Okla. Insurance Commissioner Seeks To Prevent ‘Looting’ With Receivership Request

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March 31, 2010 Wednesday

INSURANCE INSIGHT

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Okla. insurance commissioner seeks to prevent 'looting' with receivership request

Tim Zawacki

Kim Holland's attorneys referred to Imperial Casualty ownership and management as "scam artists" as they blasted the embattled company's attempts to block an order of receivership and made public a series of damaging e-mail messages.

The fate of Frisco, Texas-based and Oklahoma-domiciled workers' compensation writer Imperial Casualty and Indemnity Co. is scheduled to be determined at an April 9 court hearing, but Oklahoma Insurance Commissioner Kim Holland has made her perspective on the suitability of existing management remaining in charge of any insurance company abundantly clear by way of her words - and theirs.

"Imperial's management is not fit to be engaged in the business of insurance," the attorneys of record for Holland argued in a motion filed in Oklahoma County, Okla., District Court on March 29. When Imperial Casualty challenged Holland's March 18 application for an order of rehabilitation, the Oklahoma commissioner's attorneys responded with the release of a damning series of e-mail messages and a blistering series of allegations that go far beyond her previous charges that certain of the company's executives had engaged in improper transactions, dodged a subpoena, lacked integrity and showed complete and utter disregard for state law.

Many of the insurance receiverships that have transpired during the last 18 months - either for the purposes of rehabilitation or liquidation - have followed companies' inability to maintain sufficient levels of capitalization due to issues surrounding their investment portfolios, prior-year reserve development, reliance on reinsurance and other operational concerns. Some companies tried, but failed, to complete a sale on satisfactory terms. Imperial Casualty's current predicament may be technically tied to the argument that it will be forced to pay the liabilities associated with a loss portfolio transfer and 100% quota share reinsurance contract entered in conjunction with the January 2009 sale of former parent Providence P&C Insurance Co., since renamed Park Avenue Property & Casualty Insurance Co., to Park Avenue Insurance LLC, thus rendering it insolvent. Holland's March 29 argument suggests that that matter was only a small part of the story.

Imperial Casualty has been afforded the opportunity to show cause at the April 9 hearing as to why an order of receivership should not be entered. But the company on March 25 submitted an application to dissolve, vacate or modify the order to show cause, arguing that it is not insolvent and the court lacked authority to issue an injunction. Imperial Casualty reported policyholders' surplus of $12.3 million as of Dec. 31, 2009; its total adjusted capital amounted to 5,524.6% of its authorized control level risk-based capital at that date. The company also filed a motion for expedited discovery to allow it to understand the basis for Holland's allegations.

Holland responded to the motion for expedited discovery by pointing out that the onus in the April 9 proceedings under the Oklahoma Uniform Insurers Liquidation Act falls upon Imperial Casualty to demonstrate why her application should be denied. Her representatives devoted what would appear to represent a sense of indignation to a 30-page response to Imperial Casualty's application to dissolve, vacate or modify.

"There are a few simple truths that mandate the continuance of the injunction against Imperial," Holland's attorneys concluded in that response. "Imperial is insolvent - without question. Imperial is owned and managed by scam artists who use the company to steal money from its policyholders and others. Fraud is the norm - the ordinary course of business."

Holland's attorneys noted that Imperial Casualty's application had been supported by an affidavit of company Chairman and President Derek Lancaster. They advised the court to disregard anything he said, given his alleged five-year track record of "fleecing" the insurer by way of a "bogus" management services agreement that allegedly resulted in payment of $8.6 million in fees for work that a company established by Lancaster and his father, Jerry, allegedly did not perform.

Holland's attorneys further accused Derek and Jerry Lancaster and other Imperial Casualty principals of "looting" the company by way of the January 2009 sale of the former Providence P&C. Imperial Casualty's most recent annual statutory statement reports that the company is 100% owned by Providence Holdings Inc. The company, in turn, is 75% owned by Falcon Holdings LLC, which is 61% owned by Jerry Lancaster, 13% owned by Aaron Lancaster, 13% owned by Daron Lancaster and 13% owned by Jan Schindler. Derek Lancaster is 25% owner of Providence Holdings. According to Holland's response, Providence Holdings made distributions following completion of the January 2009 transactions of $9.2 million to Jerry Lancaster, $5 million to Derek Lancaster, and just less than $2 million apiece to the three 13% owners.

Holland's attorneys attached several e-mails involving the company principals, which they said demonstrates their allegedly dishonest conduct. One discussion, according to the interpretation provided, has Derek Lancaster and other company executives joking about the falsification of Imperial Casualty's financial statements and how they might go about selling their secrets to American International Group Inc. Another has Vice President, Secretary and General Counsel Robert Thomas telling Derek Lancaster that "[expletive deleted] the company ... is really in my best interest and all I do all day." The response provided by Holland's attorneys indicated their expectation that Imperial Casualty will claim the e-mails are protected by attorney-client privilege, but they rejected that argument given their belief that Thomas is in-house counsel and was not rendering legal advice.

Oklahoma County District Court Judge Noma Gurich on March 30 denied both Imperial Casualty's application and motion, clearing the way for the April 9 hearing. The better question now may not be whether Holland's application for receivership will be approved, but whether the commissioner's escalating series of allegations lead to any additional charges against the company principals.

A spokesman for Holland told SNL that the investigation remains ongoing, and the department is proceeding for the time being in the same manner it would with any other receivership.

April 6, 2010