A new lawsuit in Delaware is shaking up the insurance industry, focusing on collateral protection insurance linked to intellectual property. The Vesttoo Creditors Liquidating Trust has filed a complaint against Aon and China Construction Bank (CCB), claiming their actions contributed to Vesttoo’s downfall, leaving insurers with significant claims.
The lawsuit, brought on behalf of creditors including subsidiaries of Markel and Beazley, alleges that Aon’s collateral protection insurance program entered the market based on unreliable valuations and conflicts of interest. The Trust claims that forged letters of credit, allegedly arranged with help from a CCB employee, misled counterparties about the bank backing their transactions. They are seeking to recover losses that affected various players in the insurance sector, from carriers to investors.
According to the filing, Aon’s program was marketed as a way for rapidly growing companies to borrow against the value of their intellectual property. Insurers were supposed to provide policies to secure the collateral, while investors took on the risk. The Trust argues that this scheme expanded quickly, with Vesttoo acting as a link between insurance risk and capital markets, despite growing concerns over the legitimacy of the letters of credit used in these deals.
The complaint claims that more than $2.8 billion in letters of credit were forged. Internal messages at Aon reportedly showed worries about lending to companies without revenue and the challenges of accurately assessing the value of intellectual property. It is also alleged that Aon funneled particularly risky transactions to Vesttoo as they developed their collateral protection insurance model.
Aon has firmly rejected the accusations, calling the lawsuit a misguided attempt to shift blame for Vesttoo’s fraud onto them. They argue that an internal investigation by Vesttoo identified its own executives and other conspirators as responsible for the fraudulent actions. Aon has stated they will vigorously defend themselves against these claims.
The lawsuit highlights the need for better verification of bank instruments in collateralized reinsurance deals. It raises questions about how insurers manage risks associated with intellectual property and the importance of independent valuation standards. Industry professionals may need to take a closer look at their processes for onboarding credit providers and verifying collateral.
The Vesttoo saga began in 2018 when the company quickly gained attention for using AI-driven risk models to connect insurers with capital-market investors. By 2022, Vesttoo had raised around $80 million, reaching a valuation of nearly $1 billion. However, by mid-2023, it was revealed that billions in letters of credit backing reinsurance deals were fraudulent, leading to mass layoffs and the company’s bankruptcy.
As the case unfolds in Delaware’s bankruptcy court, it could set important precedents for the insurance industry. Insurers and other financial institutions involved in similar structures may face heightened scrutiny and need to reassess their risk management practices. The outcome could influence how capital flows in the insurance market and the design of future products.