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Insurance
disputes hit
Bishop trust

Companies threaten to reject
coverage if the estate takes
a role in a suit against
former trustees

By Rick Daysog
Star-Bulletin

The insurance companies for the Kamehameha Schools are threatening to reject up to $75 million in coverage, in a development that could have far-reaching consequences on the litigation surrounding the $6 billion charitable trust.

In court papers filed on Friday, the estate's interim board of trustees said that Federal Insurance Co. is reserving its right to deny $25 million in coverage if the trust takes an active role in the attorney general's surcharge lawsuit against former trustees Henry Peters, Richard "Dickie" Wong, Lokelani Lindsey, Oswald Stender and Gerard Jervis.

Separately, Bermuda-based XL Insurance Co. also is reserving its right to deny $50 million in reinsurance coverage purchased by the trust's captive insurance subsidiary, P&C Insurance Co. over a dispute over warranties provided by the estate, several people close to the trust said.

The insurance is supposed to protect the estate from damages such as alleged in the state's lawsuit. In that suit, the state is trying to show that the former trustees took excessive compensation, mismanaged the Kamehameha Schools' educational programs and incurred more than $200 million in investment losses during their tenures.

Denial of the insurance coverage could mean the trust gets stuck with millions of dollars in legal costs arising from the attorney general's surcharge suit, which is set to go to trial on Sept. 18. It also could affect the size of any potential settlement in the case.

Federal Insurance, which has been paying for the legal defenses of the embattled former trustees, is taking the position that unless the former board members take part in court-mandated mediation in the surcharge proceeding, any role in that mediation effort by the current interim board could be a basis for denying coverage, the trust said.

The trust's policy with XL has a similar clause that allows the reinsurer to deny coverage for legal actions against the trust's former trustees if the Kamehameha Schools interim board actively participates in the case, the estate said.

However, XL put the trust on notice that it may pull its coverage more than two years ago, people familiar with the estate said. XL, which collected $3.9 million in premiums from the trust during the past several years, told the trust back in February 1998 that it was reserving its right to deny coverage due to an August 1997 warranty by a P&C official.

The warranty -- which is a statement by the insured customer that a certain condition or risk exists -- noted that the trust was not a subject of any significant claims.

At the time the warranty was made, the attorney general's office and the Internal Revenue Service had already launched their separate investigations of the estate's former board members while retired Judge Patrick Yim had begun his encyclopedic fact-finding investigation of the Kamehameha Schools.

XL is a unit of Hamilton, Bermuda-based Exel Ltd., which previously had financial ties with the estate. Back in 1998, Exel merged with Mid Ocean Ltd., a reinsurance company in which the estate was a co-founder and once held a 5 percent stake.

Elizabeth Pitrof, XL's Chicago-based attorney, declined response.

A trust spokesman, the attorney general's office and the court-appointed special master for the trust's insurance matters, attorney Michael Tanoue, also had no comment on the XL dispute, citing a protective order issued by the probate court.

As for its court filing on Friday, the estate's interim board is asking Probate Judge Kevin Chang for guidance on its insurance matters, saying the state's legal action places them in a bind.

While the trust would benefit from the attorney general's surcharge suit, the estate's involvement in such a suit could void their insurance coverages, the interim board said.

In particular, the estate's interim board is asking Judge Chang whether they must take part in the court-mandated mediation for the surcharge proceeding or whether they must assist the attorney general in preparing their case against the former trustees.

Deputy Attorney General Hugh Jones said the interim board's obligations in this case are crystal clear: It's their fiduciary duty to pursue the former trustees for alleged breaches of trust or assist the state's case even if their insurance policies won't pay for those costs.

Just because an insurance policy doesn't cover potential surcharges against the former trustees doesn't discharge the board from its unabiding duty, said Jones, who recently asked for a one-year delay for the surcharge trial due to the interim board's alleged delays in turning over pertinent documents.

"An insurance policy should not dictate a trustee's fiduciary duty," Jones said.

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