The Market Review Committee of Commonwealth Automobile Reinsurers (“CAR”) has scheduled for May 11, 2016, an appeal by the Rapo & Jepsen Insurance Services, Inc. (“Rapo & Jepsen”) against Arbella Mutual Insurance Company (“Arbella”). Rapo & Jepsen has appealed the termination of the agency’s commercial automobile exclusive representative producer appointment.
Allegations of “facilitating premium fraud” through sham corporations to get commercial rate for foreign licensed drivers
Rapo & Jepsen has had an appointment to Arbella under CAR’s servicing carrier program since 2011. During the five years that the appointment has been in force Rapo & Jepsen has stated that the agency has placed over six thousand commercial automobile insurance policies with Arbella under its exclusive representative contract.
In response, Arbella has now stated that many of these six thousand commercial risks placed by Rapo & Jepsen should never have been written because:
- Rapo & Jepsen us[ed] its CAR Commercial Appointment to submit applications for commercial auto insurance on behalf of foreign operators who are not using their vehicles for commercial purposes;
- Rapo & Jepsen has been engaged in an ongoing practice of making corporate filings on behalf of such individual applicants for the purpose of enabling the applicants to obtain commercial automobile insurance;
- Rapo & Jepsen has been creating business trusts for the purpose of enabling such individual applicants to obtain commercial automobile insurance;
- Rapo & Jepsen’s applicants were not engaged in any commercial activity and were not using their vehicles for commercial purposes.
Arbella also stated that, “…Rapo & Jepsen facilitated premium fraud by enabling non-commercial risks to avoid paying the higher premium that they would have been charged, had they been rated and insured in the private passenger market.”
Cancellation by Arbella alleges improper use of commercial policies
On March 2, 2016, Arbella hand-delivered a letter to Rapo & Jepsen notifying the agency that Arbella was terminating the agency’s exclusive representative producer commercial lines appointment. The notice of termination first listed the legal language of CAR’s Rule 14(B) and stated, without asserting any facts, that the agency had violated nine separate sub-parts of the Rule.
Arbella does assert in the termination letter that it advised Rapo & Jepsen of “the improper use of the CAR commercial appointment” and “provided [Rapo & Jepsen] with ample opportunity to cease the practice. However, instead the practice only intensified.”
The “intensified” practice, according to Arbella, was that the agency expanded its actions so that, “the scheme included not only holders of foreign licenses, but also Massachusetts licensed individuals who would have paid substantially more in the private passenger market, but who obtained commercial policies for non-commercial private passenger-type vehicles and thereby avoided experience rating and evaded premium.”
Arbella ended its listing of Rapo & Jepsen’s alleged course of conduct stating that the agency’s actions:
- involved the facilitation of premium fraud, the failure to verify the information provided by the applicant, including rating and licensing data;
- the failure to cooperate with Arbella in its attempt to obtain accurate rating information;
- the failure to comply with written procedures supplied by Arbella for requesting coverage;
- the failure to notify Arbella of suspected fraud;
- the failure to cooperate with Arbella during investigations;
- the failure to order coverage for which the insured is eligible;
- the failure to conduct monetary transactions with the insured as required by the Rules of Operation and [Rapo & Jepsen’s] contract; and
- the failure to retain the necessary documentation of transactions in accordance with the CAR Manual of Administrative Procedures.
Rapo & Jepsen appeals cancellation to CAR denying Arbella’s allegations
For its part, Rapo & Jepsen appealed Arbella’s termination notice to CAR’s Market Review Committee on April 1, 2016. Rapo & Jepsen’s Request for Review under CAR Rule 20 attached a copy of Arbella’s termination letter with the agency’s rebuttals.
The points in Rapo & Jepsen’s Request for Review rejected Arbella’s claims stating:
- that the agency never took part in any fraudulent activity in connection with the business of motor vehicle insurance;
- that under CAR Rule 13B(5)(b) Arbella had a duty to “verify that information contained in the application for insurance is accurate as to classification, garaging, discounts, credits, vehicle use, vehicle description and experience for those risks eligible for the experience rated;”
- that in each case Arbella underwriters accepted the risks and never expressed any concern that the agency was “engaging in any fraudulent activity;”
- that no one else at Arbella ever communicated to the agency any such concern.
In its rebuttal, the agency asserted that it repeatedly “requested guidance from Arbella” ,but Arbella never provided any procedural manuals or written directions to the agency whatsoever. The agency also asserted that the simple reason it never reported any suspected fraud was because it never found any indications that any fraud was occurring.
Rapo & Jepsen also argued that it does verify information provided by insureds, who in many cases are foreigners primarily from Brazil, and who speak with agency personnel in the customer’s native languages. The agency asserts that it has written over 6,000 commercial policies in the past 5 years and that it made a good-faith effort to assure that the information underlying a policy was accurate.
Rapo & Jepsen providing insureds “standard forms for organization of business entities”
Rapo & Jepsen did attach to its Request for Review its “business authorization” form whereby the proposed insured authorized Rapo & Jepsen to prepare articles of organization, an operating agreement for an LLC [limited liability company], preparation of a partnership agreement, preparation of dba documents, and the filing of organizational documents for a fee.
The fees charged were not stated on the form. The form did indicate, however, that the signatory understood that the agency was not providing legal services nor advising on matters of law, but only providing “standard forms for organization of business entities.”
Interestingly, the form provides for an indemnity by the customer to the agency “to hold the agency ‘harmless’ from any liability which may arise as a result of [Rapo & Jepsen] providing the accommodations to customer offered hereunder.”
Rapo & Jepsen internal audit allegedly finds irregularities in an employee’s practices
In a supplementary letter to CAR, Arbella, and the Commissioner of Insurance dated April 12, 2016, the president of Rapo & Jepsen, John J. Rapo, advised that after receiving Arbella’ notice of termination he had ordered an internal audit of the agency.
The day after informing his staff of the audit, a long-term employee, Daniel Bertolazzi (aka DeLima), failed to appear for work and, according to Mr. Rapo, “Rumor has it that he suddenly returned to his native country, Brazil…”
According to Mr. Rapo, Mr. Bertolazzi was a trusted employee for 14 years who had a relationship with finance companies and car dealerships as sources of business. According to Mr. Rapo, however, the internal audit uncovered that many of the policies written by Mr. Bertolazzi were not entered into the agency management system, but had been entered in a private cloud account. Additionally, the audit allegedly discovered that many applications had never been signed, requisite documentation was missing and that Mr. Bertolazzi may have placed coverage for customers for which they may not have been eligible.
The three-page single-spaced letter covered much of the same ground as the original attachment to Rapo & Jepsen’s Request for Review to CAR along with asserting that Mr. Rapo was confident that no one else at Rapo & Jepsen “was participating in these activities or aware of Mr. Bertolazzi’s practices.”
Arbella’s response double downs on fraud allegations
On April 28, 2016, Attorney Roberta Fitzpatrick, of Arbella, responded to the agency’s allegations and Mr. Rapo’s subsequent letter relating to Rapo & Jepsen’s internal audit.
Attorney Fitzpatrick’s letter asserts that the background of the termination began shortly after the assignment to Arbella of the Rapo & Jepsen agency. Arbella began to notice that “an unusually large percentage” of the accounts were sole proprietors who were filing for commercial policies under “doing business as” certificates for private passenger-type vehicles.
Attorney Fitzpatrick asserts that Arbella had several meetings and communications with the principals of the agency in 2011 setting out the guidelines and expectations and expressing concerns over “the unusual number of non-Massachusetts licensed applicants” insuring a single private passenger vehicle under a commercial policy.”
According to Attorney Fitzpatrick, these early concerns were sparked because “…at that time, Arbella determined that more than 80% of the [Rapo & Jepsen] policies were sole proprietors insuring single private passenger-type vehicles.” This percentage contrasted sharply with the average non‑fleet private passenger-type vehicles and cars commercial auto business totaling only 12.5% on average.
In contrast to the assertions of Rapo & Jepsen, Attorney Fitzpatrick states in her letter that Arbella had interviewed Rapo & Jepsen’s applicants for insurance and determined that a number of the applicants were not using their vehicles for commercial activity as required by the rating rules. Arbella informed the agency of its findings and specifically advised the agency that:
- Many of the applicants for insurance were foreign licensed drivers, applying under the guise of small businesses, who had been in Massachusetts for more than one year, were required to obtain a Massachusetts driver’s license and would not have been eligible for a Massachusetts private passenger policy;
- Some of the operators listed on the policy had no connection to the applicants;
- Rapo & Jepsen was involved in assisting applicants in the creation of businesses for the purpose of obtaining commercial insurance for applicants who were ineligible for such insurance.
Attorney Fitzpatrick’s letter also states that Arbella’s Special Investigation Unit, “undertook an extensive investigation” into the agency’s accounts in light of the patterns that Arbella had observed regarding new business commercial policy submissions:
…specifically in the face of new Registry Requirements requiring sole proprietors to provide a Social Security number in order to register a motor vehicle, [Rapo & Jepsen] implemented a scheme whereby the agency began creating Massachusetts shell corporations for non-Massachusetts licensed drivers who are unable to register a vehicle in their individual names.
The letter goes on to state that Arbella alleges that these corporations were being formed by the agency at the time the persons were applying for insurance and that the agency was also setting up other types of business entities [Limited liability companies and Partnerships] on behalf of such ineligible individuals for the sole purpose of obtaining commercial automobile insurance.
The agency’s scheme, according to the letter, allegedly involved the obtaining of tax employer identification numbers for the corporation and that thereby only needed to provide the Tax ID number to register the vehicle in the corporate name and avoiding the need for Social Security number.
The letter also states that Arbella’s SIU investigator had interviewed witnesses and verified that:
(1) the applicants were not involved in the commercial enterprises identified in the corporate filings and other business documents;
(2) some applicants did not know that Rapo & Jepsen had established a business for them and
(3) those applicants that understood that Rapo & Jepsen was creating a business for them were told by Rapo & Jepsen that this was the only way they could obtain insurance.
Arbella claims Rapo & Jepsen orchestrated scheme to create sham business entities to obtain commercial policies for ineligible insureds
The letter also asserted that Arbella had given warnings and obtained an agreement from Rapo & Jepsen not to assist applicants in this manner and that the warnings had gone unheeded.
According to the letter:
- Rapo & Jepsen not only facilitated a scheme that allowed ineligible persons to obtain access to CAR commercial insurance through the improper use of Rapo & Jepsen’s limited servicing carrier appointment, but Rapo & Jepsen actually orchestrated the scheme;
- Rapo & Jepsen advised and encouraged the applicants to establish businesses for the sole purpose of obtaining insurance;
- Rapo & Jepsen charged the applicants fees for the creation of the corporation, charged the applicants fees for the filing of the corporate documents with the Secretary of State;
- Rapo & Jepsen obtained Tax EIN [employer identification] numbers for the applicants and provided other indicia of a business — upon information and belief, in some circumstances, Rapo & Jepsen would actually create a computer generated business card for the applicant’s sham company;
- After creating and filing the corporate documents for the applicant, Rapo & Jepsen would send the application for commercial insurance to Arbella with a copy of the corporate filing, a copy of the Tax EIN Notice and an image of a business card, all to induce Arbella into believing that the application was for a legitimate commercial enterprise.
Based on these alleged facts, the letter states, “the evidence is that Rapo & Jepsen orchestrated the creation of sham corporations, filed false corporate documents, and may have orchestrated the signing of forms, solely for the purpose of creating paper trail to defraud Arbella into accepting new business applications, irrespective of whether the applicants were using insured vehicles for commercial purposes.”
Finally, the letter ends stating:
In short, Rapo & Jepsen did not simply facilitate fraud by failing to validate information concerning an applicant’s personal business use of a vehicle. Rapo & Jepsen actively engaged in the fraud as detailed herein. Rapo & Jepsen charged these applicants thousands of dollars in fees and collected hundreds of thousands of dollars in commissions by improperly binding commercial coverage through the Agency’s limited servicing carrier appointment.
Hearing scheduled for May 11, 2016
The appeal of Rapo & Jepsen will be heard on May 11. Arbella has stated that it will be filing backup materials on its investigation results with CAR for the hearing.
Agency Checklists will update its readers on the hearing and on the additional evidence that Arbella has stated that it will file substantiating its claims against Rapo & Jepsen.