After four years of litigation, and on the eve of trial, four companies in the ACE insurance group have reportedly agreed to pay $14 million to settle a national class action brought by a company in Lancaster County, Pennsylvania to recover unpaid “dividends” on workers’ compensation policies.
The case was brought by Highland Tank and Manufacturing Company, which is based in Manheim, Pa., for itself and as class representative for about 900 other companies that bought the same type of policy. The settlement was announced by Charles Frey, Jr., vice-president and general manager of Highland Tank, and by the attorneys for Highland Tank.
The insurance companies that have agreed to pay the settlement are Bankers Standard Insurance Company, Pacific Employers Insurance Company, ACE P&C (formerly CIGNA P&C, Inc.) and ACE American Insurance Co. (formerly CIGNA Insurance Company).
All four of the defendant companies are wholly owned subsidiaries of ACE INA Holdings Inc., which is in turn owned by ACE Ltd., a Cayman Islands company based in Bermuda but traded on the New York Stock Exchange.
“We have been discussing a possible settlement for some time. The terms of this settlement and its amount are within our expectations,” said John W. Herbkersman, senior vice president for communications with ACE INA Holdings Inc.
“The settlement amount is not material,” he added.
The settlement amount represents what is estimated to be 100 percent of the unpaid policy “dividends” that were sought in the case.
The workers’ comp policies in question were sold between 1997 and
1999, and reportedly offered the potential for a partial return of a pre-paid premium, based on the policyholders’ losses during the policy year. The partial return was called a “dividend.”
Documents prepared by the insurance companies for policyholders and brokers before the policies were bought reportedly said that “dividends” under the policies would be based on a specific formula, in which the policyholders’ losses were a key component. The lower the losses, the higher the “dividend.”
The policies were reportedly sold while the defendant companies were owned by CIGNA, and were assigned by CIGNA to its “CIS” (Commercial Insurance Services) division, which CIGNA used for its small to medium-sized customers.
In July 1999, CIGNA sold all of its property and casualty business to ACE, Ltd. for $3.5 billion, and the CIS business went to ACE as part of that transaction.
Soon after this acquisition, ACE reportedly decided that the CIS business was not a strategic fit with its plans, and sold the renewal rights on that business to Employers Insurance of Wausau.
ACE then reportedly put the “dividends” of the CIS policies “on hold” in the last quarter of 1999, and in March 2000 made that “hold” permanent, deciding that no further “dividends” would be paid on those policies.
ACE was reported to have based its decision on the overall unprofitability of the CIS business, without regard for the individual loss record of any customer or the “dividend” to which that customer would have been entitled under the formula presented in the pre-sale documents.
The dividends that were not paid on the CIS policies ran from the last
quarter of 1999 through the first quarter of 2002. ACE estimated these to total about $14 million, roughly the same amount that the settling ACE companies have now agreed to pay.
Highland Tank bought its policies through Murray Insurance Associates, an insurance agency also based in Lancaster.
Highland Tank filed its case in October 2000 in the Court of Common Pleas of Lancaster County, Pa., alleging breach of contract, bad faith and other claims.
The case was the first national class action to be certified in Lancaster
County, and only the second national class action to be certified in a
Pennsylvania state court for a claim under the Pennsylvania insurance bad faith law that went into effect in July 1990.
The settlement in Highland Tank’s case affects about 900 policyholders and about 1100 policies.
Written notices to all policyholders advising them of the settlement and its provisions are expected to be sent out within the next 30 days. Payments under the settlement are hoped for by the end of the year.
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