Opinion ID: 741879
Heading Depth: 3
Heading Rank: 2

Heading: The audit examination

Text: 10 According to Royal Indemnity, it was the company's examination into the rating and underwriting practices of the Royal Global division that led to Mr. Bahl's lower 1993 evaluation and eventual termination in 1994. Royal Indemnity, concerned about the compliance of its insurance practices with state insurance laws, had its Market Conduct Compliance Department conduct an examination of the rating and underwriting practices in Royal Global. This review of policies written by Royal Global was meant to simulate an examination conducted by a state insurance department and to identify potential violations so that Royal Global could take corrective action. The examination was led by the Regulatory Compliance Division Manager, Richard Ballantine. 11 Following this examination in November 1992, the findings were distributed to members of Royal Global's management, including Tom Brown, Managing Director, and Driscoll, who was about to become Vice President of North American Operations for Royal Global. On January 29, 1993, upon receipt of the report, Brown wrote to Driscoll of his disappointment and concern with the findings of the market conduct examination. He believed that there had not been strict adherence to statutory requirements and ordered Driscoll to bring the files into compliance: 12 I have to view these findings as a serious failure on the part of Management. It typifies the hands off style which I abhor. I need to know the following by urgent return fax: 13 Are there grounds for immediate termination for the responsible Underwriters and Underwriting Management? If not, why not? 14 I presume that compliance is a feature of job descriptions and authority levels. If not, why not? 15 I want your immediate concentrated efforts applied to rectifying all non compliance issues. I do not care if you work nights and weekends, but I want your assurances that these will be rectified immediately, and I want a guaranteed deadline by which you will meet compliance totally. 16 R.26 at 361-62. Once Driscoll received this letter, he issued a memorandum to Royal Global's Underwriting and Rating staff to review all their new and existing policy files to ensure that the files were in compliance. He also arranged for a mandatory seminar on compliance issues for all underwriters. In early 1994, Royal Global conducted internal audits of its offices in New York, Chicago and Los Angeles. 17 The audit of the Chicago office, conducted between January 31 and February 4, 1994, reviewed property and casualty account files and examined both compliance and underwriting issues. The audit team included Driscoll; Ballantine, Regulatory Compliance Division Manager; and John Dugan, Underwriting Account Executive in Royal Global's New York office. Ballantine reviewed the accounts for compliance with state law, and Driscoll and Dugan reviewed them from an underwriting standpoint. The Chicago office had prior notice of the audit and the auditors prepared written work sheets documenting their findings for each account file they reviewed. Mr. Bahl criticized the audit procedure, however. He claimed that there was no notice of the audit format, no work sheets provided, no list of the accounts to be reviewed and no checklist of the elements the auditors were checking. 18 The auditors were quite critical of Mr. Bahl's files. Ballantine noted, on his work sheets and in the summary of his findings, that most of the property files he reviewed did not contain the necessary rates documentation and that the lack of documentation was a serious violation. Ballantine's section of the summary, entitled Compliance, stated: 19 Property--it appears that most files did not have the necessary documentation from a regulatory perspective. No full process for rate development was in the file as required. The majority of the files reviewed were eligible for various rating plans[;] however, no documentation was present identifying the rating plan used in the rate calculation. This is a serious violation. 20 Property underwriters in Chicago were brought into New York for a special session conducted by the market conduct people of Royal USA. There should be no reason for a misunderstanding on the part of the underwriters as to what is required in the area of compliance. 21 R.26 at 401-02. Driscoll and Dugan concurred in that assessment of Mr. Bahl's property files. Dugan's report, after evaluating eleven files, also pointed out the lack of underwriting documentation and assessment. Dugan rated the files as poor or barely adequate in many categories. Driscoll's own observations were based on a review of only two property files; nevertheless, his summary of the audit was equally critical of Mr. Bahl's files and his procedures in underwriting and compliance. 22 After the audit was completed and the work sheets were compiled, Driscoll filed a written report. He pointed out many deficiencies in the property files. He observed that the documentation was so poor that a reviewer of that file would not be able to determine what had been done. He also noted that, in many cases, reinsurance that had been purchased was either excessive or insufficient to cover Royal Indemnity's needs. Driscoll concluded that the results of the audit, overall, were unacceptable. This audit report was sent to the Chicago office along with the work sheets and the audit summary. The report requested a written response to the audit by April 1. 23 On or around March 24, 1994, Trahant sent Driscoll a reply to the audit. It contained Mr. Bahl's line-by-line written responses to the individual work sheets, exhibits in support of his responses, and a memorandum detailing his comments to the audit summary. Trahant did the same. Mr. Bahl claimed that he satisfactorily responded to each issue raised by the auditor and demonstrated that, where warranted or required, all the account files contained rates documentation. 4 Trahant also commented that Mr. Bahl's files prior to the audit were in good order and contained the necessary documentation on how rates were developed. 24 However, after Driscoll received Mr. Bahl's and Trahant's responses to the audit, he concluded that the responses were totally inaccurate and inadequate. Driscoll claimed that Mr. Bahl's responses showed a lack of appreciation for the severity of the deficiencies found by the auditors and a complete lack of understanding of the issues involved in compliance. Driscoll noted that, had a state insurance auditor discovered the deficiencies, possible legal consequences--such as substantial fines or even the loss of Royal Indemnity's license to do business in the state-could have resulted. Accordingly, based on the audit results and Mr. Bahl's and Trahant's inadequate responses, Driscoll determined that both Bahl and Trahant should be discharged. 5 Mr. Bahl was terminated on April 14, 1994, about two months after the audit had been conducted and about a week after he received his performance review for the 1993 calendar year which pronounced his overall rating as needs improvement. He was replaced by a 33 year-old woman. After his termination, Mr. Bahl filed a charge of discrimination with the Illinois Department of Human Rights. Upon receipt of his rightto-sue letter, he brought this action in United States District Court for the Northern District of Illinois.