The Pennsylvania Insurance Department and Kingsway Financial Services have both filed complaints in Commonwealth Court regarding the distribution of shares of troubled insurer Lincoln General.

Joel Ario

Last week, state regulators said they planned legal action against Ontario, Canada-based Kingsway and its subsidiary, Kingsway America, regarding Lincoln General Insurance Co. of York, Pa., a commercial insurer for the trucking industry facing financial difficulties.

For months, regulators and Kingsway have discussed ways to wind-down Lincoln General and Kingsway’s responsibilities in that process as the ultimate controlling corporation, according to Pennsylvania Insurance Commissioner Joel Ario.

Ario contends that rather than moving forward with those discussions, Kingsway sought to divest itself of the company, and thereby violating to state law, by donating 100% of the company’s stock 20 different charitable organizations, along with a $20,000 check.

Ario dubbed the donations “sham transactions,” in a statement, indicating that Kingsway skirted state insurance laws. Kingsway denied any wrongdoing.

On Nov. 20, Ario announced that the Pennsylvania Insurance Department filed a complaint in Commonwealth Court to force Kingsway to unwind those transactions.

“Kingsway attempted to dispose of its interest in the Lincoln General Insurance Company through stock donations to 20 unsuspecting charities,” Ario said in a statement. “Today, we are asking the Commonwealth Court to unwind this transaction for the benefit of Lincoln General and its policyholders.”

Among the arguments made by Ario to the court in seeking a reversal were that Kingsway must meet its legal obligations to Lincoln General rather than passing it along to “innocent charities” and that failure to unwind Kingsway’s transactions “will invite others to engage in similar sham transactions and undermine the web of laws that protect insurance companies against abandonment by their parent holding companies.”

Ario added that his office considers Kingsway’s actions “unlawful.”

Before the Pennsylvania Insurance Department filed its complaint, Kingsway made its own filing in Commonwealth Court, according to the company.

It is asking the court to declare the donations as lawful and not requiring Ario’s permission.

“Kingsway has met, and fully intends to continue to meet, its regulatory and contractual obligations in respect of Lincoln,” the company said in a statement.