The California Department of Insurance took over management Monday of Cal-Farm Insurance Co., a Sacramento-based writer of automobile and homeowners insurance affiliated with the California Farm Bureau Federation, the state's largest farm organization.
Cal-Farm's problems have drawn it into a widening mortgage-securities fraud investigation that grew out of a $95-million loss by giant Bank of America.
The Department of Insurance obtained a conservation order late last week in Sacramento County Superior Court after Cal-Farm experienced a high rate of defaults on real estate development loans issued on its behalf by an agent who named the company as guarantor of the loans.
A department spokesman said that $60 million in loans are in default and another $100 million remain outstanding.
Continues to Function
Insurance Commissioner Bruce Bunner and Henry J. Voss, president of the California Farm Bureau, said in separate statements that Cal-Farm continues to function and that loss claims will continue to be processed. California insurance officials already have acted against two other insurance firms--Glacier General Assurance Co. and Pacific American Insurance Co.--after they failed to make good on similar guarantee bonds.
Bunner said the department acted on Cal-Farm because it and the company are unsure of the amount of collateral backing other loans that the company bonded. The order was sought, he said, "because of the potential for financial hardship and for the protection of the policyholders."
Cal-Farm collected $79 million in premiums last year, the department said, mostly in automobile and homeowners insurance, and has about 100,000 policyholders. A sister company dealing in life insurance is not affected by either the liability or the court order, it added.
Financial guarantee bonds provide an inducement to lenders to make real estate development loans by promising to pay if the borrowers default.
Because of the bond losses, Cal-Farm lost $3.5 million last year and expects to report a $5.5-million loss this year, according to Carl J. Santillo, executive vice president. Cal-Farm filed a lawsuit in U.S. District Court in Los Angeles last Jan. 29 seeking at least $45 million in damages against Eagle Bonds and Insurance Brokers Inc. of Agoura, a corporation whose ownership it says is shared by brothers Errol P. and John M. Coughlan Jr. The suit also names the Coughlans' father, John M. (Jack) Coughlan, who, it said, acted as an agent of the brothers.
In the lawsuit filed under federal racketeering laws, Cal-Farm states that it approached Eagle Bonds in response to a 1982 Wall Street Journal advertisement, placed by the Coughlans, seeking the underwriting services of an insurance company.
According to the lawsuit, Eagle Bonds said it would find qualified borrowers in construction and real estate, and the insurance company would write bonds backing the loans. Eagle Bonds and Cal-Farm agreed to the arrangement in May, 1983.
But in September of that year, Cal-Farm said it was severing the relationship after Santillo concluded that "this wasn't a proper business for Cal-Farm to be involved in." A Department of Insurance official said California's Insurance Code forbids a company from both underwriting bonds and selling property and casualty insurance.
At that time, Cal-Farm believed that its liability totalled $2.22 million, plus interest on loans that it claims the Coughlans arranged for another firm they control, California Pacific Construction Co., which the lawsuit describes as a shell designed to protect the Coughlans from individual liability.
Now, however, Cal-Farm believes that it may be liable for defaulted loans on more than 50 other projects. It estimates its loss at $15 million and has asked the court for triple that amount as punitive damages under the federal racketeering law.
According to the suit, the Coughlans "knew that Cal-Pac could not make payments to the lender as promised" because the company lacked sufficient assets.
In an interview to be published in this week's issue of the California Farm Bureau's newspaper, Ag Alert, Santillo claims that "a substantial amount of collateral" exists for the outstanding bonds but adds that the amount is unknown.
"We believe the liability is not as large as the department estimates," he said of the state's $60-million figure, "but, truthfully, we cannot prove that statement."
Eagle Bonds and Cal-Farm are included on a list of companies, compiled by a federal, state and local government task force, which is part of a widening investigation of fraudulent mortgage-securities practices that so far have caused San Francisco-based Bank of America to write off $95 million in losses. According to a task force document obtained by The Times, however, neither Eagle Bonds nor Cal-Farm appear to be linked to the same brokers and agencies involved in the B of A case.
No one was available for comment Monday at Eagle Bonds' office in Agoura.