BoA wins $17.85m weather derivatives lawsuit

Diamond State Insurance, a unit of Cayman Islands-domiciled United National Group (UNG), has agreed to pay Bank of America (BoA) $17.85 million to settle its claims over a series of weather derivatives policies written through the now defunct Customized Worldwide Weather Insurance Agency (CWWIA).

The payment resolves litigation, which has been pending in the US District Court for the Southern District of New York since 2000, brought by the bank and Platinum Indemnity, a Bermuda-based insurer that ceded the weather risks to Diamond State. BoA and Platinum had sought $29 million in damages.

The underlying derivatives contracts covered Enron and other energy traders, including North Carolina-based Duke, against losses resulting from unexpectedly warm weather. Platinum and an affiliate wrote the contracts and secured their obligations with letters of credit from BoA. They also ceded portions of the risks to Diamond State and other reinsurers, including Chubb.

But Diamond State denied liability under its reinsurance contracts after the energy traders suffered losses, instead alleging that CWWIA principal Harold Mollin fraudulently bound the coverage and then concealed details of the transactions from Diamond State. The insurer filed its own suit against Mollin, alleging that he fled with the premiums of the derivatives contracts. Mollin is believed to be in hiding in Thailand.

Diamond State is, however, trying to recoup its payment to BoA in an arbitration against Bermuda-based Partner Reinsurance. In a statement issued last week, UNG said it has “activated a pending arbitration against Partner Reinsurance Company Ltd and Partner Reinsurance Company of the US, seeking recovery under a reinsurance agreement covering business produced by Worldwide Weather Insurance Agency on a 100% basis with regard to the type of risk involved.”

In addition, Diamond State is seeking indemnification and contribution from Partner Reinsurance Company of the US because of its role in the appointment of Mollin and CWWIA.

One London-based weather trader, speaking on condition of anonymity, told RiskNews' sister publication Energy Risk that Mollin fled with anywhere between $10 million and $20 million, following the alleged fraud, adding that other CWWIA employees were not aware of Mollin’s alleged fraud at the time.