The Maryland Insurance Division, in a rare action, has taken over Eastern Indemnity of Rockville, removed its officers and frozen its assets.
According to Insurance Commissioner Edward J. Muhl, the bonding company got into difficulty by writing coverage for contractors and subcontractors -- some of whom posed high risks -- who could not get coverage elsewhere.
He also described the company, which essentially is insolvent, as mismanaged.
C. Graham Perkins, the company's majority stockholder, was ousted as president, along with the directors and some employees. A call to Perkins' home was answered only with, "No comment."
Eastern Indemnity began operations in February 1980 and now does business in the District of Columbia and 15 states, including Virginia, Texas and Louisiana.
According to Best's Insurance Reports, the $11 million company suffered losses during the past three years. Last year, they amounted to $517,000.
Muhl said the company had a "tremendous number of problems over the past three of four months," and termed the situation "chaotic." He added that its financial statements supplied to the division were "in error, misleading or wrong."
As contributing causes, Muhl listed four projects in Atlanta, Louisiana, Houston and Quantico, Va., that were temporarily halted because of Eastern Indemnity's problems until the state came along and provided some money.
The company wrote about $10 million in bond insurance last year, including $2.5 million in Maryland. That state, along with some others, has suspended the company's license. Louisiana's commissioner, Sherman Bernard, said he has notified all agents there to stop doing business with Eastern Indemnity until the problems are solved.
A Montgomery County Circuit Court judge on Wednesday approved the plan whereby Muhl becomes Eastern Indemnity's "rehabilitator," or effectively the head of the company and in charge of its operations. Muhl said his major priority is to determine liabilities and stop further losses. Should that prove impossible, the commissioner could ask the court for permission to liquidate the company.
Muhl said that no Maryland contractors currently bonded would lose coverage. If necessary, Maryland property and casualty insurance companies would be assessed by the Maryland Insurance Guaranty Association to provide the funds. The private insurer's director, Joseph Petr, said yesterday it has covered four or five insolvencies over the past six years; only one has required a special levy.