2 Businessmen Sue Cal-Farm for $450 Million : Action Is Latest Move of Charges, Countercharges

Two Agoura businessmen filed suit Thursday against Cal-Farm Insurance, claiming that the troubled Sacramento-based insurance firm induced them to write millions of dollars of worthless bonds.

The $450-million suit, filed in U.S. District Court in Los Angeles, was brought by brothers Errol and John Coughlan and two companies they control, Eagle Bonds & Insurance Brokers and California-Pacific Construction.

The action is the latest move in a 2-year-old dispute that has led to several multimillion-dollar lawsuits, charges and counter-charges of fraud and racketeering, a state and federal investigation and the sale of Cal-Farm Insurance, once the profitable insurance arm of the California Farm Bureau.

The property-casualty and life insurance lines of Cal-Farm were sold to Encino-based Zenith insurance in June, while the remainder of the company is operating under the name C-F Insurance. The business bought by Zenith is not the subject of the Coughlans’ suit.

Complicated Case

The complicated case has come to the attention of the FBI and other investigators looking into a mortgage securities scandal that cost Bank of America $95 million late last year, because financial guarantee bonds written by Eagle and backed by Cal-Farm involve a number of parties linked to the B of A case.

Financial guarantee bonds provide an inducement to lenders to make real estate and small-business loans by promising to pay if the borrowers default.

The state Insurance Department has seized three insurance firms--Cal-Farm, Pacific American Insurance and Glacier General Assurance--for writing hundreds of millions of dollars in such bonds in violation of their California charters.

Scores of small banks and thrifts nationwide lost millions of dollars on loans backed by bonds when borrowers defaulted and the insurance companies were unable to make good on the claims.

The Coughlans’ suit against Cal-Farm alleges that the insurance firm and its officers exposed more than 100 lending institutions to as much as $170 million in potential losses by guaranteeing bad real estate and business loans.

The suit describes Eagle Bonds and the Coughlans as “unsuspecting middlemen” in the scheme, which involved a Santa Ana mortgage broker and lenders from as far away as New Jersey, Minnesota and Louisiana.

Undetermined Collateral

Defaults have already occurred on about $100 million in Cal-Farm bonds, which are backed by an undetermined amount of collateral, state insurance officials said.

A Cal-Farm spokesman called the suit “a smoke screen brought by them in response to our earlier complaint saying they were the real culprits. We’re sure the courts will bear out our view.”

Cal-Farm sued Eagle Bonds and the Coughlans in January, alleging that they broke agreements with the insurer and wrote guarantees on loans that they knew would never be repaid. About $20 million in loans backed by Cal-Farm bonds were made to the Coughlans and companies they controlled.

As of June, Cal-Farm had paid $14 million on claims from defaulted loans and expects to pay at least $40 million more.