TALLAHASSEE — Florida regulators have filed a lawsuit accusing financial services giant Allianz of gutting a Miami property insurer, falsifying its documents and then cashing in on more than $20 million in fees as the company plunged into insolvency.
Coconut Grove-based Magnolia Insurance Co. went belly up in 2010, just two years after it began taking 100,000 policies out of Citizens Property Insurance Corp.
Taxpayers ultimately picked up the tab, and the Department of Financial Services is trying to recoup some of the money from the Munich-based multinational Allianz.
According to a lawsuit filed late last month, subsidiaries of Allianz played a major role in the demise of Magnolia, charging the upstart company excessive fees and misreporting its financial status even as it was going under.
Allianz "intentionally participated in the misreporting and/or misrepresentation of the financial condition of Magnolia," the lawsuit says, for the purpose of "prolonging the existence of the insurance company to continue to secure collection of fees and payments."
Allianz has firmly denied accusations made against it and its subsidiary, Allianz Risk Transfer.
"These claims are totally unfounded," said Hugo Kidston, head of communications for Allianz Global Corporate & Specialty. "We've got a hard-earned reputation to protect, and we fully intend to do so."
Taxpayers have chipped in more than $50 million to cover Magnolia's claims since 2010.
The Department of Financial Services and the chief financial officer's office say Allianz provided a questionable loan to Magnolia, charged "exorbitant" fees, and then began stripping the company of its worth until it eventually folded.
As the company's finances began to deteriorate, Allianz allegedly participated in a scheme to misreport its financial status and keep it afloat, the lawsuit claims.
Kidston denied the allegations in the complaint as "completely false," and said Allianz actually lost millions of dollars on the loan.
Magnolia went belly up despite the fact that there were no hurricanes in Florida between 2008 and 2010 when it was in operation. Its downfall, and the ensuing lawsuit, call into question the practice of allowing smaller "takeout" companies to take over policies from state-backed Citizens.
The goal of the takeouts is to get risk out of Citizens, and reduce the likelihood that homeowners will have to pay "hurricane taxes" after a storm. But in several cases, including Magnolia's, taxpayers have had to pick up the tab anyway, acting as a backstop after smaller private companies become insolvent.
Takeout companies like Poe Financial Group, Northern Capital and HomeWise Insurance all went bust after taking over large chunks of Citizens' policies. The insolvencies cost taxpayers tens of millions of dollars and the policies have often ended up back with Citizens.
Takeouts have intensified in the last year, as a handful of private insurers have taken over more than 300,000 Citizens policies. None of those companies has folded yet and most Citizens takeouts do not end up in bankruptcy or litigation.
Still, the Allianz case highlights the risks involved in shrinking Citizens, even as the company considers providing hundreds of millions dollars in incentives to encourage more takeouts.
The state is seeking more than $20 million in damages from Allianz and has hired counsel from the law firm of Hinshaw & Culbertson to handle the case.
Contact Toluse Olorunnipa at tolorunnipa@MiamiHerald.com.