INSURANCE: Another Enron?

The very notion of a company knowingly and intentionally misleading investors, employees and the general public under the watchful eye of high-dollar securities analysts, federal regulators and legislators is enough to make the average citizen demand more controls in accounting procedures and accountability of corporate executives.

But, is Enron the only one with their hands in the cookie jar? No.

Our association of policyholders, Policyholders of America ("POA"), believes there's an even bigger scam underway and policyholders are unwitting participants.

Insurance companies must set loss reserves for every claim submitted by a policyholder. That loss reserve must truly reflect the loss amount. In other words, if a policyholder submits a water damage claim, the adjuster (or their supervisor) must set an amount aside to reflect the true value of the loss.

The amount set, known as a loss reserve, is calculated as a liability of the insurer and collectively these loss reserves are reflected on the balance sheets of the insurance company.

The insurer's balance sheets are used by rating services, investors and others to determine the financial strength of the insurance company. Fewer liabilities translate into greater financial strength.

The demise of Enron came when the company hid its true liabilities, creating a false sense of security for investors, employees, creditors and others.

We have analyzed a number of claims within our database where the insurer set loss reserves at an artificially low level.

Through deposition and trial testimony, POA uncovered a pattern where insurers set arbitrarily low loss reserves knowing that their "undisputed" liabilities increased dramatically. In just one case, a normal water damage claim became a toxic mold claim because of delays and bad faith and the undisputed cost of repair, as set forth by the insurer's experts, increased by more than $600,000. Regardless of this dramatic increase, the loss reserve was not increased and the insurer's balance sheet did not reflect a true picture of the financial strength of the company.

Under oath, insurers have admitted that they never increased the loss reserves even though they knew their undisputed liabilities increased dramatically. Extrapolate out the thousands of relatively inexpensive water damage claims that have turned into expensive to remedy mold claims, and you find the true, yet hidden, liabilities.

POA strongly urges attorneys involved in these cases to request, during the discovery process, all loss reserve data pertinent to their client's case. If the insurer has not increased their loss reserve based on their own repair bids, a case for defrauding investors (in the case of mutual companies the investors are policyholders) can be made. Such activity should be reported to the State Insurance Commissioner, State Securities Board, and a host of other regulators.

Check here to read each editorial. New editorials are added frequently so be sure to visit this section often.

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