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Porch Group, the owner of insurer Homeowners of America Insurance Company (HOA) which was impacted by the Vesttoo reinsurance letter of credit (LOC) collateral fraud, has now taken the step of suing broker Gallagher Re, claiming it “grossly mismanaged” the administration of the reinsurance.
As we reported last week, Porch Group filed a law suit in New York against China Construction Bank Corporation, over the Vesttoo reinsurance collateral fraud, accusing the massive Chinese bank of “enabling its personnel to perpetrate a colossal fraud” on the plaintiffs.
Now, as the company looks to recover damages it says total more than $100 million, Porch has directed attention also to its reinsurance broker, effectively claiming that its security as a counterparty and of the collateral supposed to be underpinning its reinsurance deals was not properly managed.
Porch states that Gallagher Re’s job was to secure it reinsurance coverage for its subsidiary Homeowners of America Insurance Company (HOA) but that it “grossly mismanaged” the administration of a new reinsurance facility that was established under Aon’s White Rock structure and that was supposed to have been backed by Vesttoo.
Interestingly, Porch stated in its lawsuit that there were “numerous red flags that Vesttoo and China Construction Bank… were unreliable.”
Stating in the case that has been filed in Dallas County, Texas, “Gallagher ignored critical red flags that would have warned any reasonably diligent insurance broker that the reinsurance contract arranged by Vesttoo and purportedly backed by a letter of credit issued by China Construction Bank was unreliable.
“Despite a clear contractual obligation to obtain written evidence of China Construction Bank’s agreement to guaranty reinsurance risk directly from China Construction Bank, Gallagher failed to do so, both in late 2021 when the 2022 contract was negotiated and in late 2022 when it secured the renewal contract and a new letter of credit for 2023.”
Porch even claims that Gallagher Re turned a “blind eye to red flags” and that the reinsurance broker “utterly failed to meet its most basic obligations to HOA under the parties’ contract and Texas law.”
“Gallagher’s contractual breaches and professional malfeasance caused HOA to suffer catastrophic losses when the reinsurance facility Gallagher arranged and administered suddenly went up in smoke,” Porch’s law suit states.
When the Vesttoo letter of credit (LOC) fraud scandal broke into the news and it became clear no collateral of any worth was underpinning HOA’s reinsurance deal with the insurtech, Porch was left with the resulting costs.
The company notes it had to “write off $48.2 million in losses, provide tens of millions to HOA in emergency capital funding, and obtain more expensive alternative coverage,” to fill the gaps it now claims were “caused by Gallagher”.
“Because of Gallagher’s breaches, Porch has sustained more than $100 million in losses, including the loss of funds released from the reinsurance account as a result of Gallagher’s authorization and failure to perform due diligence, the costs of losing its expected reinsurance coverage, the costs of alternative insurance coverage, the payment of millions of dollars in unearned commissions to Gallagher, the precipitous decline in Porch’s enterprise value from the crisis, the costs of heightened regulatory supervision, and attorneys’ fees that will total millions of dollars through trial. By this action, Porch seeks to recover those losses from Gallagher,” the company states in its law suit filing.
This isn’t the first lawsuit against a reinsurance broker in relation to the Vesttoo fraud, of course. The case brought against Aon by fronting specialist Clear Blue is also ongoing.
It’s worth also recalling here, that Porch agreed a $30 million strategic arrangement with Aon, that included releasing all claims related to the Vesttoo fraud that it had against the broker.
The Vesttoo fraud has of course raised questions over counterparty and collateral security responsibilities, which some of those damaged by the fraud were always going to try and seek recoveries for, with reinsurance brokers one of the more predictable avenues for this to be pursued.
Of course, with Vesttoo in bankruptcy and what little funds were left in the insurtech’s bank accounts either distributed in small settlements to some cedents, or having gone to pay legal bills, there is no other avenue to turn to where damages of this scale could be pursued anyway.
As we said last week in our article on Porch’s lawsuit against China Construction Bank, “It stands to reason that, given the extensive financial damage cause by the Vesttoo reinsurance collateral fraud, additional law suits will come to light over time, as those that faced damages look to recover some of the value lost.”
But, it remains to be seen how successful these legal actions are, when all parties in the reinsurance market value chain that touched these transactions appear to have been equally-duped by the fraud that occurred. No doubt we’ll see more legal action before the saga disappears from headlines though.
It was just a matter of time until more legal activity emerged. Although, we are still waiting for a criminal law focus to emerge, as there are parties that perpetrated this fraud that continue to avoid the legal spotlight, for now.
Porch sues Gallagher over brokers’ role in Vesttoo reinsurance transactions was published by: www.Artemis.bm
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