Contractor in Surety Dispute Accuses Arch Insurance of Fraud

A Southern California construction company accuses Arch Insurance Co. of “fraudulent and deceptive behavior,” and has hired the public relations specialist who represented Michael Cohen when he spoke out against President Donald Trump to take those allegations to the press.

Washington D.C. attorney Lanny J. Davis, with Davis Goldberg Galper, is asking the National Association of Insurance Commissioners to investigate accusations that Arch has shown a pattern and practice of fraud and other malfeasance when adjusting claims against performance bonds.

Davis’ client, Pinner Construction Co., says an Arch claims adjuster brought a “consultant” to a meeting at its headquarters in Anaheim to discuss its surety claim after a subcontractor on a state hospital project failed to perform. Pinner discovered later that the consultant was actually an indemnitor for the defaulting subcontractor — in essense, the underwriter for the bond — and he admitted before witnesses that Arch had told him to lie about his role.

“I think the laws ought to be changed if this is something that is permissable,” Newt Kellam, Pinner’s chief administrative officer, said during a telephone interview with the Claims Journal. “There should be some legislation, I think.”

Pinner in November 2019 filed a lawsuit against Arch’s claims adjuster, Peter Apostolidis, seeking at least $5 million in damages for alleged fraud and negligent misrepresentation. The company is also in arbitration with a separate claim against Arch.

Kellam said under California law, it will be difficult to win an award greater than the $3.5 million policy limit on Arch’s bond. So his company also hired Davis, a well-known inside-the-Beltway public relations specialist, to call attention to Arch’s fraudulent behavior. Kellam said he even dispatched about 60 Pinner employees to picket during an Arch Insurance event with brokers in Los Angeles.

Davis was once called the “crisis consultant to the stars” by the New York Times. He is most recently known for representing Cohen, Trump’s formal personal attorney and “fixer”, when he began giving interviews to the press about the president’s alleged lack of character.

Kellam said his company has been in business for 100 years and never before has sued an insurer to collect from a performance bond.

“It really hurt this company,” he said. He said Pinner would have to do $200 million in sales to earn the amount that it lost because of the malfeasance.

The dispute stems from Pinner’s decision to hire Stanton Utilities as a subcontractor for heating, air-conditioning and ventilation work after Pinner won a state bid to build a new kitchen at the Patton State Hospital in San Bernardino. Pinner required subcontractors to post performance bonds to participate in the $23 million project. Stanton bought a surety from Arch, a carrier based in Bermuda.

Kellam said as the construction date drew closer, it became clear that Stanton would not be able to complete all of the HVAC work. In April 2018, Stanton gave notice that it was abandoning the project, Pinner says in the lawsuit. Pinner called a meeting with Arch to discuss the potential claim against Stanton’s surety.

The owner of a construction company that had also submitted a bid on the hospital project, Alan Othman, showed up for that meeting. Kellam said he found that odd, but Arch’s claims adjuster — Apostolidis — told him that he was acting as a consultant for Arch.

Kellam said Othman told him later that Arch had told him to lie about his role, and that actually he was the indemnitor for Stanton’s performance bond with Arch. In other words, Arch had passed the risk of default to Orthman through a separate indemnification agreement.

Kellam said Orthman owns a construction company, USS Cal Builders, that has submitted a competing bid on the Patton State Hospital project. He said he does not know Orthman’s exact relationship with Stanton, but he assumes that he must have had an ownership interest or he would not have agreed to indemnify the company’s bond.

Kellam said Pinner would not have accepted the bond if it knew Orthman was an indemnitor.

Davis asked on April 15 asked Insurance Commissioner Ricardo Lara to investigate. “The potential conflict of interest of this arrangement is self-evident: Orthman, owning the losing bidder, had some incentive to cause Pinner problems on the Patton Project, even to cause it to default by deficient work,” Davis said in a letter to the commissioner.

Orthman, contacted by telephone, denied having any ownership interest in Stanton. He said he had indemnified the company on a previous project, but not the Patton State Hospital job. He refused to answer further questions, saying, “I would rather not get involved with it.”

Kellam said after Stanton defaulted, he asked Apostolides if he could supplement Stanton’s crews so his company could complete the HVAC work without interfering with any payment from the surety bond. He said Apsotolides told him there would be no problem.

But in October 2018, Arch denied Pinner’s claim for the extra costs it incurred when hiring the extra HVAC crews. The carrier said by completing the subcontracted work with another contractor, Pinner had breached the terms of its contract under the performance bond.

Pinner says in the lawsuit that it spent $5 million to complete the HVAC work.

California law treats surety bonds differently than property and casualty insurance contracts, said Kellam, who is an attorney. Plaintiffs may not collect in excess of the policy limits unless fraud is shown.

Davis said when he discovered that Arch Insurance is owned by a public company, Arch Capital Group, he knew that public pressure could be applied against the company if Arch is found to have committed fraud. Institutions regulated by the Securities and Exchange Commission are required to disclose substantial fraud allegations to investors, he said.

Davis said a cursory investigation by his office found nine lawsuits against Arch Insurance that show a pattern of delaying and denying valid claims against surety bonds.

“Even when it cannot reasonably deny liability, it appears Arch still forces litigation by refusing to pay its obligations on its surety bonds,” Davis’ letter to NAIC says.

in addition to asking the National Association of Insurance Commissioners for an investigation, Davis has sent copies of the letter to all 50 state insurance commissioners.

A spokesman for Arch said the company does not comment on pending litigation. Apostolidis did not reply to a voicemail message. NAIC also declined comment on whether it will investigate Pinner’s allegations, or even whether it had received Davis’ letter. A spokesperson for California Insurance Commissioner Ricardo Lara said the Insurance Department has contacted Davis, but cannot confirm or deny the existence of an investigation.

About the photo: The new kitchen at Patton State Hospital, built by Pinner Construction, is shown. Photo courtesy of Verdical Group.