The Captive Con

In May 2020 a case was filed in a Kentucky court that was unusual, at least for the captive community.

A complaint submitted to the court by Lexington Insurance Company, a subsidiary of AIG, claimed that firm Ambassador Captive Solutions had committed fraud to create counterfeit insurance policies.

However in a reply to the court Ambassador deny all allegations, and claim that the case “is not about fraud, forgery, or counterfeits. It is a contract dispute, where parties disagreed on the formation of the contract. None of the defendants in this matter have cheated Lexington, AIG, or anyone else out of money.”

As well as Ambassador the complaint from Lexington named four other defendants: Gagliardi Insurance Services, Goldenstar Specialty Insurance, Performance Insurance Company in behalf of Goldenstar Holdings and Smart Insurer, and Brandon White.

Gagliardi is a brokerage that already had business relationship with Ambassador, and White a principal at Ambassador. Performance is a Cayman-domiciled captive, and Goldenstar a Pennsylvania-domiciled captive.

Well known captive manager Atlas Insurance Management is also mentioned in the lawsuit, as the manager hire by Goldenstar. However there is no claim that Atlas acted inappropriately or had any knowledge of the alleged fraud.

The Complaint

The complaint alleged that in 2018 White and Ambassador, who already had a business relationship with Lexington, approached the complainant with a pitch. Ambassador declined, “multiple times”.

“White and Ambassador sought to induce Lexington to enter into a further business arrangement in which Gagliardi Insurance (an insurance broker) would sell Lexington insurance policies to sports teams and leagues (principally youth sports), and Lexington would then reinsure those policies to Goldenstar Holdings, a captive insurer affiliated with Ambassador. Lexington declined that opportunity, more than once,” the complaint read.

The complaint stated that in early 2018 White contacted AIG, saying that Ambassador was interested in changing the carrier for their captive reinsurance program. Currently working with QBE, White said they were looking for a change and considering AIG.

In June 2018, after meeting with Ambassador, AIG became the issuing carrier for two of Ambassador’s group captive programs and were in regular contact with the firm.

It was in August of that same year when the trouble began. White approached AIG with a proposal for Lexington to act as the issuing carrier for one of their captive reinsurance programs. The program would involve accident and health policies sold by Gagliardi to youth and professional sports teams. The program would involve Ambassador creating captive reinsurer Goldenstar Holdings, which would be owned by broker Gagliardi.

In October 2018, AIG told White that they were not interested in being the issuing carrier for the program.

“After reviewing the submission documents for the Gagliardi Insurance Program, AIG decided not to participate. AIG never performed any actuarial or credit analysis on the proposed program and never even generated a quote. The Gagliardi Insurance Program was not suitable for AIG and the application was quickly rejected,” the lawsuit said.

Despite this, AIG claim that White asked the carrier to reconsider “several more times”, with AIG rejecting the proposition each time.

The Signatures

Two months later in December 2018 White really started to run into trouble. Third-party administrator Health Special Risk (HSP), who had been hired as the TPA for the Gagliardi Insurance Program, did not know that there was no issuing carrier for the program. HSP emailed AIG executive Joseph Davina asking for a formal TPA agreement to be completed. Davina, confused, asked White why he had received the email when Lexington had declined to be part of the Gagliardi Insurance Program.

AIG claims that White responded to tell Davina not to contact HSR, and that the email was just a “miscommunication”.

“Upon information and belief, a week later, White (or someone on his behalf) fabricated an email purporting to be from Davina’s AIG email account to White and another Ambassador principal, Darin Smith,” the lawsuit states.

“In the fabricated email, Davina appeared to grant ‘conditional approval’ on AIG’s behalf for HSR to manage claims until AIG formally approved HSR. White sent the fake email to HSR conveying what appeared to be AIG’s green light for HSR to proceed as the TPA.”

In early 2019 AIG claims that Davina spoke to White several more times about the Gagliardi program, after he received emails from Goldenstar’s captive manager, Atlas Insurance Management, Helmsman Management Services, who claimed to be the new TPA for Gagliardi.

Atlas were inquiring about letters of credit for the program, while Helmsman sent Davina an “unsigned draft of a facultative reinsurance agreement between Goldenstar Holdings and Lexington”. Each time White put the emails down to miscommunication, apologising to Davina that he kept “getting tagged”.

In an email attached to the complaint, Davina responded to Helmsman telling the TPA that AIG was not involved in the Gagliardi program.

“Is this in regards to Gagliardi? If so we are not the carrier on this fronted program. I’m not sure why this is coming up as AIG but we never quoted the Goldenstar opportunity. I have brought this up to Ambassador multiple times so not sure where the disconnect is,” Davina wrote on 14 February 2019.

The Forged Agreement

Then came 19 November 2019.

On that day Davina received an email from Atlas with a facultative resinsurance agreement attached, complete with a signature purporting to be Davina’s, dated 17 August 2018.

“The signature on the Forged Reinsurance Agreement is not Davina’s. Davina never signed any agreement with Goldenstar Holdings and never authorized anyone to do so on his behalf,” AIG’s lawsuit states.

Davina responded to Atlas, copying in White.

“This was never signed by me so not sure how you have a fully executed agreement that I never signed,” he wrote. “If you want to see my handwriting and signature it is much nicer than that.

“Please stop sending over forged documents. This is the 2nd time AIG has been sent forged documentation including an email supposedly written by me over a year ago that was never sent from my email.”

In a part of the email directed at White, Davina said that this was unacceptable and that he needed an explanation.

“I’d suggest figuring out what this document is and a very good explanation of it before I go to my legal counsel at AIG to figure out what this is,” Davina wrote to White. “This is completely unacceptable and quite frankly a relationship breaker if not resolved ASAP. I will go to my Executive leadership if I don’t have a full response and explanation by EOD tomorrow.”

In a follow up email Mark Benz, senior vice president of Lexington, told White that if AIG didn’t get an explanation they wouldn’t renew their fronting agreement with Ambassador for the group captives.

“Gentlemen, We need to know where this document came from ASAP,” Benz wrote. “This is the second time within the past year there has been some type of misrepresentation in our workings. If we can’t get an explanation as to how this occurred, we will proceed to non-renew both captives effective 2020 and report this occurrence to the proper regulatory body to protect AIG’s interests.”

The Confession

What followed is what AIG claims is a confession by White that the document was forged. On 3 December he emailed both Davina and Benz apologising.

“I apologise for this misrepresentation,” White said. “We are working to track down the genesis of this document. I can assure you that this did not come from Ambassador in any way. This is not acceptable to us and we will get to the bottom of this and commit to return and report.

“I am sorry that I do not know more at this moment but didn’t want to remain silent on this matter. This partnership is important to us and we would not jeopardize it. More to come.”

White had also earlier claimed, when Davina received the unsigned agreement from TPA Helmsmen, that the agreement was not in effect.

“Joe, this is not an agreement within Lexington. This is the draft document built from the framework that David Branca sent me… we put drafts together to prep business plan changes and to confirm language with legal to determine if changes will need to be requested once a change is made,” White wrote in February 2019.

“We do this pro-actively to get ahead of challenges. This is not in effect, obviously. Nor should a draft be in anyone’s hands. Not sure how this is out there. I have called Adrian to get clarity immediately. You won’t hear from him again. Helmsman is working on the GL side of things which we are placing through a broker…the captive manager must have sent this by mistake. It did not come from us.”

Following these events AIG launched an investigation into the Gagliardi program. It discovered 11 insurance policies issued naming Lexington as the issuing carrier, covering hundreds of youth and sport clubs. Claims totalling $1 million had already been made against the policies.

As part of this investigation, AIG allege they also discovered the Madera Residential Insurance Program, another captive insurance program which named Lexington as the issuing carrier. According to AIG “numerous” certificates of insurance had been issued that named Lexington as the fronter.

The Twist

White’s alleged confession didn’t stick. On 7 February 2020 lawyers for Ambassador and White claimed that White saw Davina sign the agreement in May 2019 and backdate it to August 2018.

In a reply to the complaint filed in August 2020 Ambassador’s lawyers stated that “Defendants vigorously deny any and all claims of fraud, forgery, and counterfeiting, and deny that the Plaintiff is entitled to relief.”

Ambassador claim, in their reply to AIG’s complaint, that the proposed agreement was simply a “contract dispute” and was about “whether or not, for about a one-year period, these captives, Goldenstar in particular, had permission to use Lexington’s name on the policies.”

Lawyers for the defendants state in their reply that the proposed deal, which they claim AIG took, was for the captives involved in the Gagliardi program to take on “100% of the total liability for all the claims insured.”

“In exchange, Lexington would allow these captives to issue policies in their name, and Lexington would receive a portion of the premium charged to the insured,” Ambassador claims. “These captives were funded with premium dollars contributed by the insureds.

“No one is asking that Lexington or AIG pay claims, and never have. It is undisputed that there are no actual damages from these policies to Lexington or its parent company AIG in this matter, as they have not paid any of the claims and are not expected to do so.”

The case is still being heard, with the defendants given an extension until mid-October to submit their latest response. No matter the outcome, the case will be one watched closely.

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