USF&G; Corp., stung by a $788,000 jury award in a bad-faith lawsuit in Alabama, has turned around and sued the savings and loan that filed the case against it.
The Baltimore insurer last month lost the initial case filed by one of its customers, SouthFirst Bankshares, of Sylacauga, Ala. A jury determined that USF&G; had acted in bad faith by failing to pay SouthFirst's claim for embezzlement losses by one of its employees. The jury awarded SouthFirst $688,000 in compensation, and $100,000 in punitive damages.
Now, USF&G; has filed a suit -- seeking an unspecified amount of money --against the officers and directors of SouthFirst, parent of First Federal of the South, a savings bank with about $84 million in assets. If the thrift loses the case, the damages would be paid to USF&G; by a different insurance company, which provided SouthFirst's officers and directors liability policy. USF&G; claims SouthFirst should have followed the recommendations of regulators and taken steps to monitor its operations better, which could have spotted the embezzler sooner.
As it was, a former SouthFirst vice president for consumer lending was able to siphon funds from the company for seven years, until he was fired in the fall of 1991. He served almost three years in a federal prison.
SouthFirst said the embezzlement cost it about $600,000. It filed a claim on its fidelity bond with USF&G;, and later filed the bad faith lawsuit for USF&G;'s alleged failure to satisfy the claim.
USF&G; says it never denied the losses were covered under the policy, which had a $1.2 million limit.
"There was no dispute as to liability," said Gary Wilson, a USF&G; vice president for fidelity and surety claims. "The only dispute was as to the amount of money leaving the bank" due to embezzlement.
The insurer said it was ready to pay $232,000 to SouthFirst in 1992, just before the thrift decided to file suit. Later, through legal discovery, USF&G; said it found evidence that the claim was worth $425,000, and even offered $650,000 before the trial started last month. But "$1.4 million was their last settlement demand," Mr. Wilson said. "We really don't know how they got to that number." SouthFirst says USF&G; was far more intransigent. "If they never disputed the fact, why didn't they send us a check?" said President Donald C. Stroup.