ORANGE : City Cites ‘Bad Faith’ in Insurance Suit

Trying to recoup some of the $7 million it lost to investment adviser Steven D. Wymer in 1991, the city is suing two insurance companies for failing to honor a contract that promised to pay up to $500,000 in the event the city suffered a financial loss because of a dishonest employee.

Filed in Orange County Superior Court on Oct. 1, the city’s lawsuit accuses Lumbermen’s Mutual Casualty Co. of Illinois and Robert F. Driver Co. of California of misrepresentation and “unreasonable and bad faith” in making policy benefit payments to the city.

The city is seeking the $500,000 plus interest, attorney fees and unspecified punitive damages against the two companies.

Officials with the two companies named in the lawsuit could not be reached for comment Monday.

As head of an Irvine investment firm, Wymer defrauded Orange and dozens of other cities in California, Colorado and Iowa of an estimated $92 million with securities and investment scams.

Wymer, who plead guilty in 1992 to nine felony counts of racketeering, stock fraud, mail fraud, bank fraud and obstructing justice, is serving a 14 1/2-year prison sentence.

Acting on advice of the Driver Co., the city obtained insurance protection against public employee dishonesty from Lumbermen’s in February, 1991, according to the lawsuit.

Under the terms of the policy, the insurance company would pay the city a maximum of $500,000 if it lost money due to the misperformance of duty or the dishonesty of a public employee, court records said.

Shortly after learning in December, 1991, that it had less than $5,000 in an account with Wymer’s firm that should have had $7 million, the city filed a claim with Lumbermen for $500,000.

According to the lawsuit, the city blames former city treasurer Lorraine Schade for failing to comply with state codes designed to safeguard municipal investment accounts.

But the insurance company rejected the claim, arguing that because the city opened its account with Wymer’s firm in 1989--two years before the city was covered--Lumbermen was not obligated to honor the claim.

The city, however, contends that because it received more than $1.2 million in quarterly dividends from Wymer’s firm for two years, their investment was, in fact, not lost until December, 1991, thus entitling them to the insurance benefit, according to the lawsuit.