A lawsuit brought by a large not-for-profit organization based on what appears to be fairly straightforward legal issues may nonetheless point to the need for small and midsize companies to be careful about where they get insurance for employee health benefits.

International Schools Services (ISS), which provides services to dozens of international educational institutions, had contracted with AAUG Insurance Co. to provide medical benefits for employees of ISS and the schools. In 2010, according to the ISS’s complaint filed in November of that year, AAUG stopped paying the insureds’ claims.

Although the ISS had paid millions of dollars in premiums, the insurer issued hundreds of checks ­— purportedly to settle claims ­— that bounced, former AAUG president Gregor Gregory admitted in court.

Part of AAUG’s defense was that, in turn, its own claims to a reinsurer in Trinidad and Tobago had not been paid. But the ISS won a preliminary injunction in a U.S. District Court in Florida that froze the insurer’s assets. The injunction also ordered AAUG to pay the ISS’s costs for hiring an independent forensic accountant to examine records relating to the premiums paid and claims disbursed under the ISS’s health-benefits plan.

The investigation discovered that, in an apparent violation of the injunction, AAUG had transferred assets to another insurer controlled by a friend of Gregory, says ISS attorney Elliott Kroll of law firm Arent Fox. Further violating the injunction, AAUG continually refused to pay the forensic accountant for services rendered.

In the latest decision in the case, issued on Wednesday, the court ordered the defendants (AAUG and Gregory) to pay the ISS’s expenses for the forensic accountant within 14 days of receiving an invoice from the ISS. The court threatened Gregory with prison time for noncompliance. The court also reserved jurisdiction to impose further sanctions against the defendants for noncompliance with its orders.

Kroll says the case can be seen as a symptom of rising health-care costs, which may push organizations into poor decisions when purchasing insurance. “There is a risk for American businesses in finding a package that looks financially attractive with health insurers that aren’t as well known as the major ones,” he says.

Pointing to the “mini-med” plans that were popular for awhile but have been widely discredited as virtually useless because of their enormous deductibles, Kroll adds, “There have been significant issues out there not only in terms of collectability, as in my client’s instant case, but also the scope of the benefits. And the more that companies deal with fringe players in the health-care market, whose numbers I think will increase in the next few years, the more these types of situations will arise.”

In response to CFOs request for comment, AAUG’s attorney, Alan Gold, notes that the ISS had renewed the policies at issue in the case for a second year after all claims were timely paid during the initial policy year.

AAUG “got into financial difficulty during the second policy year, when a large and reputable reinsurer stopped honoring its commitments not only to our client but to many other insurers as well, which caused governmental intervention against the reinsurer,” Gold says.

In addition, his client “is questioning the accuracy of the loss runs supplied to it [by the ISS] during the underwriting, which could explain why the premiums were insufficient to pay claims. [But] my client fully intends on honoring all of its contractual commitments to its insureds,” he says.

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