Mike Helenthal Jun. 30, 2016, 9:14am


PHILADELPHIA - Insurers and reinsurers are supposed to have each other's backs, but that can change when one's interest runs into the other's bottom line.

Add a reinsurance recovery company into the mix, and it can get even dicier.

"All of these things are based on formulas that can be interpreted differently," said Tom Baker, an insurance law expert and the William Maul Measey Professor of Law and Health Sciences at the University of Pennsylvania.

He said all of those competing interests can clash when it comes down to finalizing the books.

"Sometimes even the accounting is different on how premiums are collected," he said.

Take the case of Boomerang, Inc., a recovery company hired by Farmers Insurance to review its reinsurance contracts from 2003-2013. The company was to be paid 35 percent of all that it recovered.

In reviewing the contracts, Boomerang found more than $2.2 million that Farmers had allegedly been overcharged by its reinsurer, Guy Carpenter & Company LLC,  citing errors made by Carpenter's company that led to higher premiums than what Farmers owed.

And it gets more strained from there.

Boomerang currently is suing Carpenter and two of its employees in state court for a host of unfair practice allegations.

The recovery company accuses Carpenter and other associates at the company of conducting their own illegal investigation into the matter, an investigation that produced "corrected" numbers that said Farmers simultaneously owed the reinsurer around $2 million in premiums.

The result was that Boomerang's recovery claim dropped from $2.2 million to just under $300,000.

Boomerang alleges in its complaint that, "Instead of immediately submitting the request for reimbursements to the participating reinsurance carriers, as they were contractually obligated to do."

Instead, it alleges Carpenter's employees performed an internal audit of Farmers' reinsurance contracts from the 2003-2013 review period in an effort to make the books look more balanced.

"Their goal was to reduce the amount Farmers had been overcharged in order to avoid both damage to Carpenter's reputation and the return of sales commissions," the complaint said.

Baker said he is not privy to specific details of the arrangements or the lawsuit, but that the arrangement between the insurer and reinsurer in this case seemed somewhat standard.

"There are different kinds of reinsurance, the most common kind is a treaty," he said, "which is where the reinsurer takes a certain percentage of risk in a defined area and also receives a certain percentage of the premiums."

He said the unknown element in the case is whether Boomerang can prove its allegations, which are serious.

Baker said Carpenter's company, owned by parent company MMC, which also is named in the suit, "is one of the largest players in the reinsurance market."

He said the recovery company, Boomerang, represents a commercial insurance market niche he was not aware of until reading about this case.

"I've never heard of this company before," he said. "This kind of recovery business in the insurance business is a relatively new thing."

The recovery company also accuses Carpenter and his employees of fabricating underpaid claims during its review and damaging Boomerang's reputation by questioning the ethical standards of its auditing methods.

"As part of the strategy, the team fabricated underpaid premiums from casualty contracts from 2003 to 2007 to convince Farmers that it should not seek refunds based on Boomerang’s findings," Boomerang's attorney's alleged in court documents.

After a federal court review, the case was remanded to state court earlier this month.

The court ruled that Boomerang's attorney's had provided cause to continue the case, despite several attempts to have it removed.

"Boomerang has pled sufficient facts and asserted viable legal theories to support claims against (Carpenter its employees named in the suit)," the court said. 

 

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