The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | October 15, 2013 • 6 min read

Age Dispute Leads to Insurance Lawsuit

The Washington National Baseball Club filed suit against Westchester Fire Insurance Co., after the insurer denied a $1 million claim under its commercial crime insurance coverage.g of a 16-year-old Dominican Republic native to a minor league contract, for a $1.4 million signing bonus and a modest salary, according to the lawsuit. In actuality, Esmailyn Gonzalez was 20 years old, his real name was Carlos Alvarez Lugo, and he “kicked back $300,000 of his bonus” to Jose Rijo, at the time a special assistant to the National’s general manager, according to the lawsuit.

10152013LegalSpotlightBaseball“The revelation of Lugo’s true age immensely lessened the significance of Lugo’s baseball skill set,” it stated. “The $1.4 million signing bonus thus represented a complete loss resulting from the employee dishonesty, theft and fraud of Rijo, Baez [the National’s director of Dominican Republic Operations] and Lugo.”

The Nationals reported the incident to Westchester and submitted “an extensive and detailed proof of loss package to the ACE Group,” the insurer’s parent company. After three months, the Nationals were told the investigation was ongoing. Two years after the initial proof of loss was submitted, the claim was denied.

The baseball team noted that Chartis, the National’s excess loss insurer, paid its claim in excess of the Westchester policy liability limit “on precisely the same facts.”

The lawsuit charges Westchester with breach of contract and breach of duty of good faith. A hearing is scheduled, as of press time, in the Superior Court of the District of Columbia on Oct. 18.

Scorecard: The Washington Nationals are seeking $1 million after a baseball player lied about his age.

Takeaway: The timeliness of response to a claim may make a big difference in the ultimate disposition of a case when it reaches the courtroom.

Litigation Addresses Time Issue in Refusing Indemnification

Though it was years after an insurer began providing a defense to an insured, the company may still be able to disclaim coverage, according to a ruling by the New York Supreme Court Appellate Division.

The court remanded the case to a lower court to decide if Arch Insurance Co. should be required to indemnify H&H Builders Inc. and 206-208 Main Street Associates Inc. for about $9 million in property damage resulting from the collapse of a building and damage to others in Queens, N.Y.

Advertisement




H&H Builders was construction manager on a 2007 Main Street Associates project to construct a three-story office and retail building, with an underground parking garage. During excavation, the adjacent building collapsed and other buildings sustained damage.

The commercial general insurance policy excluded damage claims “arising out of subsidence, falling away, caving in or other movement of earth.” Arch agreed to provide a defense to litigation that started in October 2007. In January 2010, the insurer informed the insured that it reserved its right to disclaim coverage based on the earth movement exclusion. The court ruled H&H and Main Street Associates were unable to “demonstrate that they were prejudiced” by that delayed decision, and that the decision should be “left to the trier of fact.”

Scorecard: The insurer may not be responsible for about $9 million in claims resulting from the collapse of one building and damage to others.

Takeaway: The potential prejudice resulting from a delayed decision of indemnification is more important than the timing of that decision.

Decision to Reject Independent Counsel Upheld

A California appeals court upheld a lower court ruling that a group of insurers had no responsibility to pay for independent legal representation in a case involving soil and groundwater contamination in the City of Modesto.

Of the six insurers, only Great American Insurance Co. agreed to provide independent counsel to MBL Inc., a supplier of dry cleaning products including perchloroethylene (PCE). MBL, which was named in a number of lawsuits related to the creation of a hazardous waste site, refused to accept counsel retained by the insurers, arguing a conflict of interest.

MBL argued the insurance companies had a conflict of interest because they had offered general reservations of their right to decline coverage due to various exclusions.

In a related action, Great American also sought contributions from the other insurers to pay for the independent counsel. Great American ultimately paid $66,500 to MBL’s independent counsel in this action. With the exception of Great American, the other insurers filed a legal complaint arguing they were not obligated to provide independent counsel and had no duty to defend MBL “because MBL’s refusal to accept appointed defense counsel breached its contractual duty.”

In the Aug. 26 ruling in the Sixth Appellate District of the Court of Appeal of the State of California, Associate Justice Eugene Premo wrote that a conflict of interest would mean that the appointed counsel would have to “choose which master to serve.” In this case, the actions of counsel could not control the outcome of coverage issues as they were based on contractual issues; could not control government demands to monitor and clean up pollution; and could not control the facts as to when certain damage occurred, he wrote.

The opinion also rejected MBL’s argument that the insurers had conflicts of interest because they represented other parties in some of the actions. Since MBL was not entitled to independent counsel, Great American was not entitled to contributions from the other insurers.

Scorecard: Great American Insurance Co. will not receive contributions from other insurers for the $66,500 it paid to retain independent counsel for an insured.

Takeaway: Insurers are not required to provide independent counsel unless there is an actual, not just a theoretical, conflict of interest.

Insurer Remains on the Hook for Lifetime Benefits

The Supreme Court of Texas rejected a petition from Liberty Mutual Insurance Co. to revisit the lifetime workers’ compensation benefits paid to a claimant.

Advertisement




The insurer asked the court “to re-open determinations for eligibility for permanent lifetime income benefits — a procedure the Legislature deliberately removed in 1989. The Legislature’s choice is clear, and it is not our province to override that determination,” ruled the majority six-judge opinion of the court.

A dissenting three-judge opinion disagreed: “While the Court’s rationale makes sense for anatomical losses, it defies reason for functional losses. Advances in medicine and science offer previously unforeseen therapies and treatments that enable some persons who once seemed permanently injured to regain bandaged footfunctionality.”

The case involved Ricky Adcock, who suffered an injury to his right ankle, underwent reconstructive surgery and lost the use of his hand and foot due to complications. In 2008, Liberty sought a reassessment when it learned that Adcock was able to walk and handle objects, indicating he no longer had total and permanent functional loss of his ankle and hand.

The lower court ruled the Texas Workers’ Compensation Act is written to require lifetime income benefits to be “paid until the death of the employee.” The act permits temporary benefits and supplemental income benefits to be reopened for benefits determinations. The Texas Department of Insurance asked the court to rule in favor of Liberty, but the state high court upheld the lower court ruling.

“When the Legislature expresses its intent regarding a subject in one setting, but, as here, remains silent on that subject in another, we generally abide by the rule that such silence is intentional,” according to the majority opinion.

Scorecard: The insurance company remains responsible to pay the claimant lifetime disability benefits.

Takeaway: Courts are generally constrained by the written law, regardless of whether medical advances have made the law out of date.

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.

Advertisement




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.

Advertisement




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?

Advertisement




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.

Advertisement




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.

Advertisement




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]