Settlement Is Proposed on Failed Insurer

State regulators have submitted a proposal to settle a recent $7.5-billion government claim against failed Executive Life Insurance Co. for about $5 million--less than a penny on the dollar claimed.

Regulators and attorneys for the Resolution Trust Corp., which filed the massive claim in March, said in court Monday that the settlement will head off years of litigation that could indefinitely stall rehabilitation of the failed insurer.

However, attorneys opposing the settlement called the $7.5-billion claim by the Resolution Trust Corp. “specious” and said the settlement was like bargaining with a robber.

“This is little better than a stickup,” said Gary Fontana, an attorney representing holders of municipal bonds backed by Executive Life policies. “Every time the RTC wants to hold somebody up, they run to court and file one of these specious claims. This is what (criminals) do in other parts of Los Angeles with guns.”

The RTC suit alleged that the insurer was a link in the junk bond “daisy chain” that artificially inflated the price of junk bonds and indirectly led to the failure of about 50 thrifts, which toppled when the market for these high-risk, high-yield bonds finally collapsed.

California insurance regulators, who proposed the settlement, also maintain that the RTC claim is ridiculous. However, the proposed settlement is less costly than fighting the issue in court for the next three or four years, said Karl Rubinstein, an attorney representing the California Department of Insurance.

The settlement plan, which has been submitted to Los Angeles Superior Court Judge Kurt Lewin, would give the RTC $2 million in cash and $3 million later if Executive Life collects a judgment from a separate lawsuit against Drexel Burnham Lambert, the investment house that sold Executive Life the bulk of its bonds.

The RTC and California insurance regulators also plan to jointly pursue litigation against junk bond issuers and split the proceeds, with 60% going to the RTC and 40% to Executive Life’s estate.