Bermuda-based Inter-Ocean Reinsurance is being sued for more than $200 million by American Superior National Insurance Group for alleged fraud and unfair business practices.

California-based Superior National Insurance Group (SNTL) has filed a civil law suit in Los Angeles County Superior Court and is seeking compensation and punitive damages from both Inter-Ocean and one of the limited company's owners American Reinsurance.

SNTL alleges fraudulent conduct of American Re and Inter-Ocean because they tried to rescind a reinsurance contract between Inter-Ocean and the insurance subsidiaries of Business Insurance Group Inc., which was acquired by SNTL in 1998.

SNTL also claims that the companies were involved in fraud, intentional interference with contractual relations, international interference with prospective economic advantages and unfair business practices.

"Superior National will aggressively pursue its legal rights against American Re and its affiliate, Inter-Ocean,'' said Robert Nagle, the General Counsel for SNTL.

"The fraudulent actions of American Re and Inter-Ocean that Superior National have alleged are, in my opinion, the most flagrant that we have seen in the recent history of the reinsurance industry, and Superior National will vigorously press its claim for punitive damages to deter American Re and Inter-Ocean from engaging in similar fraud in the future.'' According to Mr. Nagle, when SNTL acquired Business Insurance Group from Foundation Health Systems (FHS) they required the seller to provide $175 million of adverse development protection and FHS decided to provide this in the form of a reinsurance contract.

"FHS discussed this reinsurance contract with a number of reinsurers, who were all afforded the opportunity to perform due diligence prior to binding the reinsurance agreement,'' said Mr. Nagle.

"Several preliminary quotes were received by FHS, including one from American Re, which was the most attractive. Upon completion of due diligence, which included the presentation of an independent actuarial opinion from Milliman & Robertson that showed that Business Insurance Group's reserves could develop to be as much as $275 million higher, and the opportunity to speak with and freely question the Milliman and Robertson actuary, several of the reinsurers, but not American Re, substantially increased their prices relative to the initial quotes.'' According to Mr. Nagle, American Re was chosen because it offered the most attractive price. After being selected, American Re designated Inter-Ocean to issue the contract.

Mr. Nagle said: "Approximately ten months after the coverage was agreed to and subsequent to the completion of the acquisition, Superior National booked $175 million of additional losses, all of which were ceded to American Re and Inter-Ocean pursuant to the reinsurance contract.

"Inter-Ocean and American Re are now taking the position that they were misled even though they were provided with an actuarial opinion calculated by a highly reputable independent actuarial firm using accepted actuarial methodologies that showed the potential for deficiencies of up to $275 million and had full opportunity to question the actuary.'' He added: "It is clear to Superior National, based upon the facts, that American Re and Inter-Ocean have no basis upon which to rescind the contract.

Superior National views their actions as an attempt to bully a smaller company into an arbitration process in which American Re and Inter-Ocean perceive they have little or nothing to lose.'' Inter-Ocean is a Bermuda-based reinsurance company owned jointly by several companies including American Re, which is a subsidiary of Munich Re.

It is also part-owned by local Bermudian insurer Argus Insurance Company and Renaissance Re.

Other listed owners are Associated Electric & Gas Insurance Services, Hanover Re, La Mutuelles du Mans, Lincon National, Reliance Insurance Company, Westfield Insurance Company and Zurich Re.