The NCUA is asking a federal court to order CUMIS Insurance Society to honor a nearly $72.5 million fidelity bond it says covers losses at St. Paul Croatian FCU in Cleveland.
According to the Aug. 18 complaint for declaratory judgment filed by NCUA attorneys, CUMIS acknowledged the proof of loss claim that the regulator filed Oct. 8, 2010 but has not paid on it, citing alleged misrepresentation and concealment of material facts.
The NCUA filed a proof of loss claim with CUMIS for nearly $72.5 million. However, because CUMIS’ fidelity bond has a $5 million coverage limit, the amount of money in dispute would be less than 7% of that figure, said Phil Tschudy, a CUNA Mutual Group spokesman.
In the Aug. 18 complaint, the attorneys for NCUA said the CUMIS bond is subject to Ohio law and should be paid.
The law cited states “although an applicant’s misstatements in an insurance application, if shown to be material to the risk and fraudulently made, is grounds for cancellation of the policy, such representation, standing alone, does not render the policy void ab initio and may not be used to avoid liability arising under the policy after such liability has been incurred.”
The alleged misrepresentation and concealment of facts goes back to the spring of 2010, when the NCUA discovered an alleged fraudulent lending scheme by Anthony Raguz, chief operating officer at St. Paul, according to the complaint filed with the U.S. District Court Northern District of Ohio-Eastern Division.
NCUA attorneys said while CUMIS claims that Raguz “misstated his knowledge of any act, error or omission which might give rise to a claim in the bond applications, these alleged misstatements do not qualify as warranties under Ohio law.”
Tschudy said the matter has not yet been litigated but feels that CUMIS is on “solid footing.” He acknowledged that if CUMIS were to lose, the most NCUA would be able to recover would be substantially less than what the agency is seeking.
The NCUA projected that the CU’s failure would cost an estimated loss of $170 million to the National Credit Union Insurance Share Fund.
“We don’t want credit unions to think CUNA Mutual is not trying to pay this and to let the NCUSIF absorb this,” Tschudy said. “We wouldn’t want people to get the impression that we’re shirking not paying.”
The NCUA, meanwhile, has been sued itself over the St. Paul Croatian collapse, by a Cleveland couple who contend the agency did not have adequate insurance.