1
2
IN THE STARK COUNTY COURT OF COMMON PLEAS
3
STARK COUNTY, OHIO
4 ----------------------------------------------
x
5 DAVID E. JAY,
6
Plaintiff,
Index No.
7
-against-
2004-CV-00843
8 CENTRE LIFE
INSURANCE COMPANY, et al.,
9
Defendants.
10
---------------------------------------------- x
11
12 DEPOSITION of the
Defendant, CENTRE LIFE
13 INSURANCE COMPANY, by RICHARD
GRILLI, taken by the
14 Plaintiff pursuant to
Notice, held at the offices
15 of Barrister
Reporting Service, Inc., 120
16 Broadway, New York,
New York, on November 3, 2005,
17 at 10:15 a.m., before
a Notary Public of the State
18 of New York.
19
20
21
22
*********************************************
23
BARRISTER REPORTING SERVICE, INC.
120 Broadway
24
New York, New York 10271
212-732-8066
25
2
1
2 A P P E A R A N
C E S:
3
GRAYDON HEAD & RITCHEY, LLP
Attorneys for Plaintiffs
4
1900 Fifth Third Center
511 Walnut Street
5
Cincinnati, Ohio 45202
6
BY: MICHAEL ROBERTS, ESQ.
7
8
9
WOOD LAMPING, LLP
Attorneys for Defendants
10
600 Vine Street
Cincinnati, Ohio 45802
11
BY: WILLIAM R. ELLIS, ESQ.
12
13
14 ALSO PRESENT:
15
ANDREW J. COHEN, ESQ.
Disability Management Services
16
1350 Main Street
Springfield, Massachusetts 01103
17
18
J.D. MARTINEZ
19
Videographer
Digital Media Productions
20
21
xxxxx
22
23
24
25
3
1
2
THE VIDEO OPERATOR: We are on
3
the record.
4
This is the videotape
5
deposition of Mr. Richard Grilli taken
6
in the case of David E. Jay versus
7
Centre Life Insurance Company, et al.,
8
filed in the
Stark County Court of
9
Common Pleas,
State of Ohio.
10
Today's date is November 3,
11
2005.
The time on the videotape
12
record is 10:15 a.m. This deposition
13
is being held at 120 Broadway, Suite
14
111, New York, New York City.
15
My name is J.D. Martinez
16
representing Digital Media Productions
17
of 120 Broadway, New York, New York.
18
Would everyone please introduce
19
yourselves for the record.
20
MR. ROBERTS: On behalf of the
21
plaintiff, Mr. Jay, this is Mike
22
Roberts.
23
MR. ELLIS: On behalf of the
24
defendant, Bill Ellis.
25
THE
WITNESS: Richard Grilli,
4
1
2
president of
Centre Life Insurance
3
Company.
4
5 R I C H A R
D G R I L L I,
6
having been first duly sworn before a
7
Notary Public of the State of New York,
8
was examined and testified as follows:
9
10 EXAMINATION BY
11 MR. ROBERTS:
12 Q
Good morning. I was a little late
13 getting here this
morning, so I appreciate
14 your patience with
me.
15
I'm Mike Roberts. I have the
16 privilege of
representing David Jay in this
17 action, David Jay versus Centre Life
18 Insurance Company and Disability
Management
19 Services.
20
Could you introduce yourself, please,
21 to the jury?
22 A
Sure. Richard Grilli, president of
23 Centre Life Insurance
Company.
24 Q
Mr. Grilli, do you have a business
25 card on you?
5
1
GRILLI
2 A
Yes.
3 Q
Do you hold any other positions -- the
4 business card
says, "Centre," at the top and
5 it has you as
president of Centre Life
6 Insurance Company with an e-mail address at
7 CentreSolutions.com. At
the bottom it says,
8 "A member of the Zurich
Financial Services
9 Group." Did I
read that correctly?
10 A
Yes.
11 Q
Do you have any other positions that
12 you hold within the
Zurich Financial Services
13 Group?
14 A
Yes, I am a senior vice
president of
15 the Centre Group of companies,
and here is a
16 business card as well of that.
17 Q
Anything else?
18 A
No. That's it.
19 Q
Do you coach a children's basketball
20 team or anything?
21 A
No.
22 Q
What is the Centre Group?
23 A The Centre
Group is a group of
24 companies that were organized in
the late
25 1980's to conduct insurance and
reinsurance
6
1
GRILLI
2
transactions. It is
a subsidiary -- our
3 parent is the Zurich Financial
Services
4 Group, the Zurich Company.
5 Q
I suspect that you and I are probably
6 peers, so I'm
hoping I'm guessing correctly
7 that you weren't
affiliated with Centre back
8 in the late
'80s, were you?
9 A
No.
10 Q
I asked a negative question. I want
11 to make sure we're
communicating well. I
12 sometimes do that and
it's not meant to trick
13 you. It's just
when you get a negative
14 response to your
negative question, if you
15 were down on the
street I would know what
16 you're talking about.
17
Were you affiliated with the Centre
18 Group companies back
in the late '80s?
19 A
No, I was not. I joined Centre in
20 2003.
21 Q
Being the president of Centre Life
22 Insurance Company, I
suspect that you've done
23 some institutional
research to bring yourself
24 up to speed with what
the history of the
25 company has been; is
that accurate?
7
1
GRILLI
2 A
No, not really. I've been in the
3 insurance
industry for many years and I have
4 been -- my prior
job at Centre was -- we did
5 a few transactions
with Centre, so I was on
6 the other side
of transactions with Centre,
7 the recipient.
8 Q
So Centre Life Insurance Company is a
9 corporation; is
that right?
10 A
Yes.
11 Q
It's not a company that the Centre
12 Group formed back in
the late '80s, right?
13 A
That is correct, yes. It's a company
14 that they bought in
1996, 1997.
15 Q The company that
"they" -- who is
16 "they"?
17 A Centre
Solutions U.S., Limited, a
18 company within the Centre Group
bought Mass
19 Casualty Insurance Company and has
20 subsequently renamed it Centre
Life Insurance
21 Company.
22 Q
You may or may not know; this is six
23 years, five years
predating you. Why did
24 Centre Solutions U.S.
Limited, why didn't
25 they just take,
purchase the assets of Mass
8
1
GRILLI
2 Casualty and
bring them in-house? Why was
3 there a distinct
Centre Life Insurance
4 Company entity?
5 A
Well, this was before my time. As I
6 said, I joined
in 2003. Mass Casualty
7 Insurance
Company had various state licenses,
8 and that is
generally the reason an entity
9 buys an
insurance company is to obtain their
10 licenses.
Otherwise you need to apply to the
11 various state insurance
departments. It
12 takes a lot of time
and effort.
13 Q How many
Centre companies are in this
14 Centre Group? Do you know?
15 A
No, I don't really know that answer.
16 There is a number of
them.
17 Q More than
a dozen?
18 A Yes.
19 Q
Do you hold any officer or director
20 positions with any
other Centre Group
21 companies or
subsidiaries other than Centre
22 Life Insurance
Company?
23 A
Can you repeat the question?
24 Q
Do you hold any other officer or
25 director positions
with any of the other
9
1
GRILLI
2 entities,
however many there are, that are
3 within this
thing called Centre Group?
4 A Yes, I
believe I'm a senior vice
5 president of Centre Insurance
Company. I am
6 also on the board of directors
of an
7 affiliate of Centre Disability
Management
8 Services.
9 Q
You said you think you're a senior
10 vice president of
Centre Insurance Company.
11 You don't know one
way or the other?
12 A
No. I am a senior vice president and
13 I believe I'm an officer of Centre
Insurance
14 Company.
15
Centre
Insurance Company is our main
16 insurance company that has a
service
17 agreement with other various
Centre entities
18 to provide services to
them. Those services
19 are accounting, actuarial, tax,
legal,
20 treasury.
21
I'm an employee of Centre Insurance
22 Company as well. My paycheck comes from
23 Centre Insurance Company. All the Centre
24 employees in New York are employed by Centre
25 Insurance Company, and then we are time -- we
10
1
GRILLI
2 do work on behalf of other Centre companies,
3 and there is a service agreement between
4 Centre Insurance Company, CICO, as it's
5 called, and the other Centre companies that
6 when we do work for them, our time and our
7 costs are allocated to them.
8 Q So Centre
Life Insurance Company, the
9 defendant in
this case, are there any
10 employees that get paid checks
from that
11 entity?
12 A No, there
are no employees that get
13 paid, but that is consistent with
all the
14 other Centre
companies within the Centre
15 Group.
16
As I said, Centre Insurance Company is
17 the employer of everybody and then various
18 individuals, a substantial amount of people
19 work on behalf of Centre Life Insurance
20 Company. We have many accountants, the tax
21 people who file tax returns, our treasury
22 people who invest Centre Life's money, who
23 handle the banking relations on behalf of
24 Centre Life. The actuarial department at
25 Centre does work on behalf of Centre Life.
11
1
GRILLI
2 So there's many
people who are involved on a
3 day-to-day basis
with the operations of
4 Centre Life
Insurance Company.
5 Q
Does Centre Life Insurance Company
6 file its own
independent tax returns with the
7 Internal Revenue
Service or is its tax return
8 consolidated
with other Centre Group
9 companies?
10 A
Prior to 2004 I believe it filed its
11 own tax return
because it was considered a
12 live company for tax
purposes. After 2004 I
13 believe it is now
filing a consolidated
14 return with other Centre
companies.
15 Q
Can you explain to the jury what that
16 means, to go from
filing our own tax return
17 to filing a
consolidated tax return with
18 other corporations?
19
I haven't gone into educational
20 background, but you
look like a guy that is
21 smart enough to tell
the jury what that
22 means.
23 A
When a corporation files its own
24 individual tax
return, its results and only
25 its results -- when I
say "results," its
12
1
GRILLI
2 income
statement, its revenues, expenses --
3 that gets
reflected on a 1120 form for the
4 IRS for
corporations.
5
When a corporation is part of a
6 consolidated
group, all the entities within
7 that
consolidated group are added together to
8 one tax return,
and then those compiled
9 numbers are then
filed as one tax return.
10 Usually there is an
agreement amongst the
11 parties when they
file a consolidated tax
12 return to share in
the tax benefits within
13 the whole group.
14 Q
So if you have three entities that
15 decide we're going to
go in and file
16 consolidated tax
returns together and one of
17 the entities has net
taxable income -- I'm
18 not a tax lawyer; I
might be using the wrong
19 word -- one entity
would have net taxable
20 income of $120
million but the other two have
21 business losses that
equal that exact same
22 amount, does that
mean that none of the
23 entities end up
paying tax? That's really
24 simplistic, right?
25 A
Right. The consolidated tax return
13
1
GRILLI
2 would show
pretax income or taxable income of
3 zero under your
example. However, yes, that
4 is correct.
5 Q
What was the reason that the company,
6 Centre Life
Insurance Company, has changed
7 the way it's
going to report its earnings or
8 income to the
government?
9 A
It hasn't changed its reporting of its
10 income. It
changed its classification from a
11 live company to a
general insurance company.
12
The specific rules by the IRS that
13 allow a company to
file as an insurance
14 company, those rules
trigger off of loss
15 reserves held by a life
insurance company,
16 and in the case of
Centre Life Insurance
17 Company, since all
the business -- since all
18 of its health
business has been ceded to
19 another Centre
company, they do not have any
20 life reserves and,
therefore, they could not
21 continue to file as a
life insurance company
22 for tax purposes.
23 Q
Was it beneficial to be able to file
24 as a life insurance
company or is it just a
25 category?
14
1
GRILLI
2 A
I don't think it makes a difference;
3 however, I'm not
a tax expert.
4 Q
Fair enough. I'm not going to say
5 anything about
tax, either, because neither
6 am I.
7
I didn't ask you to do this, but do
8 you have before
you the 2004 annual statement
9 for the company?
10 A
Yes, I do.
11 Q
That actually is marked as plaintiff's
12 Exhibit 35 in the
case, and since you brought
13 it with you and it
sits in front of you, I
14 didn't intend to
start there but why don't
15 we.
16
There is a schedule in here that names
17 all the companies
that are affiliated with
18 Centre Life Insurance
Company. Are you
19 familiar with that
schedule?
20
MR. ELLIS: Do you have a copy
21
I can work with?
22
MR. ROBERTS: It may be
23
Schedule Y.
24 A
Yes, I'm somewhat familiar with
25 Schedule Y
15
1
GRILLI
2 Q Schedule Y
for the Centre Life
3 Insurance Company 2004 annual
statement,
4 Exhibit 35, is titled,
"Information
5 Concerning The Activities of
Insurer Members
6 of A Holding Company
Group," "Information
7 Concerning Activities of Insurer
Members of
8 The Holding Company Group."
9
What is a holding company group?
10 A
Let me first explain who is on this
11 list, if I
could. There are companies on
12 this list that have
nothing to do with
13 Centre.
14
What is on this list are companies
15 that are subsidiaries
of Zurich America which
16 is a subsidiary of
the Zurich Financial
17 Group. These
are all U.S. companies. They
18 are mainly
brother/sister company,
19 brother/sister being
third brother, sister of
20 Centre Group.
21
For instance, there is the Farmers
22 Group here, and that
is a California company.
23 That is related to
the Zurich. It has
24 nothing to do with
Centre.
25
So a holding company group -- going
16
1
GRILLI
2 back to your
question, holding company group
3 is a group of
companies all under the
4 ownership,
either direct or indirect, of one
5 holding company
being the Zurich Holding
6 Company in the
U.S., and I believe that
7 Zurich Holding
Company in the U.S. is like
8 Zurich North
America is probably what it's
9 titled.
10 Q
Sir, was I mistaken? This is the
11 Centre Life Insurance
Company 2004 annual
12 statement, right?
13 A
Yes.
14 Q And this
schedule appears in the
15 Centre Life Insurance Company
annual
16 statement, right?
17 A
Yes, it does.
18 Q There must
be some law or regulation
19 that requires Centre to include
its
20 affiliated entities in its
annual statement;
21 is that correct?
22 A From my
understanding, yes.
23 Q
I counted while you were testifying
24 there, sir, page 63,
63.1, 63.2, 63.3 and
25 63.4 contain the
schedule, right?
17
1
GRILLI
2 A
Yes.
3 Q
Your copy doesn't have these numbers,
4 but they were
Bates numbered by someone
5 working on
behalf of your company for
6 production in
this case as AS00527 through
7 AS00531. I'll let you count them, but
while
8 you were testifying I counted
how many
9 entities are on the first three
pages of this
10 schedule and there is a
hundred. In the
11 second two pages has 62.
12
Do you trust by looking at it that
13 those are the right
numbers?
14 A
It seems reasonable.
15 Q
It's broken into two parts because I
16 guess one is Farmers
Insurance Company
17 affiliates. Is
that a different arm of the
18 Zurich entity?
You see there are two
19 alphabetical
listings; why would there be two
20 different
alphabetical listings?
21 A
I don't know for sure. I can
22 conjecture, but I
don't know.
23 Q
I don't desire for you to conjecture.
24 Let's take a look at
this first Schedule Y.
25
First page, AS00527, which is also
18
1
GRILLI
2 just plain 63
without any decimal, about
3 twelve companies
down in the list, first one
4 I can't even
pronounce. How do you pronounce
5 that first
company name?
6 A
I don't speak German.
7 Q
Something domiciled in Switzerland.
8 About twelve
down it says, "Centre Life
9 Insurance
Company." Do you see that?
10 A
Yes.
11 Q
It shows that Centre Life
Insurance
12 Company is domiciled in
Massachusetts?
13 A Yes.
14 Q Then it
shows what the ownership is.
15 Do you see that?
16 A Well, ownership means its parent.
17 Q
I understand.
18
According to
this schedule, Centre
19 Solutions U.S. Limited, is that
an American
20 company or a Bermuda company?
21 A
That is a U.S. company.
22 Q
You figured that out because you went
23 to Centre Solutions
on this form and found
24 out where it's
domiciled? Strike that
25 question.
19
1
GRILLI
2
I can take this form and I see Centre
3 Life Insurance Company, and then
I go to the
4 fifth column and I see who its
owners is. I
5 can then look that entity up and
I will -- it
6 says, "Centre Solutions
U.S. Limited," a
7 little ways down. Then it
says that entity
8 is owned by Centre Group
Holdings U.S.
9 Limited, right?
10 A
I've lost you. Where are you now?
11 Q I took the
owner of Centre Life
12 Insurance Company, Centre
Solutions U.S.
13 Limited.
14 A
Right.
15 Q I went to
Centre Solutions U.S.
16 Limited on this schedule, and I
went across
17 the column and I find that it's
owned by
18 Centre Group Holdings U.S.
Limited, right?
19 A
Yes.
20 Q
I can look that entity up on the list,
21 and I find Centre Group Holdings
U.S. Limited
22 is owned by Centre Reinsurance
Limited,
23 right?
24 A
Yes.
25 Q Is that
the entity that owns
20
1
GRILLI
2 40 percent of DMS?
3 A
I believe it is, yes.
4 Q So Centre
Reinsurance Limited is then
5 owned by Centre Solutions
Bermuda Limited?
6 A
Yes.
7 Q Centre
Solutions Bermuda Limited is
8 owned by Centre Group Holdings
Limited?
9 A
Yes.
10 Q And Centre
Group Holdings Limited is
11 owned by CMSH Limited?
12 A
Yes.
13 Q And CMSH
Limited is owned 64 percent
14 by Zurich Insurance Company and
a decimal and
15 36 percent by Zurich
International Bermuda
16 Limited, right?
17 A
That is correct.
18 Q
If you try to continue to follow this
19 tree, Zurich Insurance Company is
owned by
20 Zurich Group Holding, right?
21 A
Correct.
22 Q And Zurich
Group Holding is owned
23 by -- 57 percent by Zurich
Financial Services
24 domiciled in Switzerland.
Is that the mother
25 ship?
21
1
GRILLI
2 A
I believe it is, yes.
3 Q And the other part of Zurich
Group
4 Holding is owned by Allied
Zurich, PLC?
5 A
That is correct.
6 Q We look at
Allied Zurich, PLC. It's
7 owned by Zurich Financial
Services?
8 A
Correct.
9 Q And Zurich Financial Services isn't
10 owned by anybody.
11 A That's the parent company.
12 Q
We've run out of names.
13
Is that what you refer to as the
14 Centre Group, those
companies?
15 A
No.
16 Q
Some of those companies we talked
17 about are in the
Centre Group?
18 A
Yes.
19 Q
There is a whole bunch of other
20 companies we didn't
talk about that are in
21 the Centre Group?
22 A
Generally, no. Most of the companies
23 on this list are part
of the Zurich group,
24 not the Centre Group.
25 Q
When I said -- went through this tree,
22
1
GRILLI
2 when I gave the
name of a corporation that
3 had Centre in
it, does that signify that it's
4 part of the
Centre Group?
5 A
Yes.
6 Q
But we didn't name every entity that
7 has the name
Centre in it, did we?
8 A
No, we did not, but we named most of
9 them.
10 Q
But there's others?
11 A
There are a few others.
12 Q
So that first three pages list a
13 hundred companies
that I guess fall under
14 this large Zurich
Financial Services
15 umbrella, and that is
what your business card
16 says? It says
the company that you're the
17 president of is a
member of the Zurich
18 Financial Services
group, right?
19 A
Yes.
20 Q
I think I already asked you this
21 question. You
said you would have to
22 conjecture or
speculate as to why they're
23 listed separately in
alphabetical order. Did
24 I recall that
correctly?
25 A
Yes.
23
1
GRILLI
2 Q
But in its annual statement there must
3 be some law or
some regulation that requires
4 Centre Life
Insurance Company to disclose its
5 affiliations
some way, somehow, maybe third
6 cousins to 160
different other corporations;
7 is that right?
8 A
I don't know. It would appear that
9 the second page
of Schedule Y deals with the
10 Farmers Insurance
Group structure, but I'm
11 not an expert here so
we have to ask somebody
12 who knows.
13 Q
Farmers I've heard of before. It must
14 be related somehow or
else it wouldn't be
15 contemplated within
whatever law requires its
16 disclosure, right?
17 A
I don't know.
18 Q Is
Disability Management Services on
19 this affiliation list?
20 A
Yes, it is.
21 Q Who owns
Disability Management
22 Services?
23 A Centre
Reinsurance Limited owns
24 40 percent of DMS.
I believe the balance is
25 owned -- 60 percent of the
balance is owned
24
1
GRILLI
2 by management.
3 Q
That 40 percent ownership --
4
MR. ROBERTS: I'd like to make
5
a comment on the record.
6
Mr. Ellis is filming me without
7
telling me, without disclosing it to
8
me, which I think might be some
9
violation of an ethical code or code
10
of professional responsibility to
11
record a lawyer without telling him,
12
but there is the videotape of the
13
witness going on and there is also a
14
separate videotape of Mr. Ellis of me.
15
Mr. Ellis, why is this?
16
MR. ELLIS: I'm trying to avoid
17
the antics that you exposed during
18
Mr. Bonsall's deposition or at least
19
record them if they reoccur.
20
MR. ROBERTS: Would you mind
21
turning that off, sir?
22
MR. ELLIS: Yes, I would.
23
MR. ROBERTS: Very well.
24
Mr. Grilli, did you know I was
25
being recorded by Mr. Ellis?
25
1
GRILLI
2
THE WITNESS: Well, when I sat
3
down here, I noticed the camera was on
4
and it was pointed to you so, yes, I
5
happened to notice it.
6
MR. ROBERTS: I just noticed
7
it. I'm quite shocked that a lawyer
8
would do that, but -- let's get back
9
to your testimony.
10
I should have worn a tie.
11 Q
I have attempted to graph out the
12 corporate structure
which I believe is
13 represented in that
2004 annual statement.
14 Could you take a look
at this?
15
MR. ROBERTS: And we'll mark
16
this as Plaintiff's Exhibit 37.
17
Actually, Plaintiff's Exhibit 37 will
18
be that page -- we'll just make it
19
that page.
20
MR. ELLIS: Do you have a copy
21
for me?
22
Thank you.
23 Q
Does that look like the right
24 corporate structure?
25 A
I would have to spend some time going
26
1
GRILLI
2 back.
3
(Whereupon a chart was marked
4
as Plaintiff's Exhibit 37 for
5
identification, as of this date.)
6
MR. ROBERTS: Why don't we go
7
off the record and allow the witness
8
to do that. I don't want you to
9
guess.
10
THE VIDEO OPERATOR: Going off
11
the record, 10:47.
12
(Whereupon, a brief recess was
13
taken.)
14
THE VIDEO OPERATOR: Returning
15
to the record, 11:01.
16 Q
Mr. Grilli, I think I frustrated you.
17 My chart apparently
was not a very good
18 portrayal of the
Centre Group line of
19 companies up from
Centre Life Insurance
20 Company. You've
made some attempts to
21 correct it, and I
think you've thrown your
22 hands up.
23 A
No, I haven't thrown my hands up
24 totally. There
was an error made down below
25 sort of at the bottom
where you put in or
27
1
GRILLI
2 somebody put in
Centre Reinsurance Limited
3 U.S. when the
company is Centre Reinsurance
4 Limited, so
therefore with that error,
5 everything above
it or most of what is above
6 that, by putting
in that U.S. Company and not
7 the Centre
Reinsurance Limited which is a
8 Bermuda company
and above it is wrong.
9 Q
You made some notes on Exhibit 37.
10 Can you write your
name at the bottom and
11 date it?
12
MR. ELLIS: Just so the record
13
is clear, is that intended to be some
14
accurate depiction or is that just
15
some notes you made on it?
16
THE WITNESS: It was my notes
17
of some corrections, but I wouldn't
18
verify that it's totally accurate. I
19
only had a few minutes to do this. In
20
my view, it is accurate.
21
MR. ROBERTS: I think the
22
record will reflect we were off the
23
record for fifteen minutes while you
24
worked on it.
25 Q
There are, I think, in every annual
28
1
GRILLI
2 statement notes
to the financial statements.
3 Are you mindful
of that?
4 A
Yes.
5 Q
Can you turn to that section for me?
6 Page 19.2, which
is Bates numbered AS 00481.
7 Are you there,
sir?
8 A
Yes.
9 Q
There is some kind of Excel
10 spreadsheet table at
the top. At the bottom
11 it's regular
text. It starts with
number 10,
12 or section 10 is entitled,
"Information
13 Concerning Parent Subsidiary and
Affiliates."
14
Do you see that?
15 A
Yes.
16 Q In
subsection G there, there is a
17 narrative description of Centre
Life
18 Insurance Company and who owns
it and who
19 owns that and so on and so on,
right? Is
20 that description accurate?
21 A
Well, I would need to go back to an
22 organizational chart
to check it out, but as
23 far as I know, I
would assume it is correct.
24 Q It says all of the issued and
25 outstanding shares of the
company's voting
29
1
GRILLI
2 common stock are owned by Centre
Solutions
3 U.S. Limited, an insurance and
reinsurance
4 company domiciled in Bermuda.
5
Centre
Solutions U.S. Limited is
6 controlled by Centre Group
Holdings U.S.
7 Limited, a holding company
domiciled in
8 Delaware which is, in turn,
controlled by
9 Centre Reinsurance Limited, an
insurance and
10 reinsurance company domiciled in
Bermuda
11 which is in turn controlled by
Centre
12 Solutions Bermuda Limited, an
insurance and
13 reinsurance company domiciled in
Bermuda,
14 which is in turn controlled by
Centre Group
15 Holdings Limited, a holding
company domiciled
16 in Bermuda which in turn is
controlled by
17 CMSH Limited, a holding company
domiciled in
18 Bermuda which is ultimately
owned by Zurich
19 Financial Services, a financial
services
20 company domiciled in
Switzerland.
21
Did I read that correctly?
22 A
Yes.
23 Q One of
those corporations in the
24 lineage is the 40 percent owner
of DMS?
25 A That is
correct. It's Centre
30
1
GRILLI
2 Reinsurance Limited, and that is
mentioned
3 here.
4 Q
What are the
functions of Centre Life
5 Insurance Company? Or tell
me if I'm right:
6 The company doesn't sell
disability insurance
7 policies anymore, right?
8 A That is
correct.
9 Q Have you
ever seen the disability
10 insurance policies they used to sell?
11 A No.
12 Q
Are you mindful that there is a couple
13 of different
numbers? There is a NOVUS 3000
14 and then there was a
new generation called
15 NOVUS 4000 policy?
16 A
Yes, I am mindful of that.
17 Q
Are you mindful that the NOVUS 4000
18 policy kind of
tightened up the contract
19 language and limited
the -- you couldn't have
20 lifetime occupation
benefits anymore; it was
21 limited to a more
specific term, in this case
22 24 months. Are
you mindful of that?
23 A
No.
24 Q
Have you seen the NOVUS 4000 policy
25 before?
31
1
GRILLI
2 A
No.
3 Q
You just know that there is one out
4 there?
5 A
There is -- those policies that you
6 mentioned are
reflected or some financial
7 information is
reflected on this schedule
8 here of accident
and health policyholder
9 experience
exhibits for year. Those are
10 filed every year.
11 Q
So you're mindful from an accounting
12 standpoint that there
are some people out
13 there that have a
NOVUS 3000 policy because
14 you quantify how many
people in America have
15 that, and then you're
also mindful -- you can
16 track their premiums,
right, the number of
17 policyholders and how
much premium they pay,
18 right?
19 A
The information on that schedule, and
20 maybe we should go
look at that schedule, but
21 it tracks more than
just premiums. It also
22 tracks losses.
23 Q
I didn't mean to limit it to that.
24 You do an accounting
function and so you need
25 to know how many
NOVUS 3000's there are out
32
1
GRILLI
2 there.
That is the great bulk of the
3 business, the
NOVUS 3000, right?
4 A
Well, there is other business in
5 Centre Life
Insurance Company besides what we
6 call the MCIC
block of business or close
7 block of
business, so some of the other
8 business in
Centre Life actually dwarfs the
9 amounts
reflected -- that are associated with
10 the MCIC block.
11 Q
You're right. We'll get to that in a
12 second.
13
As far as the MCIC and the types of
14 policies that entity
was selling before it
15 was acquired or it
was purchased, you
16 understand that the
great majority of the
17 policies historically
sold by Mass Casualty
18 was the NOVUS 3000?
19 A
That was before my time and,
20 therefore, I'm not
familiar with that.
21 Q
If you look at the accounting records,
22 these forms we'll get
to in a second, that
23 will reflect?
We'll get there in a second.
24 A
Not necessarily. You can have a few
25 policies that have
large premium dollars so
33
1
GRILLI
2 the premium
dollars can be greater, but in
3 absolute number
of policies it could be less.
4 Just because the
premium dollars are greater,
5 it doesn't mean
the amount of policies are
6 greater.
7 Q
But you're mindful, at least, that
8 there are two
different policies of NOVUS
9 3000 and a NOVUS
4000?
10 A
Yes. There is also I think a NOVUS
11 1000 and 2000.
12 Q
You're exactly right.
13
Are you mindful that when they go up
14 higher, the number,
it is a new generation?
15 A
No.
16 Q
You're not mindful of that.
17
Let's talk about what Centre Life
18 Insurance Company
does as it relates to the
19 Mass Casualty line of
business. First of
20 all, after the Centre
Group, did they
21 purchase the assets
of Mass Casualty from Sun
22 Life?
23 A
They purchased the stock.
24 Q
So it's a stock purchase. After they
25 purchased the stock
from Sun Life a year or
34
1
GRILLI
2 two later, they
also entered some business
3 relationship or
some acquisition or some
4 transaction with
some entity related to
5 Equitable; is
that right?
6 A I believe
they bought MCIC. Centre
7 bought MCIC in '96. There
was an Equitable
8 transaction July 1, 2000.
The Equitable
9 transaction was an acquisition
of a closed
10 block of individual disability
income
11 policies.
12 Q
Was it the same kind of transaction
13 that was entered with
the Mass Casualty
14 block, essentially?
15 A No.
The Mass Casualty transaction was
16 a purchase of stock.
You're acquiring a
17 corporation, all the assets and
liabilities.
18
The
Equitable transaction was getting paid a
19 premium to take on the claims
associated with
20 the Equitable policies. So
you didn't buy
21 stock, you didn't buy a
corporation, you
22 didn't buy licenses, and it also
was a
23 reinsurance transaction.
24
The MCIC block of business is a direct
25 block of business,
"direct" being MCIC issued
35
1
GRILLI
2 the policies to
the policyholders which the
3
Equitable
transaction -- Centre is reinsuring
4 Equitable.
Equitable was the one who issued
5 the policies
to their direct policyholders.
6 It's a reinsurance transaction. It's the
7 latter.
8
Q
So the Equitable is still its own
9 free-standing company?
10 A There is an Equitable with a
11 free-standing company that has issued these
12 policies. The policyholders believe and are
13 correct that they are insured by the
14 Equitable.
15 There is a transaction where the
16 Equitable then reinsured its risks with
17 Centre Life Insurance Company on these
18 blocks, but the policyholders, all they know
19 is they have a policy with Equitable and
20 Equitable is liable to pay their claims.
21 Q Do you know, if I am an Equitable
22 policyholder and I were to file a claim
23 today, who does the claims management or
24 administration on my claim? Do you know?
25 A Disability Management
Services.
36
1
GRILLI
2 Q
The defendant in this case, DMS?
3 A
Yes.
4 Q They
administer the Mass Casualty
5 block for Centre
Life Insurance Company, and
6 then they would
also administer the Equitable
7 block as well?
8 A
That is correct.
9 Q
You said a couple of terms here that I
10 would like for you to
define, if you could,
11 for the jury.
12
Earlier you said the word "ceded."
13 What does ceded mean?
14 A
Ceded is an insurance term which in
15 the case of the
Equitable block -- we'll just
16 use them as an
example -- they issued the
17 policy.
They took on the risk. They get
18 premiums.
To alleviate the risks, they
19 entered into a
reinsurance contract with
20 Centre that
took 100 percent of their risk.
21 That transaction
where they passed over the
22 risk to Centre
for a premium is called a
23 ceded
transaction. They have ceded the risks
24 to Centre.
25 Q
So does Centre have the right after
37
1
GRILLI
2 taking on that obligation to all the premium?
3 A Under the transaction
with Equitable,
4 yes. Specifically that transaction,
yes.
5 There could be others
that, no. It's
6 specific on each
transaction.
7 Q If I'm an Equitable
policyholder today
8 and I'm sending in monthly checks, does that
9 monthly premium check ultimately make its
way
10 to Centre Life Insurance Company?
11 A Yes.
12 Q
The same thing with the Mass Casualty
13 policyholder. I
think there's perhaps 30 or
14 40,000 still out
there, Mass Casualty
15 policyholders,
50,000, maybe; do you know?
16 A I
don't know exactly, no, but those
17 numbers sound
reasonable.
18 Q Let's
assume they all pay monthly, and
19 let's assume they all
write checks and they
20 all mail them in
that. Would be 40,000
21 monthly checks coming
in for premium?
22 A
Some people might be paying on an
23 annual or semiannual
basis, so not
24 necessarily monthly.
25 Q But
for the purpose of my
38
1
GRILLI
2 hypothetical,
you would have 40,000 checks
3 come in from
across the country? Mass
4 Casualty sells
in all 50 states, right?
5 A
I believe so. I don't know for sure,
6 but I believe
so.
7 Q
As president of Centre Life Insurance
8 Company, you're
not sure?
9 A
Well, the selling of policies happened
10 years ago.
We're not in the selling
11 business. We're
in the business of paying
12 claims.
13 Q
We'll get to that in a second.
14 So these 40,000 checks come in
for
15 whatever the premium amount is?
16 A Right.
17 Q What happens with that
money?
18 A That money goes to Centre Life
19 Insurance Company. It's deposited in a bank
20 account, and then that money is transferred
21 to Centre Reinsurance U.S. Limited who has
22 entered into a reinsurance deal. It's an
23 affiliate of -- Centre Reinsurance U.S.
24 Limited is a Centre Group of companies.
25 They're located in Bermuda, and they have
39
1
GRILLI
2 reinsured CLIC with a whole block for 100
3 percent of the risks.
4
Now, this reinsurance deal was
5 pursuant to the
acquisition of MCIC. At the
6 time that Centre
acquired the MCIC, the
7 Massachusetts
Department of Insurance allowed
8 the acquisition
of MCIC to occur with the
9 proviso that
MCIC, later renamed CLIC, would
10 reinsure those risks
to another Centre
11 company who had
substantial more capital.
12 That meant the
policyholders of MCIC would be
13 protected with a
company that had much more
14 capital in it.
15 Q
So as a policyholder of MCIC, I have
16 the comfort -- I
don't know if you tell your
17 policyholders -- but
I would have the
18 comfort -- it's not
just Mass Casualty's
19 assets that are there
to protect me; it's
20 some other much, much
larger company?
21 A
That is correct. If CRUS,
Centre
22 Reinsurance
U.S. does not pay the claims,
23 CLIC is still obligated
to pay those claims.
24 Q
Have you reviewed or seen any
25 interrogatory responses or admission
40
1
GRILLI
2 responses in
this case? Do you know what
3 those even are?
4 A
I am familiar with what they are, and
5 I have looked at
none of these. I am not
6 familiar at all
with this case.
7 Q
Do you have any experience with
8 litigation?
9 A
Very little.
10 Q If it was represented in the
11 litigation that only six percent
or some
12 small percent of this plaintiff
who is a Mass
13 Casualty policyholder, only a
very small
14 percentage of his policy or the
liability is
15 reinsured, would that be an
accurate
16 statement?
17 A Let me
try to answer the question.
18 There's two
reinsurances. The Mass Casualty
19 block of business,
when CLIC acquired -- when
20 Centre acquired the company
and renamed it
21 CLIC, there was
existing inuring reinsurance
22 from two third-party
reinsurers, a company
23 part of the Swiss Re
and Munich Re.
24 Q
Those are companies located in
25 Switzerland and
Germany?
41
1
GRILLI
2 A
They might be U.S. affiliates. If you
3 think Centre's
structure is complicated, I
4 happen to have
worked at Swiss Re. Swiss Re
5 is ten times as
big. It's huge.
6
Those two companies have protected --
7 there is inuring
reinsurance provided by
8 those two
companies on the Mass Casualty
9 block, and then
the residual, the remaining
10 exposure net of that
inuring reinsurance is
11 then reinsured to
CRUS. So I'm not sure what
12 that question --
which reinsurance it dealt
13 with.
14 Q
Let me try to ask it a different way.
15
Assume I'm a policyholder of Mass
16 Casualty. I
have a NOVUS 3000. I'm going
17 back to Cincinnati
tonight. Something
18 happened and I can't
be a lawyer anymore. I
19 file a claim
tomorrow. Tuesday I read the
20 Wall Street Journal and
something bad
21 happened to Centre
Life Insurance Company.
22 It just completely
imploded.
23
Would my claim still be secured or
24 paid or payable by
this reinsurer?
25 A
I don't know for sure. Possibly there
42
1
GRILLI
2 are some rights,
and certainly in the
3 property and
casualty business which I worked
4 in prior to this
job at Centre and with my
5 experience prior
to that there were some
6 rights that
policyholders or corporations had
7 who had entered
into P&C transactions to go
8 after the
insurer and collect.
9 Q
So based on your knowledge, you would
10 conclude that Mr. Jay
-- he happens to have
11 six policies.
You would conclude that all of
12 his policies in full
have reinsurance
13 protection through an
entity other than
14 Centre Life Insurance
Company; is that right?
15 A
Yes.
16 Q
That entity is one of these entities
17 that is a parent or a
parent of a parent or a
18 sister, brother or
aunt of Centre Life
19 Insurance Company?
20 A
Yes. It would be a sister of Centre
21 Life Insurance
Company.
22 Q Which is ultimately all backed by
23 Zurich Financial Services?
24 A
It's ultimately all owned by Zurich
25 Financial Services.
43
1
GRILLI
2 Q
But at least there is security and
3 protection for
Mr. Jay beyond Centre Life
4 Insurance
Company?
5 A
Yes.
6
MR. ROBERTS: Let's go off to
7
change the tape.
8
THE VIDEO OPERATOR: Going off
9
the record, 11:24. End of tape number
10
1.
11
(Whereupon, a discussion was
12
held off the record.)
13
THE VIDEO OPERATOR: Returning
14
to the record, 11:36 a.m. Beginning
15
of tape number 2.
16 Q
Sir, when we were off the record --
17 excuse me.
Right before we broke I asked you
18 questions and I
forgot where we left off,
19 which I was curious
as to whether Mr. Jay,
20 whose policies are
with Mass Casualty,
21 whether they are
fully reinsured as far as
22 you are aware through
some other entity.
23 A
Yes, they are fully reinsured by
24 another Centre
affiliate. CRUS.
25 Q
Now, Centre Life Insurance Company
44
1
GRILLI
2 doesn't actively
seek new policyholders or
3 sell policies
presently?
4 A
That is correct.
5 Q
Is CRUS an entity that has employees
6 and actually
sells some product or service or
7 good, or does it
sell reinsurance?
8 A
It generally sells reinsurance to
9 either third
parties or entities or other
10 Centre entities
within the Centre Group of
11 companies.
12 Q
Does it sell reinsurance to entities
13 outside the Centre
Group?
14 A
I am not that familiar with their
15 day-to-day
operations. They are a company
16 located in Bermuda,
so that question is best
17 asked by the
president of CRUS, I would say,
18 or some individual
who works on a day-to-day
19 basis with CRUS.
20 Q
Have you ever been to the Bermuda
21 entity? Have
you ever been down to Bermuda
22 to see the facilities
down there?
23 A
I have been to Bermuda to see Centre's
24 offices, yes.
25 Q
Are there a lot of employees down
45
1
GRILLI
2 there?
We're in Manhattan, so by scale.
3 A
The amount of employees is less than
4 the amount of
employees in Manhattan, but
5 there are a
number of employees. I think we
6 have two floors
of a building.
7 Q
We were telling the jury about selling
8 reinsurance, and
what that means is a company
9 in the business
of reinsurance through some
10 sophisticated
actuaries and accountants
11 sitting in some room
somewhere advised the
12 company that if we
could get these premiums
13 paid to us and take
the risk associated with
14 a potential claim,
we're betting we can make
15 money. That's
the business, right?
16 A
Yes, that's the business.
17 Q
So when Zurich or the Centre Group
18 decided: Hey,
let's go get that Mass
19 Casualty block of
business -- you said '96,
20 but I think your
lawyer, Mr. Ellis, and I
21 would stipulate that
it's the fall of '98
22 that the transaction
occurred?
23 A
Right. I said '96. I meant either
24 '98 or early '99,
around that time period.
25 Q
I think it was October '98. Then it
46
1
GRILLI
2 was approved by
the Department of Insurance
3 in January '99.
4
Assume for me those are the facts, but
5 anyway, in that
time frame some really smart
6 guy, actuary
sitting in a room somewhere in
7 Switzerland or
Bermuda or Manhattan or
8 somewhere took a
look at the Mass Casualty
9 block of
business, saw that there was premium
10 income coming in
annually and the capacity to
11 make money, even
though it came with the
12 obligation to pay
claims?
13 A
I don't believe that is how we priced
14 or how we price
closed blocks of business
15 that we acquired.
16
Now, we bought the corporation --
17 let's give you an example. Let's say MCIC
18
had a hundred dollars of assets and $50 of
19
liabilities and, therefore, its equity is
20
$50. Centre really isn't interested -- what
21
they're looking at is to buy a company like
22
in my example but not pay $50 or $60 but to
23
buy the company at a discount, $30, a
24
discount to its book value. In our example
25
the book value was 50. They would buy it for
47
1
GRILLI
2
$30.
3
You should ask me why is the company
4
willing to -- why is the corporation willing
5
to sell the company for less than its book
6
value? Some line probably wanted to get out
7
of its business. They weren't interested in
8
owning the disability rider or whatever.
9 There
are companies that are sold for below
10 book value every day.
11
That is where
Centre makes its money,
12 not from -- not from generating
more premiums
13 or less premiums. The
premium flow will come
14 in, not from changing or denying
claims or
15 anything like that. It's
from obtaining the
16 proceeds of day one of buying
the book at a
17 profit, obtaining more assets
than the
18 liabilities.
19 Q
Let's talk about that for a second.
20 We were talking about
these 40,000
21 policyholders that
send in checks. That
22 doesn't happen.
It's either an automatic
23 withdrawal or some
automation to the receipt
24 of premiums, right?
25 A
With some, yes, but some do send in
48
1
GRILLI
2 quarterly
checks, yes.
3 Q
Who is the person that opens the
4 envelopes?
Is that a Centre Group employee
5 somewhere?
6 A
No, that is part of DMS's functions.
7 Q
So if I'm a direct withdrawal out of
8 my bank account
guy, the money goes directly
9 to some Centre
Life Insurance Company bank
10 account, but if I'm a
person that likes to be
11 able to write a check
and keep a better
12 control, the check
gets mailed to Boston,
13 Massachusetts, or
Springfield, Massachusetts,
14 to a DMS office?
15 A
Yes, but it still goes into a Centre
16 Life Insurance
Company bank account.
17 Q
So all 40,000 of the policyholders
18 make their premium payment in
the month of
19 November 2005. That money
is then invested,
20 right?
21
A Technically
that money is deposited
22
and then
transferred over pursuant to the
23 reinsurance contract with
CRUS to CRUS, and
24 there it is invested.
25
Q
The same goes with the Equitable
49
1
GRILLI
2
policyholder.
Wherever their check goes,
3
whether it's
automatic or a handwritten
4
check,
ultimately the same thing happens; it
5
gets to CRUS
and it's deposited and invested?
6
A
No. That is not the case, because the
7
Equitable
block is reinsured by another
8
company
outside of the Centre Group, but it
9
is
affiliated as a Zurich company. It's a
10 Zurich Insurance Company Bermuda
branch.
11 Q Let's not confuse the apple cart here.
12 Let's take with Mass
Casualty. Those are
13 invested in bonds or
equities and bonds, the
14 Mass Casualty
premium?
15 A
Bonds, no equities. Safe investments,
16 rated A by the rating
agencies.
17 Q
The company hopes it makes a lot of
18 investment income?
19 A
Well, the company helps it makes
20 investment
income. It certainly can make a
21 lot more investment
income if it was buying
22 General Motors or
Ford credit and paper.
23
When you're buying A-rated paper in
24 U.S. Treasury, you're
really more concerned
25 about the credit
quality of your investment,
50
1
GRILLI
2 so we are
concerned that we don't lose any
3 money to any bad
investment. We invested in
4 a very prudent
and conservative manner; not
5 maximizing
investment income, minimizing
6 credit exposure.
7 Q
On the credit side of the ledger you
8 have premiums
being paid and you have
9 premiums being
invested in generating income.
10 Those are the two
positives on the credit
11 side, right?
12 A
Yes.
13 Q
On the debit side of your accounting
14 spreadsheet you have
commissions, right?
15 A
Yes.
16 Q
So if big guy Feigenbaum -- actually,
17 Bill passed away, but
he's the guy that sold
18 the policy back in
1980, '82 to Mr. Jay -- if
19 he were still alive,
Mr. Jay was still paying
20 premium, some
percentage of his premium
21 payment in 2005 will
go back to
22 Mr. Feigenbaum as a
commission or not, or
23 does your right to
commission run out?
24 A
I am not an expert in the commission
25 world. I don't
know a hundred percent, but
51
1
GRILLI
2 it sounds
reasonable that there could be some
3 commission but
it might end after a certain
4 period of time.
5 Q
You know from doing your work as
6 president of
Centre Life Insurance Company
7 that there are
commissions that occur
8 annually as a
debit on the company's
9 accounting,
right?
10 A
Yes. We would call that commission
11 expense.
12 Q
And then you have the cost of
13 administering, and
that is set by some
14 agreement you have
with DMS, right?
15 A
That is an -- it's covered by
16 administrative
agreement with DMS. Yes, that
17 is correct.
18 Q
Have you ever read that agreement?
19 A
Yes, I have read it.
20 Q
When you first became president, did
21 you read it or do you
refer back to it
22 frequently?
23 A
When I became president, I've read it,
24 and I've also looked
at parts of it when
25 applicable as part of
my ongoing job.
52
1
GRILLI
2 Q
It's been marked as Plaintiff's
3 Exhibit
31. Actually, this one, because I'm
4 traveling and
didn't pack very well, doesn't
5 have the
amendments, but is this the base
6 contract,
Exhibit 31, that I've handed you?
7
MR. ROBERTS: I've marked it
8
Exhibit 31.
9
(Whereupon a contract was
10
marked as Plaintiff's Exhibit 31 for
11
identification, as of this date.)
12 A
It would appear so, yes. This was the
13 initial before the
amendments. I believe
14 there's three
amendments, but, yes.
15 Q
I think you're right.
16 So you got the commissions to agents,
17 you got the fee that you paid to
DMS based on
18 the contract you have with them,
and that is
19 a formula-based fee?
20 A
Yes, DMS's compensation is cost plus.
21
Cost plus, the plus
being a markup of costs.
22
So if, for example, if they incur cost
23
of a hundred dollars
in a month, their margin
24
is 16 percent, we
paid them $116. Although
25
there are certain
costs that are not subject
53
1
GRILLI
2
to the
markup like legal fees, those costs
3
are not
subject to the 16 percent margin.
4
Q So if a claimant like Mr. Jay files a
5
lawsuit, you go to a good strong bill firm
6
like Wood & Lamping. They then send
7
invoices. Those invoices are ultimately
8
outside the agreement between Mass Casualty
9
and DMS in an obligation directly of Mass
10
Casualty or Centre Life?
11
A Well, they are paid by DMS, and then
12
we reimburse them on a monthly basis.
13
Q
So you have litigation expenses
14
whether they pass
through or are directly
15
paid to outside
counsel?
16
A Right.
17 Q You have commissions to agents,
you
18 have the payment to
DMS, you have claims that
19 are being paid and
you have settlement of
20 claims, correct?
21
You need to answer audibly.
22 A
Yes.
23 Q
Sorry I didn't give you that
24 instruction. We
just launched into the
25 deposition.
54
1
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2
But you don't have wages to pay
3 employees,
correct?
4 A
No, not really. I wish that was the
5 case. Unfortunately, CLIC -- you can look at
6
CLIC as outsourcing two things. They
7
outsourced the claims management of its
8
claims to DMS. Those costs are then billed
9
to us on a monthly basis. Those include
10
salary, rent, parking, trips, the whole
11
nine yards.
12
At the same time the individuals in
13
Centre who work on CLIC but who are made by
14
CICO via the service agreement, we get billed
15
at CLIC for those costs. So we could easily
16
have operated Centre Life with all the
17
same -- with all its employees in-house
18
claims handling, or we operate this way but
19
it's the same thing.
20
In substance, we have employees.
In
21 substance, we have
these costs. It's no
22 different than any
other insurance company in
23 America with officers
and people and
24 accountants and
lawyers and treasurers.
25 Unfortunately, we've
got all those costs
55
1
GRILLI
2 here. I
wish we didn't.
3 Q
Let's talk about what these people
4 running through
the Centre Group might be
5 doing for Centre
Life.
6
You have an accounting function.
7 Somebody has got
to count the premiums when
8 they come in,
right?
9 A
That is done more at DMS. At Centre
10 Life you have
accountants who record
11 transactions on our
general ledger, produce
12 financial statements
like this, produce
13 quarterly financial
statement, produce
14 management reports or
management information,
15 not really reports
but financial information.
16 There is a whole slew
of accounting work that
17 is done.
18 Q
Right. So you have an accounting
19 function, a financial
function?
20 A
Right.
21 Q
There is an actuarial function?
22 A
Yes.
23 Q
Can you tell the jury what an
24 actuarial function
might be? What is an
25 actuary?
56
1
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2 A
An actuary is an individual who has
3 passed certain
tests that consist of
4 expertise in
statistics and mathematics.
5 There's many
types of actuaries, but the
6 actuary that Centre
Life uses is an actuary
7 that will
determine what its proper reserves
8 are that it
should record on its books.
9 Q
So you have folks doing accounting
10 functions, folks
doing actuary functions of
11 the type you just
described.
12
Are there folks in the Centre Group --
13 I think Scutter
Investment used to be with
14 Centre Group; they're
not anymore?
15 A
That is correct.
16 Q
So when I'm referring to the Scutter
17 Group, we're talking
about the investment
18 function?
19 A
We outsource the investment function;
20 however, we have a
treasurer department who
21 manages the
day-to-day cash flows and who
22 supervise the
investment of our funds through
23 Deutsche Assets which
used to be part of --
24 who acquired Scutter.
25 Q
Are they an affiliate?
57
1
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2 A
No.
3 Q
So you have people in accounting doing
4 the accounting,
you have people making
5 financial
projections and you have people
6 making financial
investments supervising the
7 third parties who
make the financial
8 investments?
9 A
Right.
10 Q
Who is the person that makes sure that
11 DMS is acting in good
faith?
12 A
That would be me.
13
How would you define good faith, by
14 the way?
15 Q
How do you define good faith, sir?
16 A
I would define good faith as being
17 fair.
18 Q
When was the last time you visited
19 Springfield or
Boston, Massachusetts, and
20 personally conducted
an audit of claims file
21 to assure yourself
that your third-party
22 administrator is
treating claimants in good
23 faith?
24 A
I'll answer that question, but I want
25 to expand on it a
bit.
58
1
GRILLI
2
We are, in fact, starting a claims
3 audit this month
that is going to be looking
4 at the MCIC
claims as well as the other books
5 of business that
DMS handles for us. In
6 addition, there
are many other tools that I
7 have to manage
DMS's job as a claim
8 administrator,
and I can get into those in a
9 minute.
10
Let me go through those as well. On a
11 quarterly basis, not
only do I receive it but
12 some other people as
well, we do receive a
13 litigation report and
a report on
14 insurance -- on complaints to insurance
15 departments.
This is very important to us
16 because complaints and lawsuits
hurt us
17 terribly, hurt our profitability.
18
This is not
something that we want
19 occurring. We want our
policyholders to be
20 happy. We want their
claims to be paid if
21 it's appropriate, so lawsuits
just hurts our
22 bottom line terribly.
23
What we've seen
over the last five
24 years is that the lawsuits and
the complaints
25 to the Insurance Department have
dropped off
59
1
GRILLI
2 dramatically. There's been
a dramatic trend
3 downward in those.
4 There is an annual report that we
5
receive called a SAS report that is done by
6
Ernst & Young. It's done once a year on
7
DMS's internal controls. Since DMS is a
8
third-party administrator and it affects the
9
financial statement of Centre Life, one
10
obtains an SAS 70 report because a lot of the
11
information in those reports are reflected in
12
your financial statement. There have been no
13
problems -- I've
only seen the last three
14
years of the SAS 70
reports, and there have
15
been no problems
with that.
16
We have claim audits that occur on a
17
semi-regular
basis. Now, we have had reports
18
on other books of
business that haven't
19
indicated any
problems.
20
When things are going good, we don't
21 need necessarily to
have an audit of the
22 claims function every
quarter for each
23 company. It's
the same people or similar
24 people who are
handling the claim, so we have
25 some comfort if we get a claims report on the
60
1
GRILLI
2
Equitable
block and there is no red flags
3
that go off
that things are going well and,
4
therefore,
we don't need necessarily to have
5
a yearly
audit report on the Mass Casualty
6
block, but
every few years we need to do a
7
claims
report.
8
Occasionally I receive letters from a
9 policyholder in
which case I will talk
10 generally to Andy
Cohen or John Anderson.
11 John Anderson is in
charge of claims.
12 Generally I will talk
to John because a
13 letter doesn't --
there isn't a dispute yet,
14 a legal dispute per
se, and I talk to John to
15 see what is going
on. Why have I received a
16 letter or a phone
call from a policyholder?
17 What is going
on? And that is done on a very
18 timely basis.
19 We also get monthly DMS reports
20
pursuant to the
admin agreements. Most of
21
these reports are
financial in nature, but --
22
and they're on a
monthly basis. You can see
23
what is going on in
the business. You will
24
see any red flags
if things go out of whack,
25
i.e., the amount of
claims starts to -- the
61
1
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2
amount of
people on claims drop tremendously
3
or people on
claims goes up tremendously.
4 There is also information on other costs
5 premium dollar,
a whole slew of information
6 that helps us at
a macro level manage DMS.
7
Centre, as you're probably aware of,
8 has two board
seats on DMS's board. We
9 attend the quarterly
board meetings of DMS.
10 That also allows us
to see what is going on
11 in the company.
12 There is a president's report that
13 those integrate detail for each
of the
14 operations of DMS; the legal,
the actuarial,
15 the accounting, the treasury
group there.
16 There are two filings that occur, one in New
17 York and one in California.
California deals
18 with our people being trained to
handle
19 claims properly. They're
going to continue
20 on an annual basis, and I think
in New York
21 there is a filing, a Circular 9
that deals
22 with claim handling. There
is no problem
23 with the claim handling or
complaints or
24 whatever.
25 All these tools are at my
disposal to
62
1
GRILLI
2 monitor all the
blocks of business, but
3 specifically
this one at CLIC, the MCIC block
4 of business.
5
So one doesn't necessarily need to
6 have audits done
all the time on the claims
7 handlers.
You need to do those audits
8 occasionally
coupled with all the other
9 information that
we get.
10
You asked me when was the last time I
11 was in the Boston
office. That was probably
12 a year ago.
Springfield, I would say a few
13 months ago.
Maybe in September. I believe
14 there was a board
meeting.
15
I have never missed a board meeting of
16 DMS, nor would
I. I would have it
17 rescheduled.
It's too important in managing
18 what DMS is doing to
miss a board meeting.
19 Q
My question was when was the last time
20 you were in Boston or
the Springfield office
21 to review claim
files, to audit them to make
22 sure that DMS is
acting in good faith?
23 A
I would never review claim files. I'm
24 a CPA by
background. We would hire expert
25 claim handlers, third
parties, lawyers.
63
1
GRILLI
2 They're the ones
that would do the audit. If
3 I did it, we're
not getting anywhere.
4 Q When was the last time that
Centre
5 Life hired a
third-party expert claim manager
6 to go in and audit the
DMS claim files?
7 A I
believe it was a few years ago.
8 Q
Who was that?
9 A I
believe I have their report on my
10 desk somewhere, but I do not
recollect.
11 Q Could
you fax it to me? I'll give you
12 my fax number. Would
you send it to me if I
13 ask?
14 MR.
ELLIS: Not without the
15
advice of counsel. I probably
16
wouldn't recommend that an internal
17
audit be given to you.
18 Q
You won't send it to me?
19 A
I have to listen to my counsel. I
20 don't know if it's on
my desk or my file. I
21 have seen it
somewhere.
22 Q
Would it give you discomfort to send
23 it to me?
24 A
No, but I think it would be more
25 appropriate if you
ask for the one that is
64
1
GRILLI
2 current, that is
going to take place right
3 now.
4 Q
We have a trial on Monday. Have you
5 already retained
some third party to go in
6 and do the
audit?
7
A Yes. Centre hired last year an
8 individual named Jim McNamara whose
9 background is claims management, and he
is
10 also on the board of DMS, by the way, and he
11 has been the person who has gone out and
12 hired these two individuals. One is a lawyer
13 and one is a claims man.
14 Q
Do you know their names?
15 A
No, no. I can't think of him right
16 off the top of my
head, but he would know,
17 and these are the two
individuals who are
18 going to be going to
Boston, Springfield and
19 Syracuse to do their
audit.
20 Q
This last audit that you say occurred
21 a few years ago, is
that before your arrival?
22 A
I believe it was.
23 Q
You don't have any firsthand knowledge
24 of exactly when it
occurred?
25 A
Right off the top of my head, no.
65
1
GRILLI
2 Q
Since then there's been no effort by
3 Centre Life to
send somebody in to audit to
4 make sure that
policyholders are being
5 treated with
good faith?
6
A Before I answer that indirectly, if a
7 policyholder is not being treated fairly,
8 we're going to see that through a complaint
9 to the Insurance Department through the
legal
10 analysis that we get quarterly from DMS which
11 tells us what are the new claims, what are
12 the new legal claims what's been settled,
13 what is going on.
14
Now, there has been nothing that has
15 indicated there was a problem. Just the
16 opposite. The trend has been downward.
17 Q Maybe there's people out there
that
18 just don't have the financial wherewithal to
19 file a lawsuit.
20
MR. ELLIS: Objection.
21 A
I live in Baltimore. Peter Angelos --
22 do you know who Peter
Angelos is?
23 Q
No.
24 A
He's the owner of the Baltimore
25 Orioles. He made
his money on asbestos. You
66
1
GRILLI
2 cannot pick up
the Baltimore Sun, you cannot
3 turn on the TV
without seeing this guy
4
advertising. If you've been two miles away
5 from an asbestos
facility, come and see him
6 for free.
He will file the claim for you.
7 He will do that
all for free. All gratis.
8 If you are
successful, he gets his fee once
9 you get
paid. So there are many lawyers like
10 that who are willing
to work on that kind of
11 basis, certainly in
the asbestos area.
12
There's plenty of people who don't
13 have the means to
hire lawyers, but it hasn't
14 stopped him from
collecting billions of
15 dollars. I
would say that's probably the
16 case with other areas
including Workers'
17 Comp, too. I'm
sure there are lawyers who
18 are willing to work
on a contingency subject
19 to success.
20 Q
It's your judgment that there are all
21 kinds of lawyers out
there that would take
22 any case and,
therefore, you probably don't
23 have policyholders
who are not working, not
24 getting benefits and
not healthy who would
25 decide: I just
don't have the energy to
67
1
GRILLI
2 fight them?
3 A
I don't know. I'm not in their
4 position.
5 Let's go to the insurance company
6 complaints which I
don't think costs a lot of
7 money.
Individuals, from what I've seen, one
8 of them did it himself
without a lawyer, so
9 we have not seen a
substantial number of
10 insurance company
complaints. Just the
11 opposite. They're
disappearing. Nobody
12 seems to be complaining.
13 Q Do you have statistics on that to
back
14 that up? Is
that something you gave me here
15 this morning?
16 A
No, but I think in Andy's report, I
17
think there is a page that works out of that.
18 Q
Andy's report that hasn't been
19 provided to me is
that the one you're talking
20 about?
21 A
I don't know what has been provided to
22 you.
23 Q You say that you take comfort
that
24 things are
going well, there's less lawsuits
25 and you're
comfortable with that?
68
1
GRILLI
2 A
Yes. Lawsuits are a disaster for us.
3 Let me
explain that.
4 Q
I was going to ask you a question.
5 A
Go ahead.
6 Q
This is your job. You do it.
7 A If we
have denied a claim that is a
8
valid claim, we're going to pay eventually
9
that claim plus all the back benefits anyway.
10
We're going to pay interest. We're going to
11
pay legal costs. It is not in our financial
12
interest to deny any claim that is valid. It
13
just makes no sense.
14
Conversely, from DMS's perspective
15
they have a financial incentive pursuant to
16
our admin agreement with them where they get
17
paid on cost plus. The more claims they
18
have, the more costs there are for us, the
19
more profit they make due to their margin, so
20
it's in their incentive not to deny claims;
21
just the opposite, to agree on more claims
22
because their financial incentive is they
23
want to make more money.
24 If there is more claims,
there are
25 more claims
handlers. More claims handlers,
69
1
GRILLI
2 more
costs. More costs, more profit.
3 Q During
your tenure as president, has
4 any jury concluded that Mass Casualty and
DMS
5 acted in bad faith?
6 MR.
ELLIS: Objection.
7 A
Am I supposed to answer?
8 Q
If you know.
9 A
I know of one instance, yes.
10 Q
Did that occur in Ohio?
11 A
No, what I'm referring to did not
12 occur in Ohio, no.
13 Q
Do you know what I'm referring to?
14 A
I believe I do, but I am not -- and
15 perhaps there was
some bad faith there with
16
the Jeffries case I believe you're referring
17 to.
18 Q
You're correct.
19 A
Off the top of my head, I do not
20 recollect whether
there was bad faith or not.
21 If there was, I don't
recollect.
22 Q
You're mindful that that is what a
23 unanimous jury
concluded?
24
MR. ELLIS: Objection.
25
Again, this was a settlement
70
1
GRILLI
2
effort and not a trial.
3 Q
What was the other case that I did not
4 know of but you
did?
5 A
Well, this other case does not involve
6 the Mass
Casualty book of business.
7 Q
Does it involve DMS?
8 A
Yes, it involves DMS.
9
Q On Equitable?
10 A Yes.
11 Q That was within the past two
years?
12 A Yes.
13 Q
You just told the jury that you're
14 comfortable that DMS
did a great job;
15 lawsuits are going
down, but that obviously
16 is not a good
reflection?
17 A
That is just one case in a whole -- in
18 a period of a number
of years.
19 Q
How much of your time during the week
20 is devoted to Centre
Life's business versus
21 other jobs you have
in the Centre Group?
22 A
50 percent, I would guess. It's hard
23 to say.
24 Q
Different weeks are different. I
25 suspect one week
might require a lot of your
71
1
GRILLI
2 time from one
company versus another?
3 A
Yes.
4 Q
We were talking about the positive
5 side of the ledger
being premiums and
6 investment
income, and the negative side of
7 the ledger being
DMS expense, commissions,
8 claims being
paid, settlements and these
9 administrative
costs for Centre Group
10 employees who may
contribute some time during
11 the day to Centre
Life Insurance Company
12 activities and,
therefore, on a prorated
13 basis those costs are
absorbed by Centre
14 Life; is that
right? Did I say that
15 correctly?
16
THE WITNESS: Can we repeat the
17
question?
18
MR. ROBERTS: I might be
19
quicker if I say it quickly.
20 Q
Positive side of the ledger, you got
21 premiums coming in
and investment income
22 being made, right?
23 A
Yes.
24 Q
Negative side of the ledger, you have
25 DMS administrative
costs under the agreement,
72
1
GRILLI
2 correct?
3 A
Yes. I wouldn't characterize it as
4 negative side.
5 Q
Does it add to your bottom line or
6 take away from
your bottom line to pay that
7 monthly fee or
whatever it is to DMS?
8 A
It's a subtraction to the bottom line.
9 Yes it's a
subtraction.
10 Q
So you have that, you have litigation
11 expenses for outside
counsel, right?
12 A
Yes.
13 Q
You have claim expenses, you have
14 commission to agents
and you have settlements
15 with policyholders,
right?
16 A
Yes.
17 Q
You have these costs, they're shared
18 costs, but costs of
Centre Group employees
19 who perform financial
functions, actuarial
20 functions and
overseeing of investment
21 functions?
22 A
And other things, too. Legal
23 functions.
Right.
24 Q
Let's talk about the settlement costs,
25 okay.
73
1
GRILLI
2
I get injured on the way back to
3 Cincinnati today
and I have a NOVUS 3000, and
4 it says I'm
42. For my life I get a benefit
5 every month
because I can't be a lawyer
6 anymore.
Tomorrow I call up Andy Cohen and I
7 say, "Andy,
I'm going to make a claim."
8
What happens at Centre Life when a
9 policyholder
says, "Claim"? What happens
10 financially?
11 A
Well, I don't think anything happens
12 financially at Centre
Life. This gets
13 reported to
DMS. They're responsible for
14 handling the claims.
15 Q
Can you tell the jury what a reserve
16 is, the disability
reserve?
17
A
Yes. There's two types of reserve,
18 disable life reserve and a
disable reserve.
19 I think it's -- it's either
disabled life or
20 disabled reserve and an active
life reserve.
21 Disable reserve are people on
claim, and it's
22 a reserve generated by the
actuaries or
23 calculated by the actuaries.
24 Q That's
the reserve I'm talking about,
25 that one. I'm
42. Something happens to me.
74
1
GRILLI
2 I can't be a
lawyer anymore. Maybe I can go
3 drive a
taxicab. Maybe I could drive a
4 truck.
Maybe I could work at a toll booth,
5 but I can't be a
lawyer anymore.
6
I have a NOVUS 3000 that pays me
7 benefits for
life. I call Andy Cohen. I
8 say: I
want to make a claim. At that moment
9 in time, is it
the obligation of Centre Life
10 to calculate a
reserve?
11 A
No. There is investigation that needs
12 to go on by DMS to
ascertain the facts and
13 the circumstances
before anything occurs.
14 Q
What is the trigger for reserving a
15 Centre Life reserve?
16 A
The trigger would be generated by DMS
17 once they've done all
their work, and if they
18 agree it's a claim or
a partial claim or --
19 it's based on their
work as to when a reserve
20 would be eventually
set up.
21 Q
So Mr. Baldwin at DMS is an actuary,
22 and he does the
math. Then he sends some
23 information on to
Centre Life at this trigger
24 point that this
disabled life reserve needs
25 to be established; is
that right?
75
1
GRILLI
2 A No, not quite.
Mr. Baldwin is an
3 actuary at DMS, and if it's a valid claim
and
4 it gets established, then that information
is
5 put on to the DMS database as a claim and we
6 get -- "we" being Centre, Centre
Life -- on a
7 quarterly basis get information from DMS
that
8 makes up our reserve.
9
Q You get information from DMS about the
10 number, the
objective number of dollars?
11 A
But in total. It's not by individual.
12 Q
It's an aggregate number?
13
A Correct.
14 Q
So one month there is nobody on claim
15 and it's zero,
theoretically, but during the
16 course of November
2005 all of a sudden 2,000
17 people go on
claim. Each of them would need
18 to be accounted for
in establishing the
19 aggregate reserve,
right?
20 A
Yes. Yes, but your example, there are
21 people who are
getting monthly claim payments
22 every time, so there
is a reserve.
23
I've never seen the reserve go to
24 zero. There is
a reserve up for people that
25 are getting claims,
and that reserve will
76
1
GRILLI
2 change as people
stop being disabled and it
3 changes if more
people become disabled. The
4 reserve is a
function of all the people who
5 are receiving
disability benefits.
6 Q
Right. My example was silly. I
7 wasn't
suggesting that there is any moment in
8 time when there
is nobody on claim.
9 Obviously you
have hundreds, if not thousands
10 of people on claim at
any one time. But
11 overall, the more
people you have on claim,
12 the greater on
reserve. The less people you
13 have on claim, the less
is your disability
14 life reserve; is that
a fair statement?
15 A
No, not necessarily. It depends an
16 their monthly
benefit.
17 Q
Let's add to my hypothetical.
18 Everybody's monthly
benefit is a hundred
19 dollars, every
policyholder out there. The
20 more people on claim,
the greater your
21 reserve needs to be
in the aggregate. The
22 less people you have
in claim, the less your
23 reserve needs to be
in the aggregate, right?
24 A
Yes, but I am not an actuary.
25 Q
You're the president of Centre Life
77
1
GRILLI
2 Insurance
Company. You understand the
3 concept of
disabled life reserve, right?
4
MR. ELLIS: Objection.
5 A
Yes, I understand the concept, but
6 these
hypotheticals I think would be more
7 fruitful if you
ask an actuary who is
8 familiar
intimately with these concepts,
9 these type of
questions.
10 Q
What is the effect on the annual
11 statement if reserves
one year are a million
12 dollars and the year
before were $500,000?
13 Do you reflect that
as a credit or a debit on
14 the annual statement,
that increase?
15 A
Please repeat the question.
16 Q
It's probably four questions. I
17 should probably start
over.
18
Last year Centre Life had a million
19 dollars in disabled
life reserve
20 hypothetically.
That's what is reflected in
21 the 2003 annual
statement. 2004 it jumps to
22 5 million, so you
have a delta of $4 million,
23 growth in your
disabled life reserve of
24 4 million.
25
Is that something that reflects
78
1
GRILLI
2 positively on
the company's financial
3 condition or
negatively?
4 A
There are many things that affect the
5 company's bottom
line. This disabled life
6 reserve can go
up by 4 million, but there
7 could be a
corresponding decrease in the
8 active life
reserve of 5 million and,
9 therefore, there would
be a gain of
10
1 million.
11
So looking at just this disabled life
12 reserve change from 1
to 5, you can't simply
13 say: Okay, that
change falls right to the
14 bottom line.
You've got to look at a whole
15 bunch of things.
16 Q
Can I add one more variable to my
17 hypothetical, sir?
18 A
You can, although I'm not comfortable
19 with these
hypotheticals because I'm not -- I
20 don't think I'm the
right person to answer
21 these, but go ahead.
22 Q
You signed the annual statement.
23 Don't you verify
under oath that it's true
24 and accurate?
Right?
25 A
Yes.
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1
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2 Q
Everything from 2003, from a financial
3 perspective, is
exactly the same as 2004,
4 everything to
the penny; how many coasters
5 you buy, how
much money you spend at a
6 Christmas party,
everything is exactly the
7 same. One
difference, you have more people
8 filing claims in
2004, and your disabled life
9 reserve grew in
the aggregate by $4 million.
10
Is that change something that would
11 make your 2004 annual
statement better or
12 worse than your 2003
annual statement?
13 A
I can't answer that question because
14 there is an active
life reserve that is
15 supposed to take into
account future
16 individuals who might
go on claim, and we
17 might have an active
life reserve that is
18 substantially greater
than that increase of
19 4 million, so your
question cannot be
20 answered.
21 Q
You must not understand my
22 hypothetical and I'll
move on, but my
23 hypothetical is
everything, everything stays
24 the exact same except
for that one. If
25 you're not
comfortable in answering that
80
1
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2 question, we can
move on.
3 A
I'm not comfortable. Not everything
4 stays the
same. It's a hypothetical that is
5 not reality.
6 Q
What if Mr. Baldwin reports to you in
7 the next report
he sends about reserves that
8 you need to
increase the aggregate disable
9 life reserve by
a million dollars? What is
10 triggered at the
company? Do you take a
11 million dollars and
put it in a pillow
12 somewhere or bury it
in the backyard? What
13 happens?
14 A
The company would reflect on its
15 general ledger the
increase in the disable
16 life reserve from the
information via Dave
17 Baldwin.
18 Q
At that moment in time does the
19 company's financial
condition become better
20 or worse?
21 A
That is the same question you asked me
22 before.
23 Q
I'm trying to get an answer.
24 A
Yes, but you cannot look at just the
25 disabled life reserve
alone.
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1
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2 Q
Very well.
3 A
That is not how it works.
4 Q
What if David Baldwin reports to you,
5 "Hey, we
had $2 million in reserves last
6 month but DMS
was able to settle all those
7 claims for
200,000," so you have a delta of
8 1.8 million?
9
Is that $1.8 million change good or
10 bad for Mass Casualty?
11
MR. ELLIS: Objection.
12
A The reserves on Mass Casualty's books,
13
they are fully ceded to another Centre
14 company so
there really are no reserves
15
pertaining to the Mass Casualty book.
16
They're on another Centre company.
17
They're not -- they're driven or are
18 calculated by the
actuaries based on some
19 actuarial general
assumptions. They're not
20 really done on an
individual basis.
21 Therefore, when we
necessarily settle a
22 reserve, it doesn't
necessarily end up being
23 good or bad for the
company.
24
There are many factors involved. A
25 settlement takes into
account negotiation
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1
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2 between the two
parties. There are many
3 claims where
people go on disability and they
4 go off
disability in a year or two. Well,
5 we've settled a
claim and we're taking the
6 risk that this
person might have gone off
7 claim in a year
or two and we're paying him
8 now for that
risk.
9
This is the same way on the other
10 side. The
policyholder might feel that he
11 might stay on a claim
for years, he might
12 not, and it's a
negotiation with the parties
13 that take into
account various
14 considerations.
15
I can't answer the question as far as
16 whether it's good or
bad. There's many
17 factors.
18
MR. ROBERTS: Let's go off the
19
record.
20
(Whereupon, a discussion was
21
held off the record.)
22
THE VIDEO OPERATOR: Going off
23
the record, 12:33. End of tape number
24
2.
25
(Luncheon recess.)
83
1
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2
(Time noted: 12:33 p.m.)
3
4
* * *
5
6
A F T E R N O O N S E S S I O N
7
(Time noted: 1:32 p.m.)
8
9
THE VIDEO OPERATOR: Returning
10
to the record, 1:32 p.m. Beginning of
11
tape number 3.
12
13 EXAMINATION
(CONTINUED)
14 BY MR. ROBERTS:
15 Q
Mr. Grilli, you understand you're
16 still under oath?
17 A
Absolutely.
18 Q
We've been off the record for a little
19 while. I like
to remind witnesses of that
20 when we return.
21
When we left off, we were talking
22 about reserves.
I guess what I'd like to
23 know is what is the
company required to do if
24 Mr. Baldwin says
increase the reserves by
25 whatever
amount? What does the company do
84
1
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2 internally?
3 A
Well, it's not -- it's -- that's not
4 what
happens. If an individual submits a
5 claim and it is
approved and it goes on
6 disability, then
the disability -- his policy
7 and his benefits
are then put into a database
8 and Mr. Baldwin
will calculate a reserve with
9 everybody else
in that database, and that
10 reserve is then what
gets recorded by Centre
11 Life.
12 Q
What is the recording of it? What
13 internally happens
when there is a recording
14 of a change, an
increase in the reserve for
15 whatever
reason? I'm not focused on why
16 there is an increase,
it's reported that
17 there should be an
increase. What happens
18 financially?
19 A
On the balance sheet on the liability
20 side the reserve will
increase.
21 Q
Liability increases?
22 A
Right. And the other side of
23 double-entry
bookkeeping would be something
24 called change in
reserves. It's under income
25 side. It's a
debit on your income statement.
85
1
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2 It's called
change in reserves.
3 Q
That's what happens when the reserve
4 is increased?
5 A
Right.
6 Q
When the reserve is decreased, what
7 happens from an
accounting perspective?
8 A
On the balance sheet the reserve is
9 reduced so the
liability goes down, and
10 correspondingly,
there is a gain, a credit on
11 the income statement
to the line item called
12 change in reserve.
13 Q
Very well.
14
You had mentioned during the first
15 session before we
took a lunch break that the
16 company doesn't like
litigation. It's
17 expensive. It's
risky. Do you remember
18 that?
19 A
Yes.
20 Q
Why did the company sue Mr. Jay?
21
MR. ELLIS: Objection.
22 A
I am not familiar at all with any of
23 the details of this
claim, so the answer is I
24 don't know. I
have no idea. I don't know
25 the facts.
86
1
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2 Q
If the company is adverse to
3 litigation and
you're the president of the
4 company, would
it be consistent with what you
5 desired the
company be doing for the policy,
6 to be suing its
policyholders?
7
MR. ELLIS: Objection.
8 A
Without all the facts, which I don't
9 have, I can't
answer that. We hired DMS, and
10 in this case it's the
legal side of the house
11 at DMS to make those
decisions. They're the
12 ones who are the
expert. They have the
13 facts. They've
got to make the decisions.
14 Q
You understand that the in-house legal
15 staff at DMS
are experts in claim litigation?
16 A
I'm not sure what the definition of
17 expert is.
They're knowledgeable.
18 Q
You know there are five or six
19 in-house lawyers,
right?
20 A
Yes.
21 Q
You know that their background is
22 litigation?
It's not real estate or tax or
23 benefits or
healthcare; they're litigation
24 lawyers, right?
25 A
I'm not sure. I don't know. I don't
87
1
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2 know.
3 Q During the
period before the lunch
4 break you said that you
received management
5 reports from DMS; is
that right?
6 A Yes.
7
Q How frequently do you receive those?
8 A
Once a month. Maybe the third or
9 fourth
business day following the end of the
10 month, and it
is sent by e-mail by Dave
11 Baldwin.
12 Q What
information is contained in the
13 management report?
14 A
There are numerous financial
15 schedules, premiums
recovering from the two
16 inuring reinsurers
that I mentioned. Claim
17 count, open claims,
the amount of money paid
18 in claims and out of
expenses incurred by the
19 company. That's
my recollection. There's
20 quite a few pages
with schedules in it.
21 Q
What else relating to the status of
22 claims?
23 A
I believe there's only two schedules.
24 One is a rolling schedule that starts off
25 with the ending claim
count and takes into
88
1
GRILLI
2
account claims and new additions to claims,
3
deletions and reopen claims, and I think
4
there's a dollar amount that we -- on a
5
schedule that deals with the amount of
6 monthly benefit
we're paying per month as it
7 changes over the
period. That's my
8 recollection.
9
I have not looked at one of these
10 schedules in like
thirty days. We're going
11 to get the October
schedule shortly.
12 Q
But it's a pretty important monthly
13 reporting, isn't it?
14 A
It's one of our tools that we use to
15 manage DMS on a macro
basis, a high-level
16 basis. But,
yes, it is.
17 Q
You've been getting them once a month
18 for a year and a half
or two since you became
19 president, correct?
20 A
Yes, along with some other people.
21 There's a number of
people. The accounting
22 staff get the
reports. The treasurer's staff
23 gets the
reports. It's communicated to a
24 number of people at
Centre, yes.
25
Q But it would reflect claims being
89
1
GRILLI
2
handled, right, that monthly report?
3 A In a total sense,
yes. Not in any
4 individual claim, not in any micro level
5 managed --
6 Q
There is no policyholder name in the
7 document?
Mike Roberts bought a claim this
8 month; it
doesn't say that?
9 A
No. It deals with total claims, in
10 total. It's in
total.
11 Q
So it has a statistics of claims being
12 handled, right?
13 A
Yes.
14 Q Does it have
a statistic about new
15 claims that month or accepted claims?
16 A There's a
column on the schedule that
17 deals with new claims.
18 Q So those
would be claims accepted,
19 right, approved?
20 A
Policies, right. Not accepted, but
21 policies that have
generated a claim and
22 policyholder has gone
on claim and is
23 collecting
disability.
24 Q
Does it reflect any claims that have
25 historically
been on the report but now have
90
1
GRILLI
2 fallen off
or been rejected?
3 A
No. There is a category for claims
4 for
policyholders who have gone off claim,
5 but there
can be many categories as to why
6 somebody
has gone off claim, one being that
7 he's
exhausted or he or she has exhausted
8 their
policy limits. Someone has died. It's
9 not broken
out that way.
10 Q Do you
recall signing an affidavit
11 yesterday?
12 A
Yes.
13 Q
Who presented you with the affidavit?
14 A
Could I take a look at the affidavit?
15 Q
In a moment.
16 A
I'm not sure. It was either Andy or
17 Mr. Ellis. Mr.
Cohen or Mr. Ellis.
18 Q
Either in-house counsel at DMS or the
19 representative here
in this lawsuit in Ohio
20 for DMS and Centre
Life, right?
21 A
Right.
22 Q Does DMS perform a litigation
23 management function
for Centre Life?
24 A Yes, DMS performs
litigation
25 management.
91
1
GRILLI
2 Q
When you were presented with the
3 affidavit to
sign yesterday, had you earlier
4 been given a
heads up that you would be
5 required to sign
an affidavit?
6 A
During earlier in the day I believe I
7 was told that I
would be signing an
8 affidavit, but
certainly not before yesterday
9 did I even know
about it.
10 Q
Prior to yesterday you were oblivious
11 to the fact that the
court had ordered that
12 the president of
Centre Life -- they court
13 ordered this a month
ago, October 3rd --
14
MR. ELLIS: Objection.
15 Q You were oblivious to the
fact that
16 the court in this
action ordered that the
17 president of Centre
Life execute an affidavit
18 for -- that the
defendants produce
19 statistics? You
were not aware of that until
20 yesterday?
21 A
That is correct.
22 Q
You realize we go to trial two
23 business days from
now?
24 A
No. Actually, I wasn't that aware of
25 it, no.
92
1
GRILLI
2 Q
Sitting here today --
3 A
Now I am. You have mentioned it to
4 me.
5 Q
You didn't discuss it with anybody in
6 the past 24
hours that trial is on Monday and
7 today is
Thursday?
8 A
I'm sure it came up yesterday, but I
9 don't believe it
came up previous to this
10 week.
11 Q
But my mentioning it to you now isn't
12 the first time?
13 A
That's correct. You mentioned it
14 earlier today,
actually.
15 Q
You weren't curious why you had to
16 come to New York from
Baltimore to give a
17 deposition?
18 A
Well, actually, I work in New York and
19 I live in Baltimore
on the weekends. So I
20 just came down from
our offices on 17th
21 Street.
22 Q
When was the first time that you were
23 advised that you had
to give a deposition in
24 the case?
25 A
Approximately two or three weeks ago
93
1
GRILLI
2 by one of the
lawyers from DMS.
3 Q
Prior to that had you been advised
4 that your
deposition had been requested
5 months earlier?
6 A
It's possible. I don't recollect.
7 Q
So either Mr. Ellis or Mr. Cohen
8 handed you an
affidavit yesterday, right?
9 A
Yes.
10 Q
Prior to handing you -- you understood
11 the affidavit is a
sworn statement made under
12 oath subject to
penalty of perjury?
13 A
Correct.
14 Q
Prior to them handing you the document
15 yesterday, had
anybody discussed with you the
16 subject matter of the
affidavit?
17 A
No.
18 Q
Did they discuss the subject matter of
19 the affidavit with
you as they were handing
20 it to you?
21 A
Yes.
22 Q
It was a prepared document waiting for
23 your signature,
right?
24 A
Well, we had to wait for the notary to
25 arrive, but, yes, it
was the three-page
94
1
GRILLI
2 document that
you're holding.
3 Q
But somebody prepared, actually typed
4 out this
affidavit, printed it up on paper,
5 brought it
to you with their signature line
6 on it, and
all you to do was sign it and have
7 it
notarized?
8 A
No, I didn't just sign it. I read it
9 very carefully.
10 Q
You read it very carefully, right?
11 A
Yes.
12 Q
And everything in the affidavit is
13 true?
14 A
To the best of my knowledge and
15 belief, yes.
16 Q We just talked about some
monthly
17 management report you
get that talks about
18 claims being handled,
right, provides
19 statistics on claims
being handled, right?
20 A Well, I wouldn't say it's
statistics.
21
There's two reports. It just shows a claim
22 count. I
wouldn't call that statistics. A
23 claim account
roll forward month to month,
24 year to year,
and I believe there is a dollar
25 amount, a
schedule with the dollar amount of
95
1
GRILLI
2 monthly amounts being paid on
benefit. Those
3 are the two schedules that are
contained in
4 the monthly report issued by DMS.
5 Q
After you carefully reviewed the
6 document, did
you require any changes be made
7 to it?
8 A
Yes. The date was wrong. It was
9 October. I
wanted it changed to November.
10 Q
You're talking about where you signed,
11 you crossed out
October and wrote in
12 November?
13 A
Yes.
14 Q
Other than reflecting correctly and
15 factually the month
in which you signed it,
16 did you make any
other revisions to the
17 document that was
prepared for you without
18 any discussion with
you?
19 A
I made no changes to the document.
20 Q
Can you read paragraph 4 aloud for me?
21 A
"According to the court's order of
22 2/14/03 in that
matter CLIC was to produce to
23 the extent that (it
has those) statistics of
24 claims handling,
claims accepted, claims
25 rejected from '98 to
the present."
96
1
GRILLI
2 Q
Thank you. Can I have it back?
3
You understood that the company either
4 needed to
provide these statistics or you
5 would be
obligated to sign an affidavit
6 suggesting that
there were no such thing,
7 right? Did
you have that understanding?
8 A
Yes, I had that understanding.
9 Q
I think you misread it. You said
10 claims handling. It says,
"Statistics of
11 claims handled."
12 A
Handled, sorry.
13 Q
Now, you're the one that actually
14 receives monthly
reports from DMS, right?
15 A
Well, it comes in an e-mail, but
16 there's twenty people
on the e-mail so
17 there's many people
who receive it. People
18 in DMS and people at
Centre.
19 Q
But you personally receive the
20 information?
21 A
Yes.
22 Q
So you would have personal knowledge
23 about whether the
statistics exist or whether
24 they don't exist,
right?
25
MR. ELLIS: Objection.
97
1
GRILLI
2 A
To the best of my knowledge and
3 ability those
statistics are not contained in
4 the report.
Whether they exist or not would
5 be something
that DMS would know of.
6 Q
Your judgment is the document that you
7 and I discussed,
this monthly document you
8 get, does not
contain statistics of claims
9 handled?
10 A
Well, beyond the monthly report I've
11 never seen in the DMS
board meetings or any
12 documents issued by
DMS that have the
13 statistics that
you're referring to in
14 paragraph 4.
15 Q
You just told the jury that you get a
16 monthly report
on that report. It shows an
17 objective
finite number of claims being
18 handled, right?
19 A
That is correct. Claims open. If you
20 consider that
-- which I would consider the
21 same as claims
handled. It's claim open.
22 Q
So monthly you have personal knowledge
23 that every
month you get an objective,
24 quantifiable,
finite number of claims being
25 handled,
correct?
98
1
GRILLI
2 A
Yes.
3
Q Paragraph 5 you say, "I have been made
4 aware that
CLIC does not maintain statistics
5 in this
manner nor does it receive them from
6 DMS in
this manner." Right?
7 A
Correct.
8 Q
You also mentioned that you receive a
9 president's
report. What information is
10 contained in the
president's report?
11 A
The president's report is a report
12 issued -- well, it's
not a written report.
13 It's a report
generated out of the DMS board
14 meeting. It has
maybe six or seven line
15 items to it, and it's
just an agenda that is
16 the president's
report. It's an agenda.
17
The agenda has got various categories;
18 a report from the
legal department at DMS, a
19 report from the
actuaries, a report from the
20 accounting/treasurer
at DMS, a claims report,
21 new business
report. Those are the
22 categories, as best
as I can remember them.
23 Q
That is what you are referring to when
24 you mentioned earlier
president's report?
25 A
Right. The heading is called,
99
1
GRILLI
2
"President's Report," but there is no
3 president's
report. It's just six bullets of
4 people and what
they're going to present --
5 the topics that
they're going to present on.
6 Q
You say you received letters from
7 policyholders?
8 A
Very, very, seldom, but yes, I have
9 received -- I
think I've received one in two
10 years.
11 Q
Did you keep it?
12 A
I don't know.
13 Q
Did you call the policyholder and say,
14 "Hey, I'm the
president of Centre Life. I'd
15 like to talk to you a
little bit further to
16 get to understand
what it is that you think
17 went wrong"?
18 A
No, not right away. I would first
19 talk to somebody at
DMS about it.
20 Q
Did you call that policyholder in that
21 instance; yes or no?
22 A
In that instance I received an e-mail,
23 not a letter.
And, yes, I did call that
24 policyholder
eventually.
25 Q
Do you recall his or her name?
100
1
GRILLI
2
MR. ELLIS: Objection.
3
We needn't disclose the name of
4
any policyholder.
5 A
No, I don't remember. It's been a
6 while. It
was more of a courtesy.
7 Q
What information on the SAS 70 report?
8 A
The SAS 70 report which is issued by
9 Ernst & Young on an
annual basis goes through
10 the internal
controls of DMS as it respects
11 all their
activities in connection with their
12 third-party
administration agreement with
13 Centre.
14 Q
What does that mean? What does
15 internal controls mean? Did it review their
16 claim policy procedure manual?
17
A I do not believe it did. I don't
18 believe there is a manual, but
internal
19 controls are to -- are the controls in place
20 to make sure that the
receipt of money and
21 the disbursement of
money, that no individual
22 has total access to
-- that there are
23 controls in place to
prevent the misuse of
24 those funds both coming in and going out.
25 Q It's
an analysis of the financial
101
1
GRILLI
2 internal
controls, not the substantive claim
3 administration
controls, correct?
4 A
It could have something to do with
5 some of the
claims administration, but a lot
6 of the focus is
on the financial, yes.
7 Q You receive a
monthly litigation
8 report?
9 A No.
That's quarterly.
10 Q
Have you spoken to Bob Bonsall in the
11 past week?
12 A
No.
13 Q
What kind of efforts does Centre Life
14 undertake to persuade
its policyholders that
15 they should continue
paying premium?
16 A
CLIC is not in touch with its
17 policyholders to tell
them to pay premiums or
18 not. The
policyholder administration is part
19 of what DMS is hired
to do, so we have very
20 little involvement
with the policyholders.
21 Q
Do you have any written correspondence
22 with anyone at DMS?
23 A
Let's quantify that question. Between
24 myself and
them? I have written
25 correspondence as far
as reports go where I'm
102
1
GRILLI
2 cc'd, but on an
individual basis?
3 Q
I'm talking more about a letter, an
4 e-mail that is a
narrative in form or you
5 might say,
"Hey, Bob Bonsall, can you explain
6 to me how it is
that I'm assured that you're
7 exercising good
faith in taking care of my
8 company's
policyholders"?
9 A
No, I don't have a letter or
10 individual
correspondence like that, no.
11 Q
Are you mindful that DMS sends out a
12 letter, a form letter
every year to your
13 policyholders which
is an attempt by them to
14 keep the
policyholders as policyholders?
15
MR. ELLIS: Objection.
16 A
No, I was not aware of that.
17 Q
That is a good thing isn't it? Stay
18 in touch with the
policyholders so they don't
19 stop paying their
premium payments?
20
MR. ELLIS: Objection.
21 A
Can you define "good"?
22 Q
I guess if you send them a letter
23 telling them about
all the benefits and what
24 a good idea it is to
keep their policy in
25 force and they're
persuaded by that, then
103
1
GRILLI
2 that is a good
thing for the company because
3 that person will
keep paying premiums?
4 A
With respect to a close block of
5 business, I
guess most people would say just
6 the opposite,
that we are better off
7 financially when
policyholders lapse, that
8 they don't
continue to pay premiums.
9 Q
All of the money, all of the money
10 that reflects on the
positive side of your
11 ledger for Centre
Life -- are you with me?
12 A
Yes.
13 Q
All of that money originates in your
14 policyholder's bank
account, right?
15 A
Originates from?
16 Q
From.
17 A
Okay, the policyholders' bank account?
18 No, that's not true.
19 Q
If you don't get the policyholder's
20 premium, there is no
money to invest or
21 reinvest, right?
22 A
Correct.
23 Q
So you could say that every dollar
24 that Centre Life
reflects in its 2004 annual
25 statement, every
dollar started in a
104
1
GRILLI
2 policyholder's
pocket, right?
3 A
I have to hear the question again.
4 Q
Every dollar that is reflected on the
5 positive ledger
of the 2004 annual statement
6 originated at
some point in time in a
7 policyholder's
pocket, true?
8 A
No, false. There's capital put into a
9 company's at day
one that has nothing to do
10 with the
policyholders.
11 Q
Back in 1926 when the family that
12 started Mass Casualty
-- is that what you're
13 talking about?
14 A
No, in 1999 when we bought the
15 company.
16 Q
For $34 million?
17 A
I don't think you could allocate which
18 cash in the company
that existed on its
19 balance sheet at that
date came from
20 policyholders versus
where it came from
21 capital, where it
came from reinvestment of
22 interest. I
mean, cash is fungible, so it's
23 hard to say this
piece belongs here and that
24 piece belongs there.
25 Q
Did the $34 million that Zurich
105
1
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2 Financial
Services paid to Centre Life, did
3 that stay inside
Mass Casualty or did Sun
4 Life take that
money and take it somewhere
5 else?
6 A
When a company buys another company,
7 and in this case
Centre Solutions U.S. bought
8 CLIC, whatever
the purchase price was, that
9 amount goes to
Sun Life. It doesn't go into
10 the company. It
has nothing to do with
11 Centre Life Insurance
Company.
12 Q
Right. So there was not a capital
13 investment by Centre
Life in 1998? That
14 $34 million purchase
price is money that was
15 paid in exchange for
stock, correct?
16 A
Yes, it is correct. It was paid and
17 we got the stock, and
the stock represents
18 the assets less the
liabilities of that
19 corporation.
20 Q
Right. So today every dollar that
21 reflects on your
positive side of your ledger
22 originates in a
policyholder's pocket, true?
23 A
No, false. When we bought the
24 company, there were
funds in that company
25 from day one or
reinvested funds from the
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1
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2 capital of that
company. So it's not all
3 from the
policyholders, no.
4 Q
You take the premium. You invest.
5 You make
money. You invest the return on the
6
investment. That is the reinvestment you're
7 talking about,
right, so it originated with
8 the
policyholder?
9 A
But there is capital at day one. An
10 insurance company is
established with a
11 capital.
Capital is contributed to that
12 company. It
could be in the form of an
13 investment, i.e.,
land or stocks or bonds.
14 Generally it's in the
form of cash. That's
15 the capital that is
put into this company.
16 Q
I'm going to show you a statement
17 that's been sent out
by DMS for the last
18 several years on Mass
Casualty letterhead.
19
First, I don't mean to testify, but
20 are you mindful that DMS
sends letters to
21 policyholders or
forms to policyholders on
22 Mass Casualty
letterhead?
23 A
I'm not mindful. I'm not surprised
24 there is
correspondence that is issued by
25 Mass Casualty by DMS
when they're dealing
107
1
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2 with a claim.
3
(Whereupon a document on Mass
4
Casualty letterhead was marked as
5
Plaintiff's Exhibit 11 for
6
identification, as of this date.)
7 A
Do I need to read it?
8 Q
Let's read it together.
9
MR. ROBERTS: This is
10
Plaintiff's Exhibit 11.
11 Q
First of all, it is on Mass Casualty
12 letterhead or what is
purported to be Mass
13 Casualty letterhead,
correct?
14 A
This is what this piece of paper
15 indicates, yes.
16 Q
Don't you recognize Mass Casualty logo
17 with the old building
and the, "Incorporated
18 1926,"
statement?
19 A
Actually, no, but I do recognize the
20 address. The
address seems to be correct.
21 Q
That building on this Exhibit 11 is
22 something you've
never seen before?
23 A
Not to my recollection, no. It's
24 possible I've seen
it. I've seen thousands
25 and thousands of
pieces of paper over the
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1
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2 last two years.
3 Q
The address is the location of the DMS
4 office that
administers the Mass Casualty
5 block of
business; is that right?
6 A
Yes, although there are certain
7 functions that
I'm sure are performed in
8 Springfield,
like maybe the computer system
9 is a shared
computer system. But not
10 everything is done in
Boston, but most of it.
11 Q
The address that is reflected in there
12 is the DMS office in
Boston?
13 A
Yes.
14 Q
The title of this is all bold in
15 larger font than the
rest of the page. It
16 says, "Don't Be
Caught Off Guard," right?
17 A
Yes.
18 Q
"If you were to become disabled
19 tomorrow, would you
have the funds to pay
20 your mortgage, your
utility bills, your
21 medical
expenses? Probably not if your
22 disability insurance
policy has been
23 cancelled."
24
That is the first paragraph, right?
25 A
Right.
109
1
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2
MR. ELLIS: I will object to
3
this line of questioning, and I will
4
stipulate that both counsel and the
5
witness can read the document marked
6
as Exhibit 11.
7
MR. ROBERTS: That's fine.
8 Q
Do you get the sense that the company
9 is trying to
scare the policyholder a little
10 bit there, that
they're not going to be able
11 to pay their mortgage
or utility bills unless
12 they pay you a
premium?
13
MR. ELLIS: Objection.
14 A
No, not really.
15 Q
You don't get that sense?
16 A
No.
17 Q
That series of questions, inability to
18 pay your mortgage,
your utility bills, your
19 medical expenses, you
don't think that might
20 scare some unsophisticated
policyholder out
21 in the middle of
America U.S.A.?
22
MR. ELLIS: Objection.
23 A
I don't know what the policyholders
24 may think. I'm
not in their shoes.
25 Q
You do know, though, that your company
110
1
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2 has a duty of
good faith to them; do you know
3 that?
4 A
Yes.
5 Q
How would you define that duty?
6 A
Good faith, being fair, equitable.
7 Q
Is it your judgment that sitting here
8 today, the company
owes Mr. Jay a duty of
9 good faith?
10
MR. ELLIS: Objection.
11 A
I don't know the facts of the case at
12 all.
13 Q
That's not my question. I'm not
14 asking you to pass
judgment on the case.
15
Do you have a judgment one way or the
16 other whether today
the company owes an
17 affirmative duty of
good faith to Mr. Jay?
18
MR. ELLIS: Objection.
19 A
I believe DMS handles all its claims
20 in good
faith. So the answer to your
21 question would
be yes.
22 Q
I'm not asking you to comment on what
23 kind of conduct he's
been suffering through.
24
MR. ELLIS: Objection.
25 Q
I'm just asking you, do you have a
111
1
GRILLI
2 judgment today
whether Mr. Jay -- whether he
3 has a lawsuit
pending or not -- whether or
4 not the company
owes him today an affirmative
5 duty of good faith?
6 A The company
owes Mr. Jay a duty of
7 good faith like we treat all our
8 policyholders, no different.
9 Q
You see the third paragraph there? It
10 says, "If you
allow your disability policy to
11 be cancelled, you end
up losing out on many
12 benefits. Here
are four key reasons to keep
13 the policy in force."
14
Do you see that?
15 A
Yes.
16 Q
The second bullet point says,
17 "Valuable
coverage. If disability strikes,
18 your most important
asset, the ability to
19 earn a living, could
be wiped out."
20
Do you have the feeling that perhaps
21 that kind of language
might scare somebody
22 into paying their
premium?
23
MR. ELLIS: Objection.
24 A
I can't conjecture one way or the
25 other. However
-- no, I can't.
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1
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2 Q
The next full paragraph concludes, "In
3 the year
1994."
4
Do you see that?
5 A
Yes.
6 Q
Do you know historically what the
7 performance of
Mass Casualty was in the '90s?
8 A
No, I do not know the historical
9 performance of
Mass Casualty in the 1990's.
10 It's way before my
time.
11 Q
But in your tenure as president for
12 the past two years of
this company, you
13 haven't been provided
information about the
14 company's performance
in the '90s?
15 A
No, it's totally irrelevant. In the
16 1990's it was issuing
policies. When Centre
17 bought it, it was a
closed block. It's
18 apples and
oranges. It's two different
19 things.
20 Q That
paragraph says, "In the year 1994
21 Mass Casualty paid out about $34 million
in
22 benefits. Here
are some clients who are glad
23 they had disability insurance."
Then it
24 gives three anecdotes.
25
Do you see that? Are you with me?
113
1
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2 A
Yes.
3 Q
Do you know whether the company made
4 or lost money in
1994?
5 A
I have no idea.
6 Q
Let me hand you the 1994 annual
7 statement which
is AS00001 through AS00017.
8 That is like the
annual statement that you
9 have before you
for 2004.
10
Tell me how much money the company
11 made or lost in 1994,
the year they bragged
12 about paying out $34
million in benefits.
13
MR. ELLIS: Object as to
14
relevance.
15 A
There's two ways of looking at this.
16 Are we looking at net
income? Are we looking
17 at changes in the
total surplus of the
18 company for the
year? Because some people
19 would look at net
income and some people
20 would look at changes
in the total surplus of
21 the company.
22
It so happens that in 1994 the net
23 income was negative,
which means there was a
24 loss. However,
if you look at the change in
25 surplus it was
positive, which means that
114
1
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2 there was a
gain.
3 Q
If you look at it as a loser year,
4 what was the
loss?
5 A
After tax, it's $3,198,897.
6 Q
Can you turn to the five-year
7 historical data
page of that 1994 report?
8 A
Would you know what page that is on?
9 Q
It's page 24 of the '95 report.
10 A
Okay. Five-year historical data?
11 Q
Right. Did the company make or lose
12 money in '91?
13
MR. ELLIS: Same objection.
14
I'll object to the whole line of
15
questioning.
16 Q
Did it lose $1.2 million? Line 74, of
17 the total.
18 A
What year are you referring to?
19 Q
1991.
20 A
Well, I believe the line that you're
21 referring to is the
results of the company
22 before capital gains
or losses, so there
23 could have been a
capital gain. That could
24 have changed that
loss into a gain, but prior
25 to the capital gains
and losses it indicates
115
1
GRILLI
2 a loss of
$1,217,000.
3 Q
In the next year, '92, it was $1.2
4 million
again? $1.294?
5 A
Of a loss, yes.
6 Q
And then in '93 there was a half-
7 million-dollar
gain?
8 A
Yes.
9 Q
'94, over $3 million loss?
10 A
Yes.
11 Q
Back to this marketing piece, "Don't
12 be cut off
guard." It says, "In the year
13 1994 Mass Casualty
paid out about 34 million
14 in benefits a
year."
15
They lost over 3 million, right?
16 A
Yes.
17 Q
"Here are some clients who are glad
18 they had disability
insurance."
19
Let me direct your attention to the
20 second bullet
point. Are you aware, sir,
21 that Mr. Jay has
coronary artery disease?
22
MR. ELLIS: Objection.
23 A
No, I was not aware.
24 Q
Assume for me that he has coronary
25 artery disease and he
had a triple heart
116
1
GRILLI
2 bypass, triple
heart bypass when he was 45
3 years old.
4 The
second bullet point says that the
5 company had a policyholder who was a,
6
"45-year-old fast track attorney suddenly
7 confronted with heart disease.
Bypass
8
surgery saved his life but it didn't save his
9 career. The attorney was forced
to cut back
10
his hours," so he's still working, I guess,
11 "and as a result, his compensation
suffered.
12 To help ease the burden Mass Casualty pays
13 him residual monthly benefits of $4,000 for
a
14 total of $352,000 to date."
15
Did I read that correctly?
16 A
I believe so, yes.
17 Q
Would it surprise you if this form has
18 been sent out every year for at least the
19 last seven years without any change at all?
20
MR. ELLIS: Objection.
21 A
Would it surprise me? I'm not sure.
22 No it wouldn't
surprise me.
23 Q
But it speaks in the present tense.
24 It says, "To
help ease the burden Mass
25 Casualty pays
him," present tense, right?
117
1
GRILLI
2 That is present
tense?
3 A
Yes, it is.
4 Q
So the company has been saying -- if
5 I'm right on the
facts, if this has gone out
6 every year for
seven years, the company is
7 telling all of
its policyholders that is in
8 the present
paying this guy, but the number
9 never changes;
it's always $352,000 to date.
10
If I'm telling you the truth on the
11 facts, would that
make this statement false?
12
MR. ELLIS: Objection.
13 A
I think these are examples, and I'm
14 not so sure that
these examples are updated
15 each year.
They're there for a purpose, but
16 it isn't to make sure
that whether it's 352
17 or $400,000 is
irrelevant. What the point of
18 it that they're
trying to get is they paid
19 his benefit and he's
receiving monthly
20 benefits.
21 Q
You don't even know that such a person
22 exists, do you?
You don't even know who is
23 referenced there, do
you?
24 A
No. This is a hypothetical similar to
25 the other
hypotheticals.
118
1
GRILLI
2 Q
It's not stated as hypothetical. It's
3 stated as a
matter of fact that this person
4 actually exists,
right?
5 A
Yes.
6 Q
Maybe it is a hypothetical.
7 A
It says, "Here are some clients," so
8 it would appear
that there was an individual
9 like this.
10 Q
Then at the bottom, again returning to
11 the bold print it
says, "Don't be caught off
12 guard.
Disability insurance is protection
13 you cannot afford to
be without." Right?
14 A
Well, it actually says you can't, you
15 said cannot.
It's, "Can't afford to be
16 without," but,
yes.
17 Q
Let me read it correctly then. "Don't
18 be caught off
guard. Disability insurance is
19 protection you can't
afford to be without."
20 Right?
21 A
That is correct.
22 Q
You understand that a lot of your
23 policyholders, in
fact, cannot or can't
24 afford to be without
their disability benefit
25 when they're not
working and they're
119
1
GRILLI
2 disabled?
3
MR. ELLIS: Objection.
4 A
I don't possibly know the financial
5 circumstances of
each policyholder, so I have
6 no idea.
7 Q
Sir, you have 40,000 policyholders out
8 there, right,
approximately on this block of
9 business?
10 A
Right.
11 Q
And a lot more on other blocks of
12 business, right?
13 A
Yes.
14 Q
You don't have the sense that maybe if
15 someone is not
working, not getting paid by
16 your company, that
their financial situation
17 may be difficult?
18
MR. ELLIS: Objection.
19 A
I don't have all the facts to make
20 that judgment call,
to make that assessment.
21 I don't know.
22 Q
Do you know that the company has paid
23 total disability
benefits to people who have
24 diabetes?
25 A
No, I don't know that for sure.
120
1
GRILLI
2 Q
There were some interrogatories and
3 admission
requests served on the company, but
4 DMS signed
them. They need to be signed
5 under oath, and
nobody that is employed by or
6 associated with
Centre Life signed them. It
7 was represented
in verified responses by a
8 gentleman named
Jeff Champagne.
9
Do you know Jeff Champagne?
10 A
I know of Jeff Champagne. I might
11 have met him once
when I've been at DMS's
12 offices.
13 Q
Do you know that he's an officer of
14 DMS?
15 A
Yes, he's an officer, and I believe he
16 works in the claim
handling adjudication
17 area.
18 Q
Would it surprise you if he signed
19 under oath that the
company has paid total
20 disability benefits
to people with diabetes?
21
MR. ELLIS: Objection.
22 A
No, it wouldn't surprise me.
23 Q
Is diabetes a serious illness?
24
MR. ELLIS: Objection.
25 A
I'm not a doctor. It depends on all
121
1
GRILLI
2 the other facts
and circumstances. In and of
3 itself, may not.
4 Q
But it wouldn't surprise you that the
5 company pays
under its policy total
6 disability for
people with diabetes?
7
MR. ELLIS: Objection.
8 Q
I think your testimony was it wouldn't
9 surprise you?
10 A
The company pays claims based on all
11 the facts and
circumstances if it determines
12 that this is a valid
disability claim. That
13 takes into account
people's medical condition
14 and other factors.
15
There might be other medical
16 conditions besides
the diabetes. I don't
17 know. You're
only giving me a very little
18 narrow bit of
information so. In and of
19 itself, I can't say
for sure.
20 Q
Well, the request for admission was
21 simply requested
Centre Life admit, but they
22 never did, on its
behalf, the request was to
23 admit that the
company pay total disability
24 to people who have
diabetes.
25
MR. ELLIS: Objection.
122
1
GRILLI
2 Q
So it was a narrow question, because
3 I'm referring to
a narrow question.
4 A
So what is the question?
5
MR. ROBERTS: That actually was
6
a statement. It wasn't a question.
7
MR. ELLIS: Correct.
8 Q
Are you aware that your company has
9 paid total
disability benefits to its
10 policyholders who
suffered depression?
11
MR. ELLIS: Objection.
12 A
You're asking specific questions on
13 claims, which in my
capacity I don't really
14 get involved with at
the micro level at this
15 detailed level.
We get involved at the high
16 level, but not in an
individual claim basis.
17 That's why DMS is
hired.
18 Q
You're involved on the financial end,
19 the investment side,
the actuarial side, the
20 accounting side?
21 A
And the administrative side, too. Are
22 we handling claims
properly? Are we
23 incurring
lawsuits? No, it's more than just
24 the financial
side. It's the operational.
25 It's the whole
operation of Centre Life.
123
1
GRILLI
2 Q
Did you work in disability insurance
3 prior to 2003?
4 A
No, I did not work in disability
5 insurance prior
to 2003. However, I have
6 worked in the
insurance business since 1982.
7 Q
You're a certified public accountant?
8 A
I am a CPA, yes.
9 Q
That's your stock in trade, being able
10 to get around a
balance sheet?
11 A
I don't know if it's a stock in trade.
12 Over the years I have
become more involved in
13 the insurance side of
matters and less in the
14 accounting matters,
but I did start off as a
15 CPA, yes.
16
MR. ROBERTS: Why don't we
17
switch tapes.
18
THE VIDEO OPERATOR: Going off
19
the record, 2:26 p.m.
20
(Whereupon a discussion was
21
held off the record.)
22
THE VIDEO OPERATOR: Returning
23
to the record, 2:29 p.m. Beginning of
24
tape number 4.
25 BY MR. ROBERTS:
124
1
GRILLI
2 Q
Mr. Grilli, we talked about the 1994
3 annual
statement, and you identified that for
4 me. I
appreciate that.
5
I hand you a document that is Bates
6 labeled AS00118
through AS00249. Will you
7 confirm for me
that is the '95 annual
8 statement of
Mass Casualty?
9 A
I assume it says that, and I assume
10 that's what it is.
11 Q
You're the president of that company,
12 right?
13 A
Yes, but this is something that was
14 filed previous to my
taking over the
15 presidency, so...
16
MR. ROBERTS: I think Mr. Ellis
17
will stipulate that that was produced
18
by your company under the auspices
19
that it is the annual statement. It's
20
been admitted in a request for
21
admission.
22
MR. ELLIS: I'll stipulate that
23
these are the annual statements.
24
MR. ROBERTS: Okay.
25 Q
The '96 annual statement begins at
125
1
GRILLI
2 AS00250?
3 A
Yes.
4 Q
'97 begins at AS00354?
5 A
Yes.
6 Q
'98 begins at AS1087?
7 A
Yes.
8 Q
The '99 begins at AS00992, and I'd
9 like for you to
take a look at the five-year
10 retrospective on that
'99 statement for me.
11 You know that form
I'm talking about?
12 A
Yes.
13 Q
I think it's on page AS01017. It's
14 page 23, AS01017.
15 A
Oh, yes.
16 Q
We've gone from '90 to '94 here. It
17 shows in '95 the
company lost again just shy
18 of $3 million?
2.9?
19 A
Yes, before capital gains.
20 Q
In '96, was it a loss or a gain that
21 year?
22 A
It was a loss of $5 million.
23 Q
In '97 there is $119,000 gain?
24 A
Yes.
25 Q
In '98 a $1.5 million gain?
126
1
GRILLI
2 A
Yes.
3 Q
Assume for me that October 21st of '98
4 was the date of
the sale of the stock to this
5 Centre Holdings
Group, okay? Will you assume
6 that for me?
7 A
Yes, I will assume.
8 Q
In 1999 was it a gain or a loss?
9 A
That was a loss.
10 Q
Are you able to -- well, I don't
11 understand these
statements at all. Line 53
12 talks about increases
in A&H reserves. Those
13 are the reserves for
the disability line,
14 right, accident and
health?
15 A
Yes.
16 Q
If we go the five-year retrospective
17 on that, 18 million
plus was the '95 increase
18 in reserve, right?
19 A
Yes.
20 Q
A little over $15 million was the
21 increase in reserves
in '96?
22 A
Yes.
23 Q
Just under 5 million was the increase
24 in '97?
25 A
Yes.
127
1
GRILLI
2 Q
$3.3 million was the increase in '98?
3 A
Yes.
4 Q
And then there is a $167 million
5 decrease in
reserves in '99?
6 A
Yes.
7 Q
So that was $167 million positive
8 event for the
company?
9 A
No. It was not. What happened in
10 1999 was that, as we
discussed previously,
11 the accident and
health reserves were
12 reinsured out
pursuant to the Massachusetts
13 Department of
Insurance to another Centre
14 entity, Centre
Reinsurance U.S. Limited and,
15 therefore, this is
the increase in the
16 reserves. The
reserves go down to zero.
17 They are all ceded
out.
18
This is a change. It wasn't a
19 positive
effect. This was just a change in
20 reserves because of
-- the fact that it was
21 ceded out to a third
-- to another Centre
22 entity.
23 Q
I don't know as well as you do. I was
24 wondering why there
was a big swing. That
25 certainly explains
it.
128
1
GRILLI
2
I hand you the 2000 report. AS0889 is
3 the first
page. 2001 is AS00780. 2002 is
4 AS00670.
2003 is AS00560, right?
5 A
Yes, that is correct.
6 Q
Then we're back to the 2004.
7
Why don't you get -- let me clear that
8 out for
you. Keep your blue one.
9 A
Oh, you want this back. Okay.
10 Q
What are the total assets of the
11 company reflected on
the 2004 annual
12 statement?
13 A
Admitted or nonadmitted assets?
14 Q
First tell the jury what the
15 difference is.
16 A
Total assets -- the difference between
17 assets and
nonadmitted assets is easier to
18 define is under
certain -- the statutory
19 accounting
regulations exclude certain assets
20 as being admitted,
for example, the simplest
21 ones being deferred
taxes, net deferred
22 taxes.
23
Furniture, certain computer equipment,
24 certain receivable
balances that are greater
25 than a certain period
of time, they've been
129
1
GRILLI
2 uncollected
after ninety days or whatever,
3 they're
considered not admitted. They're
4 still an asset,
but under the statutory
5 accounting
regime they're not considered
6 admitted. Therefore, the total assets of the
7 company on an
admitted basis was a billion
8 696,804,564.
9 Q
How much?
10 A
A billion 696,804,564.
11 Q
1,696,000,000?
12 A
Correct.
13 Q
What was the investment income in
14 2004?
15 A
$95,721,769. No, that is incorrect.
16 I'm sorry. Wait
a minute.
17
Total investment income would be
18 excluding realized
gains and losses,
19 $98,166,324.
However, the balance sheet of
20 Centre Life Insurance
Company at 2004 was
21 substantially
different than the balance
22 sheet at the end of
1999. There are other
23 transactions that
Centre Life has entered
24 into during this
period that affect its
25 income statement and
balance sheet.
130
1
GRILLI
2 Q
I hand you the summary of operations
3 page for the
2003 annual statement.
4
Can you tell me what the net
5 investment
income is on line 3 for the year
6 2003 and the
prior year?
7 A
For 2003 it's $97,612,753. The prior
8 year was
$120,808,007.
9 Q
Thank you.
10
(Whereupon accident and health
11
policy experience exhibit for 2000
12
through 2004 was marked as Plaintiff's
13
Exhibit 77 for identification, as of
14
this date.)
15
(Whereupon business cards were
16
marked as Plaintiff's Exhibits 80 and
17
81 for identification, as of this
18
date.)
19 Q
Sir, you had given me some documents
20 earlier that I've
marked.
21
Can you confirm for me that 80 and 81
22 are the business
cards that you handed me
23 earlier this
afternoon?
24 A
Yes.
25 Q
This morning, actually.
131
1
GRILLI
2
Document 77 is the accident and health
3 policy
experience exhibit for the years 2000
4 to 2004, which
exhibits go with the
5 respective
annual statement for those years?
6 A
Yes, that is correct.
7 Q
Does this 2004 exhibit show how much
8 premium the
company received in 2004 on Mass
9 Casualty policy?
10 A
It shows the amount of premium earned
11 which is almost the
equivalent of what you
12 said, which I think
you said was received.
13 Q
Yes.
14 A
The difference is if a policyholder
15 pays a premium in
December but it's for the
16 period January
through March, it's been
17 received in December
but it's considered
18 unearned until the
following year.
19 Q
What is the premium earned or received
20 either way?
21 A
Which year?
22 Q
For 2004.
23 A
For 2004 under which policies?
24 Q
Is there a heading for the Mass
25 Casualty policies
collectively, or is it
&n