Founder of N.J. insurance agency pleads guilty in District fraud case

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The founder of a Red Bank, N.J., a managing general agency has pleaded guilty to one count of insurance fraud in connection with fraudulent statements in an application to operate as a captive insurance company in Washington, D.C., according to federal prosecutors.

Rodney R. Ayer, 44, former president of Phoenix Underwriting Managers Inc., could face up to 24 months in prison at sentencing before U.S. District Court Judge Ricardo M. Urbina. A date for sentencing has not bee set.

In a related civil matter, Ayer has agreed to pay $500,000 as a civil monetary penalty and to set aside an additional $495,000 in an escrow account to cover specified expenses related to the insurance claims at issue, according to U.S. Attorney Ronald C. Machen Jr.

Prosecutors said the investigation is continuing and that Ayer, as part of his plea agreement, must cooperate with investigators.

Ayer was the founder, president and majority owner of Phoenix, a New Jersey-licensed MGA that focused on insurance products for unique association groups and other specialty programs. Ayer and another insurance professional, referred to as “Insurance Broker A-1,” placed association groups with insurance carriers.

In April 2006, after learning an insurance company would not establish an insurance program it was marketing, Ayer, Insurance Broker A-1 and others filed an application with the District of Columbia Department of Insurance, Securities and Banking seeking permission for a company to operate as a captive insurance company under the District’s laws. Prosecutors said the application contained false information suggesting Hannover Rueckverisherung AG had been the previous insurance carrier.

Prosecutors said three association groups served by Ayer and Insurance Broker A-1 were Wright and Co., the IMA Group (IMA), and the Hands-On Trade Association (HOTA). Wright and Co. provided supplemental insurance programs to the federal government, including a program known as the Federal Employee Professional Liability insurance program (the FEPL Program), which provided insurance protection to federal employees against civil and criminal actions filed against them for acts committed while performing official duties.

IMA and Hands-On were associations that offered their members insurance coverage through a non-profit entity known as the Health and Beauty Risk Purchasing Group (HBRPG).

Ayer admitted that he and Insurance Broker A-1 intended to insure the members of the FEPL Program and the HBRPG with insurance carriers, known as “Cells,” established through a multi-national insurance carrier, Hannover Rueckverisherung AG (Hannover Re). Ayer and Insurance Broker A-1 intended to co-own the Cells, which would be associated with Hannover Re, and supervise the administration of the FEPL Program and the HBRPG. Based on their knowledge of the claims histories for the FEPL Program and the HBRPG, Ayer and Insurance Broker A-1 expected to retain substantial underwriting profits from the FEPL Program and the HBRPG through their use and ownership of the Cells.

To be legally operative, however, Hannover Re and the insurance regulatory agency in Guernsey had to approve the Cells.

Ultimately, Ayer and Insurance Broker A-1 were unable to obtain formal approval from Hannover Re or the insurance regulatory agency in Guernsey to operate the Cells. Nevertheless, Ayer, Insurance Broker A-1 and others led the IMA, HOTA, Wright and Co., and insurance regulatory agencies in the District of Columbia and Kentucky to believe that Hannover Re had approved Cells to insure the FEPL Program and the HBRPG. Ayer and Insurance Broker A-1 received substantial premium payments from the members of the FEPL Program and the HBRPG based on representations that Hannover Re insured those Programs when, in fact, Hannover Re had not formally approved the Cells to insure the FEPL Program and the HBRPG, prosecutors said.

As a result, after Ayer and Insurance Broker A-1 paid the claims and expenses associated with the Programs, they were able to retain the underwriting profits associated with those Programs for themselves, prosecutors said.

In April 2006, after Ayer learned that Hannover Re would not establish the Cells to insure the FEPL and IMA Programs, Ayer, Insurance Broker A-1 and others caused an application to be filed with the District of Columbia’s Department of Insurance, Securities and Banking seeking approval for a District of Columbia Certificate of Authority allowing Defense Shield Insurance Co. Inc. (DSIC) to operate as a captive,  according to court records.

DSIC was intended by Ayer and Insurance Broker A-1 to succeed the Cell purportedly associated with Hannover Re as the next insurance carrier for the FEPL Program, prosecutors said. The application falsely stated that Hannover Re had been the previous insurance carrier for the FEPL Program and the IMA when, in fact, Ayer knew that Hannover Re had not been the insurance carrier for the FEPL Program and the IMA, officials said.

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