Class-Action Suit OKd in Alleged Insurance Scam

Thousands of victims of an alleged health insurance scam--known as Consolidated Local 867-- won a legal victory when a federal judge in New York City certified their lawsuit as a class action.

The Sept. 13 ruling by U.S. District Judge Milton Pollack means that the claims of an estimated 10,000 people nationwide--about three-quarters of them Californians--are now consolidated into one case with a common set of defendants: the 650-plus insurance agents who sold them the allegedly phony health policies.

Damages, including unpaid medical claims and premiums for worthless insurance, total at least $35 million, said Timothy Cohelan, a San Diego attorney representing the plaintiffs.

The plaintiffs, as well as insurance regulators and criminal prosecutors in several states, contend that Consolidated Local 867 was a sham labor union created as a vehicle to sell phony group health policies to people whose medical problems made it impossible for them to find coverage elsewhere.

Initially, in early 1990, Local 867 offered coverage through Empire Blue Cross/Blue Shield of New York, but Empire terminated that agreement in August, 1990, the plaintiffs’ lawyers said in a statement Monday.

For the next three years, Local 867 “rolled over” its clients into “a series of unlicensed, insolvent, offshore insurers,” according to the statement. Cohelan said these allegedly fraudulent insurers included Winston Hill Assurance Co. Ltd., Old American Insurance Co. Ltd., First Assurance & Casualty Co. Ltd. and Meadowlark Insurance Co.

Judge Pollack will oversee settlement discussions next Monday, Cohelan said. He said the plaintiffs will go to trial against any defendants who refuse to settle and will try to bring the alleged organizers of the fraud into the case as defendants at the same time.

William Loeb, one of the founders of Local 867, is now serving a seven-year prison sentence in New York State on federal fraud charges related to the alleged scam.

The lawyers handling the class action are Cohelan, of Cohelan & Khoury in San Diego, and Robert L. (Rusty) Brace of Hollister & Brace in Santa Barbara.