American Eagle Insurance Co., the flagship of the American Eagle Group and the erstwhile official insurance company of the AOPA, slipped gurgling beneath the waves as it went into receivership late last year. The company had been under the conservatorship of the Texas state insurance department since the preceding July.
Most of its customers have found shelter elsewhere-either with other companies or through fronting arrangements with other underwriters. The large unanswered question, however, is whether Eagle will be able to pay claims relating to incurred-but-not-filed losses. We suspect that in this regard, some customers may come up short.
American Eagle and predecessor, A, had been in business since 1962. When American Eagle come onto the scene in the early 1990s, the company began an ambitious campaign to automate its underwriting.
Further, the company continued to expand into non-aviation insurance, including coverage for contractors and long haul truckers, enjoying an A.M. Best rating of A-.
By the end of 1995, however, the company lost $13.2 million on revenues of $108 million. In March, Best downgraded the companys rating to B, just two months after American Eagle AOPAs carrier. For an aviation insurer, a B rating is a real problem.
Most national brokers of any size have in-house rules that forbid them from dealing with companies whose ratings fall below the A range and some aircraft lenders wont write loads to buyers who are using B-rated insurance.
In 1996, things got worse. Eagles scrambled to provide customers with the security of the A rating, arranging to have policies written by A-rated companies, which it then in-insured.
In some states, Eagle paid A-rated insurers and reinsurers to provide assumption of liability endorsements or ALEs. There were several problems with the ALEs: In some states-New York, Texas and Oregon-ALEs arent legal. In others, ALEs are subject to lengthy approval by state insurance regulators.
While Eagle insisted it had A-rated security, concern among brokers and customers grew. Policyholders were put in the position of having to wait for Eagle to go broke before filing claims with the guarantor. By the second half of 1996, American Eagle agents heard rumors of a strategic alliance which infuse capital to restore the A-rating.
Despite rumors of unprecedented losses during 1996, the deal took place on December 31, before the results of the fourth quarter were known. American Financial Group and its subsidiary, Great American Insurance, purchased stock in American Eagle and put two directors on Eagles board. This put Great American in the position of owning almost half of Eagles stock.
Were sure Great American was shocked when fourth quarter numbers showed net losses of up to $45 million, about 144 percent of the premium collected.
Great American quickly removed its two board members and walked away from its agreement to provide insurance assets to Eagle.
Yet Eagle continued to assure its customers that most of the losses came from discontinued lines of insurance and that the core aviation business remained profitable. Less than a week later, Best downgraded Eagle to D, the insurance equivalent of passing the 100-fathom line on the way to the bottom.
Two weeks later, Eagle brokers were stunned to learn that Great American would buy the aviation division. This deal provided for the reinsurance of all current policies by Great American and assumption of liability for all policies issued by Eagle since 1993. New policies would be written on Great American policy forms or on Eagle forms reinsured by Great American.
Just when brokers began to think they had found a life boat, the deal threatened to unravel. By last summer, American Eagle Insurance had been voluntarily placed in conservatorship with the state of Texas. Great American began to negotiate with the state, rather than the holding company which owned Eagle.
The industry rumor was that Great American had only a vague understanding of prior losses and wished to limit its liability. In any case, early this year, brokers learned that Great American would pick up Eagles liability beginning on April 1, 1997 on all policies in force or renewing after that date. Losses prior to that date would remain Eagles responsibility.
The multi-million dollar question is this: Does American Eagle have enough money to pay its outstanding claims? The answer wont come quickly. An aggravating factor is the so-called incurred-but-not-reported claims. Often claims take years to surface, especially in product liability cases which may drag along for months or years.
Another difficulty is knowing just how large liability claims will ultimately be. This often depends on the result of a trial or settlement, whose outcome is years away. It seems likely that many of the repair facilities insured by Eagle have problems that they dont even know about yet and will probably be on their own.
There are also some high-profile claims hanging, including the helicopter accident involving Christie Brinkley in 1994. According to a spokesman for the Texas Department of Insurance, Eagle had 1084 pending claims as of September 30, 1997. How many of these belong to Eagle and how many belong to Great American remains to be seen.
Texas Steps In
For those who get stuck, the Texas Property and Casualty Insurance Guaranty Association may be the only hope. The association is supported by insurers doing business in Texas, but the most it will pay is $300,000 per claim.
Meanwhile, the AOPA insurance program is available either through independent brokers or through its subsidiary, AOPA Insurance Inc., a joint venture of the association and insurance colossus AON Corp. Many independent brokers mailed warning letters to their clients when the breaking-up noises started and moved as many of their clients as possible to other companies.
While AOPA sent notices after the last two Eagle downgrades, they hung on grimly and hoped for the best. None of the brokers we spoke with who placed coverage through AOPA received anything in writing before April of 1997 backing up Eagles claims that Great American was reinsuring all of its policies.
The AOPA program is now underwritten by Great American and is safely back to A-rated security. While AOPA insureds whose policies were in effect or renewed on or after April 1, 1997 are in the clear from that date forward, its almost certain that some members-and many others-will find themselves without coverage to pay for old claims.
In one case, an association member and aircraft owner discovered damage that had been caused months earlier by the local FBO. When he investigated, he learned that the operator was insured by Eagle, which was in receivership. When he called his broker, he was amazed to learn that-yup-his insurer was also in receivership.
While Eagles management was eventually able to patch together A-rated security in most states through a combination of fronting arrangements and ALEs, there are certain time periods and certain states where American Eagle was the first and only line of defense.
In some cases, that may be no defense at all.
-by Jon Doolittle
Jon Doolittle is an Aviation Consumer contributing editor and owner of Sutton James Insurance in Hartford.