectively, in preventing that harm from occurring.
This is an excerpt, for the complete article subscribe to the Risk Retention Reporter.