Bobby N. Harmon, CPCU, ARM
July 21, 2000
VIA FAX @ 523-6313
And U.S. Mail
Dr. Hamilton McCubbin, CEO
Kamehameha Schools
567 South King Street, Suite 200
Honolulu, Hawaii 96813
RE: Kamehameha Schools - Equity 2048 - Insurance Opinion by Special Master
Dear Dr. McCubbin:
Regarding the advice of Special Master Michael Tanoue that the interim trustees should not cooperate with the Attorney General’s office because the insurance companies have indicated that they may reject coverages if the interim trustees take an active role in the dispute, I offer the following comments:
I am in complete agreement with the statement that the interim trustees should not be directly involved with the lawsuits. However, I differ with the reasoning that this course of action should be because the insurance companies are threatening to deny coverages.
It is the very purpose and obligation of the liability insurance company to defend their covered insureds. However, in this instance the insureds are the five ex-trustees, not the trust. If the insurance companies reject coverage, they are rejecting coverages for the ex-trustees, not for Kamehameha Schools.
Just as the interim trustees should not be involved in this lawsuit, neither should any officers or employees of Kamehameha Schools, such as Nathan Aipa, Colleen Wong, Louanne Kam or Rodney Park. Since it is the duty of the liability insurance companies, including P&C, to provide defense for the ex-trustees, all of these individuals have serious conflicts-of-interest by being involved.
P&C is a prime example. All of these named individuals are employees of Kamehameha Schools. None of them are authorized to handle claims for P&C (or for any other company). This is one reason that all claims involving P&C insurance policies are, according to P&C’s own written procedures, to be conducted at “arms-length” from Kamehameha Schools.
Insurance claims are properly handled by the insurance company’s authorized adjusters, with the assistance of outside attorneys approved by the insurance company. The attorneys report directly to the insurance company under attorney-client privilege rules. The defense attorneys are PAID directly by the insurance company.
The Plaintiffs, then, deal directly with the company’s claims adjuster and/or the Defendants’ attorneys. It is not necessary, or proper, for the Plaintiffs to deal directly with employees of the Insured Organization. These employees may even be potential witnesses for, or against, the insureds – a clear conflict-of-interest.
What appears to have happened in this case (and in many others) is that Aipa, Wong, Kam and Park have wrongfully and improperly interfered with the handling of the insurance companies’ claims. If the Attorney General’s requests for copies of the insurance policies, etc., had been originally directed to the company adjusters or to the attorneys for the defendants – as is appropriate – the resulting delays and conflicts with the interim trustees would have been correctly avoided.
The conflicts-of-interest issues in this case, however, appear to go beyond just the mechanics of handling the claims. The purpose of these deviations from procedures appears to be the intentional cover-up of thefts of trust funds by current employees of the estate in collusion with the ex-trustees and certain outside contractors.
Some of these individuals and outside firms are known to me and were specifically named in my RICO lawsuit, so I will not repeat them all here. However, it is worthy of note that Aipa, Kam, Wong, Park, Federal Insurance Company, P&C Insurance Company, PricewaterhouseCoopers and Marsh & McLennan were all named as co-conspirators.
If, as the insurance companies claim, coverages are denied, it would be the responsibility of the ex-trustees to bring claim against the insurance companies, (including P&C), if they feel coverage has been wrongfully denied. This action would be at their personal expense. Perhaps they might even prevail, in which case it would give them additional funds with which to pay their ultimate legal obligations, if any.
There are other reasons that “deals” should not be made with only Federal, XL and P&C at this time. It appears that all potential insurance carriers may not have been notified in this case. Specifically, SoCal and McKenzie Methane should also have Directors & Officers liability coverages. If Henry Peters or other trustees or employees of KSBE also served as Directors & Officers of these entities, there may be coverages applicable under these policies.
Also, if it is eventually found that Marsh & McLennan, Federal Insurance Company, PricewaterhouseCoopers, Mid Ocean Reinsurance, Underwriters Capital or others did, in fact, collude to defraud the estate, then the insurance policies of these entities may also be applicable.
There are other types of insurance policies carried by the estate which provide for substantial recovery of losses. Many of the alleged acts involved theft of trust monies by the ex-trustees in collusion with other KSBE executives and staff members, and with outside individuals or firms. These situations are covered by KSBE’s Employee Dishonesty insurance policy.
To collect under these Employee Dishonesty policies, these claims must be reported to the insurance carrier. In this situation, the insured is KSBE, or its covered subsidiaries – not the ex-trustees. Therefore, it would be the responsibility of the interim trustees and the Chief Executive Officer or Chief Operations Officer to report these claims to the insurance carrier – which happens also to have been Federal Insurance Company during the prior years, and to P&C and XL Insurance Companies if occurring after 9/1/97.
Usually, if the evidence of theft is strong enough, the employee or employees are immediately terminated for cause and the insurance company pays the loss to the insured upon furnishing the company with satisfactory Proof of Loss. It is then the responsibility of the insurance company to pursue the recovery of all stolen funds for their own account.
One example of this type of claim would be the elaborate scheme to reimburse Milton Holt for the theft of his campaign funds and subsequent legal defense costs. In this case, the insurance carrier should pursue all trustees, executives, employees and outside persons who participated in the fraud. This case should be easy to prove – as the collaborators in the crime would have signed purchase orders or check requests, requisitions, check approvals or similar documents, and the checks themselves. On the other end, someone would have made fraudulent invoices, and cashed the checks.
This is only one example case. From the Attorney General’s investigation, and other investigations, and from my personal experience, there are dozens of similar cases of fraud which should have been reported to the insurance companies, but were not. If the current interim trustees and principal executives continue to ignore, or cover-up, these thefts, they are also exposing themselves (and the insurance carriers) to further claims of theft and breach of fiduciary duties.
Another source of potential recovery would be the Trustee Bond of each of the five individual ex-trustees. This could possibly lead to another $500,000 recovery.
I would also like to comment briefly on the payment of fees for Trustees’ separate legal counsel as discussed in Davis Wright Tremaine’s memorandum dated 11/21/97 addressed to Nathan Aipa, and John Langbein’s letter of 11/23/97 addressed to Malcolm Moore of Davis Wright Tremaine. All that would have been required of Mr. Aipa would have been simply to report the claim to the insurance carriers. From that point on, these issues would have been handled by the insurance companies at their expense.
These opinions, therefore, were unnecessary and a misuse of trust funds (unless the trustees themselves paid for the opinions, which does not appear to be the case.)
To summarize, this case involves many complex insurance issues that were improperly left in the hands of KSBE personnel who have serious conflicts of interest.
The following suggestions are offered as means to righting this situation:
1) Kamehameha Schools should take immediate steps to relieve the interim trustees and all Kamehameha Schools’ employees from any direct involvement in the administration of ALL insurance claims;
2) To prevent any conflicts of interest and to comply with “arms-length” requirements, P&C Insurance Company should immediately replace any persons who also hold positions at Kamehameha Schools or Marsh & McLennan.
3) The estate should take prompt action to review all known or suspected monetary losses that have been uncovered in the past several years as a result of various investigations. These losses should be immediately reported to the insurance carriers.
I hope this information will be helpful to your office and to the Estate. If I can be of any further assistance, please feel free to contact me at any time.
Very truly yours,
Bobby N. Harmon, CPCU, ARM
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