2 Insurers Balk at Hawthorne’s Debt to Motorcyclists : Liability: City may have to pay part of $1.95-million settlement to members of the Vagos motorcycle club.

Hawthorne officials are worried that the city may be forced to cover at least part of a $1.95-million settlement with members of the Vagos motorcycle club while two insurance carriers battle over which one should pay.

The city last week agreed to the settlement with 70 plaintiffs who claimed in a Superior Court lawsuit that their constitutional rights were violated during several raids conducted by Hawthorne police in 1983.

The two insurers are arguing over who is responsible for payment. Two weeks ago, one of them filed suit against both the city and the other insurer, and Hawthorne officials said they may be forced to pay at least part of the award out of rapidly depleting insurance reserves.

“We hope the insurance companies don’t abandon us, because we could not afford to pay the whole amount ourselves,” City Manager Kenneth Jue said Thursday.

At issue is whether each offense against the plaintiffs constituted a separate “occurrence” under the terms of the city’s coverage.

The primary insurer at the time, Canadian Insurance Co. of Costa Mesa, maintains that the entire Vagos matter amounts to a single incident under the city’s policy, the company’s attorney, Brad Withers, said. Because the policy states that the company is responsible for up to $1 million for each occurrence, Canadian Insurance maintains that it must pay $1 million only, he said.

The city agrees with Canadian Insurance, but the carrier of its secondary coverage, for amounts in excess of $1 million, maintains that it is not liable for the $950,000 balance. Protective National Insurance Co. of Omaha, Neb., regards each violation of rights claimed by the motorcycle club as a separate occurrence and says Canadian Insurance, therefore, owes the entire amount.

“It was obvious to me and Protective National that the case against the city of Hawthorne constitutes multiple occurrences--at least, more than two,” said Lance Orloff, an attorney for Protective National.

Orloff said his client was not told about the case until shortly before the city decided to settle it three months into the trial.

“(Hawthorne attorneys) thought they were going to win the case in the beginning,” Orloff said. “Protective National wasn’t even given notice that the lawsuit was going on and that the city was in trouble until, all of a sudden, they called up and said ‘Gee, the witnesses aren’t going as well as we thought they would.’ ”

Those witnesses testified that the police had carried on a campaign of harassment against the bikers, breaking into and ransacking club members’ homes, confiscating their motorcycles and pointing guns at the heads of their children during the raids. The Police Department said its officers were searching for a club member suspected of stabbing three men in a bar fight.

“Every time the police went out and destroyed someone’s property, that was an additional occurrence,” Orloff said. “The evidence over trial was that police had a long history of going after the motorcycle gang, for whatever reasons.”

The city is concerned because in recent years, Protective National has had financial difficulties and has delayed paying or fought some claims.

Although Hawthorne started the year with about $1 million in insurance reserves, it has had to pay out half that amount to settle other cases and to cover legal expenses, Jue said.

Since the time of the Vagos raids, Hawthorne has dropped private coverage and joined the Independent Cities Risk Management Assn., a municipal cooperative. It joined the risk management pool in 1986, a couple of years after a crisis in the insurance industry left scores of communities, including Hawthorne, without coverage, Jue said.

Torrance, which at one time used Protective National as both its primary and secondary insurer, learned in October that the carrier was refusing to pay a $5.5-million judgment against its Police Department on the grounds that the officers’ actions were intentional, not accidental.

Although Protective National officials have not made that argument in the Vagos case, it “could become an issue in the future,” Orloff said.

Payment in the Torrance case has been delayed while the award is being appealed. Torrance may sue Protective National to force it to pay the judgment if the appeal is unsuccessful, City Atty. Kenneth Nelson said.

Some municipal officials suspect Protective National’s reluctance to pay claims may stem from financial difficulties that date back to the mid-1980s.

In 1986, officials with the Nebraska Insurance Department began supervising Protective National’s operations in an attempt to keep the company solvent, said Houghton Furr, a Nebraska insurance official.

In its statement of Dec. 31, 1989, Protective National reported a surplus of $18.9 million--significantly less than in previous years. Nebraska officials are reevaluating the company to determine whether it will continue to be supervised, Furr said.

Protective National’s parent company, Central National Insurance of Omaha, is in worse financial trouble. Earlier this month, Nebraska insurance officials took over Central’s day-to-day operations, a step taken when a company is in danger of becoming insolvent, Furr said.