Bobby N. Harmon, CPCU, ARM, AAI
Honolulu, Hawaii 96818
January 5, 1997
Mr. John Sinnott, Chairman of the Board
Marsh & McLennan, Incorporated
1166 Avenue of the Americas
New York, NY 10036-277
SUBJECT: Settlement Proposal for Fraud/Misrepresentation Claim
Dear Mr. Sinnott:
The purpose of this letter is to present my claim for damages directly to you and your insurance carriers in an effort to negotiate a fair and reasonable settlement and to avoid the adverse publicity and high cost of a lawsuit.
As background, I was formerly the Risk/Insurance & Safety Manager for the Kamehameha Schools Bishop Estate (KSBE), a tax-exempt charitable organization, and President of P&C Insurance Company, Inc. (P&C), a captive insurance company wholly-owned by Pauahi Holdings Corporation, a for-profit subsidiary of KSBE.
On November 20, 1996, I received my termination notice from KSBE from my superior, Nathan Aipa, who is the General Counsel and Director of the Legal Group for KSBE. The letter states, "This action is being taken in recognition of a fundamental philosophical difference between (1) our teamwork and management approach within the Legal Group, and (2) your view and approach to the management of the risk insurance and safety department."
At the same meeting, Mr. Aipa gave me my termination notice as President of P&C Insurance Company, Inc., in the form of a letter from Henry H. Peters, Chairman of the Board of Directors. This letter gave no reason for the termination.
I consider both terminations to be wrongful and instituted for unreasonable and unjust causes, and I have filed a wrongful termination claim with KSBE and its insurance carriers. My letter of December 29, 1996 to the Trustees details the motives and provides the evidence to support my claim. A copy is enclosed for your information and review.
As you will note throughout my letter to KSBE, the Honolulu offices of Marsh & McLennan, Inc. (MMI) and M&M Insurance Management Services, Inc. (IMS) have been heavily involved in the wrongful actions which resulted in my termination, and it is for these actions that I am bringing this claim against MMI and IMS.
As further background, when I joined KSBE in October, 1988, the local general agent for the estate was Insurance Factors, Ltd. In 1989, I requested proposals for a captive feasibility study from several brokers. I recommended the proposal from MMI to the Trustees, which they approved. MMI's completed study determined that a captive insurance company was feasible and recommended its formation.
In 1990, I placed KSBE's complete insurance program out for competitive bidding. MMI provided what I considered to be the best proposal, with a key element being that MMI had the facilities and capabilities to assist in the formation and on-going management of a captive, which the incumbent agent lacked. The Trustees approved the appointment of MMI as KSBE's broker of record, based upon my recommendation.
The captive formation project was sidelined for a few years mainly due to discussions on tax-related issues. In 1994, however, Trustees gave approval to my recommendations that we proceed with forming a captive.
Peter Lowe, Vice-President of IMS presented a fee proposal on June 7, 1994 (copy enclosed) which was approved by the Trustees. You will note that the Cost of Services for Ongoing Management (page 2) shows a total of $66,500 based on approximated time and expense.
P&C received its charter from the State of Hawaii in September, 1994 and wrote its first policies effective October 1, 1994. As President of P&C, I signed an Insurance Management Agreement between IMS and P&C to provide on-going management services (copy enclosed). The services to be performed by IMS are stated in the Agreement, as well as Compensation and Expense Provisions which state that the fees charged by IMS will be on a time and expense basis and that IMS shall render monthly statements to P&C.
I have had suspicions for several years that something was going on between Rocco Sansone and KSBE management. Even before I was transferred from the Administration Group to the Legal Group, there were private meetings held with Sansone, Aipa and Gil Tam. Later on, there were often private meetings and communications between Sansone, Aipa, Louanne Kam and Henry Peters. When I learned of these meetings and questioned their purpose, Sansone explained them as efforts to assist me in communicating my risk management responsibilities to my superiors and other managers.
It was not until I began to seek alternatives to MMI's property placements, however, that my suspicions of collusion between these individuals were confirmed. My letter to the Trustees details the many issues which involved MMI and IMS; therefore, I will not repeat them all here.
However, the following excerpts from my letter are particularly relevant to my claims against MMI and IMS:
Page 5, which references Exhibit 7:
I consider MMI's actions to be extremely unethical,
unprofessional and costly to KSBE. Their questionable actions
contributed to the delays in final presentation of the staff
report to Trustees, which cost KSBE over $75,000 in premiums.
The fact that we were unable to write the property insurance in
P&C by July 1 or October 1, 1996, cost P&C over $1 million in
gross written premium.
In view of these actions on the part of MMI, my recommendation
was that KSBE place their insurance program and the captive
insurance management contract out to bid for the July 1, 1997
renewals (if not before), and have P&C write the property
program on the same date. It is my belief that this
recommendation contributed significantly to my termination
twelve days later.
Page 7, under "Arms-length Relationships/Conflicts of Interest":
The officers (of P&C) included myself; Peter Lowe, an officer
of M&M Insurance Management Services, Inc., which is a
subsidiary of Marsh & McLennan, Inc.; William Richardson, a
former trustee and current consultant for KSBE; and Nathan
Aipa, General Counsel for KSBE. KSBE has also been involved
with another MMI subsidiary, Guy Carpenter, through its sizable
investments in two Bermuda insurance companies, Centre
Reinsurance and Mid-Ocean Reinsurance.
...Claims committee members included...Rocco Sansone (MMI) and
Pat Onogi (MMI).
Page 18:
...former Treasury Secretary Simon has been the estate's
business partner in several major banking deals both in Hawaii
and in Asia in recent years." (The banking deal in Hawaii was
HONFED, which was later sold to Bank of America. State
Insurance Commissioner Wayne Metcalf took legal action against
Bank of America and Goldman Sachs, along with other brokerage
companies, in connection with the failure of Investors Equity
Life Insurance Company, which had sold annuities through
HONFED. I was advised by Rocco Sansone that Mert
Chillingworth, former president of Marsh & McLennan, Hawaii,
also served on the board of directors of HONFED during the
period they were marketing the Investors Equity annuities.
Another major banking deal with Simon came after this article
was published when KSBE became the majority stockholder in
SOCAL Holdings, which owns Southern California Savings & Loan
Company.)
Simon also personally invested, along with four estate
trustees and numerous senior estate staffers, in a
Houston-based methane gas drilling project that is now mired in
federal bankruptcy court proceedings.
The estate itself invested some $85 million in the same energy
deal.
Page 20:
Goldman Sachs continues to be involved in lawsuits accusing
the firm of illegal dealings. The Star-Bulletin reports in its
December 11, 1996 edition under the headline, "Investors Equity
deal OK'd":
"A Circuit Court judge has approved a settlement between state
Insurance Commissioner Wayne Metcalf and Gary Vose, the sole
shareholder of Investors Equity's parent company at the time
the insurer was placed into liquidation in June 1994..."
"The state seized the insurance company after its management
ran up a $90 million deficit largely because Vose lost
policyholders' money in highly speculative leveraged
investments known as derivatives, the state charges..."
"Metcalf said the settlement is part of a series of actions
against Bank of America, several brokerage companies
including...Goldman Sachs, accountants and attorneys associated
with the failure of Investors Equity Life..."
"A state lawsuit accused Vose of racketeering, fraud and other
misconduct... The suit alleges that the holding company that
controlled Investors Equity conducted sham real estate deals
and used the insurance firm's assets to pay large fees to Vose
and companies connected with him..."
Bishop Estate and William Simon had other tie-ins with
Investors Equity Life through their HonFed investment. Marsh &
McLennan had a connection with HonFed as their insurance
broker, as well as Mert Chillingworth who sat on HonFed's board
of directors.
Page 25:
“One wonders about arms-length and other tax issues with many
other deals, such as the one with Benson Forests (now Shelter
Bay Forests). This deal, in which Mark McConoghy also had a
hand, involved a number of partnership transactions with Ben
Benson, which concluded with KSBE buying Benson's remaining
interests in the partnership. During the time Benson was still
a partner, the estate arranged and paid for a life insurance
policy on Benson. The policy was purchased through Marsh &
McLennan. Shortly after Benson sold his interests to Bishop,
he and his wife made a large charitable donation of an island
in the Atlantic to the Kamehameha Schools.
“During the period when the formation of the captive insurance
company was under discussion, I recommended to Mr. Aipa that I
be transferred from KSBE to the captive in large part due to
the arms-length issues. I drafted a staff report for this
transfer which was submitted to Mr. Aipa for review and
approval. The recommendation was that I be transferred to P&C
and that KSBE contract with P&C for risk management services.
The Personnel Division was consulted about the continuation of
benefit programs and other employment issues if this transfer
were made. I included an estimated $200,000 in the initial
budget for P&C to establish and operate a separate office.
This staff report was never presented to trustees by Mr. Aipa.”
“Taxpayer Bill of Rights II - Intermediate Sanctions for
Tax-Exempt Organizations. Under a bill signed July 30, 1996,
Congress enacted rules which allow the IRS to assess penalty
excise taxes on individuals who are involved in transactions
with tax-exempt organizations that constitute private
inurement. The law applies retroactively to ‘excess benefit’
transactions occurring after September 13, 1995.”
“Penalty excise taxes can also be imposed on ‘organization
managers’ (an officer, director, or trustee) who knowingly
permits the organization to engage in an excess benefit
transaction, even if that manager did not personally benefit.”
“Tax-exempt organizations cannot circumvent the rules by causing
a controlled entity to engage in the excess benefit transaction.”
An article entitled, ‘No More Sweetheart Deals’, in the September 23, 1996 issue of Forbes includes the following comments and example:
"Under the new rules, trouble starts if the IRS determines that
there has been a misdeed with an "excess benefit." It could be
fat salary, a sweetheart contract or an embezzlement. If
someone got an excess benefit, the IRS can both fine the
recipient 25% of the benefit and demand that the benefit be
given back to the charity. If the guilty party doesn't pay the
money back, he or she owes twice the excess benefit to Uncle
Sam."
"Say a board member convinces the president of a college to let
the school's insurance contracts to her firm, even though going
with a rival would save the school $150,000. In turn, the
board member is influential in voting the president a lavish
salary, perhaps $200,000 higher than the norm at comparable
universities. The IRS could force the repayment of both the
$150,000 and the $200,000..."
“What about directors who sit still for this kind of mischief?
They can be fined a collective $10,000, even if they didn't
profit..."
It would appear to me that the IRS possibly could interpret several transactions between Marsh & McLennan and KSBE/P&C as resulting in "excess benefit". For examples:
1. I obtained a property insurance proposal from Hobbs Group
which was approximately $600,000 less than KSBE was paying for
coverages placed through the incumbent broker, Marsh &
McLennan. MMI's account representative, Rocco Sansone,
represented that M&M could have gotten the same coverages with
the same company at the same price, if only I had let him know
that was what the estate wanted. Nathan Aipa and Louanne Kam
conspired with Sansone to keep MMI on as KSBE's exclusive
broker. They requested that Hobbs extend the proposal deadline
- first to July 15; then to July 31; then to August 31 - in
order to allow MMI time to arrange to take over Hobbs proposal
with the carriers. (The latest Hobbs would extend the proposal
was August 15.) They arranged to have MMI review and give their
opinion of Hobbs' proposal before allowing my staff report to
go to Trustees. I was pressured by Aipa/Kam/Sansone to give
MMI an exclusive broker of record letter to enable them to take
over the Hobbs proposal. This I would not do as I considered
it highly unethical and not in the best interests of the
estate. When MMI was unable to get a resident agent
appointment from Arkwright Insurance Company as Sansone had
represented, or make any other arrangements, MMI's policies
were canceled and the business went to Hobbs. The 45-day
delay in rewriting the policies, however, cost the estate and
its subsidiaries nearly $75,000. MMI benefited not only from
the commissions they received from the $600,000 "overcharge",
but they also received commissions for the extra 45 days their
policies were in force.
2. On June 7, 1994, I received a fee proposal from Peter
Lowe, Vice President of M&M Insurance Management Services,
Inc., (IMS) for services for the formation and ongoing
management of a captive insurance company. Fees were quoted on
a time and expense basis. The total annual estimated fee for
ongoing captive management services was $66,500.
“After the captive was formed, the actual charges made by IMS
for ongoing management services was $60,107 for the first
9-month period ending July 1, 1995. This was in line with
their proposal. MMI, however, had billed an additional
$200,000 flat fee for "brokerage services" which had not been
indicated in the proposal or in the captive management contract
with IMS.”
“Outside services required by P&C were almost always contracted
for on a time and expense basis. The notable exception was
Marsh & McLennan, Inc. They billed their services to P&C at a
flat rate of $200,000 annually, invoiced in installments of
$100,000 each. When I received the first of these invoices, I
noted there was no explanation for the invoice and I
questioned IMS about the charges. The answer was that these
were for "broker services" that IMS was not staffed to perform,
such as, policy issuance, billings, claims services, etc. I
was advised that MMI would provide further details about the
services in the future. I never received a satisfactory
explanation and a written agreement was never entered into for
these services.”
“During the year prior to the captive being formed (1993-94),
Marsh & McLennan, Inc. received $274,928 in brokerage
commissions from KSBE. During the first year of the captive
(1994-95), MMI received $290,443 in brokerage commissions from
KSBE, plus the $200,000 flat charge from P&C. In addition, P&C
paid MMI-affiliated companies IMS and William Mercer, $60,107
and $2,663 respectively. Total income to MMI and affiliates
had gone from $274,928 to $553,213 in one year. (And one of
the purported advantages of forming a captive was reduced costs
by elimination of the "middle-man".) The following year
(1995-96) the total fees and commissions to MMI and its
affiliates increased to $632,714.”
“To budget P&C's expenses for the current fiscal year, on August
28, 1996 I requested a written proposal from MMI on a ‘time and
expense’ basis (Exhibit 21), which they did not provide. Aipa
and Kam strongly pressed me to have P&C continue to pay MMI the
$200,000 annual flat fee. On October 8, 1996, a meeting was
held at the direction of Ms. Kam to discuss MMI's fees.
Attending the meeting were Ms. Kam, Rocco Sansone, Peter Lowe
and Garrett Liu.”
“One of my frequent admonitions to MMI and IMS was that P&C
should always act at arms-length from KSBE and its
subsidiaries. As Mr. Liu's meeting notes indicate, I expressed
my desire to be able to justify MMI's fees for the services
performed, and to keep P&C's costs separate from KSBE's costs.
Rocco expressed his opinion that some of the services provided
to P&C were difficult to unbundle from the services provided to
KSBE, and he suggested that a fee proposal be made for the
entire KSBE account and not just P&C Insurance.”
“Peter Lowe represented that almost all of the captives he dealt
with had a flat fee arrangement with their risk managers and
brokers. Ms. Kam remarked that I had no "bench marks" for
these service fees, and suggested I check my reference
materials and determine what other captives were doing. After
this meeting, I reasoned that the best way to obtain such
‘bench marks’ was to check with other local captive managers to
see what kind of fee arrangements they had with their clients.
In just two five-minute phone calls, I obtained ‘time and
expense’ estimates and sample agreements from two other captive
managers--something which MMI had not been willing to provide
in two years. These competitive cost estimates ran from
$25,000 to $50,000 a year and included all the services being
provided by MMI and IMS at a cost of $287,527.”
“On P&C stationery, and signing the letter as President of P&C,
I responded to Mr. Sansone with my findings and again requested
a service proposal from MMI.”
“Ms. Kam rescinded my letter without any prior notification, and
issued another PERS 9 reprimand dated October 31, 1996. In
this memorandum she states:
"I was shocked to read your letter of October 29, 1996 which
was sent to Mr. Sansone and Mr. Lowe. This letter was not
previously reviewed or approved by either Nathan or myself.
This is a flagrant failure to follow clear and express
directives from your supervisors and amounts to
insubordination. Any further incident in which you fail to
follow directives will be grounds for further disciplinary
action including immediate termination."
“Needless to say, by this time I had strong suspicions that
‘private agreements’ had been made between Nathan Aipa, Louanne
Kam, Rocco Sansone and Peter Lowe to which I had not been a
privileged party. Looking at the income MMI and its affiliates
were receiving from KSBE and P&C, I could definitely see the
opportunity for ‘excess benefit’".
“If my understanding of the Taxpayer Bill of Rights II is
correct, as an officer of P&C I could be fined $10,000 by the
IRS if it were determined that I knowingly permitted the
organization to engage in an excess benefit transaction. But
the main reason for my ‘flagrant failure to follow clear and
express directives from my supervisors’ was that I felt it was
downright dishonest.”
“In my mind, if I ‘looked the other way’ and allowed this
activity to continue, I would be breaching my fiduciary duties
to the organization. I believed that my duties to the estate
were greater than my duties to my supervisors. And I knew that
my conscience would be forever burdened with the thought that I
had stood by and allowed certain unscrupulous individuals to
‘rob’ the true beneficiaries of the estate - the children of
Hawaiian ancestry.”
Page 35:
“3) Failure to act in good faith with KSBE's insurance and
bonding companies; fraud; deceptive practices in financial and
regulatory reporting; discrimination; conflicts of interest;
breach of fiduciary responsibilities; non-bid contracts;
political favors; improper actions for personal gain or profit;
and other wrongful acts.”
“In several discussions with Mr. Aipa I was told that I was
always ‘taking the side of the insurance company’ and not
KSBE's side. I responded that I was not taking the insurance
company's side, but was only stating the conditions in the
insurance policies and what the companies required of insureds
in applications for insurance, claims reporting, etc.”
“When I would cite the insurance policy conditions, exclusions,
etc. to him in response to a question, Mr. Aipa would say that
he knew what the policy said - he wanted to know what the
company would actually do in these cases.”
“Having previously been an underwriter for the Hartford and the
Hawaiian Insurance Companies, and a vice-president in charge of
marketing for a local general agency for 17 years, my
philosophy and approach to dealing with the insurance companies
has always been one of acting with honesty and in good faith.
I have seen many situations over the years where failure to
disclose complete underwriting information to the carriers
resulted in cancellations and non-renewals, high audit
premiums, denial of claims, etc.”
“Mr. Aipa's philosphy was that ‘sensitive’ issues, financial
information, etc. should not go outside the company, or even
outside the Legal Group, if possible. Hence the heavy use of
‘Attorney-Client privilege’ memos between the legal group and
other departments within the organization.”
“Therefore, when it came to completing insurance applications
that requested ’sensitive’ information such as financial
statements, knowledge of any pending claims or future potential
claims, this information was often not disclosed to me, or was
provided only after repeated requests.”
“It is apparent that Mr. Aipa found my philosophy of dealing in
good faith with the insurance carriers too ‘open’, and in
complete contrast to his philosophy of keeping everything
‘confidential’. It is also apparent to me that he found
someone between myself and the insurance companies that was
willing to share his philosphy: the broker, Marsh & McLennan,
Inc.”
“I have heard Mr. Aipa and Ms. Kam remark that if you control
the information, you control the case. At KSBE, Mr. Aipa has
gone to great lengths to control the information. Central
Files and Documentary are under his supervision. All staff
reports are reviewed by the Legal Group. Information provided
to the Master is provided by Mr. Aipa. The Tax Department is
under Mr. Aipa. The Risk/Insurance & Safety Department was
transferred from the Administration Group, headed by Gil Tam,
to the Legal Group at the time the McKenzie Methane situation
was heating up.”
“Almost as soon as Ms. Kam joined the Legal Group, which was
shortly after I was transferred, she began to make efforts to
‘control’ the insurance information. She wanted to deal
directly with the insurance brokers, the insurance companies
and the insurance adjusters. She wanted to change the filing
system for insurance policies and claims files, and contacted
MMI directly and instructed them as to how she wanted the
policy files set up. She admonished me for not allowing
Colleen Wong deal directly with the insurance companies on
employment-related liability claims. She frequently ignored
established procedures and involved herself in the claims
process by taking on my responsibilities or the
responsibilities of the independent claims adjusters.”
“Both Aipa and Kam often dealt directly with Rocco Sansone and
Pat Onogi of MMI on specific risk and insurance matters without
my knowledge or participation. Mr. Aipa had Alan Yee work with
MMI to draft a Confidentiality Agreement.”
“Staff reports that were prepared by me were heavily edited and
re-edited by Aipa and Kam, often in private consultation with
Sansone, before they would approve them for presentation to
Trustees. My staff report regarding the Hobbs' Group's
property proposal is a prime example as described in my
response to my performance evaluation (Exhibit 3). This report
went through at least five major revisions as directed by Ms.
Kam, during a period of over a month and a half. (Note: At
this time I was not even in her division or under her
supervision.)”
“Each month we delayed in transferring the property program
meant a loss to the estate of over $50,000. Therefore, I
finally gave-in to her directives in order to have the staff
report presented to Trustees. However, what had started out to
be a factual, straight-forward report recommending that KSBE
accept Hobbs' property program, was transformed into a document
designed to mislead Trustees and others into believing that
Marsh & McLennan could be the broker of record for this program
when, in fact, they could not.”
As I stated in response to Aipa's evaluation of my performance:
"Mr. Aipa's comment (3) ‘due diligence review of the
proposed property insurance program by M&M was initiated only
after the insistence of the General Counsel’ totally escapes
me. I do not recall being asked at all to have M&M perform
due diligence. In fact, as I learned much later from Pat
Chalfin, it was Kam who had written to request that M&M
review Hobbs' proposal. And, although her letter indicated
that I was to receive a courtesy copy, I had never seen this
letter before Mr. Chalfin provided me a copy."
"As a personal opinion, I found it very unusual and highly
discomforting that a proposal obtained in good faith from a
broker be given to the incumbent broker for `performing due
diligence.' I believe that comparing competing proposals is
the responsibility and function of the risk manager or, if an
outside opinion is deemed necessary, there are professional
firms such as Tillinghast which can provide this analysis."
"...As to comment (6) `poor drafting of a staff report that
objectively presented to my satisfaction the history and
proposal of the property insurance program', I can only say
that I believe that my original draft presented the most
accurate and complete history of the proposal, and contained
detailed information about the Hobbs Group and Arkwright
Mutual, including the recommendation letters from C. Brewer
and Campbell Estate. It also included the intent that this
program was to be underwritten by P&C Insurance Company, and
was to be reinsured by Arkwright. It also included a letter
from Arkwright which indicated that Hobbs had reserved KSBE
as a prospective account in January, 1996 and that MMI would
not have been able to obtain a quotation or coverages from
them even with an exclusive Agent of Record letter. This
information was removed at