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Bled to Death 

How the state and lawyers drained the life out of an insurance company that didn't have to die

On December 10, 1997, the day the Ohio Department of Insurance raided the offices of the PIE Mutual Insurance Company with U.S. Marshals and took control of the company, it became clear to Tom McManamon that the state was out to destroy them.

McManamon was an insurance agent who worked under a subsidiary of PIE. He was a small fry compared to PIE's CEO Larry Rogers, who would soon be sentenced to 40 months in prison for doling out tens of thousands of dollars in illegal campaign contributions (to George Voinovich and then-Attorney General Betty Montgomery) and bribes (to the former deputy director of ODI). So when the ODI took control of the company, with fresh Deputy Director David Meyer in the lead, Rogers was fired immediately.

To McManamon, Meyer was just another bigwig, and because of him, McManamon was fighting for his livelihood against the state. Twelve years later, he's still fighting, and he is more convinced than ever that the game was rigged from the start.

The ODI claimed that PIE, then the largest provider of malpractice insurance in Ohio, was insolvent and unable to pay its debts. PIE was in trouble, but insolvent? Just a month prior, a group called the Doctors' Company had offered to purchase PIE's insurance renewals for $45 million over a seven-year period. And as ODI moved to liquidate the company, a consortium of at least 10 other insurance providers offered a plan they called "an effort to guaranty the financial stability of PIE." The ODI ignored both offers, and PIE was plunged into liquidation.

For this and other reasons, McManamon alleges that the liquidation of PIE was a political cover-up to "protect" Voinovich during his run for the U.S. Senate — that's where $90,000 of Rogers' illegal contributions had gone — and that once the state got hold of its assets, they were drained without regard for the victims who were actually entitled to the funds.

"PIE was never even insolvent," he says. "It's pure bullshit."

The claims concerning the solvency of PIE are polarizing, because they hold more weight than anything in determining whether the ODI was justified in initiating the destruction of PIE — a liquidation costing more than $35 million dollars that left some claimants waiting for more than 11 years to receive their settlement payments.

It's a question of intention, because the files McManamon keeps in his Westlake office point to an insolvency that was created. And since 2003, McManamon has been fighting for a chance to prove his claims before a judge. He's been deceived, passed from court to court and denied access to potentially critical documents. He points to three sets of evidence that he knows exist, evidence that he says would assure his victory. The state has them, he wants them and the way it looks, he will never get his hands on them.

Last November, 4,264 days after ODI officially placed PIE into liquidation, the state finally approved a plan to distribute the $74 million that remained from the assets of the PIE Mutual Insurance Company among the malpractice victims that the company owed settlement money.

But after 140 months, the bureaucratic machinations of liquidation had drained from PIE's assets more than $10 million in legal fees, $4 million in consulting fees, $6.4 million in liquidator salaries and benefits, and $2.8 million in rent and rent items. By the time the liquidator moved to close the process last month, just enough was left to pay the settlement holders about 82 percent of what they had won in court settlements for their lost limbs, undetected ailments and misdiagnosed diseases. Altogether, the payments were about $81 million short.

Some liquidations take even longer, says McManamon, "because the lawyers, the consultants, the Department of Insurance, the liquidator's people — they feed off this carcass and the longer they can feed off this carcass, the better it is [for them] ... It would seem that they are not accountable to any higher authority ... The liquidator has unlimited power."

But did PIE even need this intervention in the first place?

There are many ways to calculate PIE's solvency, and all of them are somewhat misleading.

Subtracting the liquidator costs, it would appear that PIE lacked about $44 million needed to pay off the $452,491,464.58 in claims that were eventually leveled against it. But this calculation is worthless when assessing the decision the ODI made in 1998, because it doesn't take into account how the state's handling of a liquidated insurance company differs dramatically from how an insurance company trying to stay in business operates.

After hearing in February 1998 that the ODI planned to liquidate the company, a consortium of at least 10 insurance companies worried about the effects PIE's liquidation would have on their clients and put forth a plan to rescue the company. The plan aimed to maximize the company's assets, minimize PIE's operating costs by using the consortium's combined resources and try to settle claims at lower rates. In fact, if PIE had paid claims at approximately the same rates it always had, the company would easily have been able to pay off its claims. The last report of PIE's assets portrayed the company with more than $399 million in assets and even subtracting the interest they've earned on investments since 1998 leaves them with approximately $341 million that could have been used to pay off claims. Further, for PIE to operate in runoff — that is, to stop taking in new business and just pay off its existing settlements — likely would've entitled the company to a discount that would have allowed for settling some claims for less.

Furthermore, with PIE in liquidation, it was more likely that cases to which it was connected would end in a settlement. Since many malpractice cases involve multiple codefendants and multiple insurance providers, the companies in the consortium were worried that their policyholders would be found negligent when they could have been better defended, and that the judgments would then be reported to the National Practitioner Data Bank, forcing them to pay higher premiums in the future.

But again, the consortium's offer was rejected by the state.

Another point not reflected in the liquidator's final report is the PIE assets that liquidators chose not to pursue, specifically those that were owed by Lloyd's of London, a British insurance and reinsurance market.

According to a report by Tracy Scott Johnson, an attorney working for the liquidator, PIE's annual financial statement included assets of more than $51 million related to anticipated recovery fees from Lloyd's of London. (McManamon believes the assets were worth more, between $80-$140 million.) To determine whether the liquidators should make an attempt to recover the funds, they requested a report from New York lawyer James Veach, a report they ultimately referenced in deciding that the funds would be too expensive to recover.

"Their comment was it could be costly to litigate to get that money," says McManamon. "Had they gotten that money, if PIE listed it as an asset in their books in their receivables, PIE would be even further from insolvency. That is, even more solvent."

Reinsurance, the insurance that insurance companies buy to help cover the payment of unusually large claims, is complicated. The terms of PIE's reinsurance program with Lloyd's were especially complex. But still, opting not to pursue $51 million, possibly much more, because it would be too costly, seems odd at best. And understanding why the liquidator chose not to pursue those assets is essential to understanding the case.

The Veach report and the information gathered to create it are not available to the public. This is part of what McManamon is fighting to obtain.

"They have never said that these documents were privileged," says McManamon. "They've just refused to turn them over. There are documents out there that they have already deemed as privileged that I can't see — which probably, if they're privileged, it would be damaging to them if it came out in public. They don't want me to depose them, and they don't want me to see those documents."

And the Veach report is probably not the most important document he's failed to obtain. Among the millions spent in the liquidation of PIE is a $150,000 settlement split between McManamon and three others. McManamon alleges that the document related to that was fraudulent.

When the liquidation began, McManamon thought his company would survive; he was certain that the subsidiary he worked under, the Providers Insurance Agency, was quite solvent. In 1999, he learned of a court motion by the liquidator that sought to consolidate all of PIE's entities in order to make them easier to liquidate. McManamon hired a Columbus lawyer to object to the consolidation. He attended two hearings and, by the fall of 1999, the judge recommended he try to mediate a settlement with the liquidators.

"We were provided a document in the form of a ledger page that indicated that there was $150,000 left, and that was all," he says. "They represented it to be all of PIE ... [and] they said 'Here, that's all that's left.'"

Why McManamon thought he was being offered all of PIE's remaining money is a mystery, but that didn't stop him from accepting it. His rational was that it was offered to him because he was the only person to complain, and he split the money between himself, his brother and two other people. A few years later, McManamon heard that PIE was making early-access payments to the Ohio Insurance Guaranty Association and realized that there might be more money in PIE than what he'd been told. McManamon wants to see that ledger again, because if what he says is true, that single document might be able to prove his fraud allegations against the Ohio Department of Insurance.

McManamon may have been the only civilian to raise a complaint, but he wasn't the first person to voice concern about the motivations behind the PIE liquidation.

One year after the ODI took control of PIE, Lynne Hengle, then the chief deputy liquidator, wrote a letter to Franklin County (Columbus) Common Pleas Judge Michael Watson, who handling the case. In it, she requested that an independent examiner be hired to determine whether then-Superintendent of Insurance Hal Duryee, former ODI Deputy Director David Randall or the ODI had participated in "any acts or omissions [that] materially cause or contribute to PIE's insolvency or reduce the value of the PIE estate."

But there is no evidence that the investigation ever occurred, and Hengle has since left the department. McManamon wants to see the memos, e-mails and documents that prompted her to write to Judge Watson, and he asserts that these documents would help support his claims.

The probability of McManamon getting the Veach report, the apparently fraudulent ledger or the Lynn Hengle documents is incredibly slim. The system has shown no sympathy for his case.

He first filed his lawsuit in August 2003, in the court of claims in Columbus. There, Judge Joseph Clark ruled that his case was within the statute of limitations, but then sat on it for 18 months before dismissing it, saying it was outside his jurisdiction. McManamon says that the defendants' attorneys and Ohio Attorney General Richard Cordray (representing the ODI) argued that the case should be filed in the court of common pleas, where the liquidation of PIE was taking place.

So McManamon filed his case there. It sat for three and a half years before a judge declared that the case was outside his jurisdiction and sent it back to the court of claims. That's where it sits today, again in Judge Clark's court.

"He should have said it wasn't in his jurisdiction when he first got it," says McManamon. "Instead, they were just trying to grind my gears and make me wait."

Judge Clark permitted the discovery of ODI documents, but it took five months for the department to comply. McManamon then tried to subpoena the documents related to Hengle's communications with Judge Watson, documents related to the Veach report and documents pertaining to his claims of fraud. In response, the attorney general's office filed a motion to "quash" the subpoena on the grounds that it was too broad, calling it a "fishing expedition" and asserting that it wouldn't create any admissible evidence. They argued further that the issue of PIE's solvency had long since been settled and that McManamon's lawsuit was nothing more than an attempt to "collaterally attack the Liquidation Court's finding of insolvency."

The court granted the motion to quash his subpoena, a move McManamon says was nearly unprecedented. He also was barred from deposing several people involved in the liquidation. So he's essentially been blocked from proving his case.

As PIE's liquidation began to close, Mary Jo Hudson, the Superintendent of Insurance at the ODI, who also acts as chief liquidator at the Ohio Insurance Liquidator, motioned for the authority to destroy approximately 3,000 boxes of PIE documents gathering dust on pallets in a warehouse near Columbus. McMamamon objected, and the court granted him the right to view the documents from late November through the end of the 2009. It was almost like a joke.

"Amongst maybe 10 million documents ... it'd virtually be searching for a needle in a haystack," he says. "But personally I don't believe the documents I want are even in that warehouse. I'd be wasting my time."

The question of whether PIE was solvent as the Ohio Department of Insurance plunged it into liquidation is a question of trust. Both sides have expert testimony and can do math that puts them millions of dollars in the right. The problem lies in calculating the solvency of a company so large and complex that the margin of error is tens of millions of dollars.

Wading through an air of uncertainty, the state seemed almost too eager to intervene in PIE's affairs. Left to its own devices, it's entirely plausible that PIE would have stayed afloat, either on its own or through the interventions of the Doctor's Company or the consortium.

So it becomes a question of intention.

At best, McManamon is facing a department that made a poorly calculated decision — one whose old boss had taken bribes from PIE leadership and was perhaps too eager to show it had changed.

At worst, he's facing a bureaucracy hiding a political cover-up, whose major players had taken advantage of PIE's fragile state in a targeted attempt to cut their ties with Larry Rogers.

Somewhere in between, he's challenging the bureaucratic machine of the Ohio Insurance Liquidator, which drains incredible slabs of fat off the corpses of liquidated insurance companies through tens of millions of dollars in legal and professional fees.

In any case, the system does not like McManamon or the questions his lawsuit raises. The system is content with its actions, and in its eyes, McManamon is only trying to question its credibility. But in determining the solvency of PIE, the state affected the lives of thousands. Its destruction fell heavily on the shoulders of the doctors it protected, the victims it cared for and the employees it fed. McManamon claims to have looked squarely in the face of ODI fraud and intentional deception, and his conviction is what drives him to challenge the motivations behind the claimed insolvency of PIE.

But without the ability to locate the documents he needs or to depose key individuals in the decision, it's unlikely that he'll ever be able to prove his claims. The resistance to his lawsuit is staggering — symptoms of a defense that will do anything in its power to keep the case out of court and wear down McManamon into submission. The struggle has only angered him, made him stubborn. As the case grinds on, suppression makes him only more determined.

"They want me to go away," he says. "I'm not going away."

news@clevescene.com

More by Niklos Salontay

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