In search of an eight-figure cash pool to help pay off hefty legal settlements, several former executives and directors of toppled Richmond blood testing company Health Diagnostic Laboratory are suing two major insurers who they say wrongfully denied them coverage in the wake of the firm’s collapse.
HDL co-founders Joseph McConnell and Russell Warnick, along with three other former insiders, each filed lawsuits in recent weeks against National Union Fire Insurance Co., arguing it left them on the hook for a bulk of the combined $53 million they agreed to pay to settle claims against them by HDL’s bankruptcy trustee.
The suits, filed within days of each other in late October and early November in Richmond federal court, ask a judge to force the insurer to cover their claims by paying at least $35 million in combined damages.
The plaintiffs are McConnell, an HDL co-founder and former chief medical officer and CEO; Warnick, co-founder and chief scientific officer; Satyanarain Rangarajan, former chief operating officer and chief information officer; and former board members Robert Galen and Noel Bartlett Jr.
Also named as a defendant in the suits filed by McConnell, Warnick, Galen and Bartlett is Federal Insurance Co., which they likewise argue stiffed them on D&O coverage. Rangarajan did not sue Federal Insurance.
HDL fell into bankruptcy in June 2015, after the U.S. Department of Justice claimed the company was paying kickbacks to doctors. The trustee overseeing the company’s liquidation then filed a lawsuit against more than 100 defendants, including the company’s co-founders, directors and shareholders, arguing they were to blame for its downfall. The case sought a total of $600 million in damages.
Like many large companies, HDL had director’s and officer’s insurance liability policies held by HDL to presumably cover them in such instances. National Union was the company’s primary D&O insurer through a policy with $10 million liability limit. Federal provided an excess liability policy also with a $10 million limit.
The plaintiffs each sought to activate the coverage as the HDL debacle ensued, only to ultimately be denied, with the insurers arguing that the allegations surrounding the company’s downfall involved acts excluded from the policies HDL had in place at the time.
Warnick, Rangarajan, McConnell, Galen and Bartlett each have since settled out of the trustees’ lawsuit, agreeing to pay a combined $53 million. They each were forced to pay some out of pocket, while holding out the argument that the insurers still should have to pay up.
McConnell ultimately agreed to a $15 million settlement with the HDL trustee. Of that, $1 million was paid personally and up to $9 million is to be paid from the insurance policies, according to his lawsuit against National Union and Federal. He’s seeking damages of $10.5 million.
Warnick agreed to a $14.95 million settlement, of which $12.5 million is to be paid by the insurance policies. He wants damages of at least $10 million.
Galen and Bartlett Jr. settled for a combined $15 million, up to $12 million of which is expected to come from insurance proceeds.
Rangarajan is seeking $3.1 million for unpaid defense costs. He paid $2 million out of pocket to the trustee as part of his $8.8 million settlement.
Each suit alleges breach of contract and seeks a judgment declaring the insurers are obligated to pay for coverage. They each preserved the right to pursue this litigation as part of the settlement.
Attorneys for the plaintiffs either did not respond or declined to comment when reached by BizSense.
National Union is a subsidiary of AIG, which did not respond to a request for comment by Monday evening. Federal Insurance Co. is a subsidiary of Chubb, which said through a spokesperson that it does not comment on pending litigation.
Meanwhile, HDL’s trustee is still in the thick of litigating recovery efforts against hundreds of parties in an attempt to recover money for the company’s creditors.
Cullen Drescher Speckhart, an attorney with Wolcott Rivers Gates who is representing the trustee, said the case is in the discovery phase and is headed for trial against the remaining defendants in February 2020.
Speckhart said the bankruptcy estate has yet to release a figure as to how much money has been recovered for creditors. She said that will come once the pending litigation is resolved.