Beacon Mutual Insurance Co. will pay a $2.5 million fine, refund $7 million to policyholders and continue to implement various management changes as the result of a long-awaited audit by Rhode Island officials of the state’s biggest workers compensation company.
The just-released 312-page market conduct exam report confirms previous reports and allegations of weak controls, favoritism in pricing, questionable golf perks and entertainment expenditures and inappropriate relationships under former Beacon Mutual managers and directors.
The examination was begun in September 2005 by the Department of Business Regulation, before various whistleblower allegations against the company became public in 2006, and was intensified after an internal report raised questions about management.
The company has since replaced its chief executive officer Joseph Solomon and named a new chief operating officer. Gov. Donald Carcieri has named several new members to the board of directors.
In Beacon Mutual’s response to the DBR report, current CEO James Rosati promised the company would work with DBR to implement the recommendations. He maintained that Beacon has already taken “significant steps” to change with its own 75-point improvement plan, and has already put in place 24 of the report’s 79 recommendations.
He also reported that the controversy has already cost the company more than $7.5 million in direct expenses to pay for its own audits and improvements.
The DBR said its examination “disclosed a corporate culture at Beacon that developed over a number of years and culminated in weak management and controls; inappropriate producer, agency and vendor relationships; favoritism and bias in pricing; inappropriate and lavish spending as well as a disregard for the regulatory process and Beacon’s corporate mission and purpose.”
The report, signed by Sharon K. Gordon, CPA, CFE, chief insurance examiner, and Elizabeth Kelleher Dwyer, legal counsel, offered a summary of its findings:
• Certain employees related to board members and other favored employers were granted significant and unsupported discounts, leading to lower-priced workers compensation insurance compared to similarly situated insureds.
• Charitable contributions were made to institutions — a hospital and a library in two instances — related to board members and senior management with little or no evidence supporting the efficacy of the contribution.
• Commissions were paid to select agents despite the fact that they did not meet required minimum loss ratio performance thresholds.
• Management, favored agents and select insureds enjoyed golf trips and other perks constituting unsuitable expenditures for a “non profit independent public corporation” serving as a the market of last resort to Rhode Island employers.
More specifically, in its review of Beacon’s pricing practices, the auditors found that the insurer “systematically violated” state law requiring it to follow approved forms and rates. These violations included failing to adopt NCCI loss costs, utilizing unapproved safety groups, employing incorrect experience modification factors, misclassifying payroll exposure and failing to file net of commissions pricing.
On at least two occasions, according to the audit, Beacon offered coverage through its out-of-state fronting arrangements to out-of-state payroll exposure to employers with no connection to a Rhode Island employer.
The auditors say they found 13 instances where accounts on a VIP list received preferential pricing.
There were “numerous” instances where accounts showed very large credits on the Rhode Island portion in order to offset higher out-of-state policy prices.
Over a period of three years (2002 to 2005), the insurer failed to obtain the state’s consent for its pricing as required on more than 2,800 policies, according to the report.
Much of the criticism of expenditures centers on former CEO Solomon.
From 2003 to 2005, the report alleges that the company spent $1.1 million on golf-related events, attire and travel for Solomon, former CEO, and David Clark, former underwriting chief. These included memberships in Massachusetts and Rhode Island golf clubs to entertain select agents and clients; $34,000 for a golf trip to Scotland; close to $70,000 for other trips to Florida, California and others states. At least $20,000 was paid to support the PGA career of one agent’s son, the report says.
Clark has pleaded not guilty to state charges of conspiracy and insurance fraud related to some of the allegations contained in the report.
In addition to his salary, former CEO Solomon enjoyed a leased corporate car, at a cost to the company of $50,000. At one point, Solomon authorized Beacon to buy the leased Lexus and then sell it to him, at a price $11,363 less than Beacon paid for it, the report claims.
Solomon also is reported to have paid $340,00 for use of a luxury box and game tickets at Gillette Stadium in Foxboro, Mass., home of the New England Patriots football team.
Beacon paid $2.5 million in unearned agency commissions that it was not obligated to pay because the agents did not meet the loss ratio terms of their contracts. The report says that many of the same agents that were paid the unearned commissions were ones with clients who received favorable pricing.
While promising to implement its recommendations, Beacon Mutual took exception to some of the language and comments in the report that it said were more speculative than factual.
For example, the report infers that Beacon’s market share increased due to improper pricing practices and opposition to competition. But Beacon says these inferences do not appropriately consider other factors behind growth. Ten of 22 state funds had similar growth between 1995 and 2005, Beacon notes.
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