AIG Comments on California Appeals Court Ruling

July 20, 2001

A California Court of Appeal has ruled that a suit against CIGNA Corp. and its former subsidiary, Insurance Company of North America (INA) — charging both companies with illegal conduct and fraud — could proceed to trial. The complaint alleges that both companies acted improperly when they transferred INA insurance obligations to another CIGNA subsidiary without the permission of INA’s California policyholders.

The court concluded that any transfer of obligations undertaken by an insurer to its policyholders can not be accomplished without the consent of the policyholders. The court also found that CIGNA and INA attempted to mislead policyholders when it notified them of the corporate restructuring and the creation of another CIGNA subsidiary, Century Indemnity Company (CIC), to handle claims arising from the unprofitable INA policies. Many of the transferred insurance policies cover injuries from pollution and asbestos exposure.

According to Ernest Patrikis, senior vice president and general counsel of American International Group, Inc. (AIG), whose subsidiaries brought the action, the court’s decision represents a significant victory for California consumers and the integrity of the insurance marketplace. He emphasized that an insurance company cannot transfer its contractual obligations to another company without the approval of its policyholders-a fundamental element of the relationship between an insurer and its customers.

According to the appellate Appeals Court decision, even when Pennsylvania and California regulators approved the transfer of insurance obligations from one company to another, California law would not permit the insurer that sold the policy to escape liability in the absence of policyholder approval.

The ruling overturns a lower court decision, which had dismissed the case. The AIG subsidiaries filed suit in California Superior Court in December 1999, asking the court to hold INA responsible for the insurance obligations it transferred to CIC. Northwestern Pacific Indemnity Company, an indirect subsidiary of The Chubb Corporation, later joined as co-plaintiff. The suit sought no damages nor did it allege harm to the plaintiffs or their customers. The action was filed to protect California consumers who bought policies and those who may have claims against policies issued by INA, which at the time was a subsidiary of CIGNA.

INA policies were transferred to CIC in an attempt to absolve INA of responsibility for paying claims under those policies and to gain a higher credit rating for INA. CIGNA selected the policies it wanted INA to keep and those it wanted to transfer. CIC, which sells no policies, was given a finite pool of assets by CIGNA to pay the INA claims.

Under California law, an obligation cannot be transferred without the consent of the party entitled to its benefit – the policyholder. California policyholders were not asked for their consent for the transfer of their policies. They were informed of the change after the fact, but neither the nature of the restructuring nor its purposes were explained. A form letter, signed by CIGNA’s property and casualty division president, also failed to explain that policyholders may not be covered by the California Insurance Guarantee Association.

The decision means the case must now be heard by the trial court. The corrective action requested by the AIG subsidiaries includes a statement by INA to its California policyholders acknowledging INA’s liability under the policies it sold and the publication of notices to that effect in newspapers, the Internet and other media. CIGNA and INA are also asked to take steps to ensure that INA’s and Century Indemnity’s policyholders are protected by the California Insurance Guarantee Association.

Cahill Gordon & Reindel of New York and Barger & Wolen LLP of San Francisco represent the plaintiffs.

Topics California Legislation Policyholder AIG

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