Interesting to see a criminal suit being brought against people named in subprime civil suits. http://www.nytimes.com/2008/06/20/business/20bear.html?_r=1&hp&oref=slogin
Dishonest conduct exclusions will surely be asserted in some of these subprime cases.
A very short class action complaint was filed in New York State Court, Kurtz v. Cayne. Defendants, Bear Stearns and a group of its directors, are alleged to have violated duties of "Candor" and "loyalty." See para. 34. It will be interesting to see how the coverage questions are resolved.
If you predicted that Bear Stearns officers and directors would be sued within “days” of the announced sale to J.P. Morgan you wildly underestimated this conflict. A suit was filed on March 17, 2008, the same day that the J.P. Morgan deal was announced. See Eastside Holdings Inc. v. Bear Stearns Cos., SDNY. Plaintiffs allege that “defendants disseminated or approved … false statements… which they knew … were misleading in that they contained misrepresentations and failed to disclose material facts…. Defendants … employed devices, schemes and artifices to defraud …[and] engaged in acts, practices and a course of business that operated as a fraud or deceit…. See paras. 61-62. You can surely expect the defendants to make D&O claims, and insurers will need to consider their fraud exclusions.
Identifying the next emerging issue is often difficult, but recent actuarial reports indicate that the subprime mortgage crisis will surely develop into an insurance coverage issue.
In January of 2008, Bear Sterns estimated that D&O insurers may face $9 billion in claims-related costs. To avoid the hype that often surrounds new insurance issues —remember the doomsday forecasts concerning Y2K— compare the subprime projection to other recent insurance issues. The $9 billion for subprime suits roughly matches the World Trade Center reconstruction cost. Insurers’ payments following Katrina and Rita were about $28 billion. On asbestos liability, it is estimated that insurers will ultimately suffer a total liability of $65 billion. The subprime crisis, therefore, appears to be significantly smaller than long-term insurance problems , but the subprime crisis is comparable to other recent discrete catastrophes, and certainly the subprime crisis is large enough to consider the coverage issues.
To identify these coverage issues, it is useful to note the types of suits being filed. Thus far, we have seen: borrower lawsuits against lenders (allegedly, loan did not fit needs or loan officer received the financial rewards for steering them towards loans with higher rates, and hidden fees and costs); borrower lawsuits against investment banks for providing financial backing to aggressive lenders despite questionable business practices; lender lawsuits against banks; shareholder suits against lenders; individual investor lawsuits; and regulators’ suits against lenders.
The common thread is that the suits generally allege some form of dishonest conduct, and this allegation creates the likely key coverage issue: fraud.
D&O policies generally exclude coverage for acts that are fraudulent. Although the policies are consistent in the concept of excluding fraud, the policies vary in the language for excluding fraud.
A common exclusion bars coverage “for any deliberately fraudulent act or omission or any willful violation of any statute or regulation if a judgment or other final adjudication adverse to such Insured Person establishes that such Insured Person committed such an act, omission, or willful violation….” (italics added) This exclusion requires more than fraud allegations. Fraud, in this form, must be “established” by a “judgment or other final adjudication.”
Other policies set the evidentiary bar lower, and coverage is barred for conduct that is fraudulent “in fact.” This language is friendlier to insurers. The “in fact” fraud exclusion does not require a final adjudication. But the application of the “in fact” exclusion is also more likely to be disputed; “final adjudication” is a brighter line than “in fact.” This is not to suggest, however, that the “final adjudication” provision will never be disputed; parties might dispute what is “final” or even what is “adjudicated.”
Dishonesty can raise coverage issues besides the fraud exclusion. For example, some policies include “personal profit” exclusions. Coverage is barred for claims “based upon, arising out of, or attributable to such Insured Person gaining in fact any personal profit … to which such Insured Person was not legally entitled.” (Italics added.) Some subprime suits will surely involve claims that the officers and directors made profits to which they were not entitled. This provision has been implicated in other recent corporate governance scandals (e.g., the personal profit exclusion was applied to Dennis Kozlowski’s claims concerning his compensation from Tyco).
Ultimately, based on the reports now being received the subprime mortgage crisis will be a significant insurance issue, with significant coverage issues.
$9 Billion. That is the new Bear, Stearns estimate of directors and officers losses arising from the subprime crisis. Bear, Stearns was tripling their estimate from this past September. Can there be any doubt that subprimes are the next huge issue for insurers?
The January 15 Wall St. J. reported that a little-known hedge fund manager made $3 to $4 BILLION-- for himself-- by recognizing the problems in the subprime markets and other "bubble" issues. The economists tell us that where there's winners there's also losers; another reason to expect suits and claims here. I'm looking at policies now with my thoughts on subprimes.
All roads-- at least all liability roads-- lead to insurance, and soon we'll be seeing the subprime crisis lead to insurance. It's been reported that the subprime issues has led to more than $170 billion in balance sheet writedowns. We now reportedly have 113 lawsuits concerning these writedowns. Can E&O and D&O claims be far behind? Claims departments should begin considering these issues, if they have not done so already.
Happy Thanksgiving. Just as Thanksgiving is the sign that the winter holidays are upon us, insurance coverage articles are the sign that a new liability issue is upon us. So, it was interesting to see Jerry Oshinsky's article entitled "Insurance Coverage for Subprime Lending Losses, Litigation, and Investigations." Mr. Oshinsky notes that "insurance companies will be reviewing fraud allegations closely." I agree. I suspect that we will not agree as to the extent that such exclusions will apply. I see fraud as a large component of this crisis. Fraud exclusions will often apply to these claims.
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