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Jun 03

City Files Lawsuit Against Former Insurance Broker

Posted on June 3, 2019 at 10:47 AM by Marc Garcia

The city has been diligently working on addressing the urgent need to change insurance carriers for its employees; as you know, several months ago we found out that our carrier could no longer meet their financial obligations, and we needed to make a unexpected change to our insurance coverage.  In the midst of that, early on, I committed to our employees that we would fight those who placed us in this terrible position, and today I am announcing a step toward that fight.

The city today filed a lawsuit against Peter C. Foy & Associates Insurance Services, Inc., alleging Foy, acting as insurance broker for the city, failed to meet its obligations as a broker and misled the city into purchasing an unauthorized, unlawful, and financially unsound health benefits plan for the city and its employees.  The health benefits plan was offered by Riverstone Capital LLC and NexGen Insurance Services Inc..  

The city’s action today follows investigations by the California Department of Insurance (“CDI”) and the U.S. Department of Labor (“DOL”) into the operation of Riverstone.  CDI and DOL determined that Riverstone was selling unauthorized and unlawful health benefits plans to more than 112 employers and their over 16,000 employees.

On February 1, 2019, the DOL filed a lawsuit against Riverstone and certain individuals who own and/or manage Riverstone, alleging failure to appoint a named trustee and keep plan assets in trust within the United States; failure to set adequate premium rates; failure to timely pay claims, inability to pay full amount of future claims, misrepresentation regarding funding; payment to themselves and others of unreasonable administrative fees and expenses from plan assets; and failure to comply with ERISA reporting requirements.  On February 1, 2019, the United States District Court for the Central District of California (“District Court”) entered a Temporary Restraining Order appointing an Independent Fiduciary to operate  Riverstone.  On February  7, 2019, the District Court, as a part of its Temporary Restraining Order under the provisions of the All Writs Act, 28 U.S.C. § 1651, enjoined and stayed all proceedings against participants, beneficiaries, the Riverstone Multiple Employer Welfare Arrangement (“MEWA”) Plan, employer plans participating in the Riverstone MEWA Plan, and plan assets.  The District Court’s Order stays all federal and state court proceedings, including collection actions, against participants and beneficiaries for unpaid medical claims.  The Independent Fiduciary will attempt to resolve outstanding claims to the extent feasible.

On February 14, 2019, the CDI issued a Cease and Desist Order effective immediately upon Riverstone and its owner/operators Travis O. Bugli, James C. Kelly and Robert M. Clarke.  The Cease and Desist Order alleges that Riverstone was marketing, soliciting, and selling purported “self-insured” health plan arrangements to employers instead of health insurance, in violation of California law.  Riverstone failed to pay medical provider claims totaling approximately $24 million dollars, exposing employers and their employees to risks and significant financial liabilities.  The investigation revealed Riverstone’s business practice of pooling and commingling contributions Riverstone received from its employer clientele into its own corporate accounts. “This company and its owners misrepresented their ability to pay medical claims, putting employers and their employees in immediate danger,” said Insurance Commissioner Ricardo Lara. “We took action to stop these illegal practices and ensure the safety of California workers and employers.”

The city’s complaint against Foy alleges "from October 2016 through February 2019, Foy acted as an insurance broker for the city.  As such, Foy owed the city those duties owed by an insurance broker under California law including, but not limited to, the duties to use reasonable care, diligence, and judgment in procuring insurance requested by the city and to avoid misrepresentations concerning coverage procured.  In addition, Foy held itself out to the city as having expertise in medical benefits insurance coverage, represented that it was familiar with the city’s insurance coverage needs, and represented that it was familiar with Riverstone and the Fortress/Riverstone Plan that Foy recommended to the city.  Based on those representations, the city relied on the recommendations of Foy and purchased the Fortress/Riverstone Plan for Plan Years 2017, 2018 and part of 2019.” 

“Foy failed to carry out its responsibilities and duties to the city to use reasonable care, diligence and judgment in procuring insurance requested by the city. . . At the time it recommended the Fortress/Riverstone Plan to the city, Foy knew, or in the exercise of due diligence should have known, that the Fortress/Riverstone Plan was an unauthorized, financially unsound MEWA, which should not under any circumstance have been recommended to the city, and that Riverstone was a sham company.” 

The city’s complaint further alleges that when the city started to receive complaints from its employees that their health care claims were not being paid, the city reported these issues to Foy.  Foy reassured the city that nothing was wrong with the Fortress/Riverstone Plan or Riverstone, that the Fortress/Riverstone Plan and Riverstone were financially sound and well managed, and that the issues arose from providers’ billing errors, employee misunderstandings of the health benefits offered, a change in a third party administrator, and other benign causes.

Foy systematically and continuously breached its duty of care to the city.

The city is seeking monetary recovery against Foy for all loss, costs and damages suffered, and indemnification for any future losses.  The city currently estimates there are $8.3 million in unpaid claims by city employees under the Fortress/Riverstone Plan.

A copy of the complaint can be found here. [View Documents]

I will share more as progress is made.