Free Response in Opposition to Motion - District Court of California - California

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EDMUND G. BROWN JR. Attorney General of the State of California W. DEAN FREEMAN Supervising Deputy Attorney General FELIX E. LEATHERWOOD Supervising Deputy Attorney General DIANE SPENCER SHAW, State Bar No. 073970 Deputy Attorney General LISA W. CHAO, State Bar No. 198536 Deputy Attorney General 300 South Spring Street, Room 1702 Los Angeles, California 90013 Telephone: (213) 897-2486 Fax: (213) 897-5775 LASZLO KOMJATHY, JR., State Bar No. 099861 California Department of Insurance 45 Fremont Street, 24th Floor San Francisco, CA 94105 Telephone: (415) 538-4413 Fax: (415) 904-5896 Attorneys for Plaintiff Steve Poizner, Insurance Commissioner of the State of California, in his capacity as the Liquidator of Frontier Pacific Insurance Company UNITED STATES DISTRICT COURT

15 SOUTHERN DISTRICT OF CALIFORNIA 16 17 18 19 20 Plaintiff, 21 v. 22 23 24 Defendants. 25 26 27 28
DECLARATION OF WILLARD ROBERTS IN SUPPORT OF PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO STAY PROSECUTION OF ACTION PENDING ARBITRATION OF CLAIMS

STEVE POIZNER, INSURANCE COMMISSIONER OF THE STATE OF CALIFORNIA, in his capacity as the Liquidator of Frontier Pacific Insurance Company,

CASE NO. 08 CV 772 L (POR) DECLARATION OF WILLARD ROBERTS IN SUPPORT OF PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO STAY PROSECUTION OF ACTION PENDING ARBITRATION OF CLAIMS

NATIONAL INDEMNITY COMPANY, a Nebraska corporation; and DOES 1 through 10, Hearing Date: Time: Courtroom: Judge: August 18, 2008 10:30 a.m. 14 Hon. M. James Lorenz

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I, Willard Roberts, declare: 1. I am employed as an Estate Trust Officer of the Insurance Commissioner of the

State of California's Conservation & Liquidation Office ("CLO"). I make this declaration in support of the Opposition of Plaintiff Steve Poizner, Insurance Commissioner of the State of California (the "Commissioner"), in his capacity as the liquidator of Frontier Pacific Insurance Company ("FPIC"), to the Motion of Defendant National Indemnity Company ("NICO") to Stay Prosecution of Action Pending Arbitration. I know the following of my own knowledge and could and would competently testify thereto if called upon to do so. 2. I have served as the ETO of the FPIC estate since the March 2003 and am familiar

with the documents and records regarding FPIC maintained by the Commissioner since he was appointed as FPIC's liquidator in 2001. 3. As the ETO for FPIC, I have primary responsibility for the overall administration

of the FPIC conservation and liquidation estate, including but not limited to, matters pertaining to FPIC's financial reporting, claim administration, legal matters, reinsurance contracts and estate expenditures. 4. I am also familiar with the CLO policies and practices regarding the maintenance

of business records of insurers for which the Commissioner is appointed as conservator or liquidator and I have personal knowledge of the manner in which FPIC's business records have been maintained since the Commissioner was appointed as conservator in 2001. I am also responsible for the overall custody and control of the books and records maintained by FPIC prior to conservation and liquidation. I have reviewed the CLO's files for FPIC in preparation of this declaration. 5. FPIC was a California domestic insurance company that transacted insurance in

California and other states. It was a wholly owned subsidiary of Frontier, a New York insurance company. 6. FPIC's financial difficulties arose after its parent, Frontier, was placed into

rehabilitation in the State of New York and FPIC could no longer collect the $12.8 million owed by Frontier to FPIC as its reinsurer. As a result of Frontier's rehabilitation, FPIC was declared -2DECLARATION OF WILLARD ROBERTS IN SUPPORT OF PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO STAY PROSECUTION OF ACTION PENDING ARBITRATION OF CLAIMS

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insolvent and conserved by the Commissioner on September 7, 2001. 7. On November 30, 2001, FPIC was placed into liquidation upon the order the

California Superior Court for the County of San Diego, in the matter entitled Insurance Commissioner v. Frontier Pacific Insurance Company, Case No. GIC 774028, and the Commissioner was appointed as the liquidator pursuant to California Insurance Code section 1010, et seq. A true and correct copy of the Order Appointing Commissioner As liquidator and Restraining Orders is attached hereto as Exhibit A and incorporated herein by this reference. 8. The Commissioner has been diligently marshaling FPIC's assets and winding up

its operations. The Commissioner's ability to marshal assets has been thwarted by the extensive commingling of the Frontier and FPIC accounts, their book of business and the reinsurance agreements. Reinsurance is normally the largest asset of an insolvent insurer. The Commissioner as liquidator has the responsibility to continue to collect reinsurance recoverables and disburse such funds primarily to the California Insurance Guarantee Association ("CIGA") to pay policyholder claims made against FPIC. As of this year, the Commissioner has completed most aspects of the FPIC's insolvency proceeding, including the resolution of almost all of the claims and collection of a substantial portion of FPIC's assets. A significant matter that prevents the Commissioner from closing the estate and distributing assets to claimants is the collection of reinsured losses of the estate including over an estimated $28 million ultimately owed by NICO. 9. Prior to its liquidation, FPIC and Frontier entered into three reinsurance

agreements with NICO as their reinsurer. NICO assumed two of the agreements pursuant to a Novation Agreement, and entered into a third agreement directly with FPIC and Frontier. 10. FPIC and its parent, Frontier, were each the reinsured under the Coinsured

Aggregate Excess Loss Reinsurance Agreement effective January 1, 1995, and the Aggregate Excess Loss Reinsurance Agreement effective January 1, 1998 (collective "Centre Re Agreements") with Centre Reinsurance Company of New York and its successor Zurich Reinsurance (North America), Inc. ("Zurich Re"). 11. The Centre Re Agreements allowed FPIC and Frontier to withhold all of the

insurance premiums due the reinsurers in a funds held account less the reinsurers' margins of 8% -3DECLARATION OF WILLARD ROBERTS IN SUPPORT OF PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO STAY PROSECUTION OF ACTION PENDING ARBITRATION OF CLAIMS

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and 8.75% ("Centre Re Funds Held"), respectively, so that FPIC and Frontier can reimburse themselves for reinsured losses. 12. On or about December 21, 2000, with FPIC and Frontier's consent NICO entered

into a Novation Agreement with Zurich Re which substituted NICO as the reinsurer for FPIC and Frontier. In consideration for assuming all of Zurich Re's obligations and liabilities under the Centre Re Agreements, NICO received $68,200,000 from Zurich Re. 13. Just prior to the Novation Agreement, on September 27, 2000, NICO and Frontier

entered into an Aggregate Reinsurance Agreement, effective date of July 1, 2000 (the "NICO Agreement"). On January 5, 2001, the NICO Agreement was amended by Endorsement No. 1 to add FPIC as an additional reinsured. FPIC paid NICO a $21 million premium in consideration of NICO's agreement to pay on behalf of Frontier and FPIC up to $858,554,275 with NICO's liability to FPIC limited to a maximum of $47,089,799 for all covered losses. 14. Throughout FPIC's liquidation, the Commissioner worked with Frontier and

NICO to reconcile loss data, and report and collect on reinsurance recoverables. This was necessary since all of the accounts and records were commingled and in the possession of Frontier at its principal office located in New York. 15. On or about January 7, 2005, the Commissioner submitted a billing to NICO for

payment of FPIC's claims under the NICO Agreement. Subsequently, during the course of meetings held June 22 through June 24, 2005 at Frontier's office in New York with Frontier representative Neal Conolly in attendance and Joe Casaccio of NICO, it was agreed that the Commissioner would await the Rehabilitation Court's approval of Endorsement No. 3 before rebilling NICO for FPIC's losses. Neal Conolly, the designated agent of Frontier represented to Dick Oshita and I that once Endorsement No. 3 was approved by the Rehabilitation Court, FPIC would be able to collect the reinsurance receivables due from NICO. 16. On or about September 20, 2005, after receipt of the order approving Endorsement

No. 3, Frontier submitted FPIC's reinsurance losses in the principal amount of $4,883,090 to NICO for payment. 17. NICO, however, refused to pay based on the terms of Endorsement No. 3. NICO -4DECLARATION OF WILLARD ROBERTS IN SUPPORT OF PLAINTIFF'S OPPOSITION TO DEFENDANT'S MOTION TO STAY PROSECUTION OF ACTION PENDING ARBITRATION OF CLAIMS

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EXHIBIT A

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