Court Tosses Pennsylvania Regulator’s Suit Against Kingsway

A Pennsylvania court has dismissed a lawsuit filed by Pennsylvania insurance regulators that alleged Toronto-based Kingsway Financial illegally jettisoned its ownership in Lincoln General Insurance Co. to a group of 20 charities.

The suit, filed in November, alleged the company essentially paid off the charities to each take a portion of the ownership of Walshire Assurance Co., a subsidiary that owned Lincoln General Insurance Co. In connection with its divestiture, Kingsway had agreed to pay $20,000 to each of the charities — which included groups that work on cancer research, feeding the homeless and helping the blind — in exchange for their taking a 5 percent stake in Lincoln General.

Kingsway acquired Lincoln General in 1998, but the insurer has been in financial distress since 2005. Last May, Kingsway agreed to a run off of Lincoln General, but completed the divestiture before the run off was finished.

Pennsylvania insurance commissioner Joel Ario sued Kingsway, alleging that the transaction was illegal. The commissioner wanted the court to reverse the transaction. The department’s lawyers argued that Kingsway needed state approval to sell the company and that the charities needed approval to acquire the company.

The court, however, disagreed, ruling that, since Kingsway was not a domestic insurer, it did not require approval by the department to sell Lincoln General. It also ruled that, since the charities were not acquiring a controlling interest in Lincoln General, they did not need the department’s approval to do so.

In a statement announcing the legal victory, Kingsway said it “has met and will continue to meet all of its regulatory and contractual obligations in respect of Lincoln.”

A judge in the case, while concurring that Kingsway was legally correct in its actions, said that the case highlighted an “improper” use of charitable donations and said the actions of Kingsway essentially amounted to a bribe of the charities.

Court documents reveal that Kingsway had orchestrated a scheme in which it targeted 20 charities in the New York City area — notably, outside the legal reach of Pennsylvania authorities — to accept a donation without any notice. Kingsway executives made it clear to the charities that the donation of $20,000 would only be given if the accompanying 226,0000 shares of Lincoln General came with it.

Company executives even required an officer of each of the charities to pose for a photograph with the stock grant, in an apparent attempt to concretely establish the stock had been accepted by the charity.

In his opinion on the case, Judge Dan Pellegrini write that “the end result of the scheme is that Kingsway has no obligation to cover Lincoln’s debts to its insureds, potentially costing taxpayers of Pennsylvania who bear the ultimate cost of Lincoln’s failure to meet is obligations. While its scheme may not have violated the insurance laws of Pennsylvania, it is well within the powers of the Attorney General of Pennsylvania and the Attorney General of New York to investigate whether Kingsway’s use of charitable corporations was improper or any fraud occurred.”