On May 11, 2016, Commonwealth Automobile Reinsurers’ Market Review Committee began hearing the appeal of the Rapo & Jepsen Agency against the cancellation by Arbella Protection Insurance Company (“Arbella”). After a lengthy hearing at CAR and a ruling against Rapo & Jepsen’s claim that the cancellation notice from Arbella was invalid, the Committee adjourned until June 22, with leave for both Rapo & Jepsen and Arbella to submit additional evidence on the matter.
Arbella presents its case of agency fraud to support its cancellation
At the request of the Committee’s Chairman, Joseph Leahy, Arbella presented its case arguing that the agency had engaged in systematic fraud in establishing sham businesses for ineligible or improper insureds. This resulted in these insureds being able to purchase commercial insurance policies at a substantial discount.
The Committee heard initial presentations by Arbella’s counsel, Roberta Fitzpatrick; Arbella’s specially retained fraud counsel, Frances Robinson; Arbella’s Special Investigation Unit (“SIU”) investigator, Edward Spellman; and an outside investigator, Mr. Frank Hart, a former agent of the Bureau of Alcohol, Tobacco and Firearms (“ATF”). Summaries of their presentations are outlined below.
Arbella’s testimony involved the history of the relationship between Arbella and Rapo & Jepsen, the scope and depth of Arbella’s investigation into the Rapo & Jepsen’s agency practices which included establishing corporations and trusts for foreign licensed operators and operators with no licenses; and the fifteen in-depth investigations that Arbella submitted to the Committee in early May. See Agency Checklists’ May 10, 2016 Article, “Arbella Filing Seeks To Prove Its Claim Of Premium Fraud Against Rapo & Jepsen.”
Rapo & Jepsen argues Arbella’s cancellation not valid and with lack of opportunity to rebut Arbella’s claims
Following Arbella’s lengthy initial presentation, counsel for Rapo & Jepsen, Joshua Lewin, of the firm of Bowditch and Dewey, presented the agency’s arguments. First, he argued that the notice of cancellation did not comply with the 2014 amendments to the CAR Manual of Administrative Procedures following the Division of Insurance decision in the Calianos Agency appeal. For more information on this decision, see Agency Checklists’ December 15, 2013 Article, “In A 46-Page Decision, Mass. DOI Reverses Calianos Agency’s ERP Cancellation and ARP Decertification by CAR.”
Second, Attorney Lewin represented to the Committee that because of CAR’s five-day rule on submitting documents, Arbella had effectively “sandbagged” the agency by dumping 461 pages of documents on Rapo & Jepsen without allowing the agency adequate time to investigate and respond. Attorney Lewin did, however, discuss several insureds cited by Arbella as having no knowledge that they had a corporation. According to Attorney Lewin, documents produced from the agency’s files, and never requested by Arbella, showed that one or more of these insureds questioned by Arbella’s fraud investigators may well have just told the investigators what they wanted to hear. A summary of Attorney Lewin’s argument, excluding the notice issue, is outlined below.
Committee rules on adequacy of cancellation notice first.
During the course of Attorney Lewin’s arguments regarding the Calianos amendments to the Manual of Administrative Procedures, the Committee took up the issue of the adequacy of Arbella’s notice. The amended cancellation procedure states:
In order to adequately advise the ERP [Exclusive Representative Producer] of the termination and satisfy due process, a notice of termination of an ERP contract must contain sufficient facts and supporting documentation to establish the basis for the termination.
The Arbella cancellation notice did not contain any facts or supporting documentation. All of Arbella’s supporting documentation was supplied long after the cancellation issued. However, the main issue in the argument focused on whether another provision of the cancellation procedures applied that states: “At a minimum, a notice of termination of an ERP contract issued by a Servicing Carrier must:
* * *
(2) State the specific CAR Rule provision(s) that constitute the basis for the termination.”
After a discussion on the matter, the Committee voted that the notice of cancellation satisfied the procedural rules of CAR, since the notice did specify the CAR Rule provisions that constituted the basis for the termination.
Committee will reconvene on June 22 and will allow Rapo & Jepsen to submit rebuttal documents on Arbella’s claims
After ruling on the validity of the cancellation notice, the Committee also responded to Rapo & Jepsen’s request to conduct its own investigation of Arbella’s documentary submission compiled over literally years of investigation.
Upon determination of these issues, the Committee adjourned the hearing to reconvene on June 22, at 10:30 A.M. The Committee also allowed Rapo & Jepsen until June 10 to submit any rebuttal documents in response to the 461 pages of documents that Arbella had submitted for the May 11 hearing.
The Committee also gave permission to Arbella to respond to any submissions by the agency by June 16.
Summary of Attorney Roberta Fitzpatrick for Arbella at hearing
The head of litigation for Arbella, Attorney Roberta Fitzpatrick, presented to the Committee an in-depth history of the relationship between Rapo & Jepsen and Arbella, since the agency’s assignment to the insurer as its Commercial Servicing Carrier in 2011.
Attorney Fitzpatrick indicated that almost immediately Arbella noticed that the mix of business received from Rapo & Jepsen, under the agency’s commercial limited servicing carrier agreement, had a skew towards single vehicle policies.
Arbella found that eighty (80%) percent of the agency’s commercial placements were private passenger- type single operated vehicles. In comparison, the normal ratio in the residual market, according to Attorney Fitzpatrick, was twelve (12%) percent. In addition to this unusual percentage, Arbella also noticed that a significant percentage of these same submissions had foreign licensed operators.
Back in 2012, Arbella met with Mr. Rapo and advised him that the company was very concerned about this ratio and the predominance of foreign licensed operators in the submissions. Arbella claims that it had three meetings with Mr. Rapo in 2012 which finally ended in an agreement, according to Arbella, in which Rapo & Jepsen would only place “legitimate businesses.”
In the later part of 2012, Arbella began non-renewing a number of the risks placed with Arbella by Rapo & Jepsen. These non-renewals were based upon material representations by insureds as well as interviews with insureds where they allegedly stated that they did not have any business but, in fact, had been told by the agency that “this is what they had to do.”
The agency also pressed Arbella on its non-renewal notices. In decrying Arbella’s actions, the agency claimed that its prior Servicing Carrier, Pilgrim Insurance, had renewed this book of business for a number of years and that Arbella’s actions in cancelling this book amounted to “discrimination” and “redlining.”
After Arbella began cancelling these insureds, however, it says these same insured contacted Arbella and claimed that contrary to what they had previously said, they did, in fact, have a small business “on the side.” Arbella, now unsure of the legal situation of these insureds as commercial risks and concerned if the agency were involved in counseling these insureds to commit fraud, agreed to reinstate all the cancelled and non-renewed insureds, according to Attorney Fitzpatrick.
After agreeing to reinstate each and every application that had been non-renewed so as to not disrupt the existing business of the agency, Arbella met with the agency’s president, John Rapo, and laid out its rules on future commercial risks. This meeting resulted in an October 4, 2012 letter memorializing the discussions between the parties. It stated that Rapo & Jepsen would not place anyone in the commercial pool who was otherwise ineligible and that the agency would only place with Arbella insureds “genuinely engaged in commercial business.”
As a result, in 2013, there was in fact a drop in new business from the agency, according to Attorney Fitzpatrick. At this time, the Registry was also working on new regulations that would not allow persons to register vehicles under a sole proprietorship or d/b/a certificate, unless they had a Social Security number.
In 2014, after the new Registry regulations requiring Social Security numbers for registering went into effect, Arbella again began to see an uptick in submissions from the agency. This uptick in new business from the agency included people applying for insurance based upon an employer identification number issued by the Internal Revenue Service to businesses. In many cases, these applications were filed by corporations rather than by individuals.
In response, Arbella began to investigate these corporations and reported the matter to the Insurance Fraud Bureau of Massachusetts (“IFB”). According to Attorney Fitzpatrick, there is an ongoing investigation that has included the active participation of Arbella’s SIU investigation and the IFB.
Attorney Fitzpatrick then previewed some of the testimony to be given by Arbella’s investigator. Without going into great detail, the preview stated that in investigating the agency submissions, Arbella found that, in many cases, the agency charged, in addition to fees for forming corporations and trusts, other fees, such as a $100.00 charge for an automobile motor club or a $100.00 administrative fee. Arbella investigators allegedly found that insureds generally had no idea what the fees were or why they were being charged.
Arbella said that it also has received calls from legal firms handling immigration issues for some Rapo & Jepsen insureds. In these instances, the legal firms said these insureds had had corporations set up by Rapo & Jepsen without their knowledge and were now having an issue because they had never filed tax returns.
As view by Arbella asserted Attorney Fitzpatrick,
This is not an agency that accepted applicants who were trying to dupe the agency into believing they were businesses. This is an agency that duped the applicants and duped Arbella. The applicants would show up with lots of cash. They would leave with their vehicle registered, insured and a new business and no money.”
Before turning the lectern over to Arbella’s other witness, Attorney Fitzpatrick concluded by saying:
…Arbella believes that root of the problem is the agency and that the only way to resolve this is to terminate the agency and send a clear directive that this type of active fraud within an agency is not going to be tolerated.”
Specially retained fraud counsel coordinated Arbella’s investigation of Rapo & Jepsen
The next person to present a statement for Arbella was Attorney Frances L. Robinson, of the law firm of Davis, Robinson & Molloy, LLP. Ms. Robinson had been specially retained by the board of directors of Arbella to act as fraud counsel for the Rapo & Jepsen investigation. Attorney Robinson coordinated the investigation and oversaw the interviewing of almost 200 insureds and the activities of two fraud investigators, Edward Spellman, of Arbella and Frank Hart, a private investigator.
She indicated that the investigation showed that there was not one particular employee involved, but that each of the Rapo & Jepsen locations appeared to have an employee whose duties included the setting up of corporations, trusts and partnerships for those persons who needed insurance, but were otherwise ineligible.
Attorney Robinson indicated that the investigators had begun their examination of the agency’s practices by comparing the dates of incorporation for Rapo & Jepsen’s insureds. That is when an insured had set up their corporations vis-à-vis with the date of the insured’s insurance application. She advised that in thousands of cases the dates were exactly the same.
Attorney Robinson also stated to the Committee: “The fifteen examples before you are a fraction, but are representative of what was repeated over and over again.”
Arbella SIU Investigator relates statements made by specific insureds about Rapo & Jepsen’s actions
Arbella SIU investigator, Edward Spellman, next gave the Committee details on certain people who were listed on Arbella’s submission of the fifteen specific insureds placed by Rapo & Jepsen as commercial risks.
One of these insureds was a Beatrice Flores, originally from El Salvador. Ms. Flores contacted Arbella regarding her commercial policy and the corporation through which she supposedly operated her florist business. In sending her materials to Arbella, she also carbon copied the Internal Revenue Service as well, notifying them about the fact that she had no corporation, no business, and, therefore, no obligation to file any taxes.
Ms. Flores originally placed her insurance on June 12, 2014 through the Everett office of Rapo & Jepsen. When Mr. Spellman visited her and recorded her statement, she clearly advised the investigator that she had no such business and knew nothing about any florist business. She did note, however, that on the business card that Arbella had in its file, it did have her correct phone number but an email address that was not her own.
As a result of the interview with the Arbella investigator, Ms. Flores, submitted her own an affidavit swearing to the fact that she had no known florist business and voluntarily cancelled her policy with Arbella. She then obtained a proper policy through Commerce Insurance.
Investigator Spellman volunteered that the Commerce policy when properly rated cost $2,596.00. In comparison, Ms. Flores, in placing her policy through Rapo & Jepsen, received an Arbella commercial policy with a premium of $850.00, plus the additional fees Rapo & Jepsen had charged for setting up the corporation that she had now repudiated as being bogus.
In his presentation at CAR, Investigator Spellman also discussed the Lazo Trust. The investigation of Mr. Lazo involved a policy placed through the Framingham office of Rapo & Jepsen and which involved the establishment of a voluntary trust. When interviewed by Arbella, Mr. Lazo claimed that he had no idea what a trust was and that he was a worker who did day work for cash. He had no Social Security number, but said that his vehicle was a family vehicle and that Rapo & Jepsen never had permission from him to set up a trust.
Investigator Spellman indicated that Mr. Lazo had paid $1,090.00 to Rapo & Jepsen to register and insure his vehicle. From that sum, he had paid from a $100.00 administrative fee, a $300.00 trust fee and registration fee of $478.00. There was also a $50.00 runner fee, but the down payment to Arbella was $162.00, and there was no accounting for the discrepancy between the registration fee charged and the actual registration paid of $353.25.
Arbella, in rating Mr. Lazo’s vehicle, found that the private passenger rate for his vehicle would have been over $4,000.00, according to Investigator Spellman.
The investigator also cited a third example involving one Camilla Noguera. Ms. Noguera came to the investigator as part of a claims investigation. She had a Mass license and had a corporation alleging that she operated a beauty salon. In reality, however, Ms. Noguera was a 19-year-old operator with limited experience and no license for cosmetology. The rating of her policy showed that had the policy been properly placed, the cost would have been $5,788.00.
Mr. Spellman confirmed that in the almost 200 investigations Arbella had conducted, in almost all cases there was no underlying legitimate businesses in existence for these supposed commercial risks placed by the agency through corporations or trusts set up by Rapo & Jepsen.
Statement of former ATF investigator, Frank Hart
The final Arbella witness was Mr. Frank Hart, a private investigator and former ATF Agent. Mr. Hart, who has his own investigating company, was retained by Arbella in December 2013 to assist in the Rapo & Jepsen investigation.
Mr. Hart confirmed that the stories repeated over and over again during the course of the almost 200 investigations followed a clear pattern: there were few, if any, legitimate businesses; the insureds knew nothing about any businesses; and the insureds were unaware of how their vehicles had been insured as corporations or trusts.
Additionally, for those insured whose policies were with trusts, Mr. Hart said that invariably these insureds had no idea what a trust was or that they were named as trustees on a trust instrument.
Mr. Hart also talked about several individual investigations. However, his main statement related to the meeting between Rapo & Jepsen’s president, John Rapo and Arbella that took place on January 20, 2016. He indicated that Mr. Rapo had stated in the course of the meeting that everybody knows what is happening and that the system is “broke”. He also stated that he knows of 20 others agencies doing the same thing that he is doing.
Mr. Rapo’s position was that if people come into the agency and state they have a business “we don’t question them.”
After Mr. Hart finished, Attorney Fitzpatrick again summarized Arbella’s position before the attorney for Rapo & Jepsen made his presentation.
Joshua Lewin, of Bowditch and Dewey, argues for dismissal and questions Arbella’s timing
The attorney for Rapo & Jepsen began his presentation by arguing strenuously that Arbella had not followed the CAR rules regarding notice of termination and that under the CAR rules the cancellation should be overturned. As stated earlier, after some discussion the Committee finally voted to find the form of the notice of cancellation valid.
Attorney Lewin also argued that due to the inadequate nature of the notice which only specified the violations without any information, it did not give the agency adequate time to present any reasonable defense in response to Arbella dropping a substantial amount of information on the agency five days before the hearing. He argued that for this reason alone, the notice requirement was even more important and should be upheld by the Committee as being insufficient.
Attorney Lewin did not rest his arguments entirely on this fact, but pointed out that in substance, Arbella has come forth with fifteen policies out of 10,000 policies in force to say that the agency should be terminated. These fifteen policies amounted to only 0.0015% of the policies that Rapo & Jepsen had placed with Arbella. He found this sample to be “woefully inadequate” and the fact that Arbella talks about hundreds of other investigations was simply not substantial, and is not even in the record properly as part of the termination.
He characterized the whole proceeding by Arbella as “sandbagging.” The Attorney also indicated that even though the agency had inadequate time because of Arbella’s late notice to investigate, the agency could likely prove that some of the fifteen insureds may well have been lying to Arbella.
He urged the Committee to look at Mr. Messias, No. 4 on Arbella’s list, as an example.
Mr. Messias told Arbella that he did not know he had a corporation and that he did not have a license. However, in 2015, Mr. Messias purchased a vehicle of which Rapo & Jepsen had nothing to do with. In applying for financing to purchase the vehicle, however, Mr. Messias used the name of his corporation on the financing documents. He then registered the new vehicle in the name of the corporation and signed the registration in the name of the corporation.
Although the SIU investigation from Arbella indicated that Mr. Messias stated that he never had a license, Attorney Lewin advised the Committee that Mr. Messias did, in fact, have a license and the agency has a copy of that license in its files.
Attorney Lewin also commented on another person Arbella presented as not knowing anything about his corporation.
This person, Manual Ventura, number 5 on Arbella’s list, had reported seven losses between June of 2014, and December of 2015. Mr. Ventura was being investigated by Arbella’s SIU for fraud. He too had purchased vehicles in the name of his corporation and financed his vehicles in the name of his corporation.
As Attorney Lewin intimated, why would a person like this, under investigation for criminal conduct, tell the truth to fraud investigators from the insurance company that is trying to possibly have him prosecuted.
Attorney Lewin also discussed two additional insureds on Arbella’s list and the inaccuracies of what these people told Arbella.
The final example that Attorney Lewin gave, however, was the MIG Company which was listed as Number 3, on Arbella’s list. According to Arbella, Mr. Chaves, the owner of MIG Corporation, said that the corporation was “for the purpose of getting auto insurance” and that “he has never owned a business of any kind.”
Attorney Lewin advised the Committee that this particular individual had not only a commercial auto policy with Rapo & Jepsen in the name of his corporation, but that for the last three or four years he had had a general liability policy and workers’ compensation policy for his corporation. Also, in the same time period Rapo & Jepsen had issued numerous certificates of insurance for this person. In addition, Mr. Chaves has filed annual reports with the Secretary of State for the last three years for his supposedly unknown corporation.
The point that Attorney Lewin stressed was that most of these people are quite concerned about being interviewed by an investigator, since many are from countries in which an investigator is almost always a police investigator. From experience, they know that they may be abused or punished if they do not go along with what the police officer says. In this case, he suggested, a number of these people, perhaps with reason, were quite willing to say whatever the SIU investigators indicated as what they wanted to hear.
Committee voted on validity of notice and adjourned after allowing further submissions
After Attorney Lewin’s statement, the Committee allowed for further rebuttals, but eventually elected to put Rapo & Jepsen’s claim that the cancellation was invalid to a vote.
After the Committee denied Rapo & Jepsen’s request to invalidate the cancellation notice, the Committee allowed Rapo & Jepsen additional time to file documents in response to Arbella’s filing and to allow Arbella additional time to respond.
Agency Checklist will keep its readers updated on this second day of hearing
Agency Checklists plans to report on the hearing adjourned until June 22, and will also report on any additional filings submitted by either Rapo & Jepsen or Arbella.