The Pennsylvania Insurance Department said it plans to appeal a Commonwealth Court decision to dismiss its challenge against Kingsway Financial Services over how it distributed shares of a troubled subsidiary.

In November, regulators filed suit against Ontario, Canada-based Kingsway and Kingsway America over Lincoln General Insurance Co. of York, Pa., a commercial insurer for the trucking industry facing financial troubles.

After months of negotiations on ways to wind-down Lincoln General, Pennsylvania regulators said Kingsway sought to divest itself of the company completely and, in what the insurance department considered a violation of state law, donated 100% of the company’s stock to 20 different charitable organizations, along with a $20,000 check.

Joel Ario

In announcing the suit by state regulators, Pennsylvania Insurance Commissioner Joel Ario dubbed the donations “sham transactions,” a characterization Kingsway objected to, leading it to file its own suit against Ario’s office.

In announcing the court’s dismissal of the case, Kingsway said in a statement it “has met and will continue to meet all of its regulatory and contractual obligations in respect of Lincoln.”

In a 16-page opinion, written by Commonwealth Court Senior Judge Rochelle S. Friedman, the court agreed with Kingsway that its action did not violate three areas of state law, nor does the company have to submit attorney fees to the Pennsylvania Insurance Department.

Part of the court’s objection to the state’s claim was that Kingsway America is a Delaware corporation and not a domestic insurance company and, therefore, not held to the part of state law referring to such “domestic insurers.”

The court summarily dismissed the insurance department’s case against Kingsway.

Court weighs in on ‘scheme’

In a concurring opinion, Judge Dan Pellegrini did agree with the majority, but noted “the scheme” by Kingsway “to jettison its failing subsidiary…by bribing 20 charities.”

Pellegrini said he needed to write separately to “highlight [Kingsway’s] improper use of charitable corporations to accept its detritus.”

Noting the peculiar arrangement of the donations – “intended as a bribe rather than a bona fide donation,” Pelligrini noted – he also said all of the charities receiving stock and a check were located in the New York City area, “conveniently out of reach of Pennsylvania authorities,” and not one recipient had a history of owning insurance stock.

The judge noted that the insurance department has continued to request more information on the charitable donations, but Kingsway has refused to comply with those requests.

Pellegrini also suggested that Kingsway’s days in court may not be over. Noting Kingsway’s lack of obligation to cover Lincoln’s debts, the judge said the result could well cost Pennsylvania taxpayers who will ultimately bear that cost.

“While its scheme may not have violated the insurance laws of Pennsylvania, it is well within the powers of the Attorney General of Pennsylvania and the Attorney General of New York to investigate whether Kingsway’s use of charitable corporations was improper or any fraud occurred,” Pellegrini said.

In a statement to IFAwebnews.com, the Pennsylvania Insurance Department said it is “disappointed” in the Commonwealth Court decision “and plans to appeal.”