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Insurance slugfest with accusations of espionage

Aaron Kremer October 14, 2009 0

jamesriverA Richmond-based insurance company thinks its former CEO went rogue and broke his contract when he left to start a competing firm. The company wants its day in court and an injunction against the upstart.

The startup, meanwhile, says it followed all non-compete clauses and that it’s  ploy to drown it in legal fees before it can launch successfully.

For six years, Mike Kehoe was the boss at James River Insurance. He helped get the company going in 2002 and helped it grow. He also helped sell it for $575 million in 2007, pocketing $6.4 million in stock options and bonuses, according to the lawsuit.

But something went wrong after the buyout, and Kehoe left in May 2007 and started working on his own insurance startup, Kinsale.

And that’s about when the trouble started. In a suit filed in July in U.S. District Court in Richmond, James River Insurance seeks to prevent Kinsale from launching, and seeks compensation for the damage it has suffered and may suffer. It is also seeking a jury trial, which has been tentatively scheduled for January.

James River claims Kehoe committed business espionage when he left to form a competing firm, and that he and other accomplices stole secrets and some of its top employees, who also hacked computers and ordered a hard drive “swap” to hide their alleged misdeeds. Kinsale has at least four former James River executives on staff, according to the complaint, and may have hired more.

Kehoe’s lawyers filed a response that said the lawsuit is meant to discourage his business.

“The lawsuit was filed three days before our capital raise was due to close,” said Kehoe.

Kinsale plans to start selling competing policies in the first quarter of 2010, Kehoe said in a phone interview. The company, which recently leased 7,000 square feet at 6802 Paragon Place in Henrico, will write specialty insurance for higher-hazard businesses that for whatever reason can’t get coverage from standard insurance companies. That’s the same basic model as James River.

The startup raised more than $80 million on July 2, Kehoe said, and has 23 employees. That number will likely double by March 2010, Kehoe said.

James River Insurance, which has 130 employees and an office on two floors at Reynolds Crossing, is also going after a former private equity investor who is funding Kinsale, as well as a handful of other former executives.

Kehoe and other executives named in the suit said in a response filed with the court that they did nothing wrong, instead alleging that James River is trying to drown the startup with legal fees and use the discovery process to dig up additional dirt. That’s not allowed in Virginia, the defense wrote in its response to the complaint, adding that the plaintiffs have not adequately proven that there have been any damages such as loss of business.

It’s unclear what exactly is meant by the compensatory damages. No dollar figure was listed in the complaint. A lawyer for James River did not comment, and the company’s spokesman said he cannot comment on ongoing litigation.

Kevin Holden, a lawyer in the Richmond office of the firm Jackson Lewis who works often on workplace litigation, said companies often seek an injunction to prevent a competitor from starting up.

“Once you start competing, it’s almost impossible to measure damages,” Holden said.

Mike Kehoe

On May 5, 2008, Mike Kehoe resigned as president and CEO of James River Insurance. In court filings, his attorneys wrote that he left the company because of corporate mismanagement after the company was sold for $575 million to a group that included Goldman Sachs.

“He did not wish to remain associated with James River or its executive leaders, who were executing an ill-conceived business plan and mismanaging James River,” wrote his defense’s response to the complaint.

James River alleges that even though Kehoe said he wanted to stay, that was a lie. And after he left, they say, he broke his non-complete clause, which was supposed to last for one year. “Shortly after his resignation on March 5, 2008, Kehoe posted a website, www.kinsaleinsurance.com, which was registered on March 14 2008 to Kehoe.” The suit also alleges that he incorporated Kinsale Capital.

But that may not be a crime against James River. Several lawyers who handle similar cases said that in Virginia, an employee may plan to compete against an employer – even while employed – as long as they don’t actively compete. That means they can do such tasks as find office space, register new businesses and do research.

The suit also says Kehoe breached the non-solicitation clause of his contract and went after James River’s top employees, recruiting some at a cookout in the spring. As proof, the complaint says he posted job listings on Craigslist on May 31, one day before his non-compete and non-solicitation clauses ended.

There is some discrepancy between when Keohoe says his non-compete and non-solicitation expired and when James River says it expired.

Computer theft?

James River also alleges that Kehoe hired away senior executives in early June and then “induced them to access without authorization misappropriate James River trade secrets … and breach their respective duties of loyalty to James River.”

The other defendants are:

•    William Kenney, former chief information officer at James River
•    Brian Haney, former chief actuary officer at James River
•    Ann Marie Marson, a former chief claims officer at James River
•    Edward Desch, the former chief financial officer at James River

The vacant positions at James River have been filled, said John Clarke, a spokesperson for the company. “James River had a pretty deep bench here, so we did it with a combination of internal promotions and internal hiring.”

Each of the defendants knew they were going to leave James River for Kinsale and attempt to steal information, the suit alleges: “They engaged in a conspiracy to cover up or to conceal efforts by instituting or participating in a purported company policy in March 2009 to ‘Swap out’ hard drives of certain computers. But only certain executives, including defendants, but not others. The effect of this so-called program was to make the discovery of espionage more difficult, if not in some cases impossible to uncover.”

The suit says they took with them propriety data, such as data management and reporting systems, broker lists and relationships, a broker contact database, rates used to price business and email address books.

Holden, the attorney from Jackson Lewis, said that the truth would likely come out during the discovery period, when the court will examine email records. He said employees will often say that they were the ones who approached the new company, and that they weren’t solicited.

“There is a very fine line between what constitutes solicitations,” he said, “You can announce a departure and say, ‘I’ve left,’ but you cannot say, ‘Let’s discuss the opportunities we have.’ ”

Private Equity also named

The suit also names Greg Share, who worked for Fortress Investment Group in 2007 and who reviewed James River for a possible acquisition. The complaint claims Share met Keohe while working for Fortress and examining James River’s operations as part of due diligence for his firm. That meant he had privileged knowledge, and now he’s using it against the company, the suit says.

Aaron Kremer is the BizSense editor. Please send news tips to [email protected]

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