Insurance firm closed after fraud claims

Chris Jones

Friday, Feb. 8, 2002 | 11:08 a.m.

A federal judge has shut down a Nevada-based health insurance company that regulators say bilked consumers out of nearly $15 million in premiums.

Court papers filed by the U.S. Department of Labor allege that Employers Mutual LLC of Carson City duped more than 22,000 people from across the nation into purchasing bogus discount health insurance coverage that the company never honored.

Defendants James Graf, William Kokott, Nicholas Angelos and Karl Hanson established Employers Mutual and a series of sub-companies that created and oversaw employee benefit plans designed to provide health insurance coverage for small business employees. While court papers claim its principals were paid salaries of $8,000 to $5,000 per month and diverted as much as $2.5 million in premiums for their personal use, Employers Mutual's policyholders have been left with millions in unpaid claims.

The Labor Department alleges the company owed between $4.5 million to $6.5 million in unpaid claims as of October.

Beginning in September 2000, Employers Mutual began selling its products across the nation through independent insurance agents who worked on commission. Because the plans were typically sold at a rate lower than most competitors, thousands of individuals signed on over a 13-month period.

U.S. District Judge Howard McKibben in Las Vegas issued a temporary restraining order shutting down the company in mid-December and an independent fiduciary has since been appointed to settle Employers Mutual's affairs. McKibben last week issued a permanent injunction shutting down the company and freezing its assets. There may not be enough money to satisfy the company's outstanding debt, however.

The Department of Labor alleges that almost $6 million of the collected premiums have been used for purposes other than the payment of claims and that Employers Mutual may have less than $2 million in its accounts. Court papers also allege the defendants mislead their customers by falsely claiming their products were funded and governed by the federal government under the Employee Retirement Income Security Act, or ERISA.

The Nevada Insurance Division said it didn't regulate Employers Mutual, which was incorporated in Nevada in July 2000 but was operated by the defendants out of Canyon Lake and Glendale, Calif.

ERISA claims supercede any state laws and require incidents involving private pension or welfare plans be handled at the federal level.

The Nevada Division of Insurance and Attorney General's office assisted the Department of Labor in its investigation of Employers Mutual. In late November Nevada Deputy Attorney General Edward Reed issued subpoenas to more than 80 individuals or business representatives with associations to the company, including five Southern Nevada businesses.

Betty Baker, insurance counsel for the Nevada Division of Insurance, said she hopes legal action against Employers Mutual will deter similar cases of fraud in the future.

"These plans are generally presented as an ERISA plan so (agents) won't have to answer to any state division of insurance," Baker said. "It seems like less red tape and it's cheap, so (agents) will market these plans and sell them so small employers get suckered in.

"We hope the agents who sell these plans will get the message: if it looks too good to be true, call the division of insurance and make sure things are as they need to be. These plans should never have been sold."

The defendants and their attorneys could not be reached for comment. In court papers, however, the defendants argued that the federal court did not have proper jurisdiction over the case because Employers Mutual never set up an employee welfare benefit plan and instead worked with independent and unrelated employers.