September 15, 2006
What An Underwriter Wants: D&O Insurance Submissions and the Hunt for the Virtuous Insured
The negotiations of directors’ and officers’ policies tend to follow a bit of a different pattern from that in other lines of insurance, and the reason for this is plain: the insureds under these policies include the most important individuals at a company who are trying to cover their own assets. D&O negotiations for sophisticated companies often will involve not only price negotiations but an unusual amount of negotiations over wordings, too.
In general, D&O insurance has several coverage components that may co-exist in a single policy. The background corporate and securities laws impose personal liability on the directors of a corporation for various forms of non-, mis-, and mal-feasance and seeks to hold them accountable to the absentee owners of the company, the shareholders. Corporations will provide direct indemnification for directors for some or all of these liabilities, and the indemnity may be mandatory or at the discretion of the board at the time a claim is made (permissive indemnification). What is know as “Side B” insurance is a vehicle for the corporation itself to obtain funding from the insurer for the corporation’s statutory, bylaw, or contractual obligation to indemnify the directors.
A corporation, however, may not be permitted to indemnify a director for certain types of claims or may be unable to do so financially. Accordingly, directors desire protection above and beyond the corporate indemnity, and it is this exposure that often is the focus of D&O insurance policy purchases. “Side A” insurance provides direct coverage for directors (and other covered persons) for their liabilities and defense expenses that are not indemnified by the corporation. Side A insurance can be included in a D&O policy with Side B or Side A coverage can be a standard alone vehicle safeguarding the director. (Th latter usually is called “Side-A DIC” coverage or “A-Side DIC” coverage, with DIC being the abbreviation for “difference in condition,” a shorthand for coverage that plugs in gaps left when other insurance policies do not respond.)
I have previously addressed some of the technical wordings issues that potential insureds may wish to consider in evaluating the coverage under D&O policies (of whatever stripe). I firmly believe that the investment in working closely with capable insurance brokers – and (self-interestedly) coverage counsel – is important, because whether coverage will be found to apply in some circumstance really can depend on a change in one word (such as a change from “any” insured to “such” insured). But it takes two to tango as they say, and just because we may want a change in policy language does not mean that the underwriter will be inclined to accept it or to accept it at a reasonable price. Accordingly, what are the steps that insureds can take to make their insurers most comfortable in providing coverage and, one hopes, broadening its scope?
Professors Tom Baker of the University of Connecticut and Sean Griffith of Fordham have put together a working paper that is available on a website for academic papers that reports on their empirical effort to understand what makes D&O underwriters comfortable and influences their pricing (and presumably wording) decisions. See Tom Baker and Sean J. Griffith, Predicting Corporate Governance Risk: Evidence from the Directors’ & Officers’ Liability Insurance Market (June 15, 2006) (revised August 15, 2006). There is little pretense in insurance markets that D&O policies are not scientifically priced. This is not to suggest there may not be guidelines for underwriters in establishing the price of coverage or in the willingness of underwriters to negotiate policy terms – or even to bind the coverage at all. One should draw a distinction between the “absolute” price and the “relative” price: the first being the rational economic value of the risk transferred and the corresponding services to be provided; the latter being the price of a roughly equivalent policy compared with other sellers in the marketplace. While the “absolute” price may be elusive if not ignored in insurance markets, the relative price is not: the impact of competition affects the price of goods, especially for insurance where the seller’s cost of the product will not be known until after the sale (i.e., the payments it might make under the policy). See generally Sean M. Fitzpatrick, Fear is the Key: A Behavior Guide to Underwriting Cycles, 10 Conn. Ins. L. J. 255 (2004); Richard Stewart et al., The Loss of the Certainty Effect, 4 Risk Mgmt. & Ins. Rev. 29 (2001).
Further, I do not mean to suggest that the liability regime, the breadth of the coverage provided, and the nature of the insured has no impact on pricing; my point is that this all is hardly scientific. Given that insight, however, one should recognize that the process of underwriting – especially D&O insurance which is considered to be highly personal (as compared with fire insurance, for example) – is a human process, affected by making the seller comfortable with the insured whose interests the insurer is promising to protect.
In this context, the work by Baker and Griffith is especially enlightening, for they highlight that the prospective insured’s “deep [corporate] governance” cultural norms and constraints affect the willingness of underwriters to play ball (selling a policy, negotiating its wordings, and establishing a price). According to the survey, underwriters believe they can separate the wheat from the chaff and select good risks to underwrite.
Underwriters look to objective data: information from public filings, private databases or analysis services, claims history, company knowledge of ticking time bombs, and especially any intent to acquire other companies or issue securities. Market capitalization and stability is important; as Baker and Griffith explain:
Insurers, unlike investors, do not look favorably upon high-growth companies. Insurers focus more on downside risk because they have a fixed return (the policy premium) that is modest in relation to their exposure to loss (the policy limits), while equity investors have a fixed exposure to loss (their initial investment) and a potentially unlimited upside (their share of the business’s growth.) (p. 30)
While business intelligence affects the basic modeling of policy premiums, Baker’s and Griffith’s information suggests that corporate governance practices and culture differentiates one risk from another and in turn the willingness of underwriters to negotiate. “Culture and character, we were regularly told, are at least as important as and perhaps more important than other more readily observable, governance factors in assessing D&O risk.” (p. 32)
Underwriters seemed keen to know how incentives for executive action are determined, such as executive compensation formulas and the strength of internal controls (and the compliance culture, such as the vigor of the insider-trading prohibition). Revenue-recognition procedures are considered especially important as are channels for compliance, dissent, whistle blowing and the like. (And it is the way culture norms shape action that is key – not dead-letter policy manuals on bookshelves or corporate intranets.) Process and controls are especially important when business acquisitions are contemplated – not just that M&A activity is in the offing but how the company goes about the acquisition and the integration of acquirees.
The subjective assessment of underwriters seems to include questions of ethics, morality and humility, in personal conduct and in the conduct of the business. Arrogance and excessive risk taking are markers for bad risks. (Even the number of speeding tickets by the CEO was felt to be an indicator of D&O risk.) Overcommitment to growth, excessive risk taking, aggressive earnings-per-shares targets may create a culture where individuals may be tempted to shave a little here and there.
Perhaps all these factors are obvious and nebulous in their actual effect on underwriting pricing and term negotiations. Nevertheless, Baker’s and Griffith’s results counsel that prospective insureds put together their underwriting submissions and prepare for their underwriting meetings to feature corporate-governance culture and character issues. The policies and procedures – but more important the company’s norms and practices – are key differentiators among prospective insureds. Risk managers and chief financial officers should be empowered by these results, as should corporate counsel, internal auditors, and chief compliance officers.
Negotiating the wordings of policies is a tedious, time-consuming process that may prove outcome determinative at the point of claim. But to have the opportunity to engage in such negotiations at all, insureds need to have a willing partner – an insurer willing to sell a policy to them at a reasonable price for value. And these days, questions of culture and character separate which insureds are good risks and which are not.
In short, what D&O underwriters search for (without trying to overstate the point too much) are companies that abide by the classical idea of virtue, set forth well by Aristotle:
For instance, both fear and confidence and appetite and anger and pity and in general pleasure and pain may be felt both too much and too little, and in both cases not well; but to feel them at the right times, with reference to the right objects, towards the right people, with the right motive, and in the right way, is what is both intermediate and best, and this is characteristic of virtue.
Aristotle, II Nicomachean Ethics, pt. 6 (350 B.C.E.). Perhaps D&O underwriters are the truest disciples today of Diogenes.
Posted by Marc Mayerson at 9:43 AM | Comments (1) | TrackBack
April 5, 2006
What You See Is Not What You Get: Renewal Policies
One aspect of insurance practice that I like is the seemingly unlimited number of nooks and crannies in insurance law. But like a tree falling in the forest, the existence of one pro-policyholder rule or another in a given state has little impact on human behavior -- or trial outcomes -- unless that rule is called upon. One such rule is the "renewal rule."
When a policyholder renews an insurance policy with its carrier, the insurer must provide prior notice to the insured if it intends to reduce coverage under the newly issued policy. In one of my cases, a corporate client had purchased a primary-layer CGL policy from one insurer in 1969, renewed it in 1970, and then renewed it again. The sudden-and-accidental pollution exclusion was introduced in early 1970 (see Mayerson, Affording Coverage for Gradual Property Damage Under Standard Liability Insurance Policies: A History, 8 Coverage 3 (Sept./Oct. 1998)), so for the final policy the insurer issued its then-standard CGL form and stapled to it the pollution exclusion. The question presented was whether the pollution exclusion in this last policy -- which had been provided to the policyholder, a large multinational chemical company -- was to be given effect.
For a first policy with an insured, the insurer does not have the same duty to point out a limitation on the coverage. Generally speaking, insureds are charged with knowledge of the content of their insurance policies, even if it is undisputed that the insured never actually read the policy at the time it was issued. See generally Western World Ins. Co. v. Stack Oil. Co., 922 F.2d 118, 122 (2d Cir. 1990); Metzger v. Aetna Ins. Co.,, 125 N.E. 814, 816 (N.Y. 1920). (By the way, did you read the insurance policy issued to you before completing the purchase?) But this general rule that insureds are charged with knowledge of the terms of their policies does not overcome the application of the more particular rule regarding renewal of insurance policies. If this were not so, then the well-established notice-of-reduction rule would be without effect. See Davis v. USAA, 273 Cal. Rptr .224, 227 (1990); Magness Constr. Co. v. Ohio Farmers Ins. Co., 261 A.2d 537, 539 (Del. Super. 1969); Walton v. Sterling Fire Ins. Co., 197 N.Y.S.2d 277, 280 (N.Y. App. 1960) ("Implicit in such renewal is that the terms of the existing policy are to be contained in he absence of a contrary intention.").
The renewal rule is not a matter of reformation, see 91 ALR 2d 546, 549 & n.10, or fraud in the factum, and is not subject to a contractual limitations period. The insured may defend against the effort to enforce a coverage-reduction in a renewal policy without pleading and proving the elements of reformation; instead, the (purported) coverage reduction is of no effect. The insurer must prove that in renewal it gave notice before the policy took effect of the desired coverage restriction (and it is not enough for the insurer to send along a notice enclosed with a copy of the renewal -- the insured must be given the opportunity ex ante to object to its inclusion, negotiate its elimination, or take its business elsewhere).
Insureds are under no obligation to disabuse the carrier of a belief that its limitation or exclusion was effective. There is no authority of which I am aware that holds that, when a carrier attempts to reduce coverage in a renewal policy without notice, the insured can be prevented from objecting to enforcement of the unauthorized reduction. Otherwise, an insured would be required to be forever vigilant, guarding against the risk that its carrier might slip an unannounced new exclusion into the renewed policy.
In the case I handled mentioned above, we were litigating the question more than two decades later (the 20-year-old policy nevertheless having been triggered), and no peep was ever made by the insured or its broker at the time. No matter, though. Neither contemporaneous objection nor (detrimental) reliance by the insured is an element of this legal doctrine. In my case, because in the renewal process the insurer did not provide specific advance notice of the reduction in coverage the court had little trouble in concluding that the exclusion -- physically a part of the policy -- was of no legal effect.
Given the state of the law, the outcome we obtained was hardly surprising (to me at least, I'm not so sure about how the insurer thought about it). A more difficult question was presented in a Sixth Circuit case decided in 2003 where a follow-form excess insurer sought to rely on a coverage restriction that was included in the underlying policy, which in turn was a renewal. See Amway Distributors Benefits Ass'n v. Northfield Ins. Co. (6th Cir. 2003). By way of definition, a following-form insurer issues a couple-page policy that principally adopts the terms of the underlying wording and incorporates it as its own. Coca-Cola Bottling Co. v. Columbia Cas. Ins. Co., 11 CA 4th 1176,1182-83, 14 Cal. Rptr. 2d 643, 647 (1992) ("Following form policies 'are typically written on the same terms and conditions as the coverage provided by the underlying primary coverage. They are generally short, consisting of one or two pages, with an endorsement or provision that incorporates by reference the underlying policy coverages, except for the premium, the liability limits, and the obligation to investigate, defend, or pay costs of defense'."); Monsanto Co. v. American Centennial Ins. Co., 1991 WL 35714 (Del. Super. Ct. Feb. 20, 1991); Ford Motor Co. v. Northbrook Ins. Co., 838 F.2d 828 (9th Cir. 1988); following-form carriers may add additional terms and coverage restrictions per other endorsements in the policies they issue. See Home Ins. Co. v. American Home Products, 902 F.2d 1111, 1113 (2d Cir. 1990).
In Amway, here's how the court framed the dispute:
The real question, then, is whether an excess carrier . . . is bound as a matter of law by the underlying carrier's failure to comply with the renewal rule. We believe that the answer is "yes," because the "follow form" linkage between an excess insurer and the primary insurer should logically apply to procedural as well as substantive obligations to their common insured. In effect, an excess insurer who lives by the sword must die by the sword.
Id. The majority rejected the insurer's implicit argument that the insured's position was really the invention of its lawyers and that the coverage -- which would otherwise be barred for the particular claims being fought over -- were not all that important to the insured at the time it bought the policy. Seeming to the relish being confronted with this unusual insurance-law rule, the court states:
This type of extra-contractual argument, if successful, would require those purchasing insurance to affirmatively validate the importance of each and every coverage purchased. We find no authority supporting such an obligation. Furthermore, we suspect that any such obligation would turn the world of insurance upside down, since one has to be either super-diligent or a masochist to read an insurance policy with a fine-toothed comb.
Id. Furthermore, the Sixth Circuit rejected the argument that the presence of a broker as an intermediary on behalf of the insured negates application of the renewal rule. See id. (Kennedy, J., dissenting) ("Where brokers are involved in negotiating the terms of the policy, the rationale for a 'renewal rule' such as Michigan's is diminished, since there would be less need to protect unknowing insureds from the passive misrepresentations of their insurers."). The rejection of the insurer's argument that the renewal rule does not apply if a broker is involved means that just because the insured and its agents are "sophisticated" or possess "bargaining power" does not negative application of the rule, nor is it relevant that the brokers may know (as in the case I handled) that the new exclusionary language was "in the air" as it were, being discussed in trade publications, speeches, industry-form-drafting-organization [now, ISO] press releases, and other vectors of inculcation.
Both the majority and the dissent agreed further that, if an excess insurer was to be bound by the misdeeds of the primary that failed to provide notice of the reduction in coverage, the excess insurer would have recourse against the primary. As the court explained,
This triangular relationship between the primary insurer, the excess insurer, and the insured presents the classic problem of which one of the two relatively "innocent" parties must suffer when the "wrongdoer" causes a loss. IN the present situation, we believe that . . . the excess insurer ] was in a much better position than the insureds to analyze unannounced changes in the underlying policy that it had agreed to follow. As between [the excess insurer] and the insureds, therefore, [the excess insurer] should be bound to provide the greater coverage and be the one to seek indemnity back against the [primary].
This assumption -- which serves as what I tend to call an existential escape valve for the court -- may not be so straightforward; the question whether a primary insurer owes any legal duties directly to excess insurers and the theory under which such a claim is pursued is highly controverted, with much of the judicial commentary falling into obiter dicta rather than ratio decidendi. The nature of the duty and its limits may not be so clear. E.g., Continental Casualty Co. v. Reserve Ins. Co., 307 Minn. 5,10 239 N.W. 2d 862,865 (1976); Certain Underwriters at Lloyd's v. The Fidelity and Casualty Ins. Co. of N.Y., 4 F.3d 541, 547 (7th Cir. 1993). One can imagine such an action being pursued as an equitable contribution or indemnity claim by the excess insurer, but I have not puzzled through how that outcome would be resolved in a well-presented case by both sides. (In turn, the tagged excess or primary might make an claim under its insurance company professional-liability or errors-and-omissions (E&O) coverage or its reinsurance under, in particular, a follow-the-fortunes clause (and then be greeted with negligent underwriting claims as in Bonner v. Cox., known as the Aon 77 case).)
The focus here, of course, from the perspective of the policyholder lawyer, is the renewal doctrine, or the rule that in renewal policies that coverage restrictions are not effective if the insured had no prior notice from the insurer itself of their inclusion. In the case I handled, a chemical company presented with a standard-form CGL policy in 1970 that had a pollution exclusion included. That exclusion was "accepted" by the broker and the insured without objection -- no one ever pointed out any error or confusion about the terms of the coverage. Yet, two different courts looked at the same facts (why two courts is a different story) and each concluded independently that the renewal rule unquestionably applied, and so a primary policy with defense (in additional to limits) coverage was found to apply to several major environmental-liability, site clean-up, natural-resources damages, and toxic-tort administrative and court proceedings, liabilities the carrier would have skated out of (it claimed) if this particular exclusion applied. What we saw -- what both sides saw -- in the file as the actual, bona fide copy of the policy was indeed what we ended up with -- sans an outcome-determinative exclusion.
While the notice-of-reduction-in-a-renewal-policy rule is a favorable one that policyholders should press when presenting or litigating claims against their insurance company, it cannot do so unless the policyholder's counsel is aware of this particular rule; if not, then the insured's lawyer better be an insured lawyer.
Tags: Insurance, Blawg, Renewal Policy, Reduction in Renewal Policy, New Exclusions, Insurance Litigation, Insurance Coverage, Policyholder Lawyer
Posted by Marc Mayerson at 12:11 AM | Comments (3) | TrackBack
February 11, 2006
What a Director (or Officer) Wants: A Guide for Insureds to the Wordings of D&O Policies
Claim frequency and claim values are going up for directors and officers of corporations, but insurance premiums are going down, coverage terms are getting broader, limits are increasing, and retentions are constant or decreasing. This is one of the findings in the most recent report from Tillinghast/Towers Perrin. As the report states, it “seems counterintuitive that there is a decrease in the excess premium given the increase in excess limits and increasing claim severity.” Premiums decreased by 8 percent in Tillinghast's survey (downward pressures confirmed by others) compared to last year’s survey of some 2000 survey participants, with average limits being $14.3 million. And 25 percent of US participants reported increased enhancements to their coverage terms and another 10 percent reported narrowing of exclusions. The principal markets for this insurance in the US are provided by Chubb and AIG, with other players trying to gain market share in different segments, such as Beazley.
Following the recent uptick in corporate liability and corresponding coverage disputes -- and the reported instances where directors have been required to dig into their own pockets as part of a settlement, directors and officers increasingly are asking about the precise terms of the coverage (roughly one-half of all companies in the Tillinghast survey). Increasingly, corporate directors and officers are scrutinizing (or should be scrutizing) the terms of the corporate-provided indemnities provided by their companies, in addition to evaluating the other form of protection for them, private insurance, and in both instances raising questions of credit-risk for each. What follows is a guide for in-house counsel, risk managers, and the directors and officers themselves to understand the coverage afforded by D&O policies and the specific changes that one might look for, and one needs to understand that issues may change depending on the particular industry in which the company operates. Sweating the small stuff here is important, because whether or not an insurance company affords indemnification may turn on the presence of one word or phrase – or its absence.
In general, insurance policies for directors and officers provide coverage for defense costs and liability payments (both judgments and settlements) for covered wrongful acts if a claim is made against the insured during the policy period. This is often referred to as “Side A” coverage. In addition, most policies afford coverage for the company’s own expenses incurred in indemnifying covered persons pursuant to the corporate indemnity in the company by-laws. This is often referred to as “Side B” coverage. Usually, there is a deductible that applies to claims within Side B coverage, and D&O policies typically seek to require that the company advance defense costs and make payment for any judgment or settlement before the insurance company will pay.
Coverage is triggered by the assertion of a claim against covered persons or the company during the policy period, but all claims relating to a particular factual circumstance (i) will be subject to a single per-claim policy limit and (ii) regardless when asserted, will be assigned to the policy period in which the first of any series of such claims was made. Typically, the covered persons and the company share a single policy limit for both the Side A and Side B coverage (defense and indemnity combined).
Moreover, D&O policies afford the opportunity to “lock in” coverage before claims are asserted in the event that circumstances giving rise to future claims are discovered during the policy period and a specialized form of notice to the insurer is provided during the policy period (but not after). If such notice of circumstances is provided, all subsequently asserted claims will be deemed to have been made in the period that the notice of circumstances was provided. Correspondingly, later-incepting policies will automatically exclude coverage for claims made in the period of their coverage to the extent the claims relate to a matter as to which notice of circumstances has been provided earlier.
While for particular markets there may bemore opportunity for negotiating more favorable policy terms, scrutinizing policy wordings not only requires great patience, but usually there is no one right answer: for example, if government investigations are covered under the defense coverage of a policy, that will be good for the directors subject to the investigation, but may not be so good for the other directors, because the costs of that defense effort will reduce the money that is otherwise available to the non-target directors (since defense costs in D&O policies are almost always subject to policy limits); on the other hand, if by affording defense coverage to a government investigation, a better defense can be mounted, that may be to the advantage of the non-target defendants if it avoids any criminal or civil liability at all. So the real key is just for the directors and officers to understand the issues and determine for themselves the advantages or disadvantages.
I really cannot identify a "top ten" of key changes on which a director or officer should focus, because the change in policy terms that one cares about is the one on which coverage will hinge. When I am asked as a policyholder lawyer to evaluate the terms of proposed insurance policies, here’s some of the wording issues I look at (the following discussion will be most comprehensible if you follow along with your own D&O policy form and with apologizes for the length of this post):
Prior and Pending Exclusion. Policies will bar coverage for demands, suits and the like against the insured pursued before the Pending or Prior Date set forth in the declarations; while the claim-first-made trigger would seem on its own to preclude coverage in the event a new, related claim were made during the policy period stemming from the situation at issue in the prior matter, this exclusion broadens the preclusion of coverage if a claim is made during the policy period that is based upon or arises from “the same or any substantially similar fact, circumstance or situation underlying or alleged therein.” This language is broad and could easily result in a dispute; it would be preferable to delete this phrase so as to ensure that only claims associated with the particular prior lawsuit are barred, rather than losing coverage because a different claim is later determined to arise from a “substantially similar . . . [prior] situation.” Prior-and-pending exclusions that eliminate coverage (only) for particular prior suits that are identified by name sometimes are called “laser beam” exclusions.
Insured versus Insured. Coverage will be barred for actions brought by or on behalf of any other Insured; this avoids insurers funding internecine disputes. This exclusion may be limited such that it won’t apply to non-collusive derivative actions, wrongful-termination claims, and contribution actions.
It is helpful to narrow the exclusion by excepting actions brought by bankruptcy or insolvency trustees, examiners, liquidators or receivers, creditors of the estate, or a trustee of a trust established for the benefit of creditors (or any assignee of the foregoing); furthermore, policies can deem any assignment of claim or delegation of prosecution of a claim against a covered person that takes place under the auspices of a court proceeding (to which the insurance company had notice) as not qualifying as a claim the insured “solicited, assisted, or participated.” Likewise, it would be desirable for defense coverage to be preserved for “I v I” claims.
The risk of suits against individual insureds typically increases following a change in control in the company, but a change of control decreases the likelihood that any such suit would be collusive (which is the vice to which the insured v. insured exclusion is directed). Accordingly, limiting the application of the exclusion after a change in control would be favorable.
Since covered insured persons also typically own stock, a class action against directors by shareholders implicates insured v. insured exclusions. Some cases have held that implicitly the exclusion should bar coverage only to the extent of the insured person’ s interest in the case, but it would be better to make such a limitation express by adding an exception to the exclusion “to the extent that an Insured Person is a member of a class alleging Loss.”
Finally, where a policy is extended to cover multiple years, it is useful to limit the exclusion so that it does not apply to claims by former directors and officers who have not served as such for at least three years (for example).
Pollution Exclusion. Desirable exceptions to this exclusion include shareholder suits against insured persons arising out of environmental loss incurred by the company, claims not indemnifiable by the company, toxic-tort claims, and coverage for defense costs. Another alternative is seek to have this exclusion not apply to the Side A coverage at all (but still apply to the Side B cover).
Accounting of Profits. The executive-liability (Side A) coverage usually does not apply to a claim seeking an accounting of profits from the sale of securities. It is desirable for the policy still to provide a defense to such claims, which can be accomplished through limiting the scope of the exclusion to “Loss (other than Defense Costs).” Moreover, these exclusions are often written to apply to loss “on account of” a claim for an accounting; it would be preferable to limit the exclusion “to the extent” of the accounting. Thus, the introductory language of the typical exclusion could be rewritten as “The Company shall not be liable under Insuring Clause 1 for Loss (other than Defense Costs) paid by an Insured Person or for which the Insured Person is liable.”
Importantly, it is desirable for this exclusion to apply only to “such” insured person, which means that coverage for “innocent” insured persons is unaffected.
Deliberate Fraud. Policies will exclude coverage for “deliberate fraudulent act[s] or omission[s]” or “willful violations” of law. Such exclusions are limited to claims where there is a “judgment or other final adjudication” adverse to the insured person. It is conventionally thought that this “final adjudication” language means that if the underlying liability action is settled rather than tried the exclusion does not apply. Some courts, however, have not limited these types of exclusions in this manner and permit the adjudication of deliberate fraud to take place in the coverage case; in other words, the settlement of the underlying case will not necessarily prevent the carrier from denying coverage on this basis. (This is true even if the carrier has denied coverage initially and the insureds settle the liability action.) It is important for the insureds to understand this, especially since this risk is contra the conventional wisdom.
As noted, the deliberate-fraud exclusion applies if there is a “judgment or other final adjudication,” which would not include certain resolutions of criminal matters such as by pleas of nolo contendere or “no contest.” In other words, pleas might not per se establish the applicability of the exclusion. (As noted, following such a plea arrangement, under some case authority the carrier would still be able to seek to prove the elements of deliberate fraud.)
Moreover, in a circumstance where punitive or exemplary damages are insured under the policy, the deliberate-fraud exclusion applies also to limit coverage for the company’s indemnification of the directors and officers (if permitted by the corporate-indemnification statute). In other words, if punitive damages are not sought or are considered uninsurable in the circumstances and if the company’s corporate indemnification applies, then the insurer will reimburse the company for its indemnification (subject to deductible) without regard to the deliberate-fraud exclusion; if punitive/exemplary damages are sought and are indemnifiable, then the deliberate-fraud exclusion will be applicable to the claim for coverage under company-reimbursement coverage (Side B), in addition to applying to the claims of the individual insureds (Side A).
It is desirable for the exclusion to apply only to “such” insured person, which means that coverage for “innocent” insured persons would be unaffected. As with the “accounting of profits” exclusion it would be preferable to preserve defense coverage.
Personal Profit. Policies will exclude Side A coverage for insured persons relating to his or her having obtained personal profit, remuneration, or other advantage to which the insured is not legally entitled. These types of exclusions are being invoked in the context of suits seeking recovery of bonuses and other payments that were made based on, for example, the profits of a company where that year’s accounts become reopened following a restatement of earnings. (The insured v. insured exclusion may also apply to some claims covered by this exclusion.)
Policyholders should desire that this exclusion apply only to “such” insured persons, which means that coverage for “innocent” insured persons is unaffected. As with the “accounting of profits” exclusion it would be preferable to preserve defense coverage.
Presumptive Indemnification. D&O policies tend to presume that in all circumstances where permissible the company will indemnify the insured persons. (Indemnification against many securities-related claims under the registration and anti-fraud provisions of federal securities law is not permitted by the SEC. See Globus v. Law Research Service Inc., 418 F.2d 1276 (2d Cir. 1969). Similarly, RICO violations and antitrust liability may not be indemnifiable. See Sequa Corp. v. Gemlin, 851 F. Supp. 106 (S.D.N.Y. 1993). By statute, liability under the Foreign Corrupt Practices Act is not indemnifiable. 15 U.S.C. §§ 78ff( c)(4), 78dd-2(b)(4). There is also some risk that the advancement of defense costs by the company may be prohibited by section 402 of the Sarbanes-Oxley Act, but the SEC has not taken this position publicly to my knowledge. At least for securities violations, the courts have permitted indemnification by separately purchased insurance. E.g., PepsiCo v. Continental Cas. Co., 640 F. Supp. 656 (S.D.N.Y. 1986).)
The purpose of the presumptive-indemnification provision, of course, is to not allow the company to manipulate the deductible by simply refusing to perform the indemnity and thus require the carrier to pay for amounts that would otherwise be within the deductible (inasmuch as policies are structured such that the corporate indemnity responds first to protect the insured individuals).
Accordingly, and consistent with the deductible provision, in the event that a company incorrectly refuses to perform the corporate indemnity, the insured persons are exposed to the deductible, and their recourse will lie against the company (and not the insurer). It would be preferable for the insured persons, however, to be entitled to compel the insurance company to pay without regard to the deductible and for the insurer then to be subrogated to the insured person’s right of indemnification (so that the insurance company pursues the company for indemnification).
This presumptive-indemnification provision may not apply to the extent that the company has “financial impairment”, in which event presumably the insured persons are not exposed to the deductible amount. This language also aids in helping to segregate the insured persons’ rights to access policy proceeds in the event of bankruptcy of the company (though for that purpose it would be preferable to omit the provision altogether).
The best result is not to have any such provision in the policy and to vest in the insurer the right to pursue the benefit of the corporate indemnity (to the extent of the deductible) in the event it were not provided when it should have been. Separately from such a subrogation provision, the insurer and the company could agree in a different document that the company will always promptly and in good faith evaluate whether indemnification should be provided to the directors and officers.
Settlement. Does the insurer have the right to settle a claim against insured persons without the written consent of the insured? If the insured withholds consent, does the insurer has the power to tender the amount of money it was prepared to offer in settlement and walk away; this is known as a “hammer” clause. Though many insureds object to hammer clauses, the existence of the clause may mitigate the risk that a carrier would seek reimbursement of settlement amounts, inasmuch as it can tender the amount it believes is appropriate in settlement and cut off its obligations.
Trigger. D&O policies apply if there is a claim “first” made against an insured in the policy period. There often is litigation as to whether a particular situation rises the level of a “claim.” Does the policy makes clear that a claim is first made when the insurance company learns of the claim from the insured or a third party? Whether this is coverage-protective or not will depend on the particular facts, but it is generally helpful to avoid what is otherwise a commonly litigated question (i.e., whether the claim was “first made” during the policy period).
Defense and Settlement. The insurer is not liable for any covered defense cost or settlement if it does not consent to their incurrence, though it may not withhold consent unreasonably.
Allocation of Loss. Increasingly, I am seeing policies that specify that, where there are covered and uncovered amounts involved in a matter, an allocation of the amounts must be made based on the “relative legal exposures” of the involved parties. This is less favorable than would be the likely result otherwise, because most jurisdictions follow what is called the “larger settlement” rule where all amounts are presumed to be covered except the marginal portion that can be shown to be based on uncovered claims (or uncovered remedies). Federal securities-law claims, however, may no longer be appropriate to subject to the “larger settlement” rule approach because the Private Securities Litigation Reform Act of 1995 seeks to require proportionate liability, which may mirror the “relative legal exposure” approach of the policy language; however, for claims not subject to PSLRA a larger-settlement rule approach is likely to result in allocations more favorable for the insureds than will the “relative legal exposure” approach.
Rather than embrace a legal principle for governing allocation, the policy could set forth a mathematical formula establishing a predetermined percentage where there is covered and uncovered loss. A predetermined allocation percentage can be applied to indemnity costs, defense costs, or both, or in different percentages to each. A percentage-recovery provision furthermore could provide that an insured may opt out and choose to litigate (or arbitrate) the issue (with no presumption that the insured minimally will receive the fixed percentage).
Under some policies I have seen recently, if there is a dispute as to allocation, the insurer has the power to determine the percentage that it believes to be covered and pay only those amounts, subject to resolving the issue later with the insureds. Any subsequent resolution of the allocation will be deemed to apply retroactively, including possibly affording the insurer a right to a refund from the insureds in the event the allocation is for a lesser amount than what the insurer paid on an interim basis. Moreover, although the issue is not entirely clear, assuming the carrier underpaid defense costs and later loses the allocation dispute, it might not be required to pay interest on the amounts it incorrectly withheld from payment.
Underwriting Representations. Much of the action these days in the D&O coverage litigation world concerns rescission claims by insurers, and we have seen changes in insurance policy language that seek to buttress the position of carriers in pursuing such remedies. For example, some policies seek to lay the foundation for the carrier to argue that any factually incorrect statement in the application constitutes a material misrepresentation that establishes the basis for rescission of the policy. The language is not as carrier-favorable as one sometimes sees in that it does not expressly declare all statements in the application to be material. It is important to evaluate the language in the application form to see whether documents outside that form, such a financial filings, are deemed to be incorporated; if they are incorporated, then the carrier will have a basis to argue that an incorrect statement in an SEC filing for example (as one sees with financial restatements) constitutes a representation to the carrier that formed a material basis for its underwriting. One way to mitigate this exposure is to make clear in the application that (i) the statements are accurate only to the applicant’s knowledge and belief and (ii) only statements set forth in the application are represented as being true and implicitly that documents, materials, and oral statements not set forth in the application are not subject to a representation for truthfulness or accuracy.
Of course, ideally the policy would be non-rescindable by the carrier, at least as respects Side A coverage. Alternatively, the insurer can agree to waive its right to seek rescission unless it shows, by clear and convincing evidence, actual intent to defraud or deceive. (In some circumstances, courts have presumed an intent to deceive in a D&O matter where a false statement was made knowingly by a sophisticated party.) In this regard, a representation by the insurer that it has had a full opportunity to conduct such investigation as it deemed appropriate as part of the underwriting would be useful (though not dispositive).
Finally, there are some cases where between the date of the application and the date the policy issued some circumstance changed such that, the carrier later contends, the applicants’ failure to update the prior submission constitutes a misrepresentation. It would be useful to disclaim any continuing duty on the prospective insured to provide such updates. (Note that one needs to look also at the binders regarding this question.)
Severability. D&O policies typically contain two severability provisions: one addresses severability of exclusions and the other addresses underwriting representations. The severability-of-exclusion provision provides that knowledge of one insured will not be imputed to others for purposes of applying exclusions; this language, however, does not protect against exclusions whose application does not turn on knowledge. The underwriting-severability provision seeks to protect innocent insureds from a misrepresentation of another insured person where that misrepresentation would otherwise be considered to be material to the risk as a whole.
Generally, these are very useful and important provisions that are protective of insured persons.
Claim. D&O policies apply to “claim[s],” and policies will usually define what is meant by a claim. For example, claim sometimes is defined as a written demand for “monetary damages”, but it would be more favorable to use the word “money” alone in place of “monetary damages.” This is because much recent litigation has involved whether amounts sought in actions against directors were restitutionary in nature (and thus were not covered “damages”). Several courts, such as the California Supreme Court and the US Court of Appeals for the Seventh Circuit, have ruled that it would be against public policy to afford indemnification for restitutionary remedies. It would seem advantageous to have a textual hook favoring coverage for such remedies and certainly not risk having the contract language interpreted as affording less coverage than what public policy would otherwise permit.
The definition of claim may include expressly a criminal proceeding, but whether such language extends to “mere” criminal investigations is not clear.
Defense Costs. Policies defining covered “defense costs” may be limited to “reasonable” costs. There can be a mismatch between the insured person’s obligation to pay the bills of his or her lawyers and the carrier’s reimbursement thereof. While I am loath to acknowledge a disjunction between what is charged by counsel and what constitutes reasonable defense costs, this is a common area of dispute. Assuming an insurer will not delete this limitation completely, it would be helpful to have a provision specifying that, for example, (i) all costs incurred pursuant to a written budget from counsel and which do not vary by more than 15 percent of these costs are deemed reasonable or that (ii) all costs incurred consistent with the company’s litigation guidelines are deemed reasonable.
Moreover, if a defense counsel is hired for a case but an individual insured person wishes to retain “shadow” counsel or personal counsel to advise him or her in particular, it is not clear that this would be considered a covered defense cost. This can be rectified by stating that defense costs includes the cost of counsel retained to advise an insured person in connection with a claim.
Similarly, an insured person might not himself or herself be a target of an investigation but still may need or wish to retain counsel; while insurers may be reluctant to pay in such circumstances, the provision of such coverage could be tailored reasonably to circumstances where there is a parallel securities or other liability claim and the legal costs incurred in responding to the regulator or prosecutor assists in the defense of the parallel proceeding or claim; perhaps a set percentage of such costs could minimally be included in covered defense costs.
Interrelated Wrongful Acts. Claims that stem from interrelated wrongful acts are considered a single claim. Policies may define interrelatedness as being “causally connected.” It is difficult to know in advance whether this is a favorable definition because the amount of limits and deductibles will turn on whether the claims are “causally connected.”
Loss. As indicated regarding “claim” above, one area of common dispute in D&O coverage cases over the past several years has been whether amounts paid for liability constitute uncovered restitutionary remedies. The notion is that the disgorgement of an ill-gotten gain is essentially neutral (i.e., it is not compensation for injury but instead is shifting money back across the table) and that it would be against public policy to afford indemnification for such restitutionary remedies. Although it is doubtful that any insurer would agree to afford coverage for restitutionary remedies expressly, it still would be advantageous – though potentially not enforceable – to define “loss” to include “any amount that represents or is substantially equivalent to disgorgement, restitution or rescissionary damages, or forfeiture of any profits or remuneration.” (This language has been used as an exclusion to coverage rather than as an inclusion to coverage, but the argument favoring such an expansion of the definition of loss is that if the underlying conduct is otherwise insurable the policy should respond to afford indemnification.)
One difficulty with the cases declining coverage in this area is that the public policy that is being invoked is divined from general theoretical arguments about the nature of insurance and what the coverage lawyers contend is sound public policy. (For example, under Section 806 of the Sarbanes-Oxley Act, whistleblowers may recover special damages if they are retaliated against for reporting, e.g., a securities violation; one can imagine a court finding that public policy should not afford indemnification for such liability.) Consequently, it would be advantageous to change part the definition that excludes from covered loss uninsurable matters to make clear that a matter will be considered uninsurable loss only if the statutory law makes it so expressly (what might be termed a positive law versus natural law approach).
Although most policies do not provide coverage for “fines or penalties,” that term will not be deemed to include punitive or exemplary damages in some circumstances. For example, Michigan public policy allows for indemnification of punitive damages so long as the insured did not engage in deliberate conduct with the expectation that the insurance company would pay. See School District v. Continental, 912 F.2d 844 (6th Cir. 1990) (Michigan law). Delaware law permits coverage for punitive damages. Some policies – which are generally silent on choice of law – may set forth a choice-of-law rule as respects coverage for punitive damages: policies may provide that punitive damages are insurable if they are covered: in the place the wrongful act occurred; where the damages were awarded; where the insurer is based; or where the Insured Organization is incorporated or has its principal place of business. This type of “roving” choice-of-law provision is generally favorable, but sometimes an insurer will go further and agree that the determination by the insured’s general counsel as to application of the choice-of-law provision is final (implicitly so long as the decision is not irrational).
Finally, covered loss may not include settlement amounts that are not collectible from the insured person. This is meant to bar settlements with plaintiffs where the insured assigns the right to collect on the insurance and receives a covenant not to execute against any asset of the insured other than the insurance policy.
Financial Impairment. Policies set forth expressly the ordinary statutory requirement that insolvency of the insured will not reduce the obligations of the insurance company. Some endorsements also seek to affect how the automatic stay of litigation under the bankruptcy code will apply.
By way of background, the insurance coverage applicable to individual insureds typically is not considered to be part of the bankrupt corporation’s estate and thus not subject to the automatic stay. The case law is not uniform in this regard, and the problem for individual insureds is that it is conceivable they will not be able to access the policy proceeds in those circumstances.
I have seen policy language that seeks to address this in part by requiring all insureds to waive the protection of the automatic stay, but the provision in fact may not be efficacious. There is a split of authority as to whether a pre-bankruptcy waiver of the stay provision is enforceable (compare In Re TWA, Inc., 261 B.R. 103 (Bankr. D. Del. 2001); In Re Pease, 196 B.R. 431 (Bankr. D. Neb. 1996) with In Re Merridale Gardens Ltd. Partnership, 1996 U.S. Dist. LEXIS 22042 (D. Md. Feb. 28, 1996)). Moreover, it would seem that other creditors would be the ones to object to a release of the policy to fund, e.g., the defense of individual directors and officers, so a waiver by the insureds and the insurance company may not be relevant to their claim.
Finally, it is not clear that such a waiver would be favorable to the individual insureds given that lifting the stay would permit the insurance company to seek rescission of the policy, whereas a claim affirmatively brought against an insurance company for money often is not considered to be within the 362 stay to begin with.
Order of Payments. Following some of the headline-grabbing bankruptcies over the last few years – and the litigation over whether insurance policies were included in the estate (and thus within the automatic stay or were assets that needed to be marshaled favoring corporate creditors in general, an issue magnified when the corporation itself was covered for its own liabilities under “Side C” coverage), many D&O policies sought to rectify the issue by setting forth the order of payments among the insureds. Usually, insurers are required to pay claims on a first-come, first-served basis, and this provision seeks to prioritize the payments in favor of the individual insureds over claims made by the company itself.
Order-of-payment provisions were widely introduced following some bankruptcies of companies that had purchased “entity” or “Side C” coverage, the purchase of which being motivated in part to avoid fights over allocation between the uncovered liability of the corporation itself and the covered liability of its directors/officers. Once these companies file for bankruptcy protection, the entirety of the insurance policy became gummed up in the bankruptcy since the debtor was insured under these policies (and thus the individuals and the company were competing for the benefit of the insurance asset). Where there is no Side C coverage, there may still be a bankruptcy issue with respect to the company indemnity (Side B) coverage; these issues are avoided with Side A-only policies.
These provisions try to prioritize payment to the individual directors and allow carriers to withhold payment to the company under Side B coverage to permit more money to be available to the individual directors. (These provisions do not affect the deductible or presumptive-indemnification clauses.)
For any policy that contains Side B coverage, an order-of-payments provision is sensible.
* * * *
Given the tedious length of this post, readers may be surprised that there are still more niggling issues that I try to address when I review D&O or fiduciary-liability policies (which function similarly), and I am unable to set out the entire cookbook of what companies and their directors/officers need to look at in every circumstance.
Over the nearly twenty years I have been in private practice, I have always been surprised by how few companies or directors/officers review the precise wordings of their policies (whether they be D&O or product-liability or property coverages). Increasingly, at least in this nook of the coverage world, policyholders are looking at the wordings before they buy their policies. This is a good investment, for by the time lawyers are involved in the claims side of things it may be too late. By investing the time upfront in scrutinizing the wording carefully, one can be best assured that the protection that is intended to be obtained through the purchase of a policy will be there when the insured needs it most.
Note: This commentary was cited in M. Kressel, Contractual Waiver of Corporate Attorney-Client Privilege, 116 Yale L. J. 412, 445 (2006).
Posted by Marc Mayerson at 4:32 PM | Comments (6) | TrackBack
October 26, 2005
When ERISA Suits Tagalong to D&O Claims the Fiduciary-Liability Coverage Might Not
Corporate directors and officers litigation today often involves claims asserted under the federal securities laws as well as under federal employee-benefits law (ERISA). The plaintiffs in these suits are conceptually different: securities-law plaintiffs are people who (and entities that) purchased or sold the company’s securities; ERISA plaintiffs are participants in employee-benefit plans that held or permitted the investment in company securities. Increasingly, ERISA cases are tagging along to securities cases: the directors and officers (who often are plan fiduciaries) are alleged to have failed to disclose certain facts about the company’s operations or finances to the market generally (for securities claims) or to participants in company-sponsored employee-benefit plans (for ERISA claims).
The United States Court of Appeals for the First Circuit recently had the opportunity to address coverage for a tagalong ERISA claim that was made four years after a securities-law class action was filed. In a very troubling opinion, the court ruled that no coverage was available for the ERISA class action because the gravamen of the complaint echoed the allegations in the earlier securities class action. The basis of the court’s ruling was not that the policyholder had failed to disclose the early securities-law class action, but rather that a generic prior-and-pending litigation exclusion barred coverage. Federal Ins. Co. v. Raytheon Co. (1st Cir. Oct. 21, 2005)
Prior-and-pending exclusions take one of two forms: a laser-beam exclusion that bars coverage for prior claims that are listed by name in the exclusion and a generic exclusion that bars coverage more generally if a claim subsequently made in the policy period is related to a prior claim. This was the type of exclusion at issue in Raytheon. In particular, the language provided:
The Company shall not be liable for Loss on account of any Claim made against any Insured . . . based upon, arising from, or in consequence of any demand, suit or other proceeding pending, or order, decree or judgment entered against any Insured, on or prior to [policy inception], or the same or any substantially similar fact, circumstance or situation underlying or alleged therein.This is a reasonably standard version of the generic prior-and-pending exclusion that is found in many corporate policies today.
In Raytheon, there was no dispute that at least some of the allegations in the ERISA class suit had been cut and pasted from the securities class action. The dispute centered on how much overlap must there be between the two cases for the prior-and-pending exclusion to apply.
The court focused on the pivotal language in the exclusion, which is that, for the exclusion to apply, the claim in the policy period must be “based upon . . . the same or any substantially similar fact, circumstance or situation underlying or alleged therein.” The court found that the use of the term “base” meant that “situations in which the complaint in the second action does not draw substantial support form the allegations of the first” were not within the purview of the exclusion (slip op. at 17); however, the exclusion is not limited to only those claims where the “first action provide[s] the sole support for the second.” Id. Instead, the court held:
We think that the policy thus requires the allegations in the second complaint find substantial support in the first complaint, i.e., that the allegations of the second complaint substantially overlap those of the first. [For the exclusion to apply] the second complaint [must] substantially overlap the first with respect to relevant facts.Slip op. at 17-18.
The court stated that its construction promoted the purposes of the prior-and-pending exclusion: (i) to encourage insureds to give prompt notice; (ii) to avoid stacking policy limits in successive policies; and (iii) to discourage insureds from purchasing policies knowing that claims were going to be asserted (avoiding the “adverse selection” problem). Slip op. at 18-19.
But the court’s construction does not provide an incentive for providing prompt notice – in Raytheon, there was nothing for the insured to give notice about to its ERISA liability carriers when the securities case was filed three years earlier. No ERISA claim had been made, and even if notice had been given at that time to the ERISA carriers that year, they would have had no obligations – their policies had not been triggered since no claim had been made. (Even if in the policy in effect at the time of the securities claim there was a notice-of-circumstances provision, which is an extension of coverage by which the insured at its option can lock-in coverage for post-policy period claims if it first discovers during the policy period circumstances that later may lead to claims, the insured probably would not have been able to avail itself of this protection due to the stringency of the requirements of such provisions.) Accordingly, the rationale to stimulate early notice is entirely misplaced.
The second rationale, to avoid the stacking of policy limits, is in many ways a restatement of the first – stacking results when a claim is made in year 1 and a second, related claim is made in year 2, such that the policyholder can collect under each policy for the claim made in that year. There is at a minimum a dispute in the case law whether claims-made policies permit this result in the first place, that is, whether they permit the second policy even to be triggered from the assertion of a new but related claim in year 2; many commentators and courts believe that all subsequently related claims relate back to the first claim (since most policies define claim to include a “series” of claims) such that “the” claim was “first made” in year 1. One can debate whether claims-made or claims-first-made policies really work this way as they are written, but there is certainly a large number of insurers and commentators that believe that all subsequently asserted claims relate back to the first year, such that by design there is no cumulation or stacking of policy limits. But even under this view, crucially the policyholder gets paid for the second claim under the first year’s policy. Under the First Circuit’s ruling, the policyholder does not get paid at all for the second claim.
And none of this examines whether stacking or cumulation of policy limits is something that should be avoided. There are certainly substantial arguments in terms of risk spreading and the marginal utility of (insurers’) money that support stacking policy limits; the correct analysis is to look at the obligation of each carrier separately under its contract, to recognize that it was paid a full premium for the limits it provided, and to consider the axiom that successive carriers are not third-party beneficiaries of prior coverage.
At all events, the court’s second rationale – the avoidance of stacking – is unpersuasive (or surely it is inadequately explained or justified).
The First Circuit’s third rationale is similarly unconvincing. The third justification is that it avoids “adverse selection,” that is, the propensity of those with a higher exposure to loss to seek insurance protection. Here, too, the court’s facile invocation of insurance-speak (which arguably it does incorrectly) obfuscates rather than clarifies the analysis. What must be first recognized is that by their nature claims-made policies are retrospective in the coverage they provide – in other words, they are designed to cover past events, and the insured-against contingency is whether or not a claim will be made in the particular policy year. There is no showing at all in Raytheon that the company thought an ERISA claim would be brought at all let alone in the policy year in question. More importantly, this all underscores that the way to police the so-called adverse selection problem is through underwriting. Insurers are supposed to gauge for themselves the likelihood that a policy they are considering issuing may be forced to pay out, and the underwriters have the ability to ask for information and make that assessment (or take a risk against not having adequate information). If the policyholder did not adequately respond to the underwriters’ inquiries, then the policy may be voided on nondisclosure or misrepresentation grounds. What the First Circuit’s ruling does is not to police adverse selection (bad policyholders seeking coverage) but rather encourages bad and lazy underwriting – ironically as respects policies whose very purpose is to provide retrospective coverage.
Indeed, the court does not take into account that, because they provide coverage retrospectively, claims-made policies typically include a "retro date," that is, a provision stating that the operative events leading to a claim in the policy period must take place on or after a particular date (often, the inception date of the first policy issued by the carrier to that insured). This is significant because the Raytheon court's construction sub silentio adds an additional retro-date limitation, barring coverage for past factual circumstances that are substantially similar to misconduct undergirding any prior claim made under any type of policy.
Worse, it is not unreasonable to assume on the facts that Raytheon did disclose the existence of the prior securities-law class action; it was still pending at the time of the ERISA fiduciary policy’s inception. In the circumstances, that the insurance company did not laser-beam out any subsequent claims arguably induced the policyholder to believe there would be coverage.
While the Raytheon court uses its three policy rationales to buttress its holding, it is true that they are not necessary to the court’s ruling, which is predicated on a construction of the policy language, especially the meaning of “based upon.” While we must start the analysis with the policy language, and where the language is plain it will be applied, there remains a governor on the plain-meaning rule, which is that the result must still pass a reasonableness test. There are different ways this notion is expressed: a policy will not be construed to achieve absurd results is one formulation. Here, the result in Raytheon fails any type of reasonableness review.
To illustrate, the following propositions are all supported by the facts described in the Raytheon opinion:
a. The policyholder made adequate disclosure of the securities case in the underwriting;
b. No policy is triggered until the assertion of a claim against the policyholder;
c. The constellation of plaintiffs, legal claims and theories, and remedies are different in the securities and the ERISA cases.
The Raytheon court’s ruling means that the fiduciary-liability policies never have an obligation to respond to a follow-on ERISA case that is made in any year other than the year that the securities case is brought. In other words, unquestionably had the ERISA case been filed soon after the securities case, the fiduciary-liability carriers that year would have been required to respond. But if the ERISA case is filed the next year (or thereafter), the fiduciary-liability carriers in those years will not need to respond by dint of the generic prior-and-pending exclusion.
So, where does this leave policyholders, which are increasingly facing tagalong ERISA claims to securities cases filed against their directors and officers (who often are benefit-plan fiduciaries)?
1. The Raytheon court suggests that if the policyholder wishes to preserve coverage it in effect should provoke the filing of the ERISA tagalong within the same policy year that the securities case is filed. (Similarly, plaintiffs need to be aware of the Raytheon holding and file the ERISA case promptly to assure that insurance monies may be available to fund any settlement or judgment; thus, the court's ruling stimulates the filing of claims that might otherwise not be brought at all.)2. Policyholders should resist “generic” prior-and-pending exclusions and demand that carriers laser-beam out matters that will be excluded if a related claim is asserted later. While this may result in carriers’ seeking to exclude by name the three-year-old securities claim in Raytheon, the policyholder will have the opportunity to buy back that exclusion and, if not, to know with certainty whether there will be coverage for a tagalong ERISA case.
While I believe that generally speaking the latter result is salutary, it is an unintended consequence of the First Circuit’s decision and surely is not sufficient to justify what is otherwise an untenable holding and the untoward effects it causes. Insureds face increasing risk of tagalong ERISA claims; insurers are willing to provide coverage for that risk; and in the absence of plain and compelling policy language courts should be more reluctant to take boilerplate, general exclusions and gut crucial protection that policyholders believed they paid for.
Posted by Marc Mayerson at 11:14 PM | Comments (1) | TrackBack
August 3, 2005
An Insurance Company’s Duty to Consent
In many types of insurance policies, the carrier’s obligation to perform is tied to its consenting to the incurrence of costs or the settlement of an underlying case. One assumes that an insurer cannot withhold consent willy-nilly, for that would make coverage illusory. There is a dearth of authority, however, that makes express the circumstances in which an insurer is not permitted to withhold consent – that is to say, the circumstances in which it is required to consent. The Supreme Court of Iowa recently addressed that question and made clear that insurers are obligated to consent when faced with a reasonable request.
In Belleville v. Farm Bureau Mut. Ins. Co. (July 29, 2005), the court addressed uninsured motorist coverage and a settlement of a claim against the tortfeasor. The Belleville case in part is concerned with the insured’s claim of first-party bad faith, which the court rejects in a broad decision that is highly favorable for insurance companies. But for present purposes, that aspect of the decision is notable because the court distinguishes the relationship of the insurer and its policyholder in the UIM context from the ordinary first-party context in holding that with respect to UIM coverage the relationship between the two “is arms-length” and thus the insurer is freed from its ordinary obligations to consider the interests of the insured to be paramount, to construe the facts and coverage in the light most favorable to the insured, and to comport with other dictates associated with the carrier’s obligation of good faith and fair dealing. (p. 11-12).
Having concluded that the insurance company does not need to extend itself to accommodate the interests of the insured, the court nevertheless imposed on insurance companies a duty to consent (where coverage is tied to consent) where the request is reasonable. In other words, in an arms’ length relationship, the Iowa court recognized that, where a reasonable request is made, it would be unreasonable to withhold consent, and therefore the insurer has a duty to consent. Thus, an insurer has a duty to consent “unless it has a reasonable basis for refusing to do so.” (p. 17)
The court’s holding applies with greater force outside of the UIM context, where insurance companies are required to consider the interests of their insureds and reasonably construe the facts and policy language in their favor. Accordingly, the Iowa decision is helpful not only concerning consent-to-settlement clauses in UIM and in liability coverage generally, but also in directors’ and officers’ policies, errors and omissions policies, and other coverages where, for example, defense costs are recoverable only if they are incurred with the insurance company’s consent.
The Belleville decision also is pertinent in considering carrier claims of prejudice from breach of a duty by the policyholder, since so long as the policyholder acted reasonably the carrier cannot claim that it was prejudiced, since it would have had a duty to consent to the reasonable course of conduct anyway. See generally Coastal Iron Works v. Petty Ray Geophysical, 783 F.2d 577, 585 (5th Cir. 1986); Pickering v. Am. Employers Ins. Co., 292 A.2d 584, 591 (R.I. 1971).
Posted by Marc Mayerson at 10:06 PM | Comments (2) | TrackBack
July 14, 2005
Late Reporting in Claims-Made Policies: Getting to the Root of the Issue
The California Court of Appeal issued an innovative decision that fills in important gaps in the analysis of issues concerning providing notice under “claims made and reported” liability insurance policies. The case, Root v. American Equity Specialty Ins. Co., available at http://caselaw.lp.findlaw.com/data2/californiastatecases/g033818.pdf (Cal. Ct. App. June 28, 2005), involved an insured who faced falling between two stools: not having coverage under consecutive liability policies because the claim was made during one policy period and its report was made in the second. The Fourth Appellate District (Division Three) emphasized that its holding was narrow: it was not invalidating claims-made-and-reported policies but rather was implying an equitable grace period to report a claim under an expired policy.
Root is different from the litigation in the 1980s where policyholders swung for the fences and ultimately struck out: policyholders had early success, especially in New Jersey and California, arguing that claims-made-and-reported policies were in their nature against public policy. (This had been the result in France which effectively invalidated claims-made policies in 1990 until legislation reversed the decision a couple of years ago.) These early cases – which in California were wiped from the books by the California Supreme Court through its practice of “depublication” (see Rule 976(b)) – generally held that the disjunction between policyholders’ expectations of coverage and the forfeiture of coverage stemming from “late” notice (different from the no-loss-of-coverage-from-late-notice-unless-the-carrier-has-been-prejudiced rule) was so extreme as to warrant invalidating the reporting requirement (virtually) altogether.
As was obvious at the time, these decisions lacked sound analytical footing legally and failed to come to grips with the fundamental reality that the policy says what it says – coverage is triggered if a claim is made and is reported during the policy period. (Policies that are simply “claims made” are different inasmuch as the policyholder covenants to provide notice but the notice provision is not part of the insuring agreement itself.) Moreover, insurers did a good job in convincing courts – without evidence – that claims-made policies were inherently cheaper than are occurrence policies (but compare Tip's Package Store, Inc.,. v. Commercial Insurance Managers, Inc., 86 S.W.3d 543 (Tenn. Ct. App. 2002) (occurrence policy implicitly cheaper than claims-made on facts presented)), and the courts ultimately adopted a "you get what you pay for” stance, holding that the notice-prejudice rule does not apply to claims-made policies and thus that notice provisions in such policies are strictly enforced.
It is against this historical backdrop that Root becomes particularly important, because the Root court was well aware of this history and the California Supreme Court’s penchant for de-publishing decisions mitigating the notice provisions of claims-made policies, and the Root court strove in its lengthy opinion to lay out an analytical framework that was consonant with fundament principles of California practice and with the reasonable expectations of both sides of the insurance transaction. The key to the court’s decision was its embrace – following the argument of Professor Bob Works in particular and the Restatement 2d Contracts § 229 – of the principle that non-occurrence of a condition, which would otherwise suspend or excuse the counter-party’s contractual performance, should be excused where a disproportionate forfeiture otherwise will result.
The facts in Root involved a suit’s being filed with three days to go in the policy period, the suit not being served until the last day of the policy, the policyholder’s having been called by a reporter the day suit was filed asking about a possible malpractice action, and the insured’s prompt provision of notice once he had actual knowledge of the suit against him.
The policy at issue was a claims-made-and-reported policy but which did not contain any “extended reporting period” (that is, a contractually established grace period to report claims that were made during the initial policy term based on conduct occurring before the expiration of the policy), and the insured never was given the opportunity to purchase an extended reporting period. As the court described the facts, “the late report was made a de minimis time after the expiration of the policy and [ ] the insured had not been given the opportunity to be protected under an extended claim reporting endorsement.” (Slip op. at 14.)
The court then framed the question before it: “The central issue in this case, then, is whether the policy period reporting requirement is a condition precedent of coverage that may be equitably excused when it works a forfeiture.” (Slip op. at 17)
The court’s framing of the issue required that it determine whether the notice provision was a condition or something else. (Generally, contract law presumes that provisions are covenants and not conditions, in order to avoid forfeitures.)
The Root court found some diverging signals between whether the notice provision was a true condition precedent or was something else, in part because the notice obligations appears more than once in the policy. The court nicely captures its own thinking, saying “[s]uperfluity does not vitiate, and in fact there are occasions when it defines.” (Slip op. at 19), which it also characterized as the policy’s “contain[ing] the seeds of its own cognitive dissonance on the problem of whether the policy period reporting requirement is a element of coverage or a condition.” (Slip op. at 20.)
To try to understand what the policy drafters were seeking to accomplish the court sought to understand the fundamental commercial context for the introduction of – and hence the drafting of – claims made policies. As the court explained this: “The key is the pricing of premiums. The core idea behind the move to claims made insurance policies was to close the gap between the time when insurer prices a risk and the time when the insurer may incur an obligation to pay on that work.” (Slip op. at 20 (citing Prof. Works)).
The time gap between the collection of the policyholder’s performance – its payment of the premiums it promised – and the carrier’s being required to perform services or pay money following a casualty is what makes the pricing of policies and operation of insurance companies a tricky business. (See generally Richard Stewart and Barbara Stewart, The Loss of the Certainty Effect, 4 Risk Management & Ins. Rev. 29 (2002), and Insurance Scrawl, Economics of Property-Casualty Insurance Business). “Insurers like all businesses in a free market, have the fundamental problem of making decisions now that depend on future events, and their survival depends on guessing right often enough to be profitable. . . . Professional malpractice insurance underwriting is [] likewise particularly vulnerable to gaps between the time of pricing and the time obligation.” (Slip op. at 21). According to the court, this changes the nature of the transaction in a claims-made-and-reported policy: “With pure ‘claims made policies, that risk is shifted to the insured, who pays present dollars for protection against claims that will themselves be paid in those same dollars, that is, without regard to inflation and at a time relatively close to the insurer’s pricing decision.” (slip op. at 22)
While the court’s discussion of the economic rationales of claims-made policies gives some context to its ratio decidendi – though court pronouncements of the nature of insurance markets are in my judgment invariably simplistic and, frankly, inaccurate – what is more interesting and important to the decision is the court’s identification of the consequences of the reporting requirement in claims-made-and-reported policies and its impact on the contractual risks assumed by the parties inter sese.
The court found that the insured’s obligation to report claims affects the carrier’s ability to monitor potential payouts under the policy. (The court then leaps the chasm to speculate about the economic impact of this in hypothesizing, again without evidence and surely subject to challenge empirically and theoretically, that the insurer’s gaining administrative closure by learning of the existence of claims more promptly yields a benefit that “is passed on to the insured in the form of lower premiums.” Slip. Op. at 22.) The court recognizes that how much a particular claim will cost is unknown at the moment of its report, but knowing of the existence of the claims sooner is better than its opposite. (Slip op. at 22-23).
The court also found salient that the reporting requirement can be understood as a simple election provision, that is, a contractual hook to ensure that if the insured elects not to exercise its rights to coverage that that election is irrevocable (or what the court characterizes as a “naked forfeiture clause”, slip op. at 23). Considered either as an information-forcing provision or as an election clause, the court found that the reporting requirement thus operates as a true condition to coverage. As the court explains, “[t]he addition of a reporting requirement therefore doesn’t go to risk of a claim against the insured (i.e., what sort of claim might fall within the ambit of the costs the insurer promises to cover), but to the logically independent risk that the insured simply will not report the claim in time.” (Slip op. at 23)
Having found the reporting requirement to be a condition, the court then confronts the consequence of that characterization, for the failure of a condition can result in a forfeiture of contractual rights (or more strictly, the failure of a condition results in the other party’s contractual obligations not becoming mature). The Root court next considered the notice/prejudice rule, where the notice “condition” has been mitigated by requiring the carrier to prove that it was prejudiced from late notice before it could avail itself of the protection the notice condition provided; the court found that that approach was too blunt an instrument, especially in the context of a claims-made-and-reported policies, since a prejudice rule would effectively transmute such policies into simple “claims made” policies, which are different. “Application of the rule thus fundamentally rewrites the claims made and reported contract into a pure claims made contract.” (Slip op. at 24)
Instead, the court applied the well established, if little known, rule providing for the equitable excuse of the failure of a condition, finding this rule to be “more flexible, nuanced, and does no violence to the claims made and reported nature of the policy.” (Id.) Applying the rule to the case before it the court reasoned:
[I]n the present case, the fact that the insurer did not give the insured the opportunity to buy an extended reporting endorsement which would . . . have given him an extra 60 days to report any claims may be of significance. Had Root been given that opportunity, for example, equity might not require excuse of the condition, because its excuse would, in effect, be to give Root the benefit of something he had the opportunity to buy and passed up. The same might be said if Root had had sufficient time to conduct an investigation as to whether a claim had indeed been made against him, or had delayed reporting the claim beyond the day on which he received confirmation of the claim. But given this record the facts are sufficient to support the equitable excuse of the reporting condition. . . . In the [California Supreme Court’s] phrase, given these facts it would be ‘most inequitable’ to enforce the condition precedent of a report during the policy period.
(slip op. at 25, footnote omitted).
The Root court’s holding is narrow on the facts and the court cautions that its ruling should not be extended unduly. As is often the case, in these types of forfeiture cases, one wonders why the carrier pressed the issue as it did, when the facts are so compelling and the harm to the insurer non-existent. A modicum of good claims judgment would have avoided litigation and avoided what is for insurers a bad decision that opens the space for new arguments on claims-made-and-reported policies and, the court acknowledges, fewer summary-judgment rulings for carriers on late reporting (at least in reasonably compelling circumstances).
Root is important not just in terms of its impact on claims-made-and-reported policies but more generally in its embrace of the doctrine of equitable excuse of conditions precedent. The Root decision also supports the idea that one needs to analyze closely whether something that is labeled a condition is truly a condition – as opposed to a covenant (as I’ve elsewhere pointed out, ) and even if a provision is a condition whether noncompliance should be excused to avoid a disproportionately harsh result, as Restatement 2d of Contracts § 229 supports. See generally Bob Works, Excusing Nonoccurrence of Insurance Policy Conditions in Order to Avoid Disproportionate Forfeiture: Claims-Made Formats as a Test Case, 5 Conn. Ins. L.J. 505 (1999).
Posted by Marc Mayerson at 1:45 PM | Comments (3) | TrackBack
June 9, 2005
D&O Implications of the AIG Mess
New York’s Attorney General and Insurance Commissioner have filed a civil complaint against AIG, Maurice Greenberg, and Howard Smith. (A copy of the complaint is available at http://www.oag.state.ny.us/press/2005/may/Summons%20and%20Complaint.pdf .) Further insight into the nature of the transactions comes from the SEC’s complaint against a former executive of General Re, who allegedly aided and abetted some of the allegedly fraudulent conduct engaged in by AIG to improve its balance sheet, which made a $144 million decrease in reserves in fourth quarter 2000 look like a $106 million reserve strengthening, and a $187 million decrease the following quarter appear as a $63 million increase in reserves, measures that improved AIG’s appearance to Wall Street and positively affecting its share price. (The SEC’s June 6 complaint is available at http://www.sec.gov/litigation/complaints/comp19248.pdf ) While an increase in reserves decreases an insurance company’s surplus, a positive one-dollar movement in AIG stock price supposedly increases Greenberg’s personal worth by $65 million, according to the NY complaint. Other actions have been filed against Mr. Greenberg relating to AIG, including one filed the same day by Ohio seeking to block his now well-known effort to give several million AIG shares of stock to his wife as the turbulence was increasing. See http://www.kpmginsiders.com/display_reuters.asp?cs_id=133552
Corporate policyholders, directors and officers should monitor these matters because AIG is seeking coverage under the directors’ and officers’ insurance policies that it purchased to protect its directors against claims of liability. According to Business Insurance, “AIG purchased about $125 million of limits, with Great American Insurance Co. of Cincinnati, Ohio, writing the first $25 million layer . . . . Great American often offers primary D&O limits to financial institutions, but the insurer typically does not write primary coverage for other large risks, according to market executives. Warren, N.J.-based Chubb Corp. participates on a low excess layer of AIG's program, according to sources.” See AIG Set to Test Own Cover, BUSINESS INSURANCE (May 16, 2005), at 1, available at http://www.businessinsurance.com/cgi-bin/article.pl? articleId=16843&a=a&bt=aig
Here’s the point: For AIG – or Messrs. Greenberg and Smith – to seek insurance coverage, they likely have to take the position that certain exclusions dealing with fraudulent misconduct (that we can assume appear) do not apply and that certain monetary relief being pursued against them represent covered ‘losses.’ But when AIG does this, it will be admitting that such a construction of the policy language supporting coverage is reasonable, setting the stage for the argument that relative to its own insureds similar constructions are reasonable, yielding the result that as AIG reaches for coverage it exposes itself on the policies it issued. (And
AIG’s own insurers should adopt the inverse tack of looking to AIG’s positions in service of denials of coverage to buttress their arguments that AIG now is making opportunistic arguments seeking recovery here. E.g., Serio v. National Union, 2005 NY Slip Op 03977 (May 17, 2005), available at http://www.courts.state.ny.us/reporter/3dseries/2005/2005_03977.htm. Oh what a tangled web.)
AIG may recognize this box and elect not to pursue the coverage it purchased so as to protect the coverage it sold. But it cannot control Messrs. Greenberg and Smith who no doubt as major shareholders of AIG have an interest in AIG’s not paying claims, but probably have an interest in not paying out of their own pockets for their attorneys (or any settlement or judgment) either. Given the nature of the conduct alleged, it may well be that AIG cannot indemnify these gentlemen pursuant to standard corporate indemnifications, which means that Greenberg and Smith will seek this coverage on their own. (Whether AIG can avoid indemnifying these alleged scoundrels is a tricky question. See Bergnozi v. Rite Aid Corp., http://courts.state.de.us/opinions/ (qnuzep45rti2tom1sweqc5r1)/download.aspx?ID=37080 (Del. Ch. Oct. 20, 2003); Globus v. Law Res. Serv. Inc., 418 F.2d 1276, 1288-89 (2d Cir. 1969). While the individual’s own pursuit of D&O coverage may not be quite the admission against interest that AIG’s seeking this coverage is, it still is probative, given who they were in the company and their knowledge of insurance.
Maybe AIG will commit hari kari on the coverage it purchased in the hope of obtaining the result that both the D&O coverage it purchased does not apply and that Messrs. Greenberg and Smith are not entitled to indemnification under the corporate indemnity. Compare http://www.sec.gov/news/press/2004-67.htm (indicating SEC’s ire at Lucent’s indemnifying its directors/officers). That seemingly would be the company’s best play.
At all events, in coverage disputes henceforth with AIG, Great American, and Chubb, policyholders should be pursuing discovery into the exchanges on coverage.
A final twist bears mention: Throughout Attorney General Spitzer’s complaint, he relies on the individual defendant’s invocation of his right to refuse to self-incriminate under the Fifth Amendment. Of course, in a criminal case, a prosecutor may not invite a jury to assume that the answer to a question that is not responded to on Fifth Amendment grounds supports an inference that the defendant is guilty; in a civil case, that limitation generally does not apply. (See generally Robert Johnston, Inferring Dishonesty: The Fifth Amendment and Fidelity Coverage, available at http://www.spriggs.com/news/pdfs/ACFB9AE.PDF .) But the New York action is a civil complaint, which presumably makes use of Greenberg’s invoking the Fifth fair game to support the inference that the answer would support the violation being alleged. (Query whether the State may sidestep the Fifth Amendment this way, which surely will be litigated in the case.)
But given the crucial use of the refusals-to-answer as an element of proof in the State’s case, one can assume that the D&O insurers will contend that the failure to answer somehow lays the foundation for a breach of the duty to cooperate. See Allstate Ins. Co. v. United Ins. Co., 2005 NY Slip Op. 02419 (March 28, 2005) http://www.courts.state.ny.us/reporter/3dseries/2005/2005_02419.htm. There ordinarily is not an “examination under oath” provision in D&O policies, and one can surely mount the argument that the D&O insurers’ (hypothesized) demand that Messrs. Greenberg and Smith waive their Fifth Amendment protections or sacrifice D&O coverage smacks of bad faith (see Gruenberg v Aetna Insurance Co., 9 Cal 3d 566 (1973); cf. Sakup v. State, 227 N.E.2d 822 (1967) (New York first-party bad faith). This is especially true in the context of an insurance policy with (we suppose) exclusions for fraud and one that lacks an examination-under-oath provision; in other words, it would be incongruous to permit the D&O insurers to deny coverage for refusing to answer questions/breach of cooperation when a crucial purpose of the policy is to protect against claims alleging fraud. Compare Federal Ins. Co. v. Kozlowski, 2005 NY Slip Op 02287 (March 22, 2005) http://www.courts.state.ny.us/reporter/3dseries/2005/2005_02287.htm (requiring insurer to defend and precluding litigation of its rescission claim while liability action against directors and officers were pending).
The ebbs and flow of the related liability and coverage matters here bears monitoring by policyholders and, for the parties involved, careful consideration of the big picture. (For other comments and tracking of the AIG mess, see the White Collar Crime Prof Blog.) These same tensions will arise regarding the application of ERISA fudiciary-liability insurance coverage, since (at least one) ERISA-based class action has been filed against Mr. Greenberg and others.
Posted by Marc Mayerson at 4:42 PM | Comments (6) | TrackBack
April 9, 2005
Better by Fax? Perfecting Coverage under Notice-of-Circumstances Provisions of Claims-Made Policies
Many claims-made liability-insurance policies have an important extension of coverage that enables a policyholder to lock in coverage in one year – the year that a bad situation is discovered that later may produce claims– even though claims against the insured arising from the situation are not made until after the policy period. Under “notice of circumstances” provisions, an insured can provide written notice of such a circumstance to its claims-made carrier and later-asserted claims will be deemed to have been made during the policy period in which "notice of circumstances" was given.
Insureds may want to provide notice of circumstances because it guards against the risk that a later claims-made insurer will laser-beam out eventual claims from that situation by imposing an exclusion; the later insurer may ask in its underwriting materials for the insured to identify situations that may lead to claims during the policy year – and then exclude them. Accordingly, if the insured identifies a situation that may lead to claims it may not have coverage for claims that indeed come to fruition. (If the insured fails to disclose the existence of such a situation, the insurer may later seek to rescind the policy or assert nondisclosure as a defense to performance.)
Notice-of-circumstances provisions typically require that the insured provide this notice during the policy period, which brings us to a recent decision by the New Hampshire Supreme Court. http://www.courts.state.nh.us/supreme/opinions/2005/cmc013.htm In this case, the insured consciously sought to invoke the protections of its notice-of-circumstances provision by providing written notice to the carrier. The carrier did not dispute that the content of the notice was appropriate (which is often the point of dispute) or that the relevant claims were not from the circumstances identified (another common point of dispute). Instead, the carrier refused to perform because the insured has prepared its notice on the last day of the policy period and sent it by overnight mail. The insurance company thus did not receive the notice until the day after the policy period – though the notice was prepared and sent during the policy period – and therefore, according to the insurance company, the insured had failed to comply with the notice-of-circumstances policy provision.
The case in part turns on the meaning of the word “give” as in to “give” notice to the insurance company. Once we are debating things at that level, however, we’ve already departed from practicality (or, as some have characterized, the world of the "law merchant"). The insured plainly sought to invoke the protection of the notice-of-circumstances provision, and the insurer conceded it had suffered no prejudice from what might have been a 10 hour delay in receiving notice. Yet, the New Hampshire Supreme Court denied coverage, ruling that “give” means to receive and thus the notice-of-circumstances provision had not been complied with.
Only a lawyer could have conjured this case. Presumably, if the insured had faxed the letter to the carrier, the court would have found the notice adequate. (The mailing-rule wasn’t discussed, but that rule generally goes only to proving that someone received a letter deposited in the mail, not when he or she received it.)
A somewhat related issue was decided by the 11th Circuit in an interesting case called Cast Steel v. Admiral Insurance, http://caselaw.lp.findlaw.com/data2/circs/11th/0216511p.pdf. Cast Steel involved an extended reporting period under a claims-made policy. (Actually, the policies were “claims made and reported,” which require that both the claim and the report of the claim be made in the policy period.) The policyholder had purchased consecutive claims-made-and-reported policies, and the claim was made in one policy but reported in the next one. Facially, neither policy is triggered, since both claim and report need to occur during the policy period. Had the insured not renewed the first policy, however, it automatically would have had a grace period to report claims under the first policy, a grace period that would have picked up the few hours of the “late” report. In other words, by paying an additional premium and renewing, the insured was potentially worse off than if it had not renewed at all. As the Eleventh Circuit put it, “[t]he district court’s opinion presents a somewhat alarming scenario.” (p.7)
The Eleventh Circuit concluded that the result advocated by the carrier made no sense and found that the first policy was triggered (ruling that the policy language was ambiguous). Another ground for the court’s decision that would have been available is the doctrine of disproportionate forfeiture, see Bob Works, Excusing Nonoccurrence of Insurance Policy Conditions in Order to Avoid Disproportionate Forfeiture: Claims-Made Formats as a Test Case, 5 Conn. Ins. L.J. 505 (1999). The Cast Steel case wasn’t discussed in the New Hampshire opinion but perhaps its consideration might have encouraged that court to reach a different result.
Posted by Marc Mayerson at 3:49 PM | Comments (1) | TrackBack