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Copley News Service
Dec 14, 2003
by Penni Crabtree, Copley News Service
Insurer may stay on legal hot seatIt may be the most costly piece of dirt-moving machinery in history.
In October, a Riverside jury ordered San Diego's Golden Eagle Insurance Corp. to pay $7.5 million in punitive damages after the company refused to pay a $57,500 claim on the theft of a backhoe.
The eye-popping jury award in favor of Corona-based Pacific Coast Machinery could prove to be a passing legal oddity. But court documents indicate more litigation on the horizon as Golden Eagle battles allegations by a former executive that the company instituted a policy that denied some legitimate property claims in California.
Geoff Moyle, a former assistant vice president of Golden Eagle's property claims department, alleges in a lawsuit that the company in 2000 began systematically to challenge claims as part of an effort to achieve "arbitrary" cost-saving goals and increase corporate profits.
His testimony proved crucial in the Pacific Coast case, and may have also been a factor in the settlement of another lawsuit filed by a Tulare County company after Golden Eagle denied its $2 million crop loss claim.
Dan Bacalski, an attorney for Moyle, confirmed that Moyle provided testimony in a deposition in the Tulare case. Golden Eagle reportedly settled the case for $8 million, according to testimony in the Pacific Coast case. Terms of the settlement were sealed by the court.
Bacalski said he could not confirm or deny whether Moyle has received subpoenas to testify in other lawsuits filed by former Golden Eagle policyholders whose property claims were denied. He declined to discuss Moyle's pending lawsuit against Golden Eagle.
Jane Barnett, a spokeswoman for Golden Eagle's Boston parent company, Liberty Mutual Group, said the company does not comment on ongoing litigation.
One insurance industry watchdog said such court cases are often an early indicator of a larger, more pervasive problem.
"State insurance regulators don't consistently hear about these kinds of cases, but when we start seeing lawsuits and settlements, it indicates there is a deeper problem and regulators should investigate," said Doug Heller, a spokesman for the Foundation for Taxpayer and Consumer Rights. "We are starting to see insurance companies treat their claims division as a profit center, but they are getting that savings from people who have lost homes and businesses."
In Pacific Coast's case, Golden Eagle not only denied the October 2000 claim, but tried to discourage the company from pursuing the claim by reporting a suspected fraudulent claim report against the equipment company to the California Department of Insurance, according to John Gladych, an attorney for Pacific Coast.
Yet the insurer's own investigation indicated the backhoe was stolen by a former Pacific Coast employee and that no fraud was involved, Gladych said.
Barnett said Liberty Mutual "believes the jury is incorrect in both the law and on the facts" in the Pacific Coast judgment.
"Our intention is to file the appropriate post-trial motions," Barnett said. "We believe that the trial court or the court of appeals will agree with our
Moyle, who filed a wrongful termination lawsuit in February, alleges that he was fired from Golden Eagle in March 2002 after he complained about a "leakage" policy imposed by the company.
The policy is designed to reduce overpayment of claims because of sloppy practices or inattention to detail by Golden Eagle's claims department.
In practice, according to testimony in the Pacific Coast case and Moyle's lawsuit, the policy was used to deny or restrict claim benefits even when, under California law, policyholders are supposed to be given the benefit of the doubt when a claim is in dispute but there is no evidence of wrongdoing.
It isn't the first time Golden Eagle has run into legal challenges about its payment practices. In 1997, its predecessor company, Golden Eagle Insurance Co., was put into receivership after state regulators charged that the company manipulated financial data to cover shortfalls in income and maintained inadequate cash reserves.
The original Golden Eagle, founded by the late John Mabee, was once the third-largest provider of workers' compensation insurance in the state, with assets valued at $1.3 billion.
At the time it was seized, state regulators and policyholders accused Golden Eagle in government and court records of manipulating records to hide financial problems and of court maneuvers that were designed to delay or evade paying claims.
Eventually, a settlement allowed the state to sell the old Golden Eagle to Liberty Mutual. Last year, Golden Eagle had assets of $724.7 million, insurance premiums of $197 million, and profits of $11.4 million, according to a report by A.M. Best Company, an insurance-rating and information agency.
Those profits may have been due in part to an audit procedure and the leakage prevention policy instituted in 2000, according to allegations made in the Pacific Coast case and Moyle's lawsuit.
In 2000, shortly before the Pacific Coast claim, Moyle's property claims department was determined by Liberty Mutual auditors to have a 17 percent leakage rate; Liberty Mutual considered an acceptable rate to be less than 10 percent.
In an e-mail, Moyle's supervisor referred to the leakage policy as "the Bible" and urged his workers to memorize it and institute recommended practices to curb overpayment of claims.
Moyle's department wasn't the only one expected to increase savings by reducing claim payouts. According to internal documents, the company's special investigations unit, which examines suspicious claims or those of questionable merit, was given a goal for 2000 to increase fraud "savings" by 30 percent over the previous year.
In 1999, before the leakage policy was put in place, Golden Eagle reported a profit of $1.1 million. In 2000, profits rose to almost $9 million, according to A.M. Best Company statistics.
In February 2001, another internal audit was conducted. This time, Moyle's department received a rating of 12 percent leakage, which he was able to argue down to an acceptable 6.4 percent.
After the audits, Moyle said, he complained to his supervisor that the audits were "subjective and arbitrary" and violated California insurance codes and the state's fair claims practices. He said he warned his supervisors that the policy would lead to "bad faith" litigation against Golden Eagle by policyholders.
Moyle, who authorized the denial of Pacific Coast's claim, testified that so much pressure was put on the claims department to lower the leakage score that it "colored everything."
But for the claims department's fear of the leakage audits, the Pacific Coast claim would have been honored, Moyle said.
In 2002, another annual leakage audit was conducted by Golden Eagle, andMoyle's department was again found to have 17 percent leakage - which translated into $5 million in losses.
Soon after, Moyle was rated as unsatisfactory in his annual performance evaluation and, a few days later, was fired, according to Moyle's lawsuit.
Gladych said Moyle's testimony about Golden Eagle's leakage policy and the way it was applied weighed heavily with the jury in the Pacific Coast case.
In October, the jury unanimously found that Golden Eagle acted with malice, and awarded the company $7.5 million in punitive damages, the $57,500 plus interest for the backhoe, and attorney's fees.
A year earlier, Pacific Coast's owner, Bud Sims, had offered to settle out of court for $90,000 - the cost of the machine plus attorney fees at the time. Golden Eagle did not make a settlement offer.
"All we ever wanted was to get paid for our loss and to be made whole," said Sims, who has since sold his business. "We are thankful that we were able to afford to pursue this claim and to expose the reprehensible policy and conduct of Golden Eagle."
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