Zephyr - The Catbird SeatThe Catbird Seat

Zephyr Insurance

Protection that may be Gone With the Wind

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April 19, 2006

Revival of state hurricane
fund considered

Officials are worried about dwindling insurance options

By Richard Borreca, Star-Bulletin

Senate President Robert Bunda is considering a call to revive the state’s Hurricane Relief Fund to administer an insurance program for homeowners.

The Hawaii Insurers Council held an emergency meeting Monday to address the shrinking options for getting hurricane insurance in Hawaii.

Hawaii Insurers Council spokesman John Schapperle, the president and chief operating officer of Island Insurance Ltd., said there is a national problem with the reinsurance market — the firms that back up the claims paid by insurance companies….

Bunda (D, Kaena-Wahiawa-Pupukea), an independent insurance broker and former banker, said yesterday that local industry officials are looking at the cost of providing hurricane insurance. There are concerns that firms are limiting the sale of hurricane insurance, he said.

Zephyr Insurance Co. announced Monday that it would not accept new hurricane policies for single-wall construction homes built before 1981 unless they have hurricane clips to meet 1993 and 1994 building codes….

Also, Hawaii Insurance & Guaranty (HIG) had its bond rating downgraded, causing insurance agents to tell clients to move their business to other firms. This has added to the worries about the industry, Bunda said….

J.P. Schmidt, state insurance commissioner, acknowledged that local agents “are moving customers to other insurers for hurricane insurance.”…

“Many years ago, when we activated the Hurricane Relief Fund, it was because the homeowners were getting their bills and the premiums were jacked up a huge amount,” Bunda said.

Schmidt said he doesn’t like the idea of reactivating the Hurricane Relief Fund because it would require the state to sell insurance to all policyholders if a specific company sold its hurricane insurance through the relief fund….

Right now, the relief fund maintains a balance of $182 million. The fund was created by the Legislature in 1993, following disastrous losses suffered by homeowners because of Hurricane Iniki a year earlier. With more than a billion dollars in claims, property insurance companies either folded, left the state or stopped issuing new policies….

But Schmidt said he believes the problems may ease in the next two weeks. Either HIG may get a promise of financial backing or there may be additional insurance companies coming into the market, he said.

Korean firm Dong Bu Insurance is setting up to sell insurance in Hawaii, according to Schmidt. “They are looking to write homeowners and hurricane insurance,” he said.

“Again, all this is a question of timing. … We may have this matter resolved in a week or two…” Schmidt said.

http://starbulletin.com/2006/04/19/news/story03.html

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April 18, 2006

Insurer backs off isle homes

Zephyr Insurance will no longer issue
new policies for certain homes in Hawaii

By Stewart Yerton, Star-Bulletin

In what one local real estate executive called a worrisome development with implications for thousands of homeowners, Hawaii’s largest residential hurricane insurer has said it will quit selling policies for many older homes in the Aloha State.

According to Zephyr Insurance Co. Inc.’s new guidelines, single-wall construction homes are “not acceptable,” and homes built before 1981 are not eligible unless they have been retrofitted with hurricane clips to meet 1993 or 1994 building codes….

Zephyr said the changes are a response to market changes following the fierce Atlantic storms of recent years, which have devastated parts of Florida, Alabama, Mississippi and Louisiana, causing billions of dollars in insurance losses.

“Within the last few years, and especially since the impact of Hurricane Katrina, the global reinsurance markets have raised prices for hurricane insurance and have less available hurricane insurance,” a spokeswoman for Zephyr said in written statement.

As of September, Zephyr had 70,000 policyholders in Hawaii and projected gross premiums of about $50 million for 2005, making it the state’s largest hurricane insurer. The company is owned by Kingsway Financial Services Inc. of Toronto, which is one of North America’s largest insurers of cars and trucks….

Hawaii Insurance Commissioner P.J. [sic] Schmidt was not available for comment yesterday, and Deputy Insurance Commissioner Gordon Ito said his agency was determining whether the gap created by Zephyr’s change would be filled by other companies.

Although the change in underwriting criteria will not affect existing policies, it will affect people seeking new ones, including home buyers who need hurricane insurance in order to get a mortgage. That could seriously affect the residential market, not just for buyers, but also people trying to sell older homes, said Mary Begier, a Honolulu Realtor.

“It is worrisome,” said Begier, who was involved in the establishment of the state’s Hurricane Relief Fund to provide hurricane insurance after big companies shied away from the Hawaii market following Hurricane Iniki.

Particularly troubling, she said, is that homes with single-wall construction, including the older, plantation-style cottages that represent some of Hawaii’s more charming residential architecture, are identified as completely unacceptable to Zephyr….

http://starbulletin.com/2006/04/18/news/story02.html

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September 13, 2005

Hawaii’s Largest
Hurricane Insurer Sold

A Canadian truck and auto insurer is buying
Zephyr Insurance and its parent company

Honolulu Star-Bulletin

Kingsway Financial Services Inc., a Toronto-based truck and auto insurer, is buying HI Holdings Inc. and its Zephyr Insurance Co. subsidiary for an undisclosed price….

Shaun Jackson, Kingsway’s executive vice president and chief financial officer, said Kingsway will keep Zephyr’s management in place and could increase its staff of about 15 employees as business grows….

The deal would give Kingsway a large foothold and launching pad for further expansion. Zephyr has some 70,000 policyholders in Hawaii. In the first six months of this year, Zephyr generated gross premiums of $24 million and expects $50 million in gross premiums for the year.

The deal is expected to close in the fourth quarter of this year subject to regulatory approval. Hawaii Insurance Commissioner J.P. Schmidt said his office is awaiting documentation that must be examined as part of the regulatory approval process.

HI Holdings and Zephyr were formed in 2000 by an investor group that includes Everest Reinsurance Co., Guy Carpenter & Co., Hanover Ruckversicherung AG and Island Holdings Inc.

Kingsway, one of North America’s largest insurers of trucks and automobiles, operates through 10 subsidiaries in the United States and Canada, including Kingsway General Insurance Co., York Fire & Casualty Insurance Co. and Jevco Insurance Co. The company also operates reinsurance companies in Barbados and Bermuda.

“This transaction is consistent with our niche business strategy and our interest in acquiring profitable businesses that provide geographic and product diversity,” said Bill Star, Kingsway’s president and chief executive.

Paul Picardo, chairman of HI Holdings, called the deal “a successful outcome for both parties.”…

www.starbulletin.com/2005/09/13/business/story1.html

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December 23, 2004

Top hurricane insurer in isles
raises premiums 20%

Other providers have also cited models showing
higher risks and costs since 9/11

By Dan Martin, Star-Bulletin

Zephyr Insurance Co. Inc., the state’s largest provider of hurricane insurance to local homeowners, has raised its rates by an average of about 20 percent.

The rate increase began Nov. 1 and affects Zephyr’s approximately 65,000 policies in the state.

It was the first rate increase in Zephyr’s four years in Hawaii, and follows local rate increases last year by other providers who cited higher costs and risk in the wake of the Sept. 11, 2001, terror attacks.

“The rate changes are the first in the company’s four-year history, and have been implemented to help ensure that we are prepared to meet obligations to policyholders in the event of a catastrophe,” said Richard Toyama, the company’s president….

http://starbulletin.com/2004/12/23/news/story4.html

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April 6, 2001

A Whirlwind of Insurance Worries

By Rob Perez, Star-Bulletin

THE STATE’S decision last year to exit the hurricane insurance business is helping a new company become a powerhouse in the industry.

But it also has the state’s top insurance regulator expressing “the gravest of reservations” about the company’s ability to weather a major hurricane strike in a densely populated area hare.

By year’s end, Zephyr Insurance Co. is expected to be the dominant carrier in Hawaii for providing hurricane coverage – not bad for a company that wasn’t even writing policies here a year ago.

Zephyr’s growth is being fueled by the expiring policies leaving the Hawaii Hurricane Relief Fund, the state agency formed to solve an insurance-availability crisis following Hurricane Iniki’s devastating hit on Kauai in 1992.

Zephyr is getting many of those post-fund policies, signing up customers whose basic home insurance carriers opted not to offer hurricane coverage….

One state projection, described as too optimistic by Zephyr, has the company controlling as much as 46 percent of Hawaii’s hurricane insurance business by December. Getting even close to that share in such a short time would be remarkable for any new player.

State Insurance Commissioner Wayne Metcalf says he has “the gravest of reservations” about allowing a thinly capitalized company like Zephyr to take on so much of the hurricane risk in the state.

Zephyr’s capital base of $11 million compares with the fund’s roughly $190 million cash reserve, Metcalf said.

Zephyr, however, says it has adequate capital and reinsurance to handle projected losses from a hurricane even greater than Iniki.

“We have some of the largest and most financially sound reinsurers protecting our insureds,” said company spokeswoman Jeanette Caldeira.

There’s another twist to this story, one that raises questions about a possible conflict of interest.

On July 6, 2000, the HHFR board approved the plan to stop writing hurricane policies as of Dec. 1, 2000. The resignation of the board’s executive director, Amori Ogata, took effect the day after that meeting.

He then joined Zephyr as an executive vice president.

Even if Ogata didn’t advocate the fund’s exit from the insurance market, as HHRF officials say, the fact that he quit the agency and then joined a company benefiting from the fund’s exit creates the appearance of a conflict.

Officials with the HHRF dispute that notion. They note that Ogata had no role in the decision to stop writing policies. They also note the fund was supposed to eventually go out of business anyway, just as it was designed to do once the insurance crisis abated….

“Zephyr is a private company based in Honolulu (and) has attempted to hire the best management team available so that it can be an effective competitor in the Hawaii marketplace,” Caldeira said.

Officials at the state Ethics Commission, commenting only in general terms, said a state employee within a year of quitting is prohibited from getting paid to represent another person or business on a matter in which the employee participated as a state worker. The former state employee also is banned from providing paid representation on matters involving official action from his or her former division….

Regarding Zephyr’s coverage capability, Metcalf said the company clearly meets the state’s minimum requirements. But Metcalf questions whether Zephyr would be able to cover losses if a storm of Iniki’s intensity (about 140 mph winds) or greater strikes a densely populated area like Leeward Oahu.

The company, however, is not required to have that kind of capability.

“I have the gravest of reservations, but there’s not a lot I can do about it,” Metcalf said.

Lloyd Lim, acting executive director for the relief fund, said no carrier is in a position to fully cover losses in a worst-case scenario. regulators must make judgment calls on what is adequate, he added.

Zephyr is writing hurricane insurance for customers who have their basic homeowner’s coverage with carrier such as Allstate, TIG and Island Insurance. Several other carriers, including State Farm, offer hurricane coverages as part of their overall homeowner policies.

After questions arose about the issue, Metcalf in November asked his fellow HHRF board members to reconsider their July decision and defer getting out of the insurance business until later this year.

That way the Legislature, which created the fund, would be able to decide the public policy issue of when the fund should stop writing policies, Metcalf said.

Lim, though, said the board by law clearly had the authority to make the call. He also noted that the availability crisis had abated.

Given the concerns of the state’s top insurance regulator, the prudent action would have been to defer action.

www.starbulletin.com/2001/04/08/news/perez.html

April 20, 2000

INSpire signs outsourcing agreement

Dallas Business Journal

Fort Worth-based INSpire Insurance Solutions announced that the company has entered into a 10-year functional outsourcing agreement with Zephyr Insurance Co. Zephyr is a newly established provider of hurricane coverage for residential exposure in the state of Hawaii.

Under this agreement, Zephyr will outsource all policy administration and claims administration operations to INSpire.

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August 29, 2002

CGI to buy INSpire Insurance for $8.2 M

Dallas Business Journal

Canadian technology services company CGI Group Inc. has agreed to buy the operating assets of Fort Worth-based INSpire Insurance Solutions Inc. for $8.2 million.

INSpire, which filed for Chapter 11 bankruptcy protection in February, said its operations would be integrated with CGI and continue to offer policy and claims administration outsourcing, information technology outsourcing and software services.

Through the acquisition, CGI would extend its ability to provide technology services to the insurance market and expand its business processing services capabilities.

INSpire said it made the decision to sell its operations after evaluating all alternatives and concluded that a sale is in the best interest of its shareholders….

Montreal-based CGI has more than 3,000 clients in North America, Europe and Asia and about 60 offices in 20 countries….

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December 12, 2003

CGI inks $19.5M pact with federal division

Dallas Business Journal

CGI Group Inc. said it has signed a five-year, $19.5 million contract with the Bureau of Indian Affairs for technology outsourcing services.

Under the agreement, CGI will provide data development, conversion and related support services for the bureau’s 55.7 million acres of land assets across the United States. The bureau is part of the U.S. Department of the Interior.

Also as part of the contract, CGI will use its training facility to train bureau workers on its asset and accounting management software system.

Work will be handled mainly by CGI’s Dallas-based data center, where the bureau’s data will be housed.

The agreement renews an existing relationship between CGI and the federal division that began in 1998 with the signing of an initial outsourcing contract, CGI said in a statement.

CGI (NYSE: GIV), a technology outsourcer, has its headquarters in Montreal….

Company Web Site: www.cgi.ca

For more on outsourcing, GO TO > > > Black Berets-Red China; The Bureau of Indian Affairs; Marsh & McLennan’s Mercer Consulting

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June 4, 2001

Zephyr signs Garibaldi

Pacific Business News

A former CFO of Hawaiian Airlines has signed on to be CEO of locally-based Zephyr Insurance Co., a seller of hurricane insurance.

John Garibaldi starts his new job as president on July 1, Zephyr chairman Wayne Arakaki says.

Garibaldi is ending a year’s hiatus as executive vice president and chief financial officer at Hawaiian Airlines and before that he was a trustee of the Queen Emma Foundation, CFO of The Queen’s Health Systems, and CFO of Aloha Airlines.

Zephyr Insurance is only a year old and already has more than 30,000 policies. The company only operates in Hawaii and only sells hurricane insurance.

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April 20, 2003

Business Briefs, Honolulu Star-Bulletin

NEW JOBS

>> Hurricane insurance provider Zephyr Insurance Company Inc. has hired Richard Toyama as president and chief executive officer. He began his career as Fireman’s Fund Insurance Co. and most recently serves as Mitsui Sumitomo Insurance Group Hawaii operations manager. He has 32 years of insurance industry experience in Hawaii.

For more on Mitsui Sumitomo Insurance Group, GO TO > > > Broken Trust; Dirty Money, Dirty Politics & Bishop Estate; Dirty Gold in Goldman Sachs; Yakuza Doodle Dandies

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February 22, 2004

Insurers among investors that got
Act 221 breaks

By Jim Dooley, Honolulu Advertiser

Eleven Hawai’i insurance companies, including one closely tied to the state’s two largest public employee unions, avoided paying $19 million in state taxes in 2001 and 2002 by investing in high technology ventures, including the “Blue Crush” teen surf movie.

The state won’t identify the firms or reveal full details of their investments because of Tax Department secrecy laws now being questioned by some in Gov. Linda Lingle’s administration and the state Legislature.

But government records, court documents and a local insurance executive identify the Royal State Insurance group of firms as a central player in a hui that invested in the Blue Crush production in 2001, generating millions in controversial state tax credits.

Repeated attempts to reach Royal State chief executive Melvin Higa for comment were unsuccessful. Russell Okata, head of the 40,000-member Hawaii Government Employees Association and chairman of the board of directors of Royal State Corp., declined to comment other than to say through a spokesman that he “had nothing to do with any Royal State business decisions regarding investments.”

Documents contained in a state court lawsuit over distribution of the “Blue Crush” tax credits provide glimpses into the deals worked out in government and business circles over a bonanza of tax breaks available to Hawai’i investors under the 2001 law commonly called Act 221.

These details raise further questions about the public benefit of the tax credits, which cost the state’s general fund $21.9 million in 2001 and are expected to cost $48.4 million this fiscal year and $76.7 million in fiscal 2005, according to state estimates.

The law says every dollar invested in qualifying high technology ventures, including film and television productions, can be used to reduce state tax obligations by $1. The tax credits are spread over a five-year period and are capped at $2 million per investment.

Proponents of Act 221 argue that the credits are a valuable economic tool for promoting business growth and creating new jobs in a state overly dependent on tourism and military dollars. Act 221 supporters also argue that disclosure of who benefits from the credits would be detrimental to the program.

State Rep. Brian Schatz said exposing the identities of investors receiving Act 221 tax credits could discourage further investment.

“I just don’t see the need to know the name. I need to know the numbers,” he said. “I think there are some legitimate reasons that certain investors wouldn’t want their names out there, and it’s not simply a matter of them wanting to hide.”

Critics say the credits are overly generous, have failed to produce tangible economic benefits for the state and have been shrouded in secrecy preventing public accountability.

State Sen. Colleen Hanabusa, D-21st (Nanakuli, Makaha), who opposed passage of Act 221, said she was “stunned and fascinated” by the identification of union-affiliated Royal State as a “Blue Crush” investor.

“That’s the kind of information the public should have,” she said.

“I believe if you receive a tax credit from the state of Hawai’i then Hawai’i taxpayers should know who you are.”

Lowell Kalapa of the Hawaii Tax Foundation, said it was ironic that Royal State Insurance, with its connections to Hawai’i’s public worker unions, is reducing its state taxes by investing in a venture like the “Blue Crush” film.

Public workers are paid from state tax collections.

“It’s like these guys are sucking their own well dry,” Kalapa said.

The identities of some of the “Blue Crush” investors are contained in an Act 221 tax credit lawsuit filed in 2002 by April Masini, a film and television industry figure active in Hollywood and Hawai’i, against the prominent Hawai’i law firm Cades Schutte Fleming & Wright and a partner in the firm, Vito Galati, who had helped draw in investors for “Blue Crush.”

(The firm regularly provides legal representation to The Advertiser but was not involved in the preparation or review of this story.)

Masini claims that she was wrongfully denied “Blue Crush”-generated tax credits after she worked in 2001 to convince Universal Studios to film the movie in Hawai’i.

Masini said she worked with Gov. Ben Cayetano and his high technology adviser, Joseph Blanco, to obtain tax credit approvals for the project and searched for local investors willing to put money into the production.

The law firm and Galati deny any wrongdoing.

Masini said in her suit that she helped pitch the movie tax credit proposal to Hawai’i land-holding giant Damon Estate and two local banks with “high net worth clients” who would be interested in substantially reducing their state taxes.

In one proposal, heirs of the Damon Estate, which at the time owned more than 116,000 acres of property on O’ahu and the Big Island and 13 percent of First Hawaiian Bank, were to receive $11.2 million in tax credits after investing $8.5 million in the “Blue Crush” production, according to court records.

Making a profit in tax credits is one of the controversial aspects of Act 221. The law allows out-of-state investors, who don’t need Hawai’i tax credits, to give, sell or otherwise transfer their credits to Hawai’i taxpayers.

The law also may have created an underground market in the secrecy-shrouded credits, according to paperwork filed in the Masini suit.

The proposal to Damon Estate contained a provision that Masini and a Mainland partner had the right to purchase tax credits from the estate “for resale to third parties.”

Masini’s lawsuit said the estate and banks eventually turned down the “Blue Crush” proposal and the ultimate investors were “insurance companies” brought in by Galati, the Cades law firm partner.

The insurance companies are not identified in the court case because of state tax laws prohibiting public release of “taxpayer information,” according to paperwork filed by Masini’s lawyer, Philip Brown.

However, the Masini suit does list a number of local insurance companies and executives as witnesses to be called — if and when the case goes to trial. A trial date has been tentatively set for next year.

Companies identified

Among the witnesses listed by both the plaintiff and defendants in the suit are executives of four Royal State-affiliated companies, including the Performing Arts Investors and Royal Management that were formed in mid-December 2001 when the Blue Crush investment was being finalized.

According to state business records, HGEA’s Okata was chairman of the board of Royal State at the time the Blue Crush investments were made.

Royal State is listed as the parent company of Royal State Investment Corp., which in turn is listed as the agent for Performing Arts Investors and Royal Management.

Also on the Royal State board with Okata at the time of the “Blue Crush” investment was Gary Rodrigues, then head of the 12,000-member United Public Workers Union, which represents mostly blue-collar state and county employees.

Rodrigues was sentenced last year to more than five years in federal prison in a union fraud and embezzlement case that involved Royal State and a related firm called Voluntary Employees Benefit Association of Hawaii.

Both Rodrigues and HGEA’s Okata were on the board of trustees of VEBAH.

Rodrigues is no longer affiliated with UPW. Acting union administrator Liz Ho could not be reached for comment.

Another local insurance company executive listed as a witness in the case is Colbert Matsumoto, chief executive of Island Insurance Co. Ltd.

Matsumoto wouldn’t discuss many details of his company’s investments, but acknowledged that Island Insurance has made “several investments” in high technology ventures, including the “Blue Crush” production.

Matsumoto said “an investment entity” was formed to receive money from various insurance companies for the “Blue Crush” venture. Asked if the investment entity was Performing Arts Investors, the limited liability company operating from Royal State Corp.’s Beretania Street offices, Matsumoto said: “That sounds right.”

Other executives of insurance companies listed as witnesses in the Masini suit did not respond to repeated requests for comment on “Blue Crush” investments.

The companies include Zephyr Insurance, supplier of much of the hurricane insurance coverage written in Hawai’i, Pacific Guardian Life Insurance, and DTRIC Insurance.

Royal State owns a partial interest in the DTRIC insurance business in Hawai’i, according to state business records.

First Insurance Co. of Hawaii was invited to participate in the “Blue Crush” venture but declined, said company spokesman Steve Tabussi.

“We had a look at the proposal,” Tabussi said. “It didn’t fit our investment needs.”

According to figures compiled by state Insurance Commissioner J.P Schmidt, some local insurance companies quickly took advantage of Act 221 tax credits.

A chart prepared by Schmidt for The Advertiser shows nine insurance companies claimed $6 million in Act 221 tax credits in 2001, the first year the credits were available. The following year, 11 companies reduced their state taxes by $13 million using the credits, a 117 percent increase.

Schmidt said he couldn’t reveal the names of the companies because of Tax Department confidentiality laws. But the numbers make clear that some insurance companies made multiple Act 221 investments or acquired extra credits from other sources in 2001-2002.

Under an annual percentage formula set in Act 221, the maximum allowable tax credit per investment each year is $700,000. But three companies claimed between $890,000 and $1.3 million in credits for the 2001 tax year, showing that they invested in more than one project or bought or otherwise acquired additional credits from other sources.

In 2002, two insurers reduced their state tax bills by more than $2 million each and another three companies avoided more than $1 million in state taxes apiece through Act 221 investments.

Changes to law sought

The state Tax Review Commission, which reviews state tax policies every five years, has called for changes to Act 221.

In a report last year, the commission said: “Every business receiving $2 million in high-tech investment (credits) should report back to the Legislature to justify the investment costs upon which the credit is based, account for all the credits taken, and demonstrate that the cost-benefit has been achieved.”

Kalapa of the Hawaii Tax Foundation said Act 221 credits have left the public with little means of judging their effectiveness.

“We’re all left to wonder if jobs are being created. We don’t know who’s getting the credits so there’s no real way to measure the economic benefits,” he said.

State Tax Director Kurt Kawafuchi said his department is still studying the economic effects of Act 221 and audits of companies that claimed the tax credits in 2001 to 2002 may be under way.

But the law says that Act 221’s provisions must be “liberally construed” by the tax department. Even if audits determine that tax credits were improperly received by Act 221 investors, the law says only 10 percent of previously awarded credits can be “recaptured” by the state.

Information about any recaptures would be confidential, according to Kawafuchi.

Bills to tighten Act 221 eligibility criteria and extend the program another five years beyond its present 2005 expiration date are pending at the Legislature. Provisions that would publicly identify tax-credit recipients have been dropped from the measures.

Ted Liu, director of the state Department of Business, Economic Development and Tourism favors disclosure. “Sunshine is the best disinfectant,” Liu said.

Tax Director Kawafuchi, however, said he sees good arguments on both sides of the secrecy issue and is looking for a “middle ground” solution.

Reach Jim Dooley at jdooley@honoluluadvertiser.com or 535-2447.

For more, GO TO > > > Act 221; Predators in Paradise

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December 24, 2004

Hurricane insurer raises rates 20 percent

Associated Press

HONOLULU (AP) – The state’s largest provider of hurricane insurance to local homeowners has raised its rate by an average of about 20 percent.

Zephyr Insurance Company has about 65-thousand policies in the state. The new rates went into effect on November 1^st.

It was the first rate increase in the company’s four years in Hawaii. It follows local rate increases last year by other providers who cited higher costs and risk in the wake of the September 11^th, 2001, terrorist attacks.

[A Curious Catbird asks: What effect, pray tell, do terrorist attacks have on the weather?]

Zephyr president Richard Toyama says the rate increase will help ensure that the company is prepared to meet obligations to policyholders in the event of a catastrophe….

For more on insurance profiteering on 9-11, GO TO > > > Allied World Assurance

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July 8, 2005

Weiss Ratings: Strongest and Weakest Homeowners Insurers

Strongest Homeowners Insurers …

Company Name State Weiss Risk Rating

UNITED SERVICES AUTOMOBILE ASSN TX A+

. . .

Weakest Homeowners Insurers …

ZEPHYR INSURANCE COMPANY, INC E+

. . .

(Complete chart at: www.weissratings.com/HL_Home.asp)

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October 14, 2003

Isle lawyer accused of stealing $12 million

Jerrold Chun allegedly diverted money
from an insurance company

By Debra Barayuga, Honolulu Star-Bulletin

A Honolulu attorney has been charged with fraudulently diverting at least $12 million from the estate of an insurance company declared insolvent after Hurricane Iniki.

Jerrold Chun, 55, of Chun & Nagatani, made his initial appearance yesterday in District Court on theft charges. He was released after posting $150,000 bail – reduced from $300,000 – pending a preliminary hearing Nov. 10….

Chun is accused of diverting more than $20,000 on each of three occasions from June through July from HUI/UNICO, acronyms for two insurance companies set up by Hawaiian Electric Industries and taken over by the state insurance commissioner in 1992, said Richard T. Bissen Jr., first deputy attorney general….

The insurance commissioner in 1993 declared Hawaiian Underwriters Insurance Co. Ltd. and United National Insurance Co. Ltd. insolvent and ordered them liquidated because the amount of their insurance claims exceeded their abailable funds, due to losses from Hurricane Iniki, Bissen said. Iniki hit Kauai in September 1992.

HUI/UNICO provided property insurance, workers’ compensation and other lines of insurance. Chun was hired by HUI/UNICO as counsel to the liquidator to help administer the estate.

But while Chun was successful in negotiating settlements of creditors’ claims and administering the claims of policyholders, the state Insurance Division uncovered irregularities in financial reports, said state Insurance Commissioner J.P. Schmidt.

Schmidt conducted an internal investigation that resulted in the criminal charges.

The inquiry found that “significant sums had not been properly accounted for and appeared to have gone to Mr. Chun and other individuals,” Schmidt said.

“At this time, we believe there has been at least $12,401,343 misappropriated,” he said.

Schmidt said Chun does not dispute he received the money and provided various explanations, including an agreement he claimed he struck with the previous insurance commissioner, Wayne Metcalf, regarding a “success fee.”

(For another controversial “success fee”, see Hawaiian Airlines: Flying with the Bankruptcy Buzzards.)

According to Chun, Metcalf agreed that if Chun negotiated a smaller payment to creditors than anticipated, he could keep the difference, Schmidt said.

Chun allegedly received the “success fee” in addition to his hourly fee.

Schmidt said there is no evidence of any verbal or written approval or authorication of such an arrangement and called it “highly unusual and inappropriate.” Chun had said he discussed it only with Metcalf.

Metcalf could not be reached for comment.

Schmidt, in his capacity as liquidator of HUI/UNICO, filed a civil complaint Friday against Chun, asking the court to issue a temporary restraining order to protect the estate’s funds.

Before filing the complaint, Schmidt had learned that substantial amounts of money had been transferred from HUI/UNICO to client trust accounts and business and personal accounts in the names of Chun and Chun & Nagatani.

From the trust account, $2,699,740, which Schmidt says is part of the$12 million diverted from HUI/UNICO, was deposited into an account in the name of Michael Chong of Adjusting Services of Hawaii. Chong is named in the civil complaint.

“He was apparently a part of the ‘success fee’ arrangement and received some of the funds,” Schmidt said.

Chong could not be reached for comment. He was not named in the criminal complaint. The Attorney General’s Office is continuing its investigation, Bissen said.

Chong’s position was that the arrangement had been approved and that they were acting properly, Schmidt said.

The civil suit, which alleges fraud, conversion, unjust enrichment and negligence, was filed because both have refused to return the money, Schmidt said.

The Insurance Division is continuing its investigation and conducting an audit of all HUI/UNICO operations to ensure no other money had been improperly disbursed and all money has been appropriately accounted for, he said. Chun was removed shortly after the fraud was discovered.

Despite the alleged diversion, people who held policies with HUI/UNICO will be paid “100 percent,” Schmidt said.

The money that was allegedly misappropriated is a surplus “over and above the amount paid to people who had policies and claims based on those policies,” he said.

www.starbulletin.com/2003/10/14/news/story2.html

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August 3, 2004

$8 Million no ‘common’ theft

A lawyer chooses not to contest
charges he stole client trust funds

By Debra Barayuga, Honolulu Star-Bulletin

A Honolulu lawyer pleaded no contest yesterday to stealing nearly $8 million in claims arising from Hurricane Iniki in 1992 from insurance companies taken over by the state.

Jerrold Chun, 55, an attorney who was hired to help administer the estate of HUI/UNICO – two insurance companies that were declared insolvent by the state insurance commissioner in 1992 – entered the pleas in Circuit Court to three counts of first-degree theft, racketeering and 10 counts of money laundering.

Chun asked for a deferral of his pleas, which would allow him to clear his record if he meets conditions similar to probation.

“There are mitigating circumstances which he is the first to tell you does not excuse him, but what we have found explained what happened and tells us this is not a common white-collar theft,” said Brook Hart, one of two attorneys representing Chun.

Chun was indicted in October of diverting a total of $7.9 million from the client trust account of his law firm, Chun & Nagatani, into his and two other individuals’ personal accounts.

The money was transferred into the trust account by HUI/UNICO at Chun’s request to pay for settlements in two cases and outstanding tax assessments owed to the state. According to state attorneys, Chun requested more money than was needed to pay the claim and kept the surplus.

Although claimants were paid, Chun kept $3.3 million for himself and distributed the rest to two individuals to disguise the illegal nature of the transfer, said Deputy Attorney General Mark Miyahira, who argued that Chun should enter a guilty plea, not a no-contest plea.

Chun should be held to a higher standard because, as an attorney, he knew he was breaking the law and abused his position of trust by stealing a large amount of money that he did not need and should have gone to people who had suffered losses, Miahira said. Allowing Chun to plead no contest and not admit his guilt would undermine the public’s trust in the judicial system, he said.

At the time he took the money, Chun was living a good lifestyle and had billed HUI/UNICO $279,450 for the services rendered from January to August, Miyahira said. “Simple greed fueled this case.”

Chun, who was scheduled to go to trial this month, entered his plea because he is taking full responsibility, said William Harrison, also Chun’s attorney.

Chun has repaid nearly $8 million of the amount the state says was diverted, is paying accumulated interest and is cooperating in the lawsuit filed by the state against him, his attorneys said.

The state actually obtained a $20 million windfall after Chun turned the company with a $70 million deficit around, Hart said.

“The short of it is, he did a wonderful job helping the people who were injured enormously and then inexplicably took a success fee, which was unauthorized.”

Deputy Attorney General Chris Young, who heads the criminal justice division, questioned where the state savings are if the money Chun took was indeed a “success fee,” as he claimed.

And just because a defendant pays back the losses does not fix the fact that he committed the crime, he said.

“But for the fact he was caught, the money would not have been recovered,” Young said….

www.starbulletin.com/2004/08/03/news/story10.html

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October 21, 2003

Ex-state Official’s Role in Liquidation Disputed

Two insurance firms went
bankrupt after 1992’s Hurricane Iniki

By Bruce Dunford, Associated Press

Senate Minority Leader Fred Hemmings says answers are needed to “serious questions” about the role of former state insurance commissioner Linda Chu Takayama, a Democratic Party insider, played in the liquidation of two bankrupt insurance companies following Hurricane Iniki.

J.P. Schmidt, the insurance commissioner under the new Republican administration of Gov. Linda Lingle, agrees, even thought the liquidation was unusually successful and the state stands to gain a windfall of up to $15 million.

The liquidation was handled by Honolulu attorney Jerrold Chun, who was arrested last week on three counts of felony theft and allegations that he diverted more than $12 million from insurance claims and creditor settlements resulting from the 1992 hurricane that devastated Kauai.

As insurance commissioner, Takeyama won court approval in 1993 to assign the liquidation of Hawaiian Underwriters Insurance Co. and United National Insurance Co. – subsidiaries of Hawaiian Electric Industries’ subsidiary, the Hawaiian Insurance Group – to the McCorriston Miho Miller Mukai law firm, where Chun was assigned to handle the case, said Hemmings, (R-Lanikai-Waimanalo).

Takayama, an attorney, resigned as insurance commissioner in 1994 to become deputy director of the Department of Commerce & Consumer Affairs, and later joined McCorriston Miho.

She then joined Chun in leaving McCorriston Miho to start their own law firm, Chun Chipchase Takayama Nagatani, taking the liquidation case with them, said Schmidt, who has filed a civil claim against Chun, seeking the $12 million for the state. That case does not name Takayama….

At some point, private attorney Takayama, with the court’s approval and probably because of her familiarity with the case, was appointed as a “deputy liquidator,” serving “up until we uncovered these misappropriations and what have you, at which time I removed her and Chun and the other folks involved and appointed my own deputy liquidator,” Schmidt said yesterday.

“It raises some questions,” he said. “Until we get the files and look at it, I’m not sure whether it’s improper. If it was improper, then we need to know whether it then led to any improprieties because of the conflict or not.”

A deputy liquidator is responsible to the judge overseeing liquidation and is paid out of funds from the liquidated company, Schmidt said.

Schmidt said that the files with details on the HUI/UNICO liquidation have been subpoenaed in the criminal case against Chun and are now sealed [emphasis added].

A question that has to be asked is, “During the tenure of Linda Chu Takayama’s partnership with Chun, was she a beneficiary of the business she assigned to him, directly or indirectly?” Hemmings said Friday. “She can claim, ‘I never collected a direct commission,’ but what did she collect?”

However, “if you connect all the dots, there’s a lot of politics and conflicts of interest in it,” he said. “I’m confident the attorney general and insurance commissioner are going to do what should have been done a long time ago regarding the improprieties in the insurance industry.”

Takayama, who is closely allied to U.S. Sen. Daniel Inouye, is a former top aide in the office of the U.S. Senate Sergeant at Arms. She is also a member of the board of governors of the East-West Center and is chairwoman of the Hawaii Foodbank. Her husband, Gregg, is a reporter for KHON television news in Honolulu and served for 12 years as Inouye’s press secretary, followed by three years as press secretary for then-Lt. Gov. Ben Cayetano.

In 1999 she was named to a four-year term as one of 78 public interest directors of the Federal Home Loan Banks, ans is registered with the state as a lobbyist for Abbott Laboratories Inc., Hawaii Pacific Health, Hawaii Psychological Association and Pfizer Inc.

The attorney general’s office launched a criminal investigation of the HUI/UNICO liquidation after an internal investigation by Schmidt’s office found that Chun negotiated substantially lower payouts for three claims and then kept the difference for the original claim amount.

After Hurricane Iniki hit on Sept. 11, 1992, homeowners and property owners flooded the two companies with claims that overwhelmed their reserves, at which time HEI said it would not provide additional capital, which resulted in a Circuit Court order granting Takayama’s motion for the state to take possession of the companies and their assets.

In April 1993, Takayama, then the insurance commissioner, filed a complaint against HEI on behalf of creditors and policyholders, alleging the company had misled the public about its financial support of the Hawaiian Insurance Group and had mismanaged and drained HIG’s financial assets.

In February 1994, HEI agreed to pay a $32 million settlement to reduce the anticipated $73 million deficit faced by its HIG subsidiary.

Schmidt said Chun did such a good job in liquidating the assets of HUI/UNICO that not only will the policyholders get their claims, the state general fund could end up with a potential windfall of $10 million to $15 million.