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Indemnification and Reimbursement Sought from Insurers Based on Allegedly Fraudulent Funding Program: Fifth Third Bancorp v. Ace Insurance Company

Who:    Plaintiffs:  Fifth Third Bancorp and Fifth Third Bank

Defendants:  Ace Insurance Company, Axis Insurance Company, Certain Underwriters at Lloyd’s, Continental Insurance Company, Federal Insurance Company, Fidelity and Deposit Insurance Company, and St. Paul Mercury Insurance Company

What:  In this lawsuit, Fifth Third Bancorp and Fifth Third Bank (collectively, the “Bank”) seek indemnification and reimbursement under three financial institution bonds for losses exceeding $100 million, the collective limit of liability under the bonds, allegedly sustained by the Bank as a result of the dishonest and fraudulent acts of the Bank’s former employee, Matthew Ross.  By failing to indemnify and reimburse the Bank for these alleged losses, the Bank contends that the insurers that subscribe to the bonds (collectively, the “Insurers”) breached the terms of the bonds.

The allegations regarding the dishonest and fraudulent acts of Ross are based upon the interactions between and activity of Ross and Ed Netherland of InsCap Management LLC (“InsCap”).  According to the complaint, Ross caused the Bank to fund fraudulent loan facilities for the benefit of Netherland and InsCap and to fund a credit facility designated as “LIPF II,” which was created to provide life insurance premium financing for InsCap’s “Ultra” insurance program.  As an aside, we note that there have been multiple lawsuits filed against Netherland and InsCap resulting from the “Ultra” insurance program. 

Ross purportedly advised the Bank that these loans would be protected by market valuations of the life insurance policies procured through the Ultra program that would be prepared by Life Asset Group.  Ross also purportedly advised that LaSalle Bank, the servicing agent for the Ultra program, was to serve as a fiduciary and would be liable for any “unacceptable findings.”  The complaint further alleges that Ross concealed from the Bank the close affiliation between InsCap and Life Asset Group’s owner, Gary Brecka. 

The Bank contends that Ross colluded with InsCap (including Netherland, Harish Rghavan, and Ira Brody) to defraud the Bank, inter alia, by:  (1) creating fraudulent documentation used to secure premium financing loans funded by the Bank; (2) permitting the payment of fraudulent credit fees and other payments from the Bank to InsCap; (3) creating fraudulent financial reporting statements regarding the purported collateral for the Bank’s loans; (4) funding advances for life insurance policies that were never purchased; and (5) concealing the continuous fraud occurring in connection with the LIPF II credit facility.  In connection with committing these purported dishonest and fraudulent acts, Ross allegedly received substantial financial benefits.

The Bank allegedly suffered losses in excess of $100 million and submitted a proof of loss to the Insurers in October 2011 seeking reimbursement and indemnification under the bonds for these losses, which the Bank contends resulted from the dishonest and fraudulent conduct of Ross.  However, the Insurers have allegedly maintained that the Bank has failed to demonstrate that Ross committed dishonest or fraudulent acts within the meaning of the bonds and, therefore, the bonds do not respond to the Bank’s purported losses.  The Bank subsequently commenced this action. 

When:  November 10, 2014

Where: United States District Court, Southern District of Ohio

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About this Author

Robert Mancuso, Insurance lawyer, Drinker Biddle
Associate

Robert J. Mancuso represents and counsels clients on a variety of life insurance and annuities matters and property and casualty insurance issues. Bob has significant experience handling many aspects of civil and appellate litigation in state and federal courts nationwide.

Bob represents life insurers in disputes involving the secondary market for life insurance, insurance fraud, policy lapses, policy loans, and policy cancellations. He also represents insurers in various disputes involving disability and accidental death...

215-988-2876
Nolan Tully, Insurance lawyer,Drinker Biddle
Partner

Nolan B. Tully advises clients in the insurance and financial services industries in litigation, regulatory and compliance matters. He represents insurers with respect to regulatory compliance issues, policy, insurance benefits, policy lapses, bad faith and fraud. In litigation, Nolan has represented clients on issues relating to policy lapses, the secondary market for life insurance, premium financing, fraud, and stranger-originated life insurance (STOLI).

Nolan is the co-leader of Drinker Biddle’s long term care insurance practice. He has assisted carriers in resolving issues relating to suitability, premium rate increases, developing antifraud programs, HIPAA, regulatory compliance and coverage issues. Nolan has also assisted clients with audits of various processes and procedures, including claims handling and HIPAA compliance.

215-988-2975