Vesttoo, an Israeli insurtech startup that provides data-driven risk management solutions, has been sued by Aon’s White Rock Insurance (SAC) Ltd., a subsidiary of the global insurance broker and risk advisor. White Rock claims that Vesttoo presented fraudulent letters of credit (LOCs) worth $2 billion as collateral for reinsurance transactions involving insurers that White Rock worked with. White Rock alleges that Vesttoo pocketed millions of dollars in ill-gotten insurance premiums and tried to move funds out of the business.
White Rock filed a petition for an order to show cause and a temporary restraining order (TRO) in the U.S. District Court for the Southern District of New York on August 13, 2023, seeking to freeze Vesttoo’s assets and compel the insurtech to return the $136.7 million in collateral that White Rock distributed to Vesttoo. White Rock also requested expedited discovery and depositions of former Vesttoo employees to uncover the extent of the alleged fraud.
Vesttoo files for Chapter 11 bankruptcy protection
In response to White Rock’s legal action, Vesttoo filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware on August 16, 2023. Vesttoo and its affiliates said that filing for bankruptcy was necessary “in light of the various allegations related to the fraudulent letters of credit (LOCs) used on Vesttoo’s platform.” The company said it took the matter very seriously and was conducting a rigorous internal and external analysis of the events leading up to the first report of a fraudulent LOC.
Vesttoo also said that it changed its management team in July 2023 and that former executives and former management team members did not have access to or control over any of Vesttoo’s accounts. Ami Barlev, the interim CEO of Vesttoo, said in a sworn statement that the startup “would be forced to cease virtually all operations” if the court froze its assets.
Court vacates TRO and places case on suspense docket
During a hearing on August 16, 2023, Judge Paul Engelmayer vacated the TRO that he had granted to White Rock on August 13, 2023, and placed the case on its suspense docket. The judge confirmed that the court would retain jurisdiction over the case in the event that any Vesttoo entities emerged from bankruptcy and White Rock renewed its application for preliminary relief.
The judge also noted that all of Vesttoo’s entities were deemed to have fallen into bankruptcy, including Vesttoo RT SPV LLC in Delaware, which White Rock had argued was missing from the Chapter 11 filings and should be subject to continued discovery and depositions. However, it turned out that this subsidiary of Vesttoo was inactive and had no assets or liabilities.
Implications for the insurtech industry
The legal dispute between White Rock and Vesttoo has raised questions about the credibility and transparency of the insurtech industry, which has been growing rapidly in recent years. Insurtechs use innovative technologies such as artificial intelligence, big data, blockchain, and cloud computing to offer new products and services to the insurance market. However, some insurtechs may also face regulatory challenges, operational risks, and ethical dilemmas as they disrupt the traditional insurance model.
Vesttoo, which was founded in 2018, claimed to use advanced machine learning algorithms and actuarial models to create customized risk transfer solutions for insurers and pension funds. The company said it had developed a proprietary platform that enabled insurers to transfer their liabilities to the capital markets through securitization. Vesttoo also said it had partnered with several global reinsurers, including Aon’s White Rock, to facilitate its transactions.
However, according to White Rock’s petition, Vesttoo’s platform was “nothing more than a sham” and “a massive fraudulent scheme.” White Rock alleged that Vesttoo had forged LOCs from reputable banks such as HSBC, Barclays, Deutsche Bank, and Bank of America, and used them as collateral for reinsurance contracts with White Rock’s clients. White Rock said it had discovered the fraud when it tried to verify the LOCs with the issuing banks and found out that they were either invalid or did not exist.
White Rock also alleged that Vesttoo had misrepresented its financial condition, business operations, regulatory compliance, and risk management capabilities. White Rock said it had relied on Vesttoo’s representations and due diligence materials when it entered into reinsurance agreements with Vesttoo in 2020 and 2021. White Rock said it had paid $136.7 million in collateral to Vesttoo under these agreements, which it now sought to recover.
The outcome of this case may have significant implications for the insurtech industry, as it may affect the trust and confidence of investors, regulators, customers, and partners in insurtech startups. It may also highlight the need for more rigorous oversight and due diligence in the insurtech space, as well as the potential legal and reputational risks that insurtechs may face.
