United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Oversight and Investigations,

Committee on Energy and Commerce,

House of Representatives

October 1994 INSURANCE

INDUSTRY

Chronology of F.T.

Riley’s Activities and

Related Regulatory

Actions

GAO/OSI-95-5

GAO United States

General Accounting Office

Washington, D.C. 20548

Office of Special Investigations

B-255978 

October 26, 1994

The Honorable John D. Dingell

Chairman, Subcommittee on

 Oversight and Investigations

Committee on Energy and Commerce

House of Representatives

Dear Mr. Chairman:

Your March 23, 1993, letter expressed concern about the prevalence of

fraud and abuse within the insurance industry. In that letter and

subsequent discussions with your office, you asked that we conduct an

investigation to describe the business practices of Ferrell Travis Riley. As

represented by your office, he is a known associate of James Wining, a

subject of the Subcommittee’s February 1990 report entitled “Failed

Promises,” who had pleaded guilty on March 13, 1992, to conspiracy to

commit wire fraud, mail fraud, and interstate transportation of property

obtained by fraud. As discussed with your office, our report presents a

chronology of Mr. Riley’s activities, his methods of operation, and

regulatory actions taken by state regulators against him and his associated

companies.

In developing this chronology, we relied on statements made by insurance

regulators familiar with Mr. Riley’s activities and court documents related

to civil and criminal actions that have been filed against Mr. Riley and his

related companies. We did not independently investigate the basis for the

various charges against Mr. Riley. While Mr. Riley has been indicted in a

number of instances, he has never, to our knowledge, been convicted of a

criminal act. Because Mr. Riley’s attorney declined a request by your office

for an interview with Mr. Riley, we did not obtain Mr. Riley’s response to

the charges.

Prior to September 13, 1994, no federal statutes directly prohibited

insurance fraud.1

 State regulators and others informed us that states

having statutes prohibiting fraud are reluctant to investigate and prosecute

insurance fraud cases because of budget and jurisdictional problems. By

taking advantage of this environment, Mr. Riley and his related companies

have continued to operate in a questionable manner by moving from state

to state. In a little more than a decade, Mr. Riley and his associates have

engaged in insurance activities in at least 18 states.

1

On September 13, 1994, the Violent Crime Control and Law Enforcement Act was signed into law,

which makes insurance fraud a crime if it affects interstate commerce. (Title 18 U.S.C. § 1033 and §

1034)

Page 1 GAO/OSI-95-5 Insurance Practices of Ferrell T. Riley
B-255978 

Mr. Riley’s career in the insurance business has spanned nearly 2 decades.

Over the years, Mr. Riley, his associates, and the companies with which he

has been connected have been the subject of charges which alleged selling

insurance without state approval, diversion of funds belonging to insured

or insurer, misrepresentation of company assets, and theft.

Mr. Riley’s practice was to locate an insurance company in one state but

sell insurance in another state. He then claimed exemption from home

state regulation on the grounds that he was a foreign insurer (an

out-of-state insurer) and was not doing the business of insurance in the

state of domicile. For example, in response to an attempt by the New

Mexico Insurance Department to regulate Meadowlark Insurance

Company (a Riley-related company), Mr. Riley’s attorney stated that

Meadowlark was exempt from New Mexico state regulation. In fact, it was

Meadowlark’s position that it was not subject to the jurisdiction of any

state. Further, when a state of domicile strengthened its laws, Mr. Riley

moved the company to another state with weaker regulations.

Appendix I summarizes Mr. Riley’s insurance business activities from 1976

to 1993. The chronology shows that some state regulators had limited

success in keeping Mr. Riley from continuing operations in their respective

states. Attempts to regulate Mr. Riley’s insurance activities in the

companies with which he was associated date from at least 1986. Mr. Riley

currently controls an insurance company in Kansas.

Appendix II describes “nonadmitted” insurers, who sell excess and surplus

lines insurance—the insurance Mr. Riley sold in most of the states in

which he operated.

Our investigation took place between March and November 1993. We

interviewed representatives of various state insurance commissions; state

enforcement personnel; and liquidators, conservators, and auditors

representing state insurance departments to obtain information about

what they knew of Mr. Riley’s business practices. We also interviewed an

attorney representing a private insurance company affected by Mr. Riley’s

operations and analyzed its records.

As arranged with your office, unless you publicly release its contents

earlier, we will not make this report available to others until 30 days after

the date of this letter. If you have any questions concerning this

information, please contact me or Assistant Director Donald Fulwider of

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B-255978 

my staff at (202) 512-6722. Major contributors to this report are listed in

appendix III.

Sincerely yours,

Richard C. Stiener

Director

Page 3 GAO/OSI-95-5 Insurance Practices of Ferrell T. Riley
Contents

Letter 1

Appendix I 

Chronology of Ferrell

Travis Riley’s

Insurance Activities

6

Texas 6

Louisiana 7

Wyoming 9

Meadowlark Overseas 9

Expansion of Meadowlark Companies Into Other States 10

Commercial Indemnity Assurance Company 15

Latest Activities 15

Appendix II 

Nonadmitted Insurers

and Surplus Lines

Insurance

16

Appendix III 

Major Contributors to

This Report

17

Abbreviations

GAO General Accounting Office

GGD General Government Division

NAIC National Association of Insurance Commissioners

OSI Office of Special Investigations

RICO Racketeer Influenced and Corrupt Organizations

Page 4 GAO/OSI-95-5 Insurance Practices of Ferrell T. Riley
Page 5 GAO/OSI-95-5 Insurance Practices of Ferrell T. Riley
Appendix I 

Chronology of Ferrell Travis Riley’s

Insurance Activities

We prepared this chronology on the basis of statements and documents

received from various state regulators, auditors, and investigators who had

knowledge of Mr. Riley’s operations. In addition, we obtained information

from public documents, which included indictments, transcripts, cease

and desist orders, and injunctions. We also interviewed a representative of

an insurance company affected by Mr. Riley’s operations. We did not

independently investigate the allegations raised by these sources. Because

Mr. Riley’s attorney declined a request by your office for an interview with

Mr. Riley, we did not obtain Mr. Riley’s response to the charges. The

following summarizes attempts by some state regulators and others to

keep Mr. Riley and his related companies from operating in their

respective states.

Texas In 1976, Mr. Riley owned the Sheldon Agency located in Houston, Texas.

In 1983, he organized and financed the Riley Insurance Agency on behalf

of his son, Frank Riley. According to court documents, Mr. Riley obtained

an agency appointment with Dexter Lloyds Insurance Company of

Houston, Texas, in May 19822

 and in 1983 began acquiring stock in this

company. By February 1986, Mr. Riley had become the sole owner of the

company. In August 1986, the Commissioner of the Texas State Board of

Insurance ordered Dexter Lloyds to be placed under regulatory

supervision. According to a 1988 civil complaint filed in U.S. District

Court, Mr. Riley secretly obtained control of Dexter Associates, the parent

company for Dexter Lloyds. However, the Texas State Board of Insurance

was not informed that he had purchased the company, even though state

law required such disclosure.

In October 1986, the Commissioner of the Texas State Board of Insurance

placed Dexter Lloyds in temporary receivership; and in December 1986,

the Texas Attorney General obtained a temporary injunction against

Dexter Lloyds. (In the fall of 1986, Mr. Riley moved his operation to

Louisiana when he acquired/created North American Underwriters

Insurance Company located in Lake Charles, Louisiana.) In January 1988,

Dexter Lloyds and Dexter Associates were placed in permanent

receivership when the court found that they were insolvent by an amount

in excess of $3.5 million.

While Dexter Lloyds was in receivership, the Texas receiver attempted to

secure corporate assets to pay policyholders of the failed company. In this

2

According to Texas state insurance authorities, an insurance sales firm grants an agency appointment

when it vouches for the credentials and integrity of the appointee and allows that appointee to sell

insurance for the company.

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Chronology of Ferrell Travis Riley’s

Insurance Activities

regard, the Texas receiver filed a civil complaint in 1988 in U.S. District

Court against Ferrell Riley, the Sheldon Agency, Frank Riley, the Riley

Insurance Agency, and individuals associated with Dexter Lloyds. The

complaint was filed under the Racketeer Influenced and Corrupt

Organizations (RICO) Act of 1970. This complaint made numerous

assertions, including (1) concealment of ownership in Dexter Lloyds,

(2) misappropriation/diversion of Dexter Lloyds’ moneys, and

(3) misrepresentation of the financial condition and soundness of Dexter

Lloyds.

On April 11, 1990, at the request of the state of Texas, the court dismissed

the RICO complaint because the defendants had filed for bankruptcy.

According to the Texas Liquidation Division’s former Director of Legal

Services and Receiverships, the expense to the receiver did not justify the

continued prosecution of the case.

In September 1989, the Texas Commissioner of Insurance revoked

Mr. Riley’s Texas insurance licenses. This revocation was based on the

Commission’s determination that Mr. Riley had illegally withheld money

belonging to insured and insurer, had demonstrated a lack of

trustworthiness or competence to act as an insurance agent, was guilty of

fraudulent and dishonest practices, and had unreasonably failed and

neglected to pay over to an insurance company or its agent any premium

or part thereof collected on a policy or application for insurance.

In July 1990, a federal grand jury indicted Mr. Riley and his son Frank

Riley on charges of mail fraud, false statements, and aiding and abetting.

The indictment stated that these individuals had violated criminal statutes

while doing business as insurance agents for the Sheldon and Riley

agencies. On April 15, 1991, the indictment was dismissed by motion of the

government after Mr. Riley reimbursed the victims.

Louisiana In 1986, Mr. Riley and his associates moved their insurance business to

Louisiana and acquired and/or created North American Underwriters

Insurance Company.

In March 1987, North American Underwriters’ name was changed to

Louisiana Underwriters Insurance Company. According to the Louisiana

Insurance Commission examiner, Mr. Riley was listed as a consultant to

Louisiana Underwriters. Had he been listed as an officer or stockholder,

his previous record of insurance abuse in Texas would have disqualified

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Appendix I 

Chronology of Ferrell Travis Riley’s

Insurance Activities

the Louisiana Underwriters application. Further, Mr. Riley received no

salary or consultant fees, but Louisiana Underwriters paid his expenses.

The examiner added that Mr. Riley had made all major policy and

operating decisions for Louisiana Underwriters.

According to the Louisiana Insurance Commission examiner who

examined the business records of Louisiana Underwriters, fraudulent

activities had taken place at Louisiana Underwriters in 1987. For example,

Louisiana required that assets of an insurance company be located in that

state in order for the company to be licensed to do business. The principal

asset listed for Louisiana Underwriters—mortgage loans on condominium

property—was located in Park City, Utah.

Further, the examination found that Mr. Riley had misappropriated

hundreds of thousands of dollars that should have been deposited for

future claims. For example, in 1987, Louisiana Underwriters contracted to

manage an insurance risk pool of $1 million for a group of amusement

park owners for a $100,000 management fee. Mr. Riley did not maintain the

$1 million in a required escrow account to pay policyholder claims. The

examination concluded that at least $200,000 had been spent to pay for a

trip Mr. Riley made to Monte Carlo. Another $50,000 had been used to

purchase rugs, paintings, vases, scrolls, and sculpture for personal use.

In August 1988, a short time after the state of Louisiana had begun an

on-site insurance examination of Louisiana Underwriters, Mr. Riley was

alerted (the Louisiana state examiner believes it was through a wiretap of

the examiner’s office space at Louisiana Underwriters) that the state

examiner had preliminary findings of fraud and misappropriation of

Louisiana Underwriters’ funds. The remainder of Louisiana Underwriters’

liquid assets was transferred to Wyoming 1 day before the funds could be

seized under a Louisiana state conservation order filed in August 1988. In

April 1989, the court transferred the assets of Louisiana Underwriters to

Meadowlark Insurance Company—a Wyoming company controlled by

Mr. Riley—and, as a result, the conservation order was canceled.

In 1989, a federal grand jury in Louisiana indicted Mr. Riley and his

associates for allegedly transporting cashier’s checks, obtained through

alleged conspiracy and fraud, to Louisiana. According to this indictment,

in order to meet Louisiana insurance licensing requirements, Mr. Riley

obtained a $1.7-million unsecured loan in February 1987 from the First

State Savings Bank of San Antonio, Texas. The bank president had the

loan disbursed in the form of 17 cashier’s checks, payable to North

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Appendix I 

Chronology of Ferrell Travis Riley’s

Insurance Activities

American Underwriters, which were converted to 17 separate certificates

of deposit issued to North American Underwriters. On the basis of the

$1.7 million in 17 certificates of deposit that Mr. Riley presented as

unencumbered assets for North American Underwriters, Louisiana granted

it a license to sell insurance. Shortly after the license was granted, the

$1.7 million in certificates of deposit was returned to the Texas bank that

had made the original unsecured loan. According to the Louisiana

Insurance Commission, Mr. Riley had failed to disclose the existence of

the $1.7-million loan. On May 3, 1990, Ferrell Riley and his associates at

Louisiana Underwriters were tried and acquitted of all charges. Mr. Riley

claimed that the funds used to purchase the certificates of deposit had

been borrowed, not obtained by fraud.

Wyoming In August 1988, Mr. Riley and his associates began the move to Wyoming.

They incorporated Meadowlark Insurance Company on August 30, 1988, in

Wyoming but were not licensed to sell insurance in Wyoming. Mr. Riley

was listed as a consultant to Meadowlark but not as an officer, director, or

stockholder. According to its corporate charter, Meadowlark was in the

business to sell property, casualty, marine transportation, fidelity and

surety, and other insurance. On November 16, 1988, the Wyoming

Insurance Commissioner, gave formal approval for Meadowlark to write

excess and surplus lines insurance in the state of Wyoming.3

As a result of pending legal matters in Texas and Louisiana, on April 26,

1990, Meadowlark was deemed ineligible as a Wyoming insurance

company by the Wyoming Insurance Commissioner. Insurance brokers

were forbidden to do business with Meadowlark.

Meadowlark Overseas Some states require an alien corporation (a non-U.S. corporation) to have

several years of insurance experience as part of the criteria for writing

surplus lines insurance in that state. In 1989, Mr. Riley acquired a dormant

shell corporation in the Turks and Caicos Islands, British West Indies, that

had been incorporated as Arabian Additives, Ltd. in 1982. On October 5,

1989, the name Arabian Additives, Ltd. was changed to Meadowlark

Insurance Company in the Turks and Caicos. Meadowlark now appeared

to have a history going back to 1982, allowing Mr. Riley to meet states’

criteria for surplus lines insurance. However, the Turks and Caicos

3

Excess and surplus lines insurance is property/casualty coverage that is not available from insurers

licensed by the state—called admitted insurers—and must be purchased from a “nonadmitted” carrier.

Excess and surplus lines is coverage that often is sold by only a few nonadmitted insurers. A brief

discussion of nonadmitted insurers is found in app. II.

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Appendix I 

Chronology of Ferrell Travis Riley’s

Insurance Activities

insurance administrator stated in a letter to the National Association of

Insurance Commissioners4

 in 1992 that Meadowlark was never licensed as

an insurer in that jurisdiction. Yet, in 1989, Meadowlark, which was

physically located in Albuquerque, New Mexico, distributed brochures that

said

“ . . . Meadowlark Insurance Company is a worldwide casualty, property and bond insurer

and reinsurer. . . . The company has a full administrative office in Albuquerque, New

Mexico, U.S.A. . . . The company was incorporated in the Turks and Caicos Islands, British

West Indies in 1982. In 1989 the name was changed to Meadowlark Insurance Company.”

In May 1990, Mr. Riley formed Meadowlark Insurance, S.A. in the

Dominican Republic and moved Meadowlark from the British West Indies,

which was tightening its regulation of insurance companies. James Wining5

 assisted Mr. Riley in this endeavor. Although Meadowlark Insurance, S.A.

was a legitimate corporation in the Dominican Republic, it never had a

license to sell insurance in the Dominican Republic, according to a

memorandum dated August 4, 1992, from the Superintendent of Insurance

there.

Expansion of

Meadowlark

Companies Into Other

States

Mr. Riley has expanded his activity throughout the United States since

1989. Six states—New Mexico, Missouri, Nebraska, Delaware, Maryland,

and Kansas—deserve special mention, as they highlight Mr. Riley’s method

of operation.

New Mexico In November 1989, Mr. Riley met the New Mexico Superintendent of

Insurance to request approval to sell property and casualty insurance in

New Mexico on a surplus lines basis. In negotiations with the state of New

Mexico, Mr. Riley was the lead spokesperson and principal decisionmaker,

according to New Mexico insurance authorities; however, the New Mexico

Superintendent of Insurance did not grant Meadowlark authority to sell

insurance in New Mexico. According to the New Mexico Superintendent of

4

The National Association of Insurance Commissioners consists of the heads of the insurance

departments of the 50 states, District of Columbia, and 4 U.S. territories. While it has no regulatory

authority, the association serves as a clearinghouse for information concerning unlicensed non-U.S.

insurers, especially those operating in the U.S. surplus lines market. It provides a structure for

interstate cooperation in examinations of multistate insurers and distributes model insurance laws and

regulations for consideration by state insurance departments.

5

On July 6, 1991, James Wining was indicted concerning an unrelated transaction on federal charges of

conspiracy and interstate transportation of stolen goods. On March 13, 1992, he pleaded guilty to those

and other charges.

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Appendix I 

Chronology of Ferrell Travis Riley’s

Insurance Activities

Insurance, Meadowlark could not conduct the business of insurance in

New Mexico, given that it was not licensed in New Mexico or any other

state. Further, the New Mexico Superintendent was concerned that

Mr. Riley had moved Meadowlark from the West Indies to the Dominican

Republic to avoid having his (Mr. Riley’s) insurance practices scrutinized.

In early 1990, the New Mexico Superintendent of Insurance received

information from other regulators indicating that Meadowlark was

transacting insurance business from its Albuquerque office with

consumers in other states. In February 1990, the New Mexico

Superintendent of Insurance issued a cease and desist order against

Meadowlark to stop it from transacting business in that state without a

license. In March 1990, the Department of Insurance began a formal

examination of Meadowlark’s operations, financial condition, and business

affairs to determine its eligibility for certification. Mr. Riley and his

associates continued to expand their business base in New Mexico and

elsewhere. In April 1990, the Wyoming-based M & M Management

Company (a Riley-related company) received its New Mexico corporate

charter.

The New Mexico Insurance Commission, through the Superintendent of

Insurance, identified several violations of New Mexico insurance law by

Meadowlark in 1990 and concluded that Meadowlark had transacted

$1.6 million of insurance business while located in New Mexico without

the required authority from the Superintendent of Insurance. Mr. Riley’s

lawyer contended that Meadowlark was an alien corporation and pure

surplus lines company and therefore no state had the authority to examine

its operations, financial condition, and business affairs. He further

asserted that Meadowlark was not transacting the business of insurance in

New Mexico because it was selling to residents in other states.

In July 1990, Meadowlark applied for placement on New Mexico’s

approved list of alien surplus lines insurers. But regulators denied

Meadowlark’s application, citing the company’s trust fund deficiencies,

inadequate loss reserves, incorrect valuation of assets, and false

representations. The New Mexico Superintendent of Insurance issued a

second cease and desist order against Meadowlark on August 23, 1990.

Because of ambiguities in the New Mexico Insurance Code on the

definition of the transaction of insurance business and the regulation of

alien insurance companies like Meadowlark, the state legislature changed

the law on March 16, 1991, despite intense lobbying against the bill by

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Chronology of Ferrell Travis Riley’s

Insurance Activities

Meadowlark. That legislation became known as the “Meadowlark Bill.” It

increased state regulatory powers over alien insurance companies

operating in that state, increased insurers’ requirements for capital surplus

and funds held in trust, and extended the oversight authority of the New

Mexico Superintendent of Insurance. Shortly after this legislation was

passed, Meadowlark left New Mexico. The New Mexico Superintendent of

Insurance referred Mr. Riley and Meadowlark to the Office of the New

Mexico State’s Attorney and the U.S. Attorney’s Office for investigation.

Missouri During 1990, although Meadowlark was not licensed to sell insurance in

Missouri, Meadowlark contracted with a Missouri insurance broker to sell

commercial general liability policies. Complaints received by the Missouri

Department of Insurance indicated that (1) Meadowlark Insurance

Company and M & M Management Company (as manager of Meadowlark’s

affairs in the United States) were selling insurance and adjusting claims

and (2) M & M was collecting premiums from agents who were producing

the business. In response to these complaints, the Missouri Department of

Insurance obtained a temporary restraining order against Meadowlark in

December 1990, prohibiting it from writing insurance in Missouri. In

June 1991, the state obtained a permanent injunction prohibiting

Meadowlark from transacting any insurance business with Missouri

residents until Meadowlark obtained a Missouri license. In August and

September 1991, Meadowlark Insurance Company and M & M moved their

offices from Albuquerque, New Mexico, to Kansas City, Missouri.

From April through September 1991, Meadowlark and M & M transferred

$300,000 to Mr. Riley’s lawyer, Mr. Kevin Hare. According to Mr. Hare, the

moneys were from Mr. Riley and were meant to bribe Missouri regulators

to grant Meadowlark a license to sell insurance in Missouri. However, the

attorney said that he kept the money instead. In 1994, Mr. Hare was

convicted in the Western District of Missouri of schemes to defraud and

criminal money laundering. According to evidence entered in Mr. Hare’s

trial, part of the $300,000 in M & M funds was to pay claims to insureds in

the western United States.

Nebraska In 1990, while Mr. Riley was operating without licenses in New Mexico,

Missouri, and Kansas, he was also active in Nebraska. According to the

Nebraska Department of Insurance, Meadowlark Insurance Company sold

liability insurance to Nebraska residents without a Nebraska insurance

license and without maintaining the required adequate guaranty deposits

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Chronology of Ferrell Travis Riley’s

Insurance Activities

in the United States for the protection of policyholders. The state of

Nebraska obtained a temporary cease and desist order in February 1990, a

permanent cease and desist order in April 1991, and a permanent

injunction and restraining order on June 19, 1991, against the company.

However, the district court of appeals reversed the April 1991 order on

March 31, 1992, because the term “adequate” in Nebraska statutes was

unconstitutionally vague. The Nebraska legislature subsequently rewrote

its statutes on surplus lines insurance, following the model provided by

the National Association of Insurance Commissioners, to clearly define

adequately guaranteed deposits. As a result, Meadowlark stopped selling

insurance in Nebraska.

Delaware In early 1990, the Delaware Department of Insurance learned that

Meadowlark was insuring Delaware residents but was not licensed in that

state or elsewhere. The Department of Insurance also found Meadowlark’s

annual report to be of doubtful authenticity. Asked if a cease and desist

order had been issued to Meadowlark, the regulator said that he had found

that issuing cease and desist orders to companies such as Meadowlark “. . .

is like giving Willie Sutton a parking ticket.” He had found that it was more

effective to concentrate on the agents issuing the policies. This strategy

was effective in the case of Meadowlark, as the agent who was writing

Meadowlark policies in Delaware has stopped writing them.

Maryland In 1991, Mr. Riley and Meadowlark began doing business in Maryland.

Although the Baltimore City School Bus Contractors Association was

self-insured under the Maryland self-insurance program, transportation

companies were required to provide evidence of additional security, such

as a surety bond with an approved insurance company, for payment of

liability claims. Maryland law required that only companies that have been

approved by the Maryland Insurance Commissioner to do the business of

insurance in that state may bid on the transportation surety bond business.

According to court documents, the manager of the self-insurance program

for Maryland, Austin Evans, contrary to Maryland law, approved

applications submitted by transportation companies to become

self-insured through surety bonds issued by Meadowlark, although

Mr. Evans knew that Meadowlark was not licensed in Maryland. Mr. Evans

also used his position to illegally influence self-insured transportation

companies to buy surety bonds from Meadowlark. Meadowlark, as part of

its contract with the Baltimore City School Bus Contractors Association,

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Appendix I 

Chronology of Ferrell Travis Riley’s

Insurance Activities

also provided insurance coverage for Baltimore City school children bused

to extracurricular activities, such as field trips and athletic events, and for

busing the elderly and handicapped after school.

In April 1992, prior to a grand jury’s discovery of Mr. Evans’ involvement,

the Maryland Department of Insurance issued a cease and desist order to

Meadowlark because it had discovered that Meadowlark had no license to

operate as an insurance company in Maryland. In June 1992, Meadowlark

entered into a consent agreement with the state of Maryland and ceased

insurance activities in that state.

In September 1993, Mr. Evans was convicted of a scheme to defraud the

state of Maryland and for accepting a $17,000 bribe from Meadowlark

Insurance Company in return for steering payments of over $400,000 to

Meadowlark from companies that comprised the Baltimore City School

Bus Contractors Association and others. An examination of trial testimony

reveals that while Mr. Evans was under investigation, Mr. Riley paid his

plane fare to Kansas City, put him on the payroll of Consolidated Claim

and Financial Services (a Riley-related business) at between $2,500 and

$3,500 per month, and paid his attorney’s fees.

Kansas Mr. Riley also conducted business in Kansas in 1991. According to officials

of the Kansas Department of Insurance, Kansas regulators held hearings in

early 1991 to shut down Town and Country Fire and Casualty Insurance

Company, a small company in Hutchinson, Kansas, which was nearly

insolvent. In early 1991, Town and Country negotiated with 8 to 10

investors to solve its financial problems. Mr. Riley, representing

Meadowlark and M & M, met with Kansas regulators concerning M & M’s

investment in Town and Country stock. Kansas regulators agreed to allow

Mr. Riley, representing Meadowlark and M & M, to provide $400,000 cash

to Town and Country, pending further investigation and regulatory

approval of M & M by the Kansas Department of Insurance.

By November 1991, the Kansas Department of Insurance investigation had

raised concerns over Mr. Riley’s running Town and Country, but M & M by

then had provided funds totaling $855,000, making Town and Country

solvent. In April 1992, M & M began the process of transferring all its Town

and Country stock into Prairie Star, (a Riley-related company). By

January 1993, Mr. Riley had provided $1.4 million in capital through M &

M, Magnolia Acceptance Finance Company (a Riley-related company), and

his lawyer to Town and Country to maintain company solvency. Through

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Chronology of Ferrell Travis Riley’s

Insurance Activities

Prairie Star, Inc., Mr. Riley currently controls Town and Country, a

domiciled insurance company in Kansas. Kansas regulators are aware of

Mr. Riley and his relationship to Town and Country. They said that they

are closely monitoring the company’s business practices and operations.

Commercial

Indemnity Assurance

Company

In late 1991, Meadowlark Insurance Company was winding down its affairs

in the United States.6

 Meadowlark transferred its premiums to, and

became known as, Commercial Indemnity Assurance Company.

Commercial Indemnity was purportedly organized under the laws of the

Dominican Republic in 1991. M & M Management Company compiled

Commercial Indemnity’s balance sheet as of December 30, 1991, which

showed over $5 million in assets and zero liabilities.

Latest Activities As of November 1993, Town and Country Fire and Casualty Insurance

Company was operating in Hutchinson, Kansas. Ferrell Travis Riley, M &

M Management Company, and Magnolia Acceptance Finance Company

were still operating from Kansas City, Missouri. Unlike New Mexico

regulators who have regulatory authority under the “Meadowlark Bill,”

Missouri regulators say that they do not have regulatory authority over an

insurance company located in Missouri but doing the business of

insurance outside the state. As of the close of our inquiries, Mr. Riley,

Meadowlark Insurance Company, and Commercial Indemnity were under

investigation by the federal grand jury in the Western District of Missouri.

6

In August 1991, Meadowlark Insurance Company reported $10 million in sales and a net worth of

$11.9 million.

Page 15 GAO/OSI-95-5 Insurance Practices of Ferrell T. Riley
Appendix II 

Nonadmitted Insurers and Surplus Lines

Insurance

Insurers are licensed by the states. States call insurers that they have not

licensed—but which may be licensed in other states—“nonadmitted”

insurers or carriers. Each state has its own rules for nonadmitted insurers.7

Nonadmitted insurers range from long-established and well capitalized

entities such as Lloyds of London to small, offshore carriers with little, if

any, capitalization. Some states permit nonadmitted insurers to sell

coverage that is unavailable from licensed insurers within their borders.

This kind of coverage is called “surplus lines insurance,” according to the

Insurance Information Institute’s Handbook.

Historically, policyholders bought surplus lines insurance for such

purposes as covering corporate kidnap ransom demands or insuring rock

concerts. Now, as some standard kinds of insurance have become more

expensive, nonadmitted insurers have found customers for basic coverage.

For example, nonadmitted carriers sold millions of dollars of worthless

insurance to property owners in the Los Angeles area after the 1992 riots.

Although surplus lines laws vary by state, the states use three methods to

screen unlicensed insurers for eligibility as surplus lines insurers. First, a

state may maintain a “white list” of approved surplus lines insurers.

Domestic insurers licensed in other states and unlicensed non-U.S.

insurers (alien insurers) both must apply and undergo regulatory scrutiny

to determine whether they meet that state’s standards for operating as a

surplus lines insurer. Second, a state may maintain a “black list” of

unlicensed domestic and non-U.S. insurers prohibited from operating in

that state’s surplus lines market. In these states, any unlicensed insurer

not on the black list can sell insurance to the public on a surplus lines

basis without meeting any other criteria. Third, rather than maintain a list

of approved or prohibited surplus lines insurers, a state may require only

that unlicensed domestic and non-U.S. insurers meet certain reporting

requirements, such as surplus lines premium data and types of coverage

provided.

7

Information in this appendix has been adapted from the following sources: Lynn Brenner, The

Insurance Information Institute’s Handbook for Reporters (New York: The Information Institute,

1993) and NAIC Screening of Non-U.S. Insurers (GAO/GGD-94-69R, Jan. 18, 1994).

Page 16 GAO/OSI-95-5 Insurance Practices of Ferrell T. Riley
Appendix III 

Major Contributors to This Report

Office of Special

Investigations,

Washington, D.C.

Gary W. Carbone, Deputy Director for Investigations

Donald G. Fulwider, Assistant Director for Financial and Economic

 Crimes

Jim Locraft, Special Agent

Barbara W. Alsip, Reports Analyst

Shelia A. James, Senior Evaluator

General Government

Division, Washington,

D.C.

Lawrence D. Cluff, Assistant Director for Financial Institutions

and Markets Issues

Marylynn Sergent, Senior Evaluator

Office of the General

Counsel, Washington,

D.C.

Glenn G. Wolcott, Assistant General Counsel

Leslie J. Krasner, Attorney Adviser

(600305) Page 17 GAO/OSI-95-5 Insurance Practices of Ferrell T. Riley
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