Last updated: July 11, 2019
Topic: AutomotiveCommercial
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Liquidation of aries insurance companyIntroductionInsurance companies are required to provide guaranty to businesses and personnel in varied segments of society. These ensure survival of entities be it large sized companies, a group of person or individuals on the occurrence of accidents and other unfortunate circumstances which are not foreseen. Thus these provide a high degree of safety for businesses as well as individuals by protecting them against risks of accidents, frauds, calamities or personal casualties such as injury or demise. Insurance companies are an essential part of business environment in a state and were acknowledged as commerce in the United States as early as in 1944.Being an essential part of business climate in a state or a country, insurance companies create confidence and have a major role to play in the growth of commerce hedging it against unforeseen risks. There are however instances when insurance companies have defaulted either due to unforeseen reasons or defrauding by their owners and employees. In such cases the state has to provide a guarantee to ensure that companies and individuals who had reposed their faith in the system are provided requisite relief.

Application of this principle to Aries Insurance Company by the State of Florida in 2002 ensured that interests of the large number of policy holders of the company were effectively protected. Laws in a state should secure liabilities of an insurance company as it generates greater business confidence and provides safety to life as well as savings of personnel who have placed faith in the ability of the system to support them in times of crisis.The CaseAries Insurance Company operated in the jurisdiction of the State of Florida. It provided personal as well as commercial insurance to include property and auto.

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The company also catered for workers compensation insurance.[1]   The main line of insurance underwritten by Aries was non-standard automobile private- passenger for individuals and multi peril commercial and coverage of liabilities for small businesses.[2] It had 70,000 policy holders.  Based in Miami it was placed in liquidation by the Second Judicial Circuit Court on 14 November 2002 with due consent. The receiver appointed for Aries was Florida Department of Financial Services, Division of Rehabilitation and Liquidation.[3] The Guarantee was to be provided by Florida Insurance Guaranty Association and Florida Workers Compensation Guaranty Association.

  The company was taken into receivership due to fraud by its managers which included Marcus, Paul and Saul Farynd as well as Fanny Farynd. They were also charged with fraud for obfuscating facts in the financial sheet of the company in 2002 and thereby attempting to cover up their scam.A review of the case information revealed that it was the Farynd family with father Marcus as the owner, Paul the President, Saul the secretary and Fanny the treasurer who had indulged in fraud in the case of Aries Insurance thereby resulting in loss to the Florida state to the tune of $ 100 million in guarantee money. This was provided from state funds provisioned for the same. These funds were utilized to cater for claims which were outstanding as well as for returning premiums to policyholders.

[4] The action was a result of follow up by the state’s investigators and the Prosecution which pursued the of fraud by the Company with great alacrity under due provisions of law.The family owned insurance company is reported to have diverted funds through a clutch of other self owned companies such as the Aries Underwriters Incorporated and a series of other dubious businesses such as the Onyz insurance group. These companies were deemed to have been established by the family as a larger conspiracy of a group of companies to which the owners diverted their funds. Some linked companies in the same general line of business such as the Omega Finance Corporation, the Onyz Capital Corporation and All Florida Auto Parts were also utilized by the conspirators to surreptitiously divert funds. The principals of the Insurance Company had also purposefully misrepresented the fraud in their financial statement in 2001 with the aim of concealing it.

It was the Florida State Division of Insurance (DIF), which carried out investigations to bring the defaulters to book and charged them under stringent regulations for racketeering.The case is significant as it highlights a number of legal facets of the business environment with reference to insurance. Firstly by denoting insurance as commerce the varied laws which are applicable to it remain relevant. However keeping in view the nature of the business which has very significant social and welfare facets, stringent regulations by the state are necessary. As also it is evident that compensatory mechanisms need to be in built in the system so that the larger purpose of coverage of risk and generation of a progressive business environment is consistently maintained.Legal Environment for Insurance Companies – Federal and State LegislationInsurance business in the United States is essentially under state legislation.  The McCarran-Fergusson Act is a Federal statute which provides regulatory power to the states with reference to the insurance industry.

This also indicates that state statutes in this sphere will over ride federal laws.[5] However where issues come under peripheral industries and not strictly form part of the insurance business, federal laws will continue to govern. In the case of Aries Insurance Company Florida State Laws will govern the case. These laws with reference to the year 2002, when the firm went for liquidation are contained in Chapter 624-632, 634, 635, 641, 642, 648, and 651 of Title XXXVII of the 2002 Florida Statutes. [6] Chapter 624 of the Statutes is particularly focused on Florida Insurance Code and the manner in which it is to be administered, the possible violations and their consequences and other interpretation. These statutes also provide for specific guidance on who can be termed as an Insurer. This term includes a person who has indemnified a contract with a person or a company. The Aries Insurance Company falls into this category.

It also provides for various organizations which are required to be incorporated under these statutes to include Department of Insurance. The Department is mandated by the Statute to investigate violations of provisions to the same.The Statutes in Part III have elaborated in detail the necessity for authorization and general requirements of insurers.

This confirms that a certificate of authority is required which has been specifically violated by subsidiaries of Aries. In addition it specifies the combinations that can be exercised by insuring powers, the capital funds and the risk based requirements of capital. The statutes also note that an insolvent insurer is likely to cause grave harm to society and is thus required to be suspended and his certificate of authority revoked.

This can be done without any prior notice. This provision provides the Division of Insurance Fraud (DIF) adequate authority to check companies as Aries from causing further damage once the fraud has been discovered. It also provides for insolvency of the Insurer and details the actions which are required to be undertaken. The Florida Insurance Code thus provides for appropriate statutes and designates authorities primarily at the state level for implementation of these as well as for law enforcement.In many states in the United States, it is the Insurance Commissioner who is generally the key authority for liquidation and rehabilitation purposes and acts as a receiver. However in Florida State these duties are carried out by the Division of Rehabilitation and Liquidation under the overall supervision of the Department of Financial Services.[7] The Department has thus the overall responsibility to act as a Receiver.

In this capacity it collects assets and debts due to the company and evaluates claims. The efficient functioning of this authority is thus important to provide confidence to companies as well as individuals of protection of assets invested in insurance in business and personal interests.The DIF is the primary authority in Florida for enforcing insurance law and has jurisdiction over all its facets including those related to insurer insolvency and unauthorized entities as seen in the case of Aries Insurance.[8] The Department has thus has successfully investigated the case which is being tabled for judicial hearing on 7 May 2007. The Federal Insurance Guaranty Association (FIGA) which is operating as group holding organization of all insurance companies which are its member is liable to pay for the fraud by Aries Insurance Company.

The facilitation provided by this body has resulted in settlement of compensation claims to the tune of $ 100 million against Aries without major problems to the policy holders.[9] The existence of such institutions in a state thus provides adequate confidence to businesses as well as personnel in safety and security of their principal lodged as a risk against personal and business losses.The FIGA is a statutory body which has been created at the behest of the Florida Legislature and has adequate powers to conduct its duties.

All insurance under writers in Florida are generally members of FIGA which ensures greater accountability. Thus FIGA along with its sister body the Federal Workmen’s Insurance Compensation Guarantee Authority has been providing guarantee for compensation to those insured by Aries, falling within the stipulated time period in which the fraud has been committed. However it is apparent that FIGA has not been able to ensure compliance of the insurance integrity guidelines by its members to the desired extent.Business Environment Analysis of CaseThe line of business in which Aries operated included both personal as well as commercial sectors of insurance.

For the personal segment it provided insurance cover for non standard automobile private-passengers and for small businesses it under wrote multi peril commercial and liability coverage.[10] Thus it operated in a very important sector of insurance which related to creation of confidence in personal as well as small businesses for risk free operations. Florida State has adequate statutes to cover any failings of such companies so as to develop business confidence as seen in the preceding part.An analysis of the case would also reveal that the State had an effective control mechanism for detection of insurance fraud in the Division of Insurance Fraud operating under the Department of Financial Services.[11] This was the primary body which investigated the fraud and ensured that it was noticed early and the principal offenders were brought to book. The legal mechanism of the state ensured that the Farynd Family was appropriately charged for committing fraud which would prove to be deterrence for other operators. The large number of policy holders also implied that there was a need to ensure that their interests were protected. This was assured through the state guarantee fund which provided for relief to over 70,000 policy holders.

The case also denotes major concerns over integrity of individuals involved in the insurance business. Saul Farynd, the secretary of the company also faced charges of stealing insurance premiums worth $ 100,000 from an insurance company, All Risk Underwriters LLC which was not licensed in 2003.[12] Sam was the owner of the company when he perpetrated the alleged fraud. The company had been a principal agent for Native Assurance and All Risk after collecting premium from customers did not pay the same to Native Assurance.

When it was discovered that Native Assurance was unlicensed Farynd was advised to return the money to the customers but could not pay back more than $4,900. This highlights the necessity for a deep integrity check of personnel involved in the insurance business.The creation of a clutch of companies by the Farynds for diversion of funds also needs some consideration. The large number of family controlled companies such as Aries and Onyz Incorporated operated in similar fields as Aries Insurance to include Auto Parts, Finance and Capital. This created a homogeneous group operating under single ownership which facilitated fraud.

This glaring anomaly is apparent in a cursory examination of the case. The insurance sector is required to have effective risk management measures including procedures and techniques to cover all concepts as well as practices in this field.[13] It is evident that stringent risk management measures required of insurance companies were lacking.ConclusionInsurance laws in a state should secure liabilities of an insurance company as it generates greater business confidence and secures life as well as savings of personnel who have placed faith in the ability of the system to support them in times of crisis. The aim of insurance is to spread the risk to a greater number of persons or companies. Thus the premium paid by a person goes to a pool which is considered available for distribution to members.

Insurance companies are safe custodians of the premium in the pool. However as observed in the case of Aries Insurance Company the owners succeeded in defrauding the public. The existence of statutes and organizations to implement them both in terms of law and order such as the Department of Insurance and for compensating deficits of individuals such as Division of Rehabilitation and Liquidation through the FIGA resulted in limiting the losses to small businesses and personnel thereby building overall confidence of the business environment in Florida.        Reference 1.

      OWNERS OF INSOLVENT INSURANCE COMPANY CHARGED WITH THEFT, RACKETEERING AND CONSPIRACY. (2004). Accessed on December, 09, 2006 at http://www.fldfs.com/pressoffice/Newsletter/2004/051704/May_1704alt7.

htm2.      Florida Regulators Want to Liquidate Aries Insurance. (2002). Accessed on December, 09, 2006 at http://www.insurancejournal.com/news/southeast/2002/10/28/23938.htm3.

      Division of Rehabilitation and Liquidation.  Company Information – Aries Insurance Company. Accessed on December, 09, 2006 at http://www.fldfs.com/Receiver/aries/company_information.htm.4.

      Insurance law: an overview. Accessed on December, 09, 2006 at http://www.law.cornell.edu/wex/index.php/Insurance#Federal_Statutes5.      The 2002 Florida Statutes.

(Nd (No Date). Accessed on December, 09, 2006 at http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=Ch0624/ch0624.htm6.

      Division of Rehabilitation and Liquidation. (Nd (No Date). Accessed on December, 09, 2006 at http://www.

fldfs.com/PressOffice/Poe/SouthernFamily.asp7.

      Division of Insurance Fraud. Accessed on December, 09, 2006 at http://www.fldfs.com/fraud/8.      Miami Insurance Exec Faces New Charges.

(Nd (No Date). North County Gazette. Accessed on December, 09, 2006 at http://www.northcountrygazette.org/articles/011106MiamiExec.html9.      Santomero, Anthony M.

Babbel, David F. (1997). Financial Risk Management by Insurers: An Analysis of the Process.

  Journal of Risk and Insurance, Vol. 64, No. 2, Symposium on Financial Risk Management in Insurance Firms (Jun.

, 1997), pp. 231-270[1] Owners of Insolvent Insurance Company Charged With Theft, Racketeering and Conspiracy.  2004. Accessed on December, 09, 2006 at http://www.fldfs.com/pressoffice/Newsletter/2004/051704/May_1704alt7.

htm[2] Florida Regulators Want to Liquidate Aries InsuranceOctober 28, 2002. Accessed on December, 09, 2006 at http://www.insurancejournal.com/news/southeast/2002/10/28/23938.

htm[3] Division of Rehabilitation and Liquidation.  Company Information – Aries Insurance Company. Accessed on December, 09, 2006 at http://www.fldfs.com/Receiver/aries/company_information.htm.

[4] OWNERS. Op Cit.[5] Insurance law: an overview. Accessed on December, 09, 2006 at http://www.

law.cornell.edu/wex/index.php/Insurance#Federal_Statutes[6] The 2002 Florida Statutes.

Accessed on December, 09, 2006 at http://www.leg.state.fl.us/statutes/index.

cfm?App_mode=Display_Statute&URL=Ch0624/ch0624.htm[7] Division of Rehabilitation and Liquidation. Op Cit.[8] Division of Insurance Fraud. Accessed on December, 09, 2006 at http://www.

fldfs.com/fraud/[9] Division of Insurance Fraud. Op Cit.[10] Florida Regulators Want to Liquidate Aries InsuranceOctober 28, 2002.

Accessed on December, 09, 2006 at http://www.insurancejournal.com/news/southeast/2002/10/28/23938.htm[11] OWNERS.  Op Cit.[12] Miami Insurance Exec Faces New Charges.

North County Gazette. Accessed on December, 09, 2006 at http://www.northcountrygazette.org/articles/011106MiamiExec.html[13] Santomero, Anthony M. Babbel, David F.

Financial Risk Management by Insurers: An Analysis of the Process.  Journal of Risk and Insurance, Vol. 64, No. 2, Symposium on Financial Risk Management in Insurance Firms (Jun.

, 1997), pp. 231-270