Hartford Sues Arch Over Hiring of New York Employees (Update2)

By Andrew Frye and Michael J. Moore
Bloomberg News
July 2, 2009

July 2 (Bloomberg) -- Hartford Financial Services Group Inc. sued rival Arch Capital Group Ltd. and three former employees, saying they used trade secrets in an effort to "destroy" a subsidiary of the Connecticut-based insurer.

Hartford said in the lawsuit, filed today in New York state Supreme Court, that Arch "conducted an unlawful corporate 'raid'" by hiring more than 60 managers, underwriters and employees from a unit that insures financial obligations and corporate boards. Hartford Financial Products, the New York- based subsidiary, employs about 250 people.

Hartford is guarding against employee and client defections after three consecutive quarterly losses depleted capital and a $3.4 billion U.S. bailout raised the prospect of government- imposed compensation curbs. Arch and a unit of Berkshire Hathaway Inc. settled a suit last year stemming from allegations that Arch stole trade secrets.

Hartford said in its complaint that Arch conspired with David McElroy, who left his job as president of the Hartford unit on June 5, to gain trade secrets and client information. McElroy, who is also named in the lawsuit, cooperated with Arch's efforts to hire Hartford underwriters through "threats, bullying and repeated disparagement" of the insurer, according to the complaint.

John Richardson, an Arch deputy general counsel, declined to comment.

Arch's Announcement

Arch announced on June 8 the creation of a U.S. financial and professional liability group with McElroy as president. A week later, the Bermuda-based insurer hired a former vice president of Hartford Financial Products, John Rafferty, to lead a division reporting to McElroy.

Rafferty and Michael Price, who was also a vice president of Hartford Financial Products, were also named in the complaint. Messages left for McElroy, Price and Rafferty weren't immediately returned.

Hartford is scaling back in Japan and concentrating on the U.S. as it recovers from what outgoing Chief Executive Officer Ramani Ayer calls the toughest year in the company's two centuries. In the last 12 months, Ayer cut jobs and slashed the dividend. Hartford, based in the city of the same name, lost $2.7 billion in 2008.

Hartford dropped 78 cents, or 6.5 percent, to $11.19 at 4:21 p. m. in New York Stock Exchange composite trading. Arch fell $1.70 to $58.16 on the Nasdaq Stock Market.

Hartford's Financial Products unit "continues to write new business and service its existing business," David Snowden, a spokesman for Hartford, said in a statement. "We have a deep bench of talented and dedicated employees."

'Jump Ship'

McElroy originally joined Hartford when the firm purchased what became the financial products unit from Reliance Group Holdings in 2000. According to the complaint, McElroy met with Arch starting in March to discuss leaving the company.

The week after McElroy joined Arch, according to the complaint, Arch employees began sending e-mails and text messages to Hartford FP workers, telling them to "jump" from the "sinking ship" and claiming that if they didn't join Arch, they would "never work in this industry again." The lawsuit states that Arch extended offers to numerous Hartford employees from top management to underwriting trainees.

"The only purpose of this aggressive solicitation, given Arch's lack of a need for these services, was to attempt to cause harm and disruption," Hartford said in the complaint.

The case is Hartford Financial Services Group Inc. vs. Arch Capital Group Ltd., 09/602062, Supreme Court of the State of New York, County of New York.

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