Posted on 10 Dec 2009
A New York State agency filed a lawsuit on Wednesday alleging fraud and seeking $405 million in damages from a company that has long helped administer workers' compensation insurance for companies.
In addition, the attorney general's office this week informed the company, CRM Holdings, that it would file a separate lawsuit next week charging the company with business fraud and security fraud, asserting that CRM engaged in deceptive and illegal practices to attract business.
Both the New York State Workers’ Compensation Board and the attorney general’s office say that CRM deliberately underestimated the workers’ compensation liabilities of many companies to help drum up business, enabling CRM to charge artificially low premiums, ultimately leaving the companies with inadequate reserves to cover liabilities.
In New York, many small- and medium-size employers in the same industry band together to form self-insured group trusts that provide workers’ compensation coverage to their employees. But state officials assert that more than a dozen of these group trusts have failed financially in recent years, leaving tens of thousands of workers without the insurance, because of malfeasance by CRM and other trust administrators.
In a letter sent to CRM, the office of the attorney general, Andrew M. Cuomo, accused the company of doing such a poor job administering various trusts that the trusts failed, leaving liabilities of more than $150 million — the amount that officials in Mr. Cuomo’s office said they would seek in suing CRM. The workers’ compensation board has set a far higher number — $405 million — for the damages and unfunded insurance liabilities that it says have resulted from CRM’s fraud and improper behavior.
On Wednesday, a spokesman for CRM responded to the workers’ compensation board lawsuit and the attorney general’s letter by saying: “The most important thing for us is we deny these claims. We want to try to get on with our corporate life here. We are a well-run, prudent, well-respected workers’ comp insurer.”
CRM Holdings is based in Bermuda with a subsidiary based in Poughkeepsie called Compensation Risk Management.
In its letter to CRM, Mr. Cuomo’s office wrote: “Deliberately misstating the funding status of the trusts was an essential element in CRM’s efforts to market the trusts and promote growth in trust membership. In effect, CRM’s business model was based upon fraud.”
The workers’ compensation board, in its civil lawsuit filed in State Supreme Court in Albany, accused CRM of breaches of fiduciary duty, fraud, deceptive acts and mismanagement, saying the company had pushed actuaries to distort their analyses to improve the chance that CRM would retain and attract new members to each of the trusts.
The letter sent by Mr. Cuomo’s office to CRM notified the company of its intent to file civil charges for business and securities fraud. The letter, dated Dec. 8, gave the company five days’ notice. The attorney general says that CRM failed to accurately disclose the financial conditions of the trusts it administered when it raised $68.7 million in a December 2005 public offering of its stock.
CRM said in a statement that it was disappointed with Mr. Cuomo’s decisions to bring the lawsuit and to disclose the letter before the five-day window for settlement negotiations had expired.
CRM said: “The company denies the attorney general’s allegations and believes that its business and management practices in connection with the New York trusts were proper and that all material information was disclosed during its initial public offering. The company believes that the attorney general’s allegations are without merit, but is committed to resolving the company’s legal issues in the best interests of its shareholders, employees, clients and other stakeholders.”
Mr. Cuomo’s office said CRM had “engaged in various improper practices, including under-reserving individual claims, and using improper actuarial and accounting methodologies to minimize projected claims liability.”
In June 2008, CRM agreed to surrender its license as a third-party insurance administrator in New York after state workers’ compensation officials accused the company of giving inaccurate information to the board, not cooperating with an audit and routinely failing to set aside adequate reserves for claims.