Oregon Pension Funds Sue Hartford, Travelers, Etal. Over Fraud, Criminal Bad-Faith, Breach of Contract, Misrepresentation, Negligence and Deceptive Contract Change|
By Daniel Hays
National Underwriter News
March 22, 2005
NU Online News Service, March 22, 2005 -- Three Oregon pension funds are suing their insurers and brokers for nearly $4 million, charging they were misled for years to buy employee crime insurance that the carriers wouldn't honor when a major claim arose.
The suit--which alleges fraud, bad faith, breach of contract, misrepresentation, negligence and deceptive contract change by the carriers and brokers--could have a major effect on the pension fund criminal bond market, according to Mike Farnell, a Portland, Ore. attorney representing the funds.
Named as defendants are: Travelers Casualty and Surety Company of America, Fidelity and Deposit Company of Maryland,; Hartford Fire Insurance Company, Marsh Advantage America and Willis of Oregon Inc.
The plaintiffs are the Employers-Shopmens Local 516, Coral Construction Company Restated Employee Profit Sharing Plan & Trust, Western States Health and Welfare Trust Fund of the OPEIU. They seek $3.6 million plus 9 percent interest and attorney fees.
According to the funds, when they were stung by two financial consultants, the insurers said the thefts were not covered under the definition of covered employees.
In addition to the funds that are suing, hundreds of other organizations were hurt with the collapse of a $450 million Ponzi scheme operated by Jeffrey Grayson and his son Barclay--the two principals of Portland, Ore.-based Capital Consultants, LLC, also known as CCL.
In addition to union pension funds, CCL--which is now in receivership--managed the investments of, employer benefit plans, foundations and wealthy individuals.
The elder Grayson served as CCL chairman, with his son as president. Both were hit with federal charges for their activities, which lost their clients millions through failed and fraudulent investments.
The senior Mr. Grayson was indicted on 22 counts, charging conspiracy, mail fraud, money laundering, witness tampering and making illegal payoffs to an ex-union official to have investments steered his way. He was incapacitated by a stroke before his case could be concluded. His son served an 18-month prison term.
The pension fund lawsuit sparked by the Grayson case was filed Feb. 24 in Portland's Oregon Circuit Court Multnomah County.
The funds, which include office and construction workers, said in their complaint they sought crime insurance that would meet the requirements of Section 412 of the Employee Retirement Income Security Act.
The pension groups alleged that the three carriers--despite requests for ERISA-compliant bonding--“misrepresented” the coverage provided, and never told the funds when they issued the policies or renewed them that the coverage “were purportedly intended to provide only partial compliance with ERISA.”
According to legal papers filed by The Hartford, since the Graysons were paid a fee for services rendered, they didn't qualify as employees.
The policies define employees as those compensated “directly by salary, wages or commissions” whom the policyholder has “the right to direct and control,” but does not cover any “agent, broker factor, commission, merchant cosignee and independent contractor or representative ….or director or trustee...”
According to the funds' complaint, the “Welfare Pension Plan ERISA Compliance” title of the policy does not make the exclusion clear, while the exclusion of all agents “renders the purchased coverage illusory.”
Had they known when they were buying insurance that the carriers “would now claim that the policies do not provide full compliance with ERISA…[they] would have purchased different or additional coverage,” the suit states.
Mr. Farnell said that depending on the outcome of the suit, “it's either going to change the way pension plans buy ERISA bonds or it's going to change the way industry issues ERISA bonds, or both.”
Eight days before the suit was filed, Hartford went into federal court in Portland seeking a declaratory judgment that the claim by the Western States fund is not covered by the bond.
The insurer said it brought the case in federal court because the parties were located in different jurisdictions and had “diversity of citizenship.”
Yesterday the funds responded in part that the Hartford's filing was an abuse of the federal declaratory judgment act, with a preemptive filing for the purpose of forum shopping.
None of the defendant firms in the case responded to requests for comment.