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.
Policyholders often seek discovery of carriers’ representations to reinsurers. The thinking is that if the carrier took a certain position with its reinsurers it must also take that position with its policyholders. Not so, says the United States District Court for the Southern District of Indiana. Irving Materials, Inc. v. Ohio Cas. Ins. Co., 2008 U.S. Dist. LEXIS 18692 (D. Ind. Mar. 10, 2008). There, the policyholder challenged a multiple-occurrence ruling on the grounds that the carrier had made a single-occurrence argument to its reinsurer. The court, however, ruled that the representations to the reinsurer were not material.
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.
Managing the risk of hurricanes and other natural disasters is a very difficult problem, but New York State’s proposed special hurricane fund appears to be the wrong solution. The proposal being considered would force insurers to set aside a portion of their premiums for hurricanes, but insurers would not be able to deduct this expense until it is actually spent on a hurricane. This proposal is discussed in Joe Treaster’s article in this morning’s New York Times. Special Fund Proposed for Hurricane Insurance, 10/9/07, at C4. Insurers would be setting aside money now, paying taxes now, and receiving deductions later. Rather than solving the hurricane burden, this proposal seems to exacerbate that burden. This program would quickly become another illustration of how New York is a tough place to do business.
The Minneapolis bridge catastrophe and reports of past evaluations of the bridge suggest that insurers will need to turn their attention to standards of structural integrity. A recent Washington appellate decision includes an interesting discussion of this issue. Bedford, LLC v. Safeco Ins. Co., 2007 Wash. App. LEXIS 2675 (paras. 18-20). The interesting question in future claims will be whether long-term deterioration will be considered an occurrence causing property damage. I hope that such claims will be resisted.
Definitely read the commentary in the 10/4/07 Wall St. Journal titled "International Tort Crisis," by Norman Lamont. The author speaks about foreign companies' concerns about being brought into American courts. These issues will be before the Supreme Court next week, Stoneridge v. Scientific Atlanta. The non-U.S. companies may become vulnerable to private securities lawsuits involving allegations that their U.S. listed partners misrepresented transaction. This case could be very significant for insurers of non-U.S. companies that have U.S.-listed companies as customers, suppliers, or clients.
Law.com recently published a very interesting article discussing how insurers are beginning to consider policyholders' obligations for electronic discovery. Another side of electronic discovery presents a more direct challenge: insurers' obligation to respond to discovery requests propounded directly on the insurers in coverage litigation. Much of policyholders' discovery is designed to disrupt and annoy insurers, rather than advance the cases. Policyholders bludgeon insurers with discovery in the hope that the aversion to discovery will increase settlement value. Electronic discovery will certainly present special challenges to insurers.
I’m excited to announce that my blog has been selected for the “Top Blogs” section of LexisNexis’ Insurance Law Center at: http://law.lexisnexis.com/practiceareas/insurance. I received an e-mail today from Tom Hagy, their VP of Emerging Solutions letting me know. He said that, “[LexisNexis] take[s] pride in associating with the best talent in the legal world, so we are thrilled to include you as part of this dynamic new platform that features commentary from insurance experts, and gives visitors the ability to interact with the authors and one another.” Tom went on to say that, “The selection of your blog was made by a team of insurance editors at Matthew Bender and Mealey’s – both LexisNexis companies – as one that is most often visited, referred to and relied on.”
I’m truly honored to be included in LexisNexis’ Insurance Law Center and continue to welcome your feedback and thoughts regarding insurance law.
I was happy to see the California Supreme Court decline to order an insurer to produce reinsurance information. Catholic Mutual Relief Society v. Superior Court of Los Angeles (Aug. 27, 2007). I’ve been representing insurers for more than 20 years. While reinsurance information is always sensitive, it’s almost never probative. In the few instances that I’ve seen it produced in any form, it did not advance the insured’s case. It only caused the insurer pain. Pain is the ultimate goal, and that certainly doesn't justify the discovery request.
As Michael Kunzelman noted in Forbes, this week the statute of limitations will run on suits against insurers for Katrina-related claims. It will be interesting to see these remaining suits. Of course, anything is possible, and policyholder lawyers will claim that their clients are victims of egregious misconduct. But, the reality is that policyholder lawyers (like the rest of us) are guided by the law of low-hanging fruit: the strongest cases are the first cases "picked." I will be very surprised if this last group of cases is very strong.
I'm off today to the ABA's annual meeting in San Francisco where I will be co-chairing the annual program of the Tort Trial & Insurance Practice Section's Insurance Coverage Litigation Committee. Our program will be reexamining the Tripartite Relationship among insurer, insured, and defense counsel. Our panel will be addressing the procedure, ethics, and privilege issues arising here. I'm fortunate to be working with leading practitioners, law school professors, and an appellate judge. These programs always elevate my game.
I can't help it: I love insurance cases with weird facts. So, I enjoyed reading a case addressing whether insurance covers claims for “alienation of affections.” Pins v. State Farm Fire and Casualty Co., 476 F.3d 581 (8th Cir. 2007). In fact, I wrote about this case in my October 2007 Best’s Review column. I don’t know what I found more amazing: the notion that insurance would cover an affair (the court rejected the notion) or the fact that people still bring alienation of affection suits in response to affairs. In any event, the case is a must-read for collectors of odd insurance cases.
This morning's N.Y. Times includes an interesting story concerning a terrible pollution problem allegedly caused by Ford. Can Ford Clean Up After Itself? (Sunday Business p. 1, 7/29/07).
The article describes a serious pollution problem in New Jersey that is allegedly causing health problems for nearby residents. The article focuses on the cleanup, but the next issue will surely be insurance. Ford will seek to push the costs onto its carriers. It will be interesting to explore Ford's intentions and expectations relating to its dumping. Significant coverage defenses may exist.
According to the July 19, 2007 L.A. Times, the Archdiocese's insurers will pay $227 million of the $660 million sexual abuse settlement. Amazing. If the policies were subject to standard "occurrence" language and intentional act limitations it would seem that several bars to coverage might apply. Clearly, the acts were intentional. The injuries would also be "expected", if not intended. Settling insurers were undoubtedly concerned about a policyholder-friendly court ignoring fundamental restrictions on coverage.
Yesterday, the Archdiocese of Los Angeles confirmed that it will pay $660 million to settle sexual abuse claims by 508 people. It will be interesting to see additional information concerning the insurance aspect of this settlement. The report in today's New York Times (7/16/07) indicates that the church will pay $250 million, and the remaining $410 million will be paid by Catholic religious orders and insurers. I wonder exactly how much the insurers are paying and the extent to which insurance coverage defenses (e.g., no "occurrence" and intentional conduct exclusion) discounted the coverage.
The report in today's papers concerning the Whole Foods CEO does not directly relate to insurance, but it is so unusual I must write about it. The CEO posted messages to a Yahoo stock forum concerning his company. Some of the messages concerned the CEO himself, including postings concerning his appearance. This bizarre story is a reminder for insurers to redouble their sensitivity to Internet-related risks. Additionally, it is also a reminder to carefully police their own employees' Internet activity. Even the bright, sophisticated, and successful fail sometimes to exercise good judgment online.
It will be interesting to see whether Governor Spitzer signs the legislation that would require insurers to demonstrate prejudice as part of a late notice defense. I hope that the governor declines to sign this bill. The New York no-prejudice position is a minority view, but it is a thoroughly considered view. Insurers should be free to set conditions on their coverage, and prompt notice of claims is a very reasonable condition.
I was interested to read a comment on absolute pollution exclusions on the Anderson Kill website: "in the context of negligent workplace exposure claims alleging bodily injury from exposure to a product in the stream of commerce, the [absolute] pollution exclusion should not apply." What does the "stream of commerce" have to do with an absolute exclusion? And really, the suggested exception to the exclusion raises broader questions. Don't insurers have the right to decline to issue insurance for certain risks? Barring some statutory obligation, shouldn't insurers be permitted to issue an absolute exclusion for anything at all? If an insurer issues a policy that does not apply to certain risks and the insurer does not collect a premium for these excluded risks, should the insurer be forced to pay for these risks? The attacks on the absolute pollution exclusion-- efforts to infer exceptions that do no not appear in the policy language-- are just wrong.
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