Porch rejects Gallagher’s motion to dismiss Vesttoo reinsurance deal complaint

Porch Group, the owner of insurer Homeowners of America Insurance Company (HOA) which was impacted by the Vesttoo reinsurance letter of credit (LOC) collateral fraud, has responded to broker Gallagher’s motion to dismiss the legal case Porch had raised, saying it believes the company failed to satisfy the obligations of their contract.

Porch has agreed with the motion to dismiss its complaint against parent Arthur J Gallagher, but persists with its complaint against reinsurance broking arm Gallagher Re.

To recap for you, in May we reported that Porch Group had launched a lawsuit against broker AJG and its Gallagher Re unit, claiming the administration of reinsurance related to a transaction that was impacted by the Vesttoo letter of credit (LOC) collateral fraud had been “grossly mismanaged”.

Prior to that case being launched, Porch had already entered into settlements related to the Vesttoo fraud with a number of parties, as it had been one of the cedents most affected by the collateral turning out to be forged.

The Vesttoo fraud saw the use of reinsurance collateral promises from the insurtech, backed by fraudulent letters of credit (LOC) that turned out to have been forged, lacking substance and had no real backing from capital providers and the investors supposedly behind them are thought to be non-existent.

As a result, cedents such as Porch have in some cases turned to the reinsurance broker’s behind deals that involved Vesttoo, as they looked to secure financial compensation for the damages incurred due to the fraud.

Porch has already agreed a $30 million strategic arrangement with Aon, that included releasing all claims related to the Vesttoo fraud that it had against the broker, and it filed a separate and ongoing lawsuit against China Construction Bank.

As we later reported, Gallagher responded to the lawsuit and complaint made by Porch, urging the Texas court, where the lawsuit was filed, to dismiss the petition “in its entirety and with prejudice.”

Gallagher noted that AJG was not a party to the reinsurance contract in question, which Porch has now agreed to in dropping the parent from the lawsuit.

But the reinsurance broker also claimed Porch’s lawsuit failed to state a claim, and fell “well short of the plausibility threshold,” while stating that reinsurance contract language backs up Gallagher, not the plaintiff.

Gallagher Re was not obliged to seek evidence that China Construction Bank, the bank named on the fraudulent letter of credit, had agreed to assume the risk related to the funding of the reinsurance agreement, the broker stated.

Which Porch has now responded to.

Porch said, in objecting to Gallagher’s motion to dismiss the case, that, “Gallagher failed to satisfy its most basic obligations under the parties’ contract. After Gallagher collected millions of dollars in fees from HOA and assured HOA that it had reinsurance backed by a valid letter of credit for over $200 million, HOA discovered the purported reinsurance was completely illusory.

“In breach of multiple contractual obligations, Gallagher had failed to verify— or conduct any reasonable due diligence into—the validity of the letter of credit. For years, it had ignored red flags suggesting something was amiss. As a result, Gallagher was apparently clueless as to the truth: that there was no money to back up the reinsurance policy. Put differently, there was no reinsurance at all.”

Urging the court to deny Gallagher’s motion to dismiss in full, Porch said that its subsidiary HOA had adequately stated three breaches of contract by the reinsurance broker.

The first being that Gallagher Re failed to obtain written confirmation from China Construction Bank (CCB), as an “assuming reinsurer,” of its agreement to assume the reinsurance risk in question, breaching section 5 of the contract between the parties.

The second alleged breach is of section 11 of that contract, where Porch claims Gallagher violated its duties as a reinsurance broker under Texas common law and the Texas Insurance Code, notwithstanding its obligation to “[c]omply with U.S.” law and “any other applicable economic . . . laws.”

Porch also claims a breach of contract section 13, which required Gallagher to provide reinsurance servicing duties, including administering all reserve funding. But Porch states that, “Far from administering the reserve funding for HOA’s reinsurance in a customarily diligent manner, Gallagher assured HOA it could allow $25 million of HOA’s money to leave its segregated reinsurance account because there was a valid letter of credit in place to fully fund the account—when there was no letter of credit at all.”

Porch goes on to say that, even if there were a basis for “Gallagher’s self-serving interpretations of these provisions,” that “the only conclusion the Court could then draw would be that the contract’s language is ambiguous and the parties’ intent must be determined by a factfinder.”

A separate argument made by Gallagher, that the case should be dismissed because the source of the fraud Vesttoo and the bank named on forged letters of credit, China Construction Bank, are necessary parties to it “fails at the starting gate.”

Porch claims that this is a breach of contract case, between it and Gallagher and that Vesttoo and CCB were not parties to that contract.

“It is Gallagher—not any third parties—who earned millions of dollars from a contract that it serially breached,” Porch asserts.

Gallagher had also said that, without the joining of these other parties to the lawsuit, Porch could feasibly “double” the recoveries the plaintiff receives, if its legal actions were successful.

On that and the fact the company has other legal action ongoing, against CCB in a New York court and its participation in Vesttoo’s bankruptcy case, Porch states that, “Gallagher will not incur any obligations as a result of the Vesttoo bankruptcy case or the suit against CCB in S.D.N.Y.; it is not a party to either and its contractual obligations to HOA feature nowhere in those cases. Nor is there is any risk that Porch will earn a double recovery. Should Porch recover damages in other proceedings that it seeks to recover from Gallagher prior to entry of judgment in this case, it would simply reduce HOA’s recoverable damages here.”

For these reasons, Porch says the court should deny Gallagher’s motion to dismiss the case in full.

The complexity of the Vesttoo legal proceedings remains evident and the costs to all sides involved continue to mount.

Still, no sign of any criminal proceedings have emerged in relation to the significant loss of value across multiple parties in the reinsurance chain due to the fraud. Nor have any other legal cases been launched, that we know of, against other parties or facilitators to the Vesttoo-linked reinsurance transactions in question.

These cases look set to run and the courts have a challenging job ahead of them. And, as we’ve said multiple times, it remains to be seen how successful legal actions will be, when the damages and financial costs incurred due to the letter of credit (LOC) fraud have spread so widely and blame is not easily assigned, outside of to the fraudsters themselves.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.