E&O - Employment Practices Liability (EPL) - When Is a Claim First Made - Late Notice - Notice-Prejudice Rule - Distinction Between "Claims Made" and "Claims Made and Reported" Policies

Posted by Joe Monteleone on June 17, 2013

The United States District Court for the District of Maryland recently considered the issues of what constitutes an employment practices claim, late notice and a very cogent analysis of the distinction between pure “claims made” and “claims made and reported”[1] policies and the ramifications of the distinction for purposes of applying a prejudice standard to a late notice defense. Financial Industry Regulatory Authority v. AXIS Ins. Co., No. 12–cv-1053, (D. Md., June 12, 2013). [See here for link to decision]

The issues as to when a claim is first made and when it must be first reported were fairly straight forward in this case. The insurer issued two consecutive claims made and reported EPL policies to the insured. Each required that the claim be first made against the insured during the policy period with a reporting requirement of “as soon as practicable,” but no later than 6o days after policy expiration.

There was a Charge of Discrimination filed with the EEOC in policy period No. 2, but the Court found that the claim was first made in policy period No. 1 when there was an e-mailed settlement demand referencing an earlier verbal communication. The insured argued that the claim was not made in writing as the policy required, but the Court held that the e-mail confirmation of the verbal demand clearly satisfied the policy requirement of a written demand. Thus, there was no coverage under policy period No. 2.

The insured argued, alternatively, that the claim was indeed made in policy period No. 1 and that (i) it was not reported materially late, and (ii) even if it were, the insurer must show that it was prejudiced by the late notice.

The Court considered § 19-110 of the Maryland Insurance Code, which provides in pertinent part as follows.

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured . . . has breached the policy by failing to cooperate with the insurer or by not giving the insurer the required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer. (emphasis added by the Court)

So, when does an insured breach the policy by not timely reporting a claim?

According to the Court, the answer to this depends on whether the policy is simply claims made or claims made and reported. A claims made policy only requires reporting to be prompt or as soon as practicable, while a claims made and reported policy requires the reporting to be during the policy period or before some otherwise bright line cut-off date. In a pure claims-made policy, the condition precedent to coverage is that the claim be made against the insured during the policy period. If the insured fails to report that claim timely, it is a breach of the insurance policy such that § 19-110 of the Maryland Insurance Code would apply and the insurer would have to show it was prejudiced in order to disclaim based on the late notice.

No such prejudice requirement, however, exists in the case of a claims-made and reported policy.[2] In essence, the triggering event or condition precedent, the reporting of the claim to the insurer within the prescribed time period, simply did not occur. Thus, there was no breach of any policy provision and no need for the court to undertake a prejudice analysis.

This is a very important decision because there has been some confusion in a few jurisdictions as to whether notice-prejudice requirements should apply to claims-made and reported policies. This decision sets forth a thorough analysis of how these policies differ from pure claims-made forms and why a prejudice requirement is not appropriate.

 

[1] I would like to clear the air on two common misconceptions in this area.

First, some commentators incorrectly note that a claims-made and reported policy requires claim reporting to the insurer to take place during the policy period. While this is one variant of a claims-made and reported form, the most common variant today allows for some “bright line” extension beyond the end of the policy period, most typically being 60 days, as in this case.

Second, some believe that a pure claims-made form has absolutely no reporting requirement. It is more correct, however, to say that the pure claims-made form has no “bright line” cutoff for reporting. Virtually all claims-made forms require reporting to be “as soon as practicable.” While, as discussed in this post, that may require the insurer to establish it was prejudiced by the late reporting, the as soon as practicable requirement may in many cases be construed as only allowing the insured a matter of a few days or weeks within which to report a claim to the insurer.

[2] Citing to 3 New Appleman on Insurance §20.01 [7] [b], the Court noted that nationwide courts have uniformly held that there was no need to establish prejudice when the reporting requirement of a claims-made and reported policy was not satisfied.

E&O - Financial Services - New York High Court Reverses Dismissal By Appellate Division of Dispute Over Disgorgement

Posted by Joe Monteleone on June 14, 2013

In a unanimous Opinion, the New York Court of Appeals reversed the dismissal of a Complaint in coverage litigation first filed in 2009. J.P. Morgan Securities Inc. v. Vigilant Ins. Co., No. 113, (New York Court of Appeals, June 11, 2013). [See here for link to decision]  The decision has already been the subject of considerable commentary in the blogosphere and other media. My friend Kevin LaCroix has an excellent post on the decision on The D&O Diary, which I commend you read as a foundation for my commentary that follows. [See here for link to The D&O Diary post] 

This is a very significant dispute over a critical coverage issue that has attracted the attention of the American Insurance Association as an amicus curiae advocating for the positions of the respondent-insurers. With the Court’s decision effectively remanding the dispute back to the trial level court in New York County, the litigation process will continue – perhaps for another four years or so considering the divergent view already expressed by that court, the Appellate Division First Department and the Court of Appeals.

Substantively, the Court of Appeals did not reach the issue of whether there was in fact disgorgement at issue and whether such was subject to the personal profit or advantage exclusion in the policy or uninsurable as a matter of law and public policy. All the Court held was that there were enough issues to preclude a dismissal of J.P. Morgan’s[1] claim.

In 2006, Bear Stearns settled the regulatory investigations against it for a total of $250 million. Per the SEC Order documenting the settlement, $160 million was treated as a disgorgement amount and the remaining $90 million was a civil penalty.[2]

The insurers asserted that the disgorgement portion of the settlement was not covered on the basis of public policy because it was (i) premised upon intentional misconduct and (ii) constituted disgorgement of ill-gotten gain. The insurers also raised the defense of the personal profit and advantage exclusion in the insurance policies.

The Court rejected the first argument, finding that, although the securities violations at issue were willful, there was insufficient evidence to establish that Bear Stearns intended to cause the resulting harm to investors. Of course, this issue remains to be developed further upon remand.

The rejection of the second argument is likely to be the most controversial because the Court essentially adopted the reasoning of the trial court that the bulk of any unentitled profit ( to wit, about $140 million of the total $160 million disgorgement payment) was actually gotten by certain hedge fund investors, and not Bear Stearns. Accordingly, it found that the insured could make a credible argument that only a small portion of the settlement ($20 million out of $160 million or 12.5%) was uninsurable disgorgement.

The Court paid little attention to the exclusion in the policies that provided that there would be no coverage for claims “arising out [of the insured] gaining in fact any person profit or advantage to which [the insured] was not legally entitled . . . .” (my emphasis). The Court held that the SEC Order did not effectively refute the insured’s contention that its misconduct profited the hedge fund investors, but not itself. However, the Court did not reach the substantive merits of the exclusion, only holding that it did not defeat coverage for purposes of pleading.

The Court appears to lose sight of the “or advantage” language in the exclusion. It would seem that Bear Stearns gained considerable business advantage in pleasing their hedge fund customers by allowing them to engage in the late trading and market timing activities at issue. Thus, Bear Stearns was certainly advantaged, even though the ill-gotten direct monetary gains went largely to the hedge fund investors. This is an issue that will be hopefully and successfully argued on remand, in addition to the uninsurable disgorgement issue. The insured wants to characterize the latter as merely an unfortunate “label” placed by the SEC on the settlement, but methinks that both the SEC and the insured got it right before the insured perhaps first began to contemplate the insurance consequences.

 

[1] J.P. Morgan Securities Inc. is the successor entity to Bear Stearns, which was one of the firms implicated in the market timing and late trading investigations launched by the SEC and other regulators into the mutual fund industry about a decade ago.

[2] The insured does not contest that the civil penalty amount is not covered.

E&O - Lawyers' Professional Liability Insurance - New York High Court Holds Insurer Cannot Assert Lack of Coverage for Default Judgment Due to Exclusions After Breaching Duty to Defend

Posted by Joe Monteleone on June 13, 2013

In a unanimous Opinion, the New York Court of Appeals held that “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.” K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., No. 106, (New York Court of Appeals, June 11, 2013). [See here for link to decision]

The underlying claim, albeit alleging legal malpractice, was brought against the insured lawyer for defaulted loans made to a company that he controlled along with another individual. The insurer declined to defend the claim because it asserted that the policy’s “business enterprise” exclusions applied. Consequently, after a default judgment was entered against the insured lawyer and an assignment of his rights under the policy given to the underlying plaintiffs, the insurer likewise disclaimed any obligation to indemnify for the default judgment. Before the default judgment, the insurer had declined an opportunity to settle the claim for $450,000, an amount within its $2 million policy limit.

In ruling on the issue of the duty to defend, the Court and the courts below found that the underlying complaint clearly set forth allegations of legal malpractice. The Court held that the insurer had a duty to defend in this case, relying on Automobile Ins. Co. of Hartford v. Cook, 7 NY3d 131 (N.Y. 2006), where the court held that “[t]he duty [to defend] remains even though facts outside the four corners of the pleadings indicate that the claim may be meritless or not covered . . . . “ (emphasis added)

The Court also took note of its own precedent in Lang v. Hanover Ins. Co., 3 NY3d 350 (N.Y. 2004), where the court held that:

[A]n insurance company that disclaims in a situation where coverage may be arguable is well advised to seek a declaratory judgment concerning the duty to defend or indemnify the purported insured. If it disclaims and declines to defend in the underlying lawsuit without doing so, it takes the risk that the injured party will obtain a judgment against the purported insured and then seek payment. . . . Under those circumstances, having chosen not to participate in the underlying lawsuit, the insurance carrier may litigate only the validity of its disclaimer and cannot challenge the liability or damages determination underlying the judgment.

As the Court succinctly put it, “[i]f the disclaimer is found bad, the insurance company must indemnify its insured for the resulting judgment, even if policy exclusions could otherwise have negated the duty to indemnify.”

While this decision simply affirms the law in New York on duty to defend, it serves as a useful reminder to professional liability insurers with duty to defend policies that in many cases they decline to defend at their peril. In recommending the filing of a declaratory judgment action to resolve ultimate issues of defense and indemnity, it should be noted that New York is similar to a number of other major jurisdictions, e.g., Illinois.

Despite this ruling, the result here is not compelled in all cases.

First, it leaves open the question as to whether the insurer would have had the same result under a non-duty to defend policy. Second, the Court noted that its ruling may have been different if the exclusion at issue was rooted in public policy, such as no coverage for intentional wrongdoing.[1] Along these lines, I would also argue that a wrongful disclaimer of the duty to defend should not result in coverage where the disclaimer is based on the claim not falling within the scope of any of the insuring agreements. In other words, the insurer may be deemed to have waived an exclusion defense, but one cannot otherwise create coverage through waiver.[2]

 

[1] Messersmith v. American Fid. Co., 232 NY 161 (N.Y. 1921)

[2] It also should be noted that the insurer here did not lose on all counts. The plaintiffs were unsuccessful in sustaining their bad faith claims. Thus, it appears that they will recover only the $2 million policy limit on their contact claims, but not the full $3.1 million default judgment.

D&O - Excess Insurance - Exhaustion of Underlying Limits - Second Circuit Revisits Zeig 85 Years Later

Posted by Joe Monteleone on June 07, 2013

Although fully in line with the overwhelming majority of decisions over the past six years on exhaustion of underlying limits issues, the Second Circuit on June 4, 2013, rendered a decision with a few interesting twists on the issue. The case will likely be better known to lawyers and insurance professionals as the Commodore Computer case (we will call it “Commodore” in this post), but it is formally and officially Ali v. Federal Ins. Co., 11-5000-cv, U.S.C.A. 2d Cir. (Decided June 4, 2013) [See here for link to decision]

For those of you anxiously wanting to know if this Second Circuit revisit resulted in an overruling of Zeig, the answer is no. It simply distinguished Zeig, as will be discussed further below. Thus, while I was always fond of calling Zeig “hoary precedent,” it may now just be plain hoary with little or no precedential value.

The simple holding of Commodore is that excess insurance, under the exhaustion language at issue, is not triggered unless and until payments reach the excess attachment point. Notably, neither the Second Circuit nor the Southern District of New York had to reach the question of payments by whom. Payments were not made under four of the excess policies in the tower of insurance, two each issued by Reliance Insurance Company[1] and Home Insurance Company. Both of these insurers became insolvent and ultimately proceeded into liquidation.[2]

According to the Court, each of the excess policies at issue here contained an exhaustion of underlying limits clause that in substance provides that the excess policy attaches only after the underlying insurance is exhausted as a result of payments of losses thereunder. While it might be argued that the language does not say who can make the payments, I would argue that the term “thereunder” clearly indicates that the payments must be made by the underlying insurers in exhaustion of their limits. In this case, because no one made the payments, i.e. neither the underlying insolvent insurers nor any of the insureds, the Second Circuit and the court below did not have to reach the issue of whether payments by the insured could satisfy the exhaustion language.

Turning to Zeig, it’s not dead, but is fairly in extremis. To bring back bad memories of one’s Civil Procedure course in law school, the Court noted that Zeig was decided before Erie R.R. Co. v. Tomkins, 304 U.S. 64 (1938). Among other things, Erie held that there was no federal common law and that a federal court must apply the applicable substantive state law, while federal law would apply to procedural issues. Zeig arguably applied federal common law, and does not represent New York law. In this case, the Court found that either New York or Pennsylvania law could apply but, finding no conflict between the two, it undertook no choice of law analysis.

The Court further distinguished Zeig because it dealt with a first-party property policy, rather than the third-party liability coverage at issue here. In the latter situation, there is more of an opportunity for collusive below limits settlement with underlying insurers and plaintiffs to the detriment of the excess. No such collusive potential existed with the first-party coverage in Zeig, where the insured would have to bear the loss of whatever he failed to collect from the primary insurer.

As I have said in this space many times previously, these types of disputes should ebb as the more modern day excess policies recognize exhaustion by payment from any source, including the insured itself. It should be noted, however, that this language would not have helped the Commodore directors here because no one stepped up to fill the gap by paying the Reliance and Home limits.

 

[1] In the interest of full disclosure, I was an employee of Reliance Insurance Company before it became insolvent. I do, however, deny any cause and effect between the quality of my services to the company and their eventual financial demise.

[2] As my friend Kevin LaCroix has noted in a recent post on The D&O Diary, this case is replete with “ghosts.” Three of the six director plaintiffs are represented by their estates; Commodore International Limited ceased operations almost 20 years ago; and, in addition to the insolvencies of Reliance and the Home that underlie this dispute, it should be noted that the Travelers defendant is actually the successor to Aetna Casualty and Surety Company, which wrote one of the policies at issue. For those of you of a certain age, that is Big Aetna.

D&O/EPL and E&O (Medical Professional Liability) - Same Court (Different Judges), Different Coverage Issues Re False Claims Act Qui Tam Claims

Posted by Joe Monteleone on June 07, 2013

We address these decisions in the same post primarily for the sake of convenience, and also for the fact that we do not often see coverage disputes arising under the federal False Claims Act (FCA), which are often brought as qui tam actions by a whistleblower employee or other individual outside the federal government. Interestingly, both decisions emanate from the United States District Court for the Western District of Washington – one in the Seattle Division, and the other in Tacoma. The two cases we discuss are MSO Washington, Inc. v. RSUI Group, Inc., 12-cv-6090, U.S.D.C., W. D. Wash. (Decided May 8, 2013) [See here for link to decision] and Carolina Cas. Ins. Co. v. Omeros Corp., 12-cv-287, U.S.D.C., W.D. Wash. (Decided March 11, 2013) [See here for link to decision]

MSO

At issue here were claims against the insured organization for fraudulent billing practices. The insured, a management services company that provides management and administrative services (including billing) to healthcare providers, sought coverage for these claims under a medical professional liability policy. It cannot be gleaned from the decision whether the whistleblower was an employee or otherwise.

The Court succinctly held that “the FCA claims against MSO were for fraudulent billing practices, and fraudulent billing is not a professional service or a negligent act covered [under the policy at issue]”.

The insured argued that its professional services were different from those of the medical practitioners who were its clients. In the latter case, billing may be considered ancillary to the rendering of medical care to patients, but billing services are integral to the medical management services that the insured provides.

The Court, however, noted that the insured represented on its application for the policy that it provided “primary care as a medical outpatient facility.” The insurer issued the policy on that basis, and the Court held that it “cannot claim otherwise to create an issue of coverage.” The Court did not go on to state, however, whether its holding as to no duty to defend or indemnify would have been different had the application been completed differently.

Omeros

This case involved a combined directors’ and officers’ liability (D&O) and employment practices liability (EPL) policy. The underlying whistleblower claim was brought by the company’s former CFO. In addition to his qui tam claim, the former CFO also brought a separate claim of retaliatory discharge from employment as a result of his whistle blowing activity. The retaliation claim was the first one submitted to the insurer and it ultimately exhausted the $1 million limit of liability under the EPL coverage. The insurer contended that the D&O coverage did not apply to the qui tam action because it was reported after the policy period had expired. The insured contended that the retaliation and qui tam claims were interrelated and thus the qui tam claim should be subject to the D&O coverage.

The Court held that the qui tam and retaliation claims had an event in common as required by the policy’s Related Wrongful Acts definition. That common event was false reporting to the National Institutes of Health (NIH). The Court focused not so much on differences between the two claims, but rather on the event that they had in common. The insurer raised a cogent argument that, as the qui tam claim was under the D&O component of the policy, it was subject to an exclusion for any claims arising from an employment relationship with the company. The Court, however, held that the Related Acts provision only applied for purposes of notice and reporting under the policy.

QUERY: If the qui tam claim then stands on its own for purposes of application of exclusions, why is it not then subject to the employment relationship exclusion under the D&O part of the policy? The insurer did not attempt to apply this exclusion to the retaliation claim, for which it appears they paid the available $1 million limit under the EPL part of the policy. The insurer appears only to have sought to apply the exclusion under the D&O part to the qui tam allegations, which were added by way of an amended pleading.

D&O - Late Notice Coverage Defense - Prejudice to Insurer Irrelevant

Posted by Joe Monteleone on June 07, 2013

In this case decided by the U.S. District Court for the Eastern District of Missouri, the insured provided notice of a claim to its D&O insurer well beyond the expiration of the policy and more than three years from the time its board of directors first received a demand letter setting forth the underlying claim. The insured contended that the insurer was not prejudiced by this late notice. Secure Energy, Inc. v. Philadelphia Indem. Ins. Co., No. 11-cv-1636, D.Mo. (Decided May 15, 2013). [See here for link to decision]

The Court held that Missouri precedent, including at the level of the Missouri Supreme Court, made it clear that a claims-made and reported insurer (as in the policy at issue in this case) did not have to establish prejudice before it could deny coverage for failure to report the claim within the prescribed period. Wittner, Poger, Rosenblum & Spewak, P.C. v. Bar Plan Mut. Ins. Co., 969 S.W.2d 749 (Mo. 1998); Lexington Ins. Co. v. Integrity Land Title Co., 852 F. Supp.2d 1119 (E.D. Mo. 2012).

In this case, reporting had to be as soon as practicable, but in no event later than 60 days after the expiration of the policy period. On many of these posts, I often posit the query “where was the broker during all of this?” In this case, it appears that the broker was diligently serving its client as the Court noted that the broker advised them to report the claim despite the doubts as to whether it was covered or was even a claim. In my opinion, this is almost always sound advice in these types of situations.

It should be noted, and the Court duly noted this, that Missouri is normally a “late notice prejudice” jurisdiction. Weaver v. State Farm Mut. Auto. Ins. Co., 936 S.W.2d 818 (Mo. 1997). That being said, the Wittner case cited above clearly carves out an exception to the prejudice requirement in the case of claims-made policies.

Some may say there should be a “no harm, no foul” approach here and the policy reporting requirement should not be enforced as written in the absence of a showing of prejudice to the insurer. I am not in that camp, but would be interested in hearing reader feedback.

D&O - Important FDIC Claims Coverage Dispute Voluntarily Dismissed Before Consideration of Appeal to Eleventh Circuit

Posted by Joe Monteleone on June 05, 2013

A very significant decision in the area of coverage under a D&O policy for claims asserted by the FDIC against directors and officers of a failed Georgia bank has been voluntarily dismissed by the appellants-insureds shortly after filing an appeal to the Eleventh Circuit. In the May 2013 issue of this firm’s Specialty Lines Advisory, we summarized and commented upon the lower court decision in Davis v. Bancinsure, Inc., C.A. No. 12-cv-113, 2013 U.S. Dist. LEXIS 46249 (N.D. Ga. March 20, 2013). [See here for link to decision]. The Entry of Dismissal was effective May 22, 2013. [See here for link to appellate order].

It is not known why the case was voluntarily dismissed, whether it was on account of a settlement or for some other reason.

Importantly, as discussed in greater detail in the Specialty Lines Advisory article, the lower court decision now stands. From an insurer’s viewpoint, that Court issued very favorable rulings on both the inadequacy of the insureds’ attempts to provide notice of circumstances that could give rise to a claim and the applicability of the insured vs. insured exclusion to preclude coverage for claims ultimately brought by the FDIC in its capacity as receiver for the failed bank.

In this case, it appears that the inadequate notice of circumstances letters[1] may have been drafted and sent by the bank’s former CEO. The bank was closed days after the second letter by the Georgia state banking regulators and the FDIC was appointed as receiver. It was not until 2012, after the policy had expired, that any notices of actual claims were sent to the insureds, who in turn notified the insurer.

While some might contend that the policy’s notice of circumstances provision in this case set forth some stringent notice requirements, like other provisions in other D&O policies it simply set forth the degree of specificity that must be set forth in order to make the notice valid. In my experience, the FDIC has generally been very careful in crafting these notices after it shuts down a bank and has an opportunity to consider the requirements of specificity in the policies at issue. Here, the notice was drafted and sent prior to the FDIC’s involvement.

The decision is also very significant because of its holding in favor of the insurer on the insured vs. insured exclusion. Again, my friends in the policyholder bar and in the insurance brokerage community may argue that the decision hinged on the specific reference to “receiver” in the exclusion. Nonetheless, the Court took note of the split in decisions on the insured vs. insured exclusion emanating from the savings and loan crisis era in the late 1980s and early 1990s. There have only been two or three decisions on this issue emanating from the recent wave of failed banks, and this appears to be the first decision clearly upholding the applicability of the exclusion.

[1] There were two -- the first on May 13, 2009 and the second on June 16, 2009. Both letters were sent during the three-year policy period, which ran until March 1, 2010.

E&O - Lawyers' Professional Liability - When Is a Claim First Made?

Posted by Joe Monteleone on June 05, 2013

In this case decided by the U.S. District Court for the District of New Hampshire, the insured law firm tried to construe the actual “claim” of its client as merely one of an inchoate potential claim that need not have been reported to the insurer because the insureds subjectively believed that they had not committed malpractice. Clauson & Atwood v. Professional Direct Ins. Co., No. 121-cv-199, D.N.H. (Decided May 13, 2013). [See here for link to decision]

The notice letter at issue from the client’s malpractice counsel attached a proposed tolling agreement. There was no reasonable inference that the client and his counsel simply needed more time to investigate as to whether they had a valid claim. Rather, the letter clearly set forth a threat to file suit and merely proposed the tolling agreement so that the insured firm could pursue an appeal of an adverse judgment against the client and thus moot the malpractice claim.

The Court did take notice of the fact that the client certainly did not express any continuing confidence in the insured firm, but did not necessarily imply that such an expression of confidence would have resulted in a finding that no claim had been made. Because there was an actual claim made before the policy incepted, the Court also held that there should be no consideration of whether the insurer needed to establish that it was prejudiced by late notice. Simply put, this was a case of a claim not first made during the policy period, rather than one of late notice of a claim duly made in the policy period.

While the Court seemingly was willing to entertain some subjective factors such as whether the insureds believed they had committed malpractice and whether their client may have continued to express confidence in the firm, those factors were ultimately found to be irrelevant because the Court held that there was an actual claim - not mere circumstances that could give rise to a claim – before inception of the policy.

Thus, this did not devolve into one of the many “prior knowledge” coverage disputes that often hinge on some subjective/objective analysis or, in a few states, a purely subjective analysis on the part of the insured as to whether they thought there would be a malpractice claim made against them. The claim here simply fell outside the policy period and was thus not within the scope of the insuring agreement, which limited coverage to claims first made against the insured during the policy period.

D&O - News Corp. Settles Shareholder Derivative Litigation With $139M in Insurance Proceeds - "Good Morning, D&O Insurers. This Is Your Fifth Wake-Up Call"

Posted by Joe Monteleone on April 23, 2013

There have already been numerous comments on this settlement in the legal and financial media this week. Let me briefly summarize what the litigation was all about and what may be the insurance implications.

News Corp. is a Delaware corporation that owns various print and other media throughout the world. This shareholder derivative litigation arose from alleged phone hacking by some of their British newspapers and an acquisition of a television production company owned by the CEO’s daughter. The acquisition was alleged to have been unwise and overvalued. It was alleged that the phone hacking debacle alone cost the company $346 million to deal with the investigations into that conduct, in addition to unspecified amounts attributable to the acquisition transaction. Thus, factoring out causation and liability defenses, the settlement represents only a portion of the damages that could theoretically have been recovered.

It is not known to me how News Corp. structured their D&O program, but a few conclusions can be drawn from the facts known.

First, as a Delaware corporation, the settlement amount is not indemnifiable and thus would fall on Side A of the D&O coverage[1]. Defense costs, however, are indemnifiable in Delaware derivative actions and would constitute a Side B loss. It is not known to what extent defense costs may have depleted the available limits, but it should be noted that the litigation was pending for about two years before settlement.

Second, we do not know to what extent, if any, the contributing policies were Side A only policies. These policies would not be responsible for the indemnified defense costs, but they would certainly be susceptible to pay any portion of the settlement after the traditional “ABC policies” exhausted. An educated guess would be that the settlement amount, plus covered defense expenses, captured at least a substantial portion of the available limits.

News Corp. is at least the fifth derivative settlement in recent years to top the $100 million mark. Except for the extreme outliers near the billion-dollar level and above – UnitedHealth, HealthSouth and Southern Peru Copper[2] – it is undoubtedly the highest of the above $100 million settlements to date.

As I commented to a Thomson Reuters reporter earlier this week, the settlement will probably not have much of an impact on News Corp.’s own D&O insurance program. It is still a very competitive marketplace, and no doubt many of the contributing insurers will be desirous of staying on the risk in order to recoup some of their loss through future premiums. Other insurers would be more than happy to get on this risk for the first time, given that this monstrous settlement will be behind them.

The implications for the broader Side A marketplace, however, should be significant. As alluded to above, this is the fifth wake up call to the effect that this type of insurance is not just easy premium for insurers and a degree of “sleep insurance” for the board. News Corp. attracted the foremost firm in the shareholders derivative bar, as well as well-qualified counsel that more typically operates in the class action arena. At $139 million, this is a settlement more in line with a major class action settlement.

The time is here to start pricing Side A only coverage, and indeed all excess D&O coverage, more in line with the realities of the litigation world.

[1] Aside from legal prohibitions on indemnity such as Delaware law with respect to derivative settlements, the other principal trigger of Side A only policies is a corporate insolvency making indemnification unavailable due to financial inability to pay.

[2] United Health was a settlement for approximately $900 million. HealthSouth and Southern Peru were judgments in the amounts of approximately $2.88 billion and $1.26 billion, respectively.

Insurance Generally - Claims and Underwriting - Church vs. State or Same Church, Different Pew?

Posted by Joe Monteleone on April 19, 2013

Earlier this month, my good friend Susanne Sclafane wrote an article in Claims Journal reporting on a panel discussion at a recent Advisen Casualty Conference.

The panel at the Advisen conference had some interesting comments on how, what and when the underwriting and claims departments within an insurance company should be communicating with each other.

Somewhat surprisingly, an underwriting executive from a major property-casualty insurer seemingly advocated for little to no communication between the departments, the quintessential church vs. state dichotomy. I was not at the conference, so I do not want to take any particular comments unfairly out of context, but here is the balance needed in claims/underwriting communication.

First, it would be inappropriate and to the detriment of the insurer to allow underwriting to have any form of pre-approval over reserving and settlement activities. That is not to say, however, that there cannot be a “heads up” communication from claims to underwriting when a significant reserve is going to be posted or a large settlement is going to be paid. Pre-notification does not mean pre-approval, and it is always nice to have underwriters prepared when company executives may question as to how we could have written Polluters Limited after seeing the $10 million loss reserve posted!

Second, there may be occasions when underwriting may wish claims to make an ex gratia payment on a claim in light of a strong relationship the insurer has with a particular policyholder or broker. Again, this should not be decided between underwriting and claims bilaterally. Consideration of ex gratia payments should be brought to the executive level where the concerns of both underwriting and claims can be heard. Although these types of payments may be wise business decisions and appropriate in certain circumstances, many factors need to be considered such as precedent, potential adverse construction of the payment in coverage disputes with other policyholders, and reinsurance implications.

A policyholder lawyer on the panel went to the opposite extreme and seemingly argued for claims/underwriting communication in every claims situation. I again do not want to take anything unfairly out of context, but it is not necessary that claims keep underwriting apprised of every claim decision before it is made. For example, if one is going to disclaim coverage because a claim is made outside the policy period under a claims-made form, there would probably be no need to get underwriting input on that decision. To the contrary, if one is about to rescind a policy based upon misrepresentations on the application, it is critical to meet with underwriters to determine what they deemed material to the risk and what submitted information they reasonably relied upon in accepting the risk.

In summary, there should be an abundance of communication between underwriting and claims. If feasible, these personnel should be housed in close proximity to one another to facilitate communication. Nonetheless, it is important to maintain appropriate “silos” when it comes to case reserving, settlement and other key claims-handling decisions.