The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | December 1, 2013 • 6 min read

Court Rules Against FDIC in Bank Suit

The U.S. District Court for the Northern District of Georgia ruled that St. Paul Mercury Insurance Co. need not defend nor indemnify two bank executives of a failed bank.

Charles Miller supervised Trent Fricks, who was involved in loan approvals at the Community Bank & Trust of Cornelia, Ga. (CB&T). When that bank failed, the Federal Deposit Insurance Corp. took over the bank as receiver and sued both men.

The men sought a defense and indemnification from the insurer under the terms of a directors’ and officers’ liability policy. St. Paul agreed to provide the defense under a reservation of rights, and filed a lawsuit in federal court, asserting it had no duty to defend or indemnify.

The FDIC argued otherwise. It said that the D&O policy “insured vs. insured” exclusion that barred coverage, except for a few instances, for any claims “brought or maintained by or on behalf of any insured or company in any capacity” did not apply.


Such an exclusion, it argued, was to “prevent collusive suits,” and such was not the case for the FDIC as the receiver for failed banks.

The court disagreed.

“If CB&T had sued Miller and Fricks, the exclusion would have applied to absolve Plaintiff [the insurer] from a duty to provide coverage to Miller and Fricks. As such, the exclusion applies equally to the FDIC,” according to the Aug. 19, 2013 opinion.

Scorecard: Indemnification could have cost millions in fines, and defending such a case could take years and an outlay of substantial sums.

Takeaway: Whether other courts will follow in this reasoning, the decision is good news for insurers who have been on the hook for many failed banks following the financial crisis.

Insurer Wins Right to Void Policy

Catlin, a part of the Lloyd’s syndicate, was able to legally void its insurance policy with San Juan Towing & Marine Services (SJT) because the company over-valued and misrepresented the condition of a floating drydock called the Perseverance, according to the U.S. District Court for the District of Puerto Rico.

R12-13p16_LegalSpotlight.indd“This ruling upholds the notion that regardless of whether it is the result of an honest mistake, carelessness, negligence or fraud, failure to inform underwriters about the true value or the condition of an insured property justifies an insurer’s decision to rescind a policy and negate coverage,” said James W. Carbin, a partner with Duane Morris, who represented Catlin.

SJT purchased the drydock in 2006 for $1.05 million, and began its attempt to sell it for $1.35 million in February 2010.

The price was later dropped to $800,000. SJT agreed to sell it for $700,000, but it sank before the sale was consummated. At the time, the drydock was insured for $1.75 million, under a policy finalized while the drydock was offered for sale at $800,000.

Neither the broker nor Catlin ever asked about the condition or selling price of the drydock, although both knew it was for sale and was nonoperational at the time. In actuality, the drydock was riddled with cracks, broken bulkheads, holes, barnacles and corrosion, according to court documents.

In accordance with the maritime doctrine of uberrimae fidei, a Latin phrase meaning “utmost good faith,” the court ruled: “When the insured fails to disclose to the insurer all circumstances known to it and unknown to the insurer, which materially affect the risk, the policy is voidable at the option of the innocent party.”


Scorecard: Catlin was not responsible for the any losses resulting from the sinking of the Perseverance drydock, which was valued at about $800,000.

Takeaway: Insureds must fully and candidly disclose to underwriters the risks they seek to insure, as failure to do so may result in the policy being voided.

Insurer Settles ‘Three Cups’ Lawsuit

Philadelphia Indemnity Insurance Co. agreed to pay $1.2 million to a charity that found fame, and later controversy, when its co-founder — Greg Mortenson, the author of Three Cups of Tea — was accused of fabrication and fraud, according to published reports.

Mortenson’s books profiled his initial efforts to build a school in a small village in Northern Pakistan after villagers helped him following a mountain-climbing expedition. He eventually co-founded the Central Asia Institute (CAI), which has as its mission to build schools in Pakistan and Afghanistan to promote peace through literacy and education.

A report by 60 Minutes and an expose by fellow mountain climber Jon Krakauer questioned the truthfulness of Mortenson’s accounts and alleged misappropriation of charitable funds. That led to an investigation — and a $1 million settlement in April 2012 — with the Montana Attorney General’s (AG) office as well as a class-action lawsuit filed by purchasers of his books, which was ultimately dismissed.

122013LegalSpotlightBookAbout six months after being informed of the litigation, Philadelphia Indemnity rejected any responsibility to pay CAI and Mortenson for the costs to hire counsel or defend themselves — with the exception of agreeing to pay 100 percent of the defense costs incurred by CAI in the AG matter, according to a lawsuit filed by CAI against the insurer. CAI and Mortenson ultimately paid about $1.8 million in legal fees, according to published reports.

The insurer, which contended the allegations against Mortenson didn’t fall within the coverage, had proposed allocating payments for percentages of the defense costs of the class-action lawsuit and AG investigation. CAI argued that such an allocation was contrary to Montana law.

Scorecard: Philadelphia Indemnity Insurance Co. agreed to pay $1.2 million to settle legal costs resulting from a lawsuit and investigation into a charity.

Takeaway: The claims against CAI and Mortenson were “inextricably intertwined,” as CAI contended in its litigation, and thus, a claim for coverage against one was inseparable from the other.

Policyholders Protected From Gaps

Farmers Mutual Fire Insurance Co. filed suit against the N.J. Property-Liability Insurance Guaranty Association to require the Association to pay the environmental clean-up costs that should have been paid by an insolvent insurer, Newark Insurance Co.

Until 2002, two residential properties were covered under a $300,000 homeowner’s policy issued by Newark. After Newark became insolvent, Farmers insured the two properties for a maximum limit of $500,000. Soon after, it was discovered that the two properties were affected by soil and groundwater contamination by a fuel oil leak from an underground tank.


Farmers paid all remediation costs, $112,165 to one family and $25, 958 to another, although there was no dispute that the contamination began when the properties were insured by Newark. Farmers sought reimbursement of a share of the costs from the Guaranty Association, which takes over claims of insolvent insurers. A lower court approved the reimbursement, after which Farmers and the Association agreed, pending appeal, that the Association would pay 81 percent of the costs for one property and 84 percent on the other, while Farmers would pay the remainder.

The appeals court reversed the lower-court decision.

“According to the panel, only after a solvent insurer on the risk has exhausted its policy limits to cover the liability is the Guaranty Association ‘required to disburse statutory benefits to protect the insured,’ ” according to the state Supreme Court decision upholding the appeals court’s ruling.

The Guaranty Association is designed “to protect insureds not insurers,” according to the court.

Scorecard: Farmers Mutual was responsible for the entire remediation cost of $138,123.

Takeaway: Insurers in New Jersey will not be able to depend on the state’s insolvency association for reimbursement of claim payouts.

The late Anne Freedman is former managing editor of Risk & Insurance. Comments or questions about this article can be addressed to [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.


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.


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?


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.


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 and 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.


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]