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Swimming With Sharks

A reinsurance veteran reminds dealers that business partners are best judged by the companies they keep, and details an incident that should serve as a warning to all.

May 2012, F&I and Showroom - Feature

by Gary Vucekovich

Well, I recently earned another honorary degree from the school of hard knocks, this one in insurance studies. I thought my other degrees from that school were expensive until now. Acquiring this B.S. (and that doesn’t stand for “Bachelor of Science”), required learning a lot of big words like “insolvency,” “co-mingling of funds,” “special deputy receiver,” and “liquidator,” who, it turns out, is sort of like “the Terminator.”

It started one day, late last year, as I was going through my mail in my office here at ForeSight Services Group (FSG). The first letter was from the Third Judicial District Court of Salt Lake City. It screamed at me in bold print: “WESTERN INSURANCE COMPANY NOTICE OF ISSUANCE OF LIQUIDATION ORDER.”

It was quite a contrast to my first meeting less than five years ago with the senior management and officers of Western Insurance Company Co. (WIC). At the time, they sported an impressive A.M. Best rating of “A-.” I distinctly recall us gathering in the company’s conference room — much fancier than the one I have at FSG — to discuss a possible business relationship.

My company reinsures mechanical breakdown service contracts at 100 percent for auto dealers, and I insisted that, under any agreement, all monies would flow directly from dealers to FSG. We would remit fronting fees to WIC and the dealer’s premium would go straight into a fully segregated trust account held by a dealer-owned reinsurance company, one with its own Federal Tax ID and was managed by a non-affiliated national bank. Over the course of the full-day meeting, we hammered out the details.

Four years later, WIC was declared insolvent and ordered into liquidation. By then we had set up 17 separate reinsurance custodial trust accounts totaling millions of dollars on behalf of our dealer clients. What would be the fate of these accounts? Might they be added to WIC’s general assets? Would FSG and our clients be made to circle around with other claimants like sharks, waiting for the Terminator to dole us out a morsel?

The decision came down on Dec. 29, 2011. The liquidator’s investigation had found that our dealer clients’ assets were indeed in properly segregated accounts held pursuant to tri-party agreements. Western did not control but could only seek distributions from these accounts. As such, they should not be considered part of the general assets of WIC’s estate. The court agreed and released the funds to their proper owners.

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