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Insurers’ Threats Paid Off, Consultant Says

PHILADELPHIA (CN) - Three insurance companies forced Houston to mischaracterize massive losses from Hurricane Ike as uninsured, so that city residents, not the insurers, would be left to foot the enormous bill, a property-loss consultant says.

Plaintiff MLA Claims contracted with Houston to help the city in its claims for damages from Hurricane Ike.

But when MLA prepared a claim for the maximum amount of insured damage, Houston's insurers demanded that the city "make the 'smart move'" and "mischaracterize its insured losses as uninsured so certain portions of those losses would be covered by FEMA or by the taxpayers of the City of Houston, rather than defendants," according to the complaint.

Named as defendants are Westchester Fire Insurance, Ace Global Markets Limited, and the Lexington Insurance Co.

Lloyd's of London, Ace's "proxy company," was on the hook for $74 million in losses, so, reading the writing on the wall, the defendants "encouraged the City to fob the cost of rebuilding off on the federal government," and "told the City that regardless of what defendants' insurance obligations were under any policies, and regardless of the premiums the city paid for those policies, certain insured damages to municipal property could, rightly or wrongly, be funded by federal taxpayer dollars, through FEMA, rather than through the insurers themselves," the complaint states.

"The threat of a claim prepared by industry professionals ranging as high as the [$250 million] policy limits" was intolerable for the insurers, so they threatened to cancel Houston's insurance and never insure the city again unless Houston frustrated MLA Claims' contractual obligation to pursue a comprehensive claim for the city's damage, the plaintiff says.

The defendant insurers "threatened the city that if plaintiff was permitted to carry out its job ... defendants would punish the city. Defendants threatened that not only would they cancel the city's insurance but they also would never insure the city again. Defendants threatened ... that a lack of insurance would prevent the city from obtaining financing in the future and cause it to lose its bond rating and to default on its outstanding bonds," the complaint states.

"Ultimately, the city bowed to defendants' threats - and adopted defendants' game plan for 'straightening things out,'" MLA says.

That game plan entailed preventing MLA from negotiating directly with the insurers to achieve a maximum claim settlement, and directing MLA "to cease direct communication with insurance representatives," according to the complaint.

But MLA, whose compensation was to be based on net insurance recoveries, was still required by the city to inspect 252 insured locations, even though the city knew that "it would subsequently settle the claim contrary to plaintiff's recommendation, without the full benefit of plaintiff's negotiating skills, and without even actually receiving plaintiff's finished work product," according to the complaint.

"Worse than terminating the contract, at defendants' behest, the city mutilated the contract such that plaintiff would incur ongoing expense, but defendants and the city would control, and thwart, plaintiff's ability to be paid," MLA says. "The city quite simply refused to submit to defendants any further sizable claims prepared on its behalf by plaintiff."

The city's director of Administration and Regulatory Affairs then "began to disseminate among personnel within the city what he himself has been instructed by defendants: that plaintiff was 'too aggressive' and was 'in it for themselves,'" the complaint states.

It continues: "The city also made clear in a May 19 meeting with plaintiff that the defendants' threats to cancel coverage of the city trumped the city's contract with the plaintiff, and that the city would accordingly be unilaterally modifying (that is, frustrating) and restricting plaintiff's rights and obligations under the contract." (Parentheses in complaint.)

MLA Claims seeks compensatory and punitive damages for tortious interference with contract and civil conspiracy.

It is represented by Oliver Griffin with Spector, Gadon & Rosen.

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