MTA Sues Insurer, Accuses Firm of Fraud

Hoping to recover tens of millions of dollars in losses on its trouble-plagued subway project, the Metropolitan Transportation Authority has filed a lawsuit accusing its former insurance company of extortion, bad faith, fraud and the pursuit of “personal vendettas.”

The suit says that Argonaut Insurance Co. impeded the transit agency from clearing up its liability for such costly events as the sinkage of Hollywood Boulevard.

The suit also claims that the firm was partly to blame for the MTA’s sharp reduction in federal funding because it failed to promptly pay claims from property owners in North Hollywood and Hollywood, subjecting the transit agency to “public ridicule.”

The MTA took its most recent financial hit Wednesday when a congressional panel approved less than half of the $159 million the agency wanted for subway construction in next year’s budget.

In addition, the Tarzana-based attorney who filed the suit for the MTA said in an interview Thursday that he will seek to prove that Argonaut defrauded the transit agency of millions of dollars last year in artificially inflated deductibles, and refused to provide documentation itemizing claims and expenses.

Asked why the agency paid Argonaut so much in deductibles without first obtaining a complete accounting of the bills, the agency’s outside counsel, David B. Casselman said: “We trusted them.”

J. Michael Nolan, general counsel for Argonaut, said the company “categorically denies” the claims in the lawsuit, which was filed Aug. 30 in Los Angeles Superior Court.

“We feel it is an attempt by the MTA’s outside counsel to rewrite the terms of insurance and avoid the insured’s obligations,” he said.

Nolan said the Menlo Park-based commercial insurance firm, which currently provides coverage for San Francisco’s rail and airport construction, intends to file a counterclaim against the MTA within the month.

Casselman said the MTA had paid Argonaut more than $60 million in premiums since 1986 to insure both the public agency and its rail construction contractors.

In the case of the sinkage of sections of Hollywood Boulevard above subway tunneling in 1994, the suit asserts that Argonaut failed to quickly or thoroughly investigate an estimated $1 billion in claims.

The attorney said that when transit agency officials began to examine claims along Hollywood Boulevard, “we began to realize what game Argonaut had been playing.”

Casselman said the agency discovered that the firm was charging for deductibles it could not document, overcharged for adjusters and investigators and refused to fulfill its obligation to pay for the MTA’s legal defense in several cases.

The suit also claims that Argonaut refused to hire qualified adjusters, and failed to pay for the MTA to fully investigate its liability in the Hollywood incident.

Casselman said that the agency itself paid for experts who determined that leaky pipes beneath buildings lining Hollywood Boulevard were responsible for the soil conditions that led to the sinking of the street above subway tunneling machines.

In addition, the suit alleges that Argonaut failed to treat the MTA, its lawyers and experts fairly, adding that the “individuals employed at the very highest levels of the firm” carried out “personal vendettas.”

Another key component of the suit is a claim that Argonaut in December told the MTA that it intended to cancel its insurance Jan. 30 unless the transit agency agreed to pay higher premiums and accept reduced coverage.

The suit asserts that Argonaut then declined to open its book of claims to the MTA so that the agency could fully inform a potential new insurer and replace the coverage. The suit says the MTA eventually agreed to Argonaut’s demands and then was “shocked” when the insurer proceeded to cancel the policy anyway.

“After extorting the higher cost, with lesser protection . . . defendant then breached its promise to continue coverage by issuing an authorized and devastating notice of cancellation,” the suit says.

The lawsuit says the cancellation forced the MTA to buy a type of insurance that left the agency potentially liable for millions of dollars more in payments to damaged property owners than it had been previously.

“Plaintiff is now exposed to an unknown number of uninsured claims,” the suit contends.

Added Casselman on Thursday: “Argonaut attempted to walk away from coverage they promised to provide. They kept the money and left us hanging.”

Casselman said the MTA’s deductible with its new insurer, AIG Insurance Co., is being negotiated. He said the new policy leaves the MTA exposed for an amount more than double the amount for which it was liable under the Argonaut policy, or at least $2 million per claim.

A source at Argonaut who declined to be identified said the firm finds it “paradoxical” that the MTA on the one hand alleges the mishandling of claims and on the other is suing the firm for cancellation of its policy. “That doesn’t make any sense, it’s crazy,” the source said.

Nolan, the firm’s counsel, said Argonaut would not refute the MTA’s case point by point until it filed its counterclaim, but added:

“We did do a good job, and we believe that independent studies commissioned by the MTA prove that out.”