The Philadelphia Business Journal
March 21, 2003
Four of troubled Legion Insurance Co.'s larger policyholders have asked a court to circumvent the Pennsylvania Insurance Department so they can directly pursue claims payments from Legion's reinsurers.
The Insurance Department wants to liquidate Legion, which would involve dissolving the company and distributing its remaining assets to policyholders. The agency has decided Legion is too far gone to remain viable.
Commonwealth Court Judge Mary Hannah Leavitt has heard arguments in recent days from Psychiatrists' Purchasing Group, American, Airlines, Pulte Homes and Rural Metro Corp. about the possibility of intervening in the Legion case. For American Airlines, its claims stem, in part, from 9/11.
"To my knowledge, it's the first time policyholders have been allowed to seriously intervene," said Terence P. Cummings, a lawyer with Ohrenstein & Brown of New York, which represents Delaware-based Psychiatrists' Purchasing. That group, which includes 7,500 psychiatrists, participated in a medical malpractice program with Legion,
Reinsurance is the sharing of policies among insurers to cut the risk for each.
The saga involving Philadelphia-based Legion dates back about a year, when the company had 250 employees. It's not clear how many still work there.
The company is a subsidiary of Mutual Risk Management of Bermuda.
Legion served as a "fronting" company, issuing policies for reinsurers in exchange for a fee. The company took on little of the risk itself. But Legion ran into a cash-flow problem early last year when the companies for which it fronted slowed down their payment of claims. The 9/11 terrorist attacks severely damaged the reinsurance industry.
On March 29, 2002, Pennsylvania Insurance Commissioner M. Diane Koken said she obtained court orders to place both Legion and Villanova into rehabilitation, which means the agency essentially assumed control over Legion's operations. The state agency said Legion had only $30 million in cash on hand at that time, but was paying $100 million in claims a month.
The agency halted claims payments aside from workers' compensation and accident and health claims, Insurance Department spokeswoman Melissa Fox said. Legion currently is only able to pay workers' compensation claims; there are about $250 million worth of unpaid claims.
About the same time, insurance ratings agency A.M. Best Co. downgraded Legion from "A-," or excellent, to "B" or fair, with a negative outlook, after the parent company reported fourth-quarter 2001 losses of $100 million. That cut off new premium flow as insurance brokers looked for more stable companies.
In August, the Insurance Department filed petitions to liquidate both Legion and Villanova, arguing that further rehabilitation attempts would be futile, given shortfalls among reinsurers that made significant claims payment unlikely.
Leavitt hasn't ruled regarding liquidation.
Cummings said the agency might be jumping the gun regarding liquidation - and might partially be at fault for Legion's problems. "The Legion case is interesting in Pennsylvania because a number of insurers have failed over the last 18 months," he said, citing Reliance Group and PHICO.
The suing policyholders have a lot at stake. American Airlines wants to seek direct payment from Lloyd's of London for more than $100 million in losses attributable to the Sept. 11 terrorist attacks and the 2001 crash of one of its jets in New York,
Huge homebuilder Pulte Homes wants the court to allow it to directly deal with reinsurers while waiving claims against Legion. The company said it had a Legion-fronted general liability program from 1997 to 2002, but actually placed and paid for reinsurance itself.
As for Psychiatrists' Purchasing, it's not specifically seeking a "cut through," or direct access to deal with reinsurers, although it would accept one, Cummings said
But the group contends its members could face malpractice suits that occur after the company liquidation ends. That means only a small number of claims might be paid further rehabilitation might allow more claims to be paid, Cummings said.
"As long as Legion has a chance to be rehabilitated, that's the path the state of Pennsylvania should pursue," he said
Cummings challenged the agency's assessment that the reinsurers wouldn't be able to make payments, saying those companies all seem to be fiscally healthy.
In court, Cummings said the Insurance Department has argued that if cut-through privileges were granted to four suing policyholders, that quartet would receive an unfair advantage over other claimants.
"We believe our responsibility is to the policyholders and that they are being harmed by not being able to access the guaranty funds to pay claims," Fox said.
The agency has said in court that the policyholders don't have standing to intervene. It also has said regulators need a liquidation order to trigger state guaranty fund coverage of claimants. The guaranty fund helps cover the obligations of insurers and reinsurers who can't meet them
Legion's parent, Mutual Risk Management, didn't return calls seeking comment.
That company has troubles of its own, with a stock price of 2 cents per share and potential class actions against it. Those suits contend Mutual Risk made false statements in 2000 and 2001, overstating revenue and net income. That allegedly helped pump its stock price to an all-time high of $23.75.