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
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
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.