Insurance and Utilities and Transportation, Distribution & Logistics

Court battles widen for ProLiance Energy: Gas marketer sues its insurer for millions in legal fees

October 24, 2005

ProLiance Energy LLC, already facing a $38.9 million judgment under a federal racketeering law, now is battling its insurer in court to collect more than $2 million in legal fees for its defense.

New Jersey-based Executive Risk Specialty Insurance Co. not only refuses to pay the claim but also wants ProLiance to return $1.3 million in defense expenses paid before the February verdict on behalf of Huntsville Utilities in U.S. District Court for the Northern District of Alabama.

The jury found against Indianapolisbased natural gas marketer ProLiance for fraudulent billing and other violations, using the federal Racketeer Influenced and Corrupt Organizations Act, or RICO.

The federal statute was conceived to convict mobsters and crooked labor unions.

This summer, ProLiance filed an appeal of the verdict with the 11th Circuit Court of Appeals in Atlanta.

ProLiance and Executive Risk have been sparring since April, when they sued each other in U.S. District Court for the Southern District of Indiana.

"The policy excludes coverage for any knowing, intentional, dishonest, fraudulent or criminal wrongful act," states part of Executive Risk's suit.

ProLiance interprets the $10 million commodity trader's policy differently in a countersuit for breach of contract against Executive Risk.

"Our view is the insurance policy would pay for defense costs and expenses," said Briane House, chief counsel for ProLiance.

ProLiance said it already has paid legal fees to law firms, including two in Indianapolis: Kightlinger & Gray LLC and Barnes & Thornburg LLP.

The company already had reserved $3.9 million toward legal costs of the Huntsville case, after analyzing the probability the verdict will be reversed in part or whole. It ultimately expected to recover all or a portion of those costs through its insurance policy.

Huntsville Utilities alleged that Pro-Liance, through a complex scheme, overcharged Huntsville for gas it supplied during the winter of 2000-2001. Gas prices soared, costing Huntsville more than $10 million.

It alleges that a ProLiance employee in mid-December informed Huntsville's gas manager that insufficient amounts of gas were available at a previously agreed price of $2.26 per 1,000 cubic feet of gas. Instead, gas was purchased for Huntsville at $5.95-later as high as $9.82, according to the suit.

The suit held that the ProLiance and Huntsville employees attempted to conceal ProLiance's inability to provide gas at the lower price by sending two sets of invoices to Huntsville. The first bill was based on the actual, higher price of gas ProLiance bought for Huntsville and the second indicated the original, $2.26 price.

Huntsville said its employee lacked authority to agree to a modification and that he allegedly colluded with Pro-Liance by forwarding only the falsified invoices, indicating gas was delivered at $2.26, to Huntsville's accounts payable department.

To recoup the difference between that amount and what ProLiance actually paid for the gas, the Indianapolis company "then secretly over billed Huntsville Utilities on various changes on invoices, including transportation ... to recoup the $10 million," the suit alleged.

ProLiance denied the double-billing scenario. It argued that Huntsville had no legitimate contract claim at $2.26. The Indianapolis company also argued unsuccessfully that Huntsville owes it $6 million for gas that was to be purchased under the contract.

The Alabama jury found ProLiance liable for $8.2 million in compensatory damages and $25 million in punitive damages. The total grew to $39 million after the judge socked ProLiance for some of Huntsville's legal fees.

The unfavorable judgment has already had an impact on ProLiance's co-owners: Indianapolis-based Citizens Gas & Coke Utility, which owns 39 percent, and Evansville-based utility Vectren Corp., which owns the rest.

Vectren set aside $1.4 million and could have its earnings walloped if unsuccessful on appeal.

Citizens, a public charitable trust, has set aside $1.5 million.

The case won't directly affect Citizens' residential customers, as ProLiance is one of its unregulated subsidiaries and therefore not entitled to recover damages through ratepayers.

"We can't recover this through delivery and service charges" either, said Citizens spokesman Dan Considine.
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