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Travelers, Chubb must battle errors and omissions litigation in N.J.

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A New Jersey appeals court has reinstated complex litigation filed by plaintiffs against Travelers Cos. Inc. and Chubb Ltd. units over errors and omissions coverage issued to a now-defunct Bermuda managing general agent, holding that a Bermuda court judgment that voids the coverage is not binding in New Jersey.

The litigation in Robert D. Ferguson et al. v. Travelers Indemnity Co. and Executive Risk Specialty Insurance Co. was filed by former shareholders of Lion Holding Inc., an insurance holding company whose principal operating companies were Clarendon America Insurance Co. and Clarendon National Insurance Co., according to the March 10 ruling by the Superior Court of New Jersey’s appellate division. Clarendon engaged Bermuda-based Raydon Underwriting Management Co. Ltd. as managing general agent.

In 1994, Raydon encouraged Clarendon to write reinsurance policies in in a program known as LMX that involved direct insurance policies that provided personal accident and death benefits to individuals, said the ruling. 

“Raydon’s assessment of the program was fatally flawed, generating significant losses to Clarendon as a reinsurer,” and Clarendon stopped participating in the program in 1995, according to the ruling.

When plaintiffs sold Lion and its subsidiaries, including Clarendon, it indemnified the new owners for up to $50 million in losses related to the LMX program and reduced its sale price by $25 million. 

As a result of the reinsurance problems generated by the LMX program, nearly $24 million was held from the sale of the Clarendon companies and deposited in escrow.

Meanwhile, Raydon was defunct by 2005, and plaintiffs in 2011 obtained a $92.1 million judgment in Bermuda for damages as a result of reinsurance losses, although it was uncollectible because Raydon no longer existed and had no known assets, according to the ruling.

To serve as a Clarendon’s managing general gent, Raydon had been required by New Jersey law to obtain an E&O policy. The policy, which had been purchased in July 1994 through Gulf Insurance Co., insured Raydon for losses of up to $15 million incurred as a result of errors and omissions in rendering professional services. Travelers unit Travelers Indemnity is Gulf Insurance’s successor company.

Chubb Ltd. unit Executive Risk issued an excess indemnity policy providing coverage of $10 million to Raydon to the extent losses exceeded $25 million.

Travelers informed plaintiffs in September 2011 that it was refusing to cover plaintiffs’ losses under the Gulf policy, in part because it regarded the policy as void for breach of warranty. 

It also began a civil action against Raydon in the Bermuda courts seeking a declaration the Gulf policy was obtained by fraud and thus void, and that it therefore had no obligation to indemnify Raydon.

Executive Risk also disputed the plaintiffs’ claim the Bermuda judgment was a covered loss under its excess policy. 

In December 2013, Travelers obtained a judgment from a Bermuda court voiding the Raydon E&O policy.
 
Plaintiffs filed suit in New Jersey over coverage under the E&O policy in November 2011. In its first ruling on the issue, the appellate division found the plaintiffs had standing to sue and remanded the case to a lower court. A second judge dismissed the case again.

“The issue to be decided in this case is whether Travelers and (Executive Risk) should be compelled to provide coverage and satisfy the judgment,” said the appellate court’s ruling.

The trial court erred in assuming the Bermuda judgment was binding on plaintiffs, said the appeals court.

“The public interest factors are tipped slightly in the balance of defendants as this matter will consume substantial judicial resources,” the ruling said. 

“Nonetheless there simply is no basis for concluding the choice of New Jersey as the forum for resolution is demonstrably inappropriate,” said the ruling, in reversing the lower court ruling and remanding the case for further proceedings.