Claims

AIG, Chubb, Markel, Swiss Re and Zurich are potentially liable for Thomas Cook repatriation and refund costs as they provide shortfall insurance for the Air Travel Organiser’s Licence’s (Atol) primary source of funding, The Insurance Insider can reveal. The Air Travel Trust (ATT) fund is the main source of funding for Atol, a financial protection scheme for package holidays backed by the UK government and managed by the Civil Aviation Authority (CAA). In its latest financial report for the year ended 31 March 2018, the ATT stated that it had a surplus of £170mn ($210mn). The ATT fund derives from Atol licence holders paying £2.50 for each person who books air travel covered by Atol. The ATT’s latest report said the fund had insurance cover with a £400mn annual limit. Sources said this “shortfall insurance” was provided by a panel of insurers including AIG, Chubb, Markel, and Zurich. The cover means there is around £570mn in place in total to meet refund and repatriation costs for any Atol holder failure. Swiss Re does not sit on the panel but reinsures part of the policy. Willis Towers Watson is also understood to have brokered part of the placement. The ATT’s policy was renewed on 30 April 2018 and provides cover until 31 March 2020, when it is up for renewal, the report stated. According to the ATT, the policy is triggered when costs arising from refunds or repatriations exceed £10mn, £70mn or £150mn in a policy year, with different thresholds applicable depending on the size of the tour operator. In its report the ATT said that there had been no claims on the policy since 2017, but sources told this publication there had been no claims since its inception in 2007. There is still uncertainty about the final repatriation bill but, in a statement to the House of Commons Transport Secretary Grant Schapps said that the Thomas Cook repatriation effort will cost around £100mn – twice the size of the Monarch Airlines collapse which cost the taxpayer around £50mn. According to the Financial Times, the government has also said the cost of refunding future bookings will be around £420mn. It is thought that the Thomas Cook collapse will severely deplete the ATT fund, with some sources saying it could wipe it out completely. In the case of fund exhaustion the government would likely be forced to provide assistance, possibly in the form of a loan, to mitigate the cost of repatriation operations and to ensure that protection is in place for future collapses. The CAA has denied that government intervention with taxpayer money would be necessary, saying that its insurance pot is healthy and that a credit facility could also be used to make up the shortfall. CAA CEO Richard Moriarty said that the refund programme for the 360,000 future holidays booked through Thomas Cook was three times larger than any refund programme it had ever managed before, and it was putting new systems in place to process refunds as quickly as possible. He added that around 100,000 bookings were made by direct debit and that these would be refunded in 14 days whereas other payments would take longer, but that an online system would be launched on 7 October to manage those claims. Direct debit and credit card companies could also have exposure to surety losses as they facilitated payment for the package holidays. Sources also told this publication that Zurich and Swiss Re could also be exposed to losses for Thomas Cook’s German subsidiary and its affiliate tour operator Condor, which is 49 percent owned by Thomas Cook. Condor was granted a EUR380mn ($414.8mn) bridging loan from the German government, which will allow it to continue operations until a buyer is found. Thomas Cook GmbH filed for insolvency last Wednesday and said it would restructure its business independently. A Zurich spokesperson told this publication that the maximum amount of contractual obligations to Thomas Cook in Germany was EUR110mn. Parent company Thomas Cook filed for insolvency on 23 September after it failed to secure £250mn rescue deal and the government refused to bail out the business. Following its collapse, the CAA launched the largest ever peacetime repatriation effort to bring the estimated 150,000 UK holidaymakers home. According to the CAA more than 100 aircraft have been used for the operation. As of 1 October, over three quarters of the holidaymakers, or 115,000 people, had been returned to the UK, with around 94 percent having flown on their original departure date. The repatriation will continue until 6 October, with more than 1,000 flights planned. A Zurich spokesperson confirmed that the insurer is one of number of carriers that covered the ATT fund through a surety policy, adding that they were in the “process of assessing the net impact after reinsurance for the group”. A CAA representative said the state agency did “not want to speculate on the likely impact on the ATT fund of the collapse of Thomas Cook” as the final figure may not be known for many months, until all outstanding claims are processed. AIG, Chubb, Markel, Willis and Swiss Re declined to comment. https://www.insuranceinsider.com/articles/129146/surety-market-braces-for-thomas-cook-atol-claim

In the summer of 2017, a District Judge sitting in the District of Columbia issued a decision holding that a surety could be held liable under the False Claims Act where it becomes aware of facts suggesting that a bonded principal is fraudulently participating in a government set-aside program and nonetheless continues to do business with that principal. United States ex rel Scollick v. Narula, 2017 WL 3268857 (D.D.C. July 31, 2017). Although the Narula decision arose in the context of a motion to dismiss, where the court’s findings are limited to determining the viability of the claims as plead, the decision has drawn close scrutiny (and criticism) from professionals across the surety industry. Many underwriters have exercised additional caution prior to bonding set-aside contractors due, in large part, to the draconian penalties that may be imposed for violations of the False Claims Act, including treble damages. The close scrutiny and additional caution unfortunately appear to have been well-founded. On September 4, 2019, the United States Attorney’s Office for the Western District of North Carolina announced that it had entered into a settlement agreement with a surety to resolve allegations that the surety violated the False Claims Act by bonding a general contractor that submitted false claims to the government for services performed under fraudulently obtained government contracts. The surety agreed to pay $1,040,035.20 to resolve the government’s allegations. The government alleged that South Carolina general contractor Claro Company, Inc. (“Claro”) made materially false, fictitious, and fraudulent statements and representations, or material omissions, to gain entry into and to continue participation in the 8(a) program and that Claro’s surety knew or should have known that Claro was not eligible for 8(a) set-asides. The government contended that the surety knew or should have known that Claro was not controlled by a socially and economically disadvantaged individual, and that it was affiliated with and controlled by another entity and/or individuals that did not meet the SBA’s definition of being socially and economically disadvantaged; that neither the affiliation nor control were disclosed to the SBA; and that Claro made material misrepresentations regarding its financial status to the SBA in order to avoid early graduation from the 8(a) program. The government further contended that despite the foregoing allegations, the surety continued to do business with Claro by bonding its projects and therefore allowing it to continue to fraudulently bid for contracts under the preferences in the 8(a) program. In announcing the settlement, the government acknowledged that the claims resolved in the settlement are allegations only and there has been no determination of liability against the surety. As of this writing, detailed information regarding the government’s investigation and allegations are not publicly available. It is, thus, not clear at this time whether this settlement marks the next step in a trend by the government (and qui tam plaintiffs), which started with Narula, to pursue recovery under the False Claims Act against sureties, or if this settlement is a one-off due to the unique facts and circumstances of the Claro matter. We all hope it is the latter.

There were more insurance claims to cover the non-payment of debts in the first three months of this year than in any other quarter over the last decade, the Association of British Insurers (ABI) has revealed. The ABI said continued Brexit uncertainty, competition from online sales, rising business rates, lower consumer spending, and a weaker pound were all to blame. he findings show that there were 5,114 trade credit insurance claims made by UK businesses in the first three months of this year – the highest quarterly level seen since 2009. The total value of claims paid was £48m, up by £1m compared to the previous quarter, with an average payment of £9,000 made to 57 firms every day. This comes after the latest government figures revealed a 6% increase in company insolvencies in the first three months of this year. “The 10-year high in trade credit insurance claims so far this year highlights the vital role trade credit insurers are playing in helping UK firms navigate tough trading times,” ABI assistant director, Mark Shepherd, said. “While protecting against non-payment is essential, the expertise and support of trade credit insurers is also helping firms to grow and trade with greater confidence, reducing the risk of facing bad debts.” The latest spike in trade credit insurance claims reflects a trend, with the first quarter of last year also recording the highest number of claims seen for many years. This coincided with a 13% increase in the number of corporate insolvencies recorded, with the collapse of construction giant Carillion having a far-reaching impact on businesses. “While the number of firms with this protection is rising, too many firms remain at the mercy of bad debts,” Shepard continued. “We must do more to raise awareness of the importance of trade credit insurance.” https://www.theactuary.com/news/2019/06/trade-credit-insurance-claims-hit-10-year-high/

Pinnacle Surety, a professional surety bond agency, today announced that in a recent ruling, a magistrate judge chastised the defendants for citing a vacated opinion and misrepresenting precedent. The judge ruled in Pinnacle’s favor in a motion against Manion Stigger, LLP, Cooper & Elliott, LLC, G. Bruce Stigger and Rex H. Elliott regarding the bond agency’s ongoing breach of fiduciary duty case against the law firms and attorneys. Stigger and Elliot are represented by attorneys at Freund, Freeze & Arnold and Boehl Stopher & Graves, LLP. In the ruling the judge stated that the defendants and their attorneys “cited a Sixth Circuit opinion which hardly supports their stated proposition” and “a Fifth Circuit opinion without disclosing that it is vacated.” The defendants asserted that documents and emails in and outside the possession of Pinnacle Surety were privileged. The judge ruled against the law firms while noting that the defendants misrepresented precedent to the court. In the ruling, Judge Colin H. Lindsay said of the defendants: “A dearth of on-point case law is no excuse for misrepresenting precedent to the Court.” According to the original lawsuit filed in 2016, Manion Stigger and Cooper & Elliott, LLC secretly assisted two employees against Pinnacle while the bond firm was still represented by the same attorneys. In 2013, Pinnacle hired Manion Stigger and Cooper & Elliott to represent the company in a civil lawsuit brought by a third party regarding the employment of Todd Loehnert and Brian Ayres. That case was resolved with the third party; Loehnert and Ayres continued working for Pinnacle; and the attorneys were paid by Pinnacle. The original lawsuit states that “clearly during their representation of Pinnacle, defendants acted directly and materially adverse to Pinnacle by encouraging and assisting Pinnacle’s employees . . . to prematurely breach their three-year employment agreement with Pinnacle. The lawsuit now seeks damages for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, intentional interference with an employment agreement, and civil conspiracy. https://apnews.com/Business%20Wire/aae2a53b387d4f608c5c56dec9415a58

In June 2015, Location, a tool rental company, opened an account for the benefit of a company with which it was doing business, Boréalia. Boréalia obtained a thirty-day term to pay its bills and other benefits. Bussière was a shareholder of Boréalia, via his management company, and a director of Boréalia. Bussière is a party (with the other shareholders) to the standard contract of Location as a surety of Boréalia’s obligations In June 2016, Bussière sold his shares to other shareholders and resigned as director. He sent a written note to Location to inform it of the change in the shareholding and Board. A few months later, Boéralia and several shareholders became insolvent and defaulted under the Location Contract. Location claimed from Bussière as a surety the payment of bills issued subsequent to the date on which Bussière sold his shares and resigned. Bussière contested on the ground that his guarantee is valid as long as he remains involved in the company, and that the sale of his shares and his resignation as director had the effect of terminating his suretyship. Article 2363 Civil Code of Quebec (C.C.Q.) provides that a person’s suretyship attached to the exercise by that person of particular duties within the company ends with the cessation of these duties. Location argued that the status of shareholder is not a duty and that the sale of shares cannot nullify the surety. The leading case remains that of the Supreme Court of Canada in the case Épiciers unis Métro-Richelieu c. Collin, (2004) 3 R. C. S. 257 which held that article 2363 CCQ should be interpreted broadly and liberally, its purpose being to protect the surety. The Supreme Court noted that this article is not one of public order so that the parties can depart from it, which was not the case here. In order to determine whether the end of a person’s corporate duties enables him to remove his liability as a surety arising therefrom, it is necessary to consider the common intention of the parties as to the creation of the suretyship in relation with the person’s duties and status within the corporation. Here, the court noted that the opening of the account was based on a verification of the solvency and the commitment of the shareholders, and thus that it is the attribute which took precedence for Location. The end of the shareholder’s status signified the end of the validity of the surety from that date onward. Conclusion. If a supplier of goods or services provides credit to a corporation whose shareholders or officers act as sureties, and does not want, as a result of article 2363 CCQ, to lose the benefit of their suretyship in the event of the withdrawal of one or more of such persons as shareholders, directors or officers, it must be clearly provided that the termination of the related status or duties does not put an end to the surety. http://www.mondaq.com/canada/x/807244/Shareholders/The+End+of+a+Shareholders+Corporate+Duties+and+the+End+of+Suretyship+an+Illustration

The level of payouts on trade credit insurance policies have reached a 10-year high in Northern Ireland, an industry expert has said. Nigel Birney, head of trade credit at Willis Towers Watson, has today warned that the spike in credit insurance claims is a reflection of challenges facing Northern Ireland companies amid what he called an extremely worrying number of business insolvencies. The figures from insurance firm Atradius showed the number of recent claims being made in respect of Northern Irish businesses defaulting or failing had increased significantly, representing the highest volume of claims received in a decade. The insurer also found that there has been a 50% year-on-year jump in high value claims last year, ie. those above £90,000. Insolvency specialists Begbies Traynor last month found that almost 7,000 businesses in Northern Ireland were recorded as being in a state of distress in the first three months of 2019. Mr Birney said the backdrop of Brexit and the continuing Stormont limbo is unlikely to offer any significant respite from the pressures weighing on the economy, as the trading environment in Northern Ireland continues to face challenging times. Willis Towers Watson on Creating an Inclusive Environment He said in many cases, claims payments from trade credit insurers have offered a lifeline to hundreds of NI businesses, with payouts in 2018 at significant levels. He continued: “The increase in claims is a barometer of what is happening in the wider local economy and unfortunately it doesn’t bode well. “We are now at a 10-year high in terms of payouts which is a clear indication of what is going on. “In 2018 we estimate that around £8m in claims was paid to Northern Ireland companies as a result of the failure of one of their customers and unfortunately the trend has continued into Q1 2019 with the failure of a number of high profile local companies.” He said mitigating risk and ensuring protection from non-payment is arguably more vital now than ever before. Research by Willis Towers Watson found companies feeling enormous strain on cashflow, with the average number ‘days sales outstanding’, creeping up, bringing businesses to the brink of failure, particularly in the construction and retail sector. Tony Gordon, head of risk services at Atradius Ireland, said: “The trading environment for business in Northern Ireland continues to be challenging. 2018 was a tough year for businesses and for the economy and the figures for Q1 2019 are showing no degree of comfort that a recovery is imminent with upward trend in claims volumes continuing. “Headline news often pinpoints key sectors such as construction and also foods and agriculture, but in reality, the challenges impact across all sectors. “The key is to have access to up-to-date information and as underwriters it is vital for us to work closely with businesses, constantly monitoring changes and impacts.” https://www.belfasttelegraph.co.uk/business/northern-ireland/trade-credit-insurance-policy-payouts-hit-10year-high-in-northern-ireland-38107515.html

The opening of a new Truro Township fire station on East Main Street in Reynoldsburg has been delayed again, this time until August, because the general contractor, Palmetto Construction Services LLC, abandoned the project last month. The opening of a new Truro Township fire station on East Main Street in Reynoldsburg has been delayed again, this time until August, because the general contractor, Palmetto Construction Services LLC, abandoned the project last month. The station has already faced weather delays. Its original December 2018 completion date was moved to January 2019 because heavy rain the previous spring delayed foundation work. The opening date was moved again to April this year before Palmetto backed out of the project. Palmetto “voluntarily defaulted” on its contract to build the $3.9 million Fire Station 161 in February, Truro Township fire Chief Jeff Sharps said. A Feb. 6 letter sent by email and certified mail to Sharps said the Columbus-based company “is unable to complete the … contract and does voluntarily default said contract.” The letter was signed by Casey Cusack and Jerry Diodore, both principals in the company. An email to the company seeking comment was not answered; a recording on the company’s telephone line said the voicemail box was full and could no longer accept messages. Administrator Jason Nicodemus said Truro Township had paid Palmetto $1,611,744. Fire Station 161 is about 50 percent complete, Sharps said, but construction has continued because the project’s surety bonding company, Ohio Farmers Insurance Company-Westfield Group, took over for Palmetto in mid-February and has retained most of the subcontractors Palmetto originally hired. Since the Westfield Group took over, there has been a “lot of movement at the station,” Truro Township trustee Pat Mahaffey said. “They didn’t really miss a beat. Three days later, there were people on the job and there’s been a steady stream of workers in there ever since. “Construction isn’t a perfect science and it’s unfortunate that Palmetto had this problem … but we made sure we had a good bonding agent in place. Because of the surety bond, the delay is not expected to increase construction costs, officials said. “When we were vetting the prospective bidders, the township did everything it could in terms of our due diligence,” Sharps said. “Nothing that we saw gave us any indication that this was going to happen or we wouldn’t have picked (Palmetto). “We are doing anything and everything in our power to make that opening date,” Sharps said. “This project has gone slowly but if we can get it done by August, we’re looking at about 18 months since we demolished the old station. We’re making sure we’re spending the taxpayers’ money properly. That station has to be built right and it’s got to last.” https://www.thisweeknews.com/news/20190306/contractor-defaults-on-truro-township-fire-station

A Connecticut construction firm must indemnify an Arch Insurance Group Inc. unit for $39.1 million in connection with the building of a minor league baseball stadium, a federal district court has ruled. Arch Insurance Co., a unit of Jersey City, New Jersey-based Arch Insurance Group, had issued surety bonds to North Haven, Connecticut-based Centerplan Construction Co. in connection with its construction of the Hartford Stadium, according to Wednesday’s ruling by the U.S. District Court in Hartford, Connecticut, in Arch Insurance Co. v. Centerplan Construction Co. et. al. The stadium, which is known as the Dunkin’ Donuts Park, is the home field of the Hartford Yard Goats of the Eastern League baseball team. General indemnity agreements were issued in connection with the surety bonds that obligated Centerplan and its related companies to indemnify Arch for any losses and expenses it sustained because of the bonds, according to the ruling. In June 2016 the city of Hartford terminated Centerplan’s design-build agreement for the stadium’s construction citing “continued defaults,” according to the ruling. Arch entered into a takeover agreement with Hartford and the Hartford Stadium Authority to complete the stadium’s construction. Arch filed suit against the defendants in U.S. District Court in November 2016 on charges including contractual indemnification. The indemnity agreements govern Arch’s right to indemnification, said the ruling. “Because the Defendants have failed to provide evidence from which a jury could reasonably conclude that Arch acted on the Hartford Stadium and performance bonds in bad faith, there is no dispute as to an issue of material fact, and Arch is entitled to indemnity for payments on these claims as a matter of law,” the ruling said, in awarding the insurer $39.1 million. https://www.businessinsurance.com/article/20190215/NEWS06/912326741/Arch-Insurance-awarded-$39-million-in-minor-league-stadium-indemnity-dispute