TORONTO -- Sun Life Assurance Co. of Canada has begun arbitration proceedings to void agreements under which it reinsured members of three workers compensation reinsurance pools managed by Unicover Managers Inc.

In announcing its arbitration demand, Sun Life last week charged that Unicover, a Lisle, Ill.-based underwriting manager, "wrote a volume of premium that vastly exceeded estimates contained in its contracts with Sun Life. Sun Life believes this was the result of deliberate misconduct by Unicover."

Unicover's troubles became public earlier this year when the parent of Cologne Life Reinsurance Co. -- which was both a member and retrocessionaire of the pools -- disclosed a $275 million pretax loss related mainly to Unicover.

While Unicover had said it would reinsure only about $150 million in workers comp business in the first year of a three-year program, it actually bound the pools to reinsure several billion dollars of business, reinsurers charge (BI, March 15).

Analysts have estimated the business could produce up to $2 billion in losses, much of which would flow to the heavily reinsured pools' retrocessionaires and, in turn, to those companies' retrocessionaires.

Sun Life notified Unicover in January it was terminating its retrocessional contracts and reserving its rights. The Canadian insurer has since returned premiums it received from Unicover under the agreements amounting to roughly $35 million, said Greg Gee, Sun Life's vice chairman.

Steven Mycyk, vp and corporate counsel for Unicover, denied Sun Life's charges. "We have disclosed, on a couple of different occasions, the growth in volume to (Sun Life's) agent," he said, referring to Bermuda-based underwriting manager Centaur Underwriting Management Ltd. "We believe (the charges) are completely groundless and without merit, and we are preparing a vigorous defense."

Sun Life assumed about one-third of the pools' retrocessions, and Mr. Mycyk conceded that pool members would end up retaining this share of the business if Sun Life succeeds in voiding its contracts.

Court: Lead an excluded pollutant

MADISON, Wis. -- Lead paint becomes both an irritant and a contaminant when it breaks down and therefore is excluded from coverage under policies that contain the so-called absolute pollution exclusion, the Wisconsin Supreme Court has ruled.

In Peace vs. Northwestern National Insurance Co., a landlord sought coverage from its insurer after damages were sought for alleged lead poisoning of a child who lived in one of the landlord's buildings.

The landlord, Djukic Enterprises Inc. in Milwaukee, argued that lead is not an excluded pollutant under the policy because it was not an "unwanted additive" to the paint. Also, the lead was not "released" or "dispersed" from the paint under the policy definition, the landlord asserted, according to court papers.

In 1995, a circuit court ruled that coverage was excluded under the policy and that Northwestern did not have a duty to defend Djukic. The decision was reversed on appeal.

The state Supreme Court found that, under the policy, a pollutant can be any solid, liquid, gaseous or thermal irritant or contaminant. "There is little doubt that lead derived from lead paint chips, flakes or dust is an irritant or serious contaminant," the court said in the ruling.

And although the lead does not contaminate the paint, it gives the paint the potential to become a contaminant, court papers say.

"When lead-based paint either chips, flakes, or deteriorates to dust, that action is a discharge, dispersal, release or escape within the meaning of the terms in the policy," the court ruled.

Medicare HMO cuts hit 327,000

WASHINGTON -- About 327,000 of the 6.2 million beneficiaries in Medicare HMOs are enrolled in plans that will either withdraw from Medicare next year or reduce their service areas, the Health Care Financing Administration said last week.

Only 79,000 of those beneficiaries live in areas without other Medicare HMOs in which they could enroll, however.

The 327,000 beneficiaries affected by HMO withdrawals is higher than the 250,000 estimate made recently by the American Assn. of Health Plans, an industry group.

This year, 407,000 beneficiaries were abandoned by their Medicare HMOs, but just 51,000 were left without another HMO option.

Lloyd's fines Nelson Hurst unit

LONDON -- Broker Nelson Hurst & Marsh Ltd., an agency broker for Nelson Hurst Insurance Brokers Ltd., has been fined L80,000 ($124,752) by Lloyd's regulators for misconduct.

In a regulatory bulletin issued by Lloyd's Disciplinary Board, Nelson Hurst's John Buckingham also was fined for misconduct in dealing with municipalities' business between 1993 and 1996.

The board found that Mr. Buckingham, the broker at Nelson Hurst responsible for municipalities' business that was placed on a fee-only basis, conducted the business in a manner "detrimental to the interests of Lloyd's policyholders," according to the bulletin. In addition, Nelson Hurst had failed properly to control its business, the board said. This resulted in policyholders being wrongly charged for brokerage on net premium business, and a total of L168,070 ($262,088 when converted at a current exchange rate) in brokerage payments was retained between 1993 and 1996 in breach of the fee-only arrangements. In addition, L845,349 ($1.3 million) in brokerage payments was wrongly charged in excess of net quotes provided by The St. Paul Insurance Co. Ltd., which covered the primary layer of three of the municipalities' business.

In addition to the fine, Nelson Hurst was ordered to pay L60,000

($93,564) in costs. Mr. Buckingham was fined L5,000 ($7,797) and ordered to pay L1,500 ($2,339) in costs. The fines were mitigated because both Nelson Hurst and Mr. Buckingham admitted the charges and cooperated with Lloyd's investigation, according to the bulletin.

Nelson Hurst now is a subsidiary of broker Alexander Forbes Ltd.

New York sues utility in blackout

NEW YORK -- The City of New York alleges in a lawsuit filed last week that Consolidated Edison Co. of New York Inc. was grossly negligent in failing to maintain its transmission and distribution system.

The action stems from a blackout earlier this month that affected nearly 200,000 Manhattan residents (BI, July 12). The allegations have also have been filed with the New York State Public Service Commission; the city is seeking $3 million in fines against Con Ed.

The suit filed in State Supreme Court seeks unspecified compensatory and punitive damages for the costs the City incurred during the blackout for police overtime, emergency services and damage to City property, a spokeswoman for the Office of Corporation Counsel said. The suit alleges that the blackout could have been averted had Con Ed properly maintained transmission lines in the affected area, the spokeswoman said.

The city also is asking that the court order Con Ed to develop a plan to ensure that a similar event will not recur and to appoint a special master to oversee its implementation.

WellPoint to bid again for plan

DENVER -- Woodland Hills, Calif.-based WellPoint Health Networks Inc. said it will make another offer to buy Blue Cross & Blue Shield of Colorado after state regulators reopened the bidding last week.

Last March, Rocky Mountain Health & Medical Service, the Colorado plan's parent, entered into a definitive agreement to sell it and Blue Cross & Blue Shield of Nevada to Indianapolis-based Anthem Inc. (BI, April 5).

At the time, WellPoint also made an offer to buy the plans but was outbid by Anthem, which promised a significant cash infusion to Blue Cross & Blue Shield of Colorado's surplus, according to BC/BS of Colorado President and Chief Executive Officer David Kikumoto.

But complaints by community groups that the amount offered by Anthem to a charitable foundation was insufficient prompted Colorado insurance regulators and the state attorney general to reopen the bidding process, said Mary Ellen Waggoner, deputy insurance commissioner.

So far, only WellPoint has said it will submit a new bid, though other companies are invited to make offers, Ms. Waggoner said.

In its agreement with Rocky Mountain Health & Medical Service, Anthem had promised to contribute $140 million to the Caring for Colorado Foundation and provide up to $10 million in immediate administrative assistance to help Blue Cross & Blue Shield of Colorado complete a range of operational improvements. In a separate agreement, Anthem also said it would provide up to $50 million to the Colorado plan through a surplus note, $35 million of which was paid in March. It is unknown whether that money would have to be repaid to Anthem should another bidder succeed.

Blue Cross & Blue Shield of Colorado is the state's largest health insurer, with 460,000 subscribers in its health maintenance organization, preferred provider organization and traditional indemnity plans. In addition, the Colorado plan serves 75,000 Nevada subscribers as a result of a prior merger with Blue Cross & Blue Shield of Nevada.

Anthem is the Blue Cross & Blue Shield licensee for Indiana, Kentucky, Ohio and Connecticut; WellPoint is the for-profit group health plan subsidiary of Blue Cross of California.

Briefly noted

California legislation that would permit bad-faith claims handling lawsuits against insurers by third parties received final legislative approval last week. Dubbed the "Royal Globe Bill," it is sponsored by plaintiffs attorneys and excludes insurers who write professional liability coverage for attorneys. A spokeswoman for California Gov. Gray Davis said he has not decided whether to sign the bill. . . .PXRE Corp. is establishing a holding company in Bermuda. The Edison, N.J.-based reinsurer will maintain its U.S. operations, but its corporate headquarters and a new underwriting unit will be based in Bermuda. . . .The San Diego District Attorney's office has obtained grand jury indictments against 21 people, representing eight companies, on charges including insurance fraud, payroll tax fraud, tax evasion and conspiracy to commit tax fraud, according to a State Compensation Insurance Fund spokesman. They are accused of making misrepresentations to the SCIF to allow them to obtain workers comp insurance at less than the proper rate. It is the largest set of employer insurance fraud indictments in California history, according to the district attorney's office. . . .Anthem Blue Cross & Blue Shield will purchase Blue Cross & Blue Shield of Maine, the state's largest health insurer, for $125 million. The move adds heft to Anthem's presence in New England. Earlier this year, the company announced the purchase of Blue Cross & Blue Shield of New Hampshire. In 1997, Anthem also purchased Blue Cross and Blue Shield of Connecticut. . . .Woodland Hills, Calif.-based Foundation Health Systems Inc. has entered into a definitive agreement to sell its Utah health plan subsidiary, Intergroup of Utah Inc., to Altius Health Plans of South Jordan, Utah, for an undisclosed amount. Intergroup has about 6,200 members enrolled in its commercial health maintenance organization. . . .California legislators gave final approval last week to a bill that would bar employers from laying off workers age 40 or older to cut costs stemming from their higher pay. The bill is an attempt to circumvent a 1997 California appellate court decision that eliminated employer liability for firing older workers and replacing them with lower-paid younger workers. A spokeswoman for Gov. Gray Davis said the governor has not decided whether to sign the bill. . . .Louisiana Gov. Mike Foster signed a mental health care benefits parity bill into law last week. The measure mandates parity for coverage of severe mental disorders. Plans must offer coverage for 45 inpatient days and 52 outpatient visits a year for mental health care

Errors & omissions

* An article in Business Insurance's June 21 issue listed an incorrect enactment date for a property/casualty bill. Arizona's Year 2000 liability bill, which passed as an emergency measure, took effect immediately on April 26.