A captive insurer for the Seventh-day Adventist Church has launched a high-stakes legal battle in Vermont federal court, alleging that two reinsurers failed to reimburse more than $55 million tied to abuse claims at a now-shuttered boarding school.

The lawsuit — the AIG insurance $55M Abuse Settlement suit — accuses AIG unit Lexington Insurance Co. and Swiss Re subsidiary Westport Insurance Corp. of refusing to honor facultative reinsurance agreements covering massive defense costs and settlements.

A Dispute Over $55.4 Million

In a complaint filed Tuesday, Gencon Insurance Co. of Vermont said the reinsurers declined to indemnify approximately $55.4 million in combined defense expenses and settlement payments.

Gencon contends Lexington is responsible for about $36.4 million, while Westport allegedly owes $19 million. The captive insurer argues the contracts required the reinsurers to “follow the settlements” it entered into.

“The reinsurance contracts obligate the reinsurers to follow the settlements entered into by Gencon,” the company said in its complaint, adding that it reasonably allocated the amounts it paid and that industry custom allows such allocation discretion.

Lexington and Westport have argued the underlying claims are not covered or have disputed how Gencon allocated the losses, according to the filing.

Insurance Layers and Reinsurance Agreements

Since 1987, Gencon has insured church-affiliated organizations under primary and excess general liability policies. Beginning in 1995, it transferred second-layer excess risks to reinsurers.

Westport provided coverage from 1999 to 2005, while Lexington did so from 2005 to 2011, the complaint states.

The financial clash now unfolding centers on whether those reinsurers must reimburse Gencon for settlements tied to allegations of abuse at Miracle Meadows School in West Virginia.

The Miracle Meadows Allegations

Miracle Meadows, founded in 1988 by Gayle Clark, was owned by a church member but was not owned or sanctioned by the church itself, the complaint says.

In 2014, West Virginia state police raided and shut down the school following investigations by the state Department of Health and Human Resources and a student’s attempted suicide. Clark and other staff members were arrested.

Three years later, 27 former students filed individual lawsuits alleging that from 1999 to 2014 they endured deplorable living conditions, physical and mental abuse, false imprisonment, and educational, medical and nutritional neglect. Many also alleged sexual misconduct.

Gencon said its claims administrator, Adventist Risk Management Inc. (ARM), determined the physical abuse allegations triggered a duty to defend under the general liability policies and that no exclusions barred coverage.

In 2020, ARM settled those initial 27 cases for $19 million.

Additional claims followed. According to Gencon, settlements for later cases ranged from $450,000 to $650,000. To date, ARM has resolved claims brought by 177 former students, paying nearly $86.7 million in settlements and incurring more than $2 million in defense costs.

Allocation Fight Intensifies

Gencon said ARM initially handled nonsexual physical abuse claims under general liability policies and sexual abuse allegations under employment practices and sexual misconduct liability policies.

But in 2020, ARM shifted all claims to the general liability policies. For reinsurance billing purposes, ARM first allocated the initial 27 claims to three policy years involving the most severe injuries and billed reinsurers accordingly.

Later, ARM concluded that approach did not reflect the complexity and breadth of emerging claims and was inconsistent with contract language. It revised the methodology, allocating claims based on each claimant’s first year of attendance.

To ensure uniform treatment across all claims, ARM designated them as 19 occurrences — one for each year the school accepted students. If aggregated losses for any year exceeded $1 million, the excess general liability policies were triggered, Gencon said.

The captive insurer disputes the reinsurers’ argument that courts could find separate or multiple occurrences for each victim.

Lexington and Westport’s proposed approach would be “unworkable,” Gencon argued, because former students often could not identify specific dates or instances of abuse, and school records could not reliably establish attendance periods.

Reinsurers Push Back

Gencon said 10 reinsurers have fully reimbursed defense costs and settlements. Lexington and Westport, however, have refused payment, in part asserting the claims should have been addressed under employment practices liability policies instead of general liability coverage.

Gencon counters that the alleged conduct falls squarely under primary and excess general liability policies and cannot simultaneously be covered under employment practices policies due to “other insurance” provisions and exclusions.

A Westport representative declined to comment. Representatives for Gencon and Lexington did not immediately respond to requests for comment Wednesday.

Gencon is represented by attorneys Marshall G. Gilinsky, Jerry S. Goldman, Dennis J. Nolan, Bruce Strong and Thomas Dupont of Anderson Kill PC. Counsel information for the defendants was not available.

As the AIG insurance $55M Abuse Settlement suit moves forward, the case could test the boundaries of reinsurance obligations — and determine who ultimately bears the weight of tens of millions of dollars in abuse settlements.