Governor Was Right, Says Beacon's Own Auditors

Here is the meat and potatoes of what the Giuliani group found in their audit of Beacon Mutual [the whole report is here (PDF)]. First, we have the in house problems:

Beacon executives maintained a VIP list of about a dozen companies, some of which received favorable treatment resulting in lower workers' comp rates. Solomon denied the list's existence to Giuliani's investigators, but told another Beacon executive to delete it from his computer.

Beacon paid some insurance agents "significantly greater" commissions than required under their contracts -- about $2.5 million from 2001 to 2004.

Beacon's longtime chairman, Sheldon Sollosy, who resigned in February, misused his position by refusing to provide the insurer with payroll records for a company he owned, Temporary Manpower Services. His refusal, "ignored" by Beacon management even though it violated Beacon policy, made it impossible to determine whether Sollosy's company paid the rates it should have.

Beacon's president, Joseph A. Solomon, had granite countertops installed in the kitchen of his East Greenwich house by a company that received undocumented breaks on its workers' comp insurance. An executive of the stone-working company told investigators that the $10,000 Solomon paid for the kitchen work didn't cover the total cost. Solomon said in an interview that the cost was only slightly higher, but the contractor honored his original quote of $10,000. The report found no evidence of a "quid pro quo."

Solomon and three Beacon insurance agents used Beacon funds to help pay for a trip to the exclusive Carnegie Club at Skibo Castle in the Scottish highlands three years ago. Solomon said in an interview that Beacon spent $19,000 on the trip.

The report also found "weak or non-existent" policies at Beacon regarding corporate governance, ethics and internal auditing, as well as "inadequate" financial checks and balances that invited potential, and actual, abuse.

Controls are so lacking, and special deals so prevalent among the limited number of policies reviewed, the Giuliani review found, that several Beacon employees said that "two underwriters given the same information will come to two different conclusions" regarding the rate that a company should pay.

Then there's a bit more on those "special" deals:

The Giuliani report cites several instances in which companies may have paid lower rates as a result of misclassified workers.

The report cited evidence of "misclassifications of payroll" at Temporary Manpower Services. Over a nine-year period ending in 2002, just before Sollosy sold the company and canceled his policy, Beacon lost money on Manpower six years, paying out more in injury claims than it collected in premiums.

The report also quotes an internal Beacon analysis in 2002 highlighting "numerous areas" in which Manpower received "preferential treatment," including credits that normally go to companies (based on their safety records, and a lower volume of claims), but which Beacon didn't normally grant to temp agencies. But nothing changed.

Investigators expressed concern that while Sollosy's company received "special treatment," Sollosy, as head of Beacon's compensation committee, recommended board approval of "excessive" compensation packages for Beacon executives, including Solomon, who has a $490,000 salary and a $3-million severance package.

Sollosy was also the lone person to approve Solomon's travel expenses, and did so after the fact, including the trip to Scotland, the report said.

The Giuliani team tried to interview Sollosy, but he declined, on the advice of his lawyer, Peter A. DiBiase. (DiBiase could not be reached for comment.)

In the case of Paul Arpin Van Lines, the report found credits that were "unearned and unwarranted due to a history of losses," as well as "incorrect" classifications of workers.

During an overlapping period, from 2001 to 2005, Beacon reimbursed Arpin $450,000 for its use of a luxury box for New England Patriots football games. Solomon has said that Beacon used the box to entertain valued clients and insurance brokers, but discontinued the practice early this year to avoid controversy.

An Arpin official did not return a call seeking comment.

Investigators also found evidence that the Cardi Corp. did not have any employees classified as bridge workers, even though there is "ample evidence" that Cardi is involved in bridge construction, including the company's own Web site and "at least one claim" involving an injury related to bridge construction.

Beginning in 2003, the report says, Beacon loss-prevention employees "began to insist" that bridge workers be included in Cardi's policy, bolstering their case with an auditor's visit to a Cardi construction site and photos of Cardi employees performing bridge work. But to date, Cardi does not pay any premiums for bridge workers.

A Cardi spokesman did not return a call seeking comment.

The report also questioned Beacon's due diligence in checking the payrolls and job classifications at Lifespan, by far its largest policyholder, with nearly $5 million in premiums last year. Lifespan's three-year guaranteed rate was "highly unusual and not customary," the report said.

Jane Bruno, a spokeswoman for Lifespan, said the company was above-board in its dealings with Beacon, and would not have done business with the insurer without a multiyear guarantee.

And all of this even though the Beacon Mutual guys weren't that forthcoming. Imagine what will be found when the state insurance investigators--who have subpoena power--get in there. Of course, the fact that they can't look at those hard drives isn't very helpful, is it?