The Law

Legal Spotlight

A look at the latest decisions affecting the industry.
By: | August 4, 2014 • 6 min read

Insurer Must Pay $2 Million Claim

On a normal day, Armored Money Services (AMS) would pick up about $2 million from various New York agent locations for the Omnex Group Inc., a provider of money transfer services.

That money would then be held in a secure vault and deposited within a few days into a bank account in Omnex’s name.

But on Feb. 8, 2010, Robert Egan, president of AMS, was arrested by the FBI and charged with bank fraud. The contents of the vault — about $19 million — were seized by the federal government and later put in the care of a trustee.

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It ultimately was discovered that the company owed more than $68 million to its customers on top of the $2 million owed to Omnex. Egan and the COO of the company, Bernard McGarry — both of whom eventually pleaded guilty and were imprisoned — admitted to “playing the float, i.e., using the continual influx of cash to cover the operating expenses of AMS and the affiliated company, repay prior obligations to other customers, and make officer loans,” according to a New York appeals court.

In May, the appeals court upheld a lower court decision that ruled U.S. Fire Insurance Co. should pay Omnex Group the $2 million it lost that February day, minus a $100,000 deductible as set forth in the company’s commercial crime policy.

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A lower court judge, Ira Gammerman of the New York Supreme Court, had ruled that the policy covered loss of money in the custody of a “messenger” resulting from theft, disappearance or destruction.

“In its opposing papers,” the judge said during a hearing in December 2012, “the insurance company spends a great deal of time in opposition arguing why this is not a theft, but I don’t care whether it’s a theft or not. It’s a disappearance and disappearance is one of the covered events.”

He also ruled that a section in the policy that excluded losses resulting from seizure or destruction of property by governmental action did not apply, saying the seizure by the government “was not the contributing cause of the plaintiff’s loss, rather it was the fraud committed [by AMS] … .”

Summary: U.S. Fire Insurance Co. must pay a wire transfer company $2 million, which disappeared along with $68 million owed by an armored car company.

Takeaway: Although the term “disappearance,” was not defined in the policy, the court ruled that its “plain ordinary meaning” should apply.

Policy Voided Due to Misrepresentation

Namco Financial Exchange Corp. sought a commercial crime policy for
primary and excess coverage from Liberty Mutual, Zurich American Insurance Co., Axis Insurance Co., and Twin City Fire Insurance Co., for the period of Aug. 15, 2007 to Aug. 15, 2008.

In response to a question on the insurance application, Namco said it did not keep proceeds from IRS Section 1031 transactions — which have to do with tax-deferred property gains — separate from its operating funds.  Because of that response, the insurers denied issuance of policies.

Lockton, Namco’s broker, relayed the rejections to the company and informed Namco that “as a condition of coverage, proceeds from 1031 transactions are to be held in bank accounts segregated from those of your operating funds … .” The broker instructed Namco to “confirm that this is done,” before returning an updated insurance application.

Namco followed those instructions as to the application, but the company’s procedures never changed, according to the U.S. District Court for the Central District of California, which dismissed a lawsuit against the insurers.

The lawsuit was filed by Heidi Kurtz, who was appointed trustee of the company after it went into Chapter 7 bankruptcy in 2009. Kurtz submitted insurance claims contending that Namco had misappropriated in excess of $35 million. When the claims were denied, she filed suit.

The federal court rejected her arguments that the insurance policy (not the application) did not require the funds be segregated; that the insurers needed to prove the misrepresentation on the application was intentional; that the insurers should have investigated the company after it changed its answer to that one question; and that the insurers did not promptly respond to the claim request.

“In this case,” wrote Judge Dolly M. Gee, “there is uncontroverted testimony from each insurer that it would not have issued the policy if [Namco] had answered the question differently.” She granted the insurers a summary judgment in the lawsuit in April.

Summary: Four insurance companies need not pay claims in excess of $35 million to the trustee of a bankrupt company.

Takeaway: Even if a company’s procedures are arguably in compliance with an insurance policy’s requirements, a material misrepresentation in applying for that policy will void coverage.

Contractor Ordered to Repay Insurer

Thomas VanDuinen, who operated Northern Building Co., was selected in 2008 to perform work at Midway International Airport in Chicago under the supervision of Parsons Infrastructure & Technology Group Inc., which served as project manager.

Hanover Insurance Co. issued a surety bond on Northern’s behalf.

Hanover became involved in the project in 2009 when two subcontractors complained that Northern failed to pay them a total of $205,950, halting the project.

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Hanover demanded collateral and indemnification from Northern under its agreement, a demand which was refused by the general contractor.

In March 2011, Hanover filed suit against Northern and VanDuinen to force compliance. The insurer sought $127,086 of contract funds, which it was eventually paid although it had been held for a time by the Federal Aviation Administration (FAA) when the work was stopped.

Hanover also sought payment for attorneys’ fees and costs incurred in resolving the performance and payment claims against the bond. Those fees now total $76,000.

Hanover eventually stepped into Northern’s role as general contractor and arranged for completion of the project.

In September 2012, Hanover paid $127,452 to a trustee for one of the subcontractors, which had filed for bankruptcy. That amount settled both subcontractor claims. Earlier, Hanover agreed to resolve Parson’s bond claim for performance, and $127,086, which had been withheld from Northern by the FAA, was paid to Hanover.

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Northern disputed Hanover’s arguments in the litigation, but a district court in Illinois issued a summary judgment in favor of the insurer. A three-judge panel on the U.S. 7th Circuit Court of Appeals upheld that decision in May.

“Northern has tried to make this into a multi-issue, complex proceeding. But it is actually very simple,” the federal appeals court judges wrote, noting that the agreement was “clear and unambiguous in all relevant aspects. Northern clearly breached it; Hanover did not.”

The court also offered some “closing advice” to Northern to “carefully consider” how long it wanted to continue to “drag his case out. Hanover’s attorney expenses are only going to increase.”

Summary: The court ruled the general contractor must pay the insurer $200,000, which includes $76,000 in attorneys’ fees.

Takeaway: An actual liability for a breach of the bond is not necessary for a surety bond agreement to be triggered. The insurer needs only a claim against the bond to trigger its rights and responsibilities.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]