California Insurance Commissioner Steve Poizner announced that the California Department of Insurance Conservation & Liquidation Office (CLO) has settled four lawsuits that arose from the 2003 failure of Fremont Indemnity Co., a national workers’ compensation insurer that was headquartered in Glendale, Calif. Under these settlements, the Fremont liquidation estate will receive up to $37.3 million from a number of defendants.
Fremont was one of dozens of workers’ compensation insurance companies that failed during the workers’ comp crisis of 1999 to 2003, and was one of the largest California-based workers’ comp insurers, writing more than $800 million in premiums in its final year of full operations. After Fremont was placed into liquidation in 2003, the Commissioner’s CLO conducted an investigation of the company’s operations and management. That investigation eventually resulted in four lawsuits being filed on behalf of the Fremont liquidation estate, the DOI said. The purpose of all of these cases was to recover money for the benefit of policyholders, injured worker claimants, and other creditors of Fremont.
The first two lawsuits were filed in 2004 and were entitled Fremont Indemnity Co. v. Fremont General Corp., et al. (Los Angeles Superior Court Case Nos. BC 316472 and BC 320766). These actions were filed against Fremont’s parent companies, Fremont Compensation Insurance Group (an intermediate holding company) and Fremont General Corp., Fremont’s parent company. The actions arose primarily out of the treatment of Fremont under the parent company’s consolidated federal income tax returns and under certain tax sharing arrangements among the companies.
In 2006, the CLO filed another case, Insurance Commissioner v. Rampino, et al. (Los Angeles Superior Court Case No. BC 357691), alleging that seven former directors and officers of Fremont breached their fiduciary duty to Fremont by engaging in a scheme which violated Fremont’s duties to its reinsurers prior to its insolvency. The scheme involved a practice known as “net line underwriting,” which was intended to benefit Fremont at the expense of its reinsurers, the DOI said. The lawsuit alleged that the scheme resulted in the reinsurers asserting claims for rescission of multiple valuable reinsurance treaties, which ultimately had to be settled at a loss to Fremont.
The fourth and final lawsuit, Insurance Commissioner of the State of California v. Fremont General Corp., et al. (United States Bankruptcy Court for the Central District of California, Case No. Adv. Proc. No. 8:08-ap-01258-ES), was filed in 2008 and arose out of a dispute over the ownership of a corporate fine art collection valued at more than $4 million. This art collection included numerous photographs by famed photographer Ansel Adams, the DOI said.
In addition to its failed insurance company operations, Fremont General was also the owner of a subprime mortgage lender, Fremont Investment & Loan, now known as Fremont Restructuring Corp. The failure of Fremont Investment & Loan in 2008 resulted in Fremont General filing for bankruptcy protection in June 2008. The filing of the bankruptcy case resulted in an automatic statutory “stay” of the lawsuits against Fremont General. The CLO preserved Fremont’s claims against Fremont General by filing several claims in the Fremont General bankruptcy case. The D&O Case was allowed to proceed to trial because the defendants were individuals not directly involved in the Fremont General bankruptcy case, the DOI said.
The CLO’s claims, its participation in the Fremont General bankruptcy proceeding, and the ongoing trial in the D&O Case eventually led to global settlement discussions among all the parties in the cases. These settlement talks were successful, and resulted in two separate settlement agreements.
The first settlement resolved the Tax Cases, the Art Case, and the claims filed by the CLO in the bankruptcy case. The second settlement resolved the D&O Case. Through these settlements, the Commissioner has succeeded in recovering up to $37.3 million for the benefit of the Fremont estate. The benefits received or to be received by Fremont under the Settlements include:
- Immediate cash payment of $5 million from Fremont Restructuring Corp.;
- Immediate receipt of $4.1 million in proceeds from the sale of the Art Collection;
- Control over the equity interest in Fremont Life Insurance Co., valued at approximately $1.2 million;
- Two allowed general creditor claims against the Fremont General bankruptcy estate in the total face amount of $40 million, on which the Fremont liquidation estate is entitled to receive up to, and expects to receive prior to the end of the year, distributions of $27 million.
When the full value of the settlements is realized later this year, the Fremont estate will have up to $37.3 million in additional funds available to pay policyholder claims in its liquidation. In addition to the recovery of these funds, the settlement of the Tax Cases also provides for the preservation of more than $600 million in beneficial tax attributes the benefit of Fremont (NOLs), the DOI said. The preservation of this portfolio of NOLs will assist the Commissioner in protecting Fremont from exposure to federal income tax liabilities for the duration of the liquidation process.
The settlement agreement in the D&O Case also resolved certain collateral matters in which neither the Commissioner nor the Fremont estate were involved. Specifically, the agreement resolves several employment and retirement benefit plan claims against Fremont General by several of the individual D&O defendants. That unrelated settlement between these individuals and Fremont General did not have any negative impact on the amount of recovery received by the Commissioner, nor did it delay the benefits due to Fremont under the settlements, the DOI said. In fact, federal ERISA law shields the assets of retirement benefit plans from being seized as part of an insurance liquidation proceeding, like the Fremont liquidation. Disputes over the retirement plan benefits are strictly between Fremont General (as the plan sponsor) and the individual participants.
Additional information regarding the liquidation of Fremont Indemnity Co. may be found on the CLO’s website, at www.caclo.org.
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