Pa. to end 20-year control of insurer
Remaining claims of failed Colonial Assurance will be paid, and its former owner will get back $2.3 million.

Inquirer Staff Writer

After 20 years, the Pennsylvania Insurance Department is ready to end its control of a failed insurer, paying all remaining claims and giving $2.3 million back to the company's former owner.

In a petition filed Wednesday in Commonwealth Court, insurance commissioner M. Diane Koken blamed Colonial Assurance Co.'s former owner, Louis V. Mazzella Sr., both for financial management problems that hastened Colonial's state takeover in 1984 and for litigation that the state says has delayed settling the case.

Mazzella pleaded no contest in 1987 to federal fraud charges for diverting Colonial funds into bank accounts he controlled, in what he said was a desperate attempt to save his business amid a dispute with another insurer. Since then, he has waged a so-far-unsuccessful legal fight to regain control of the company, which he contends was never really insolvent.

Last month, the Insurance Department released a report by a Harrisburg certified public accounting firm hired to review Colonial's financial reports. The firm said it could not perform an audit on Colonial because state officials could not provide proof of certain Colonial income and expenses.

The state also failed to produce information about several million dollars Colonial was owed, but failed to collect, under state management, according to the auditor.

In its petition, the Insurance Department said the missing records were not important, and it praised state liquidators for returning Colonial to solvency.

In 1984, the state said, Colonial faced a $16.5 million deficit between its assets and its potential liabilities. But after taking control, state liquidators closed that gap.

First, they dismissed $7.2 million in claims against Colonial as illegitimate. Then, delays in settling the case enabled the state "to earn millions of dollars in investment income," according to department spokeswoman Melissa Fox. By 2001, Colonial was showing a cumulative surplus of more than $4 million.

Today, Colonial has $16.5 million in assets and owes $11.9 million in claims to former clients, including businesses and individuals, which would be fully paid pending the court's approval.

The difference, $4.6 million, would normally go to the company's former owner, Mazzella.

However, Koken wants special permission from the court to use some of that money to pay interest to Colonial claimants. That would leave $2.3 million for Mazzella, according to the petition. He has the right to challenge Koken's plan.

Reached in Florida yesterday, Mazzella said he has hired a forensic accounting firm to check the state's numbers. "Unfortunately, there's all these missing documents," Mazzella said, citing the auditor's report. "Why didn't the state keep accurate records?"

He also disputed the Insurance Department's right to pay interest on the claims.

If Mazzella is paid, he has at least one creditor of his own waiting for a piece.

The Colonial takeover was acrimonious, with the owner and state employees trading personal accusations in civil court. Former Pennsylvania insurance examiner Robert Savitsky won a $90,000 federal judgment against Mazzella in 1991 under the state's abuse-of-process law. Savitsky has been unsuccessfully trying to collect that money from Mazzella ever since, court records show.

Colonial is the smallest of more than 20 failed insurance companies currently run by the Pennsylvania Insurance Department.