by Christopher Graham and Joseph Kelly

Directors and officers liability insurance isn’t anything like first-party property insurance. But companies sometimes treat it that way. And occasionally the issue reaches a court. And so it was in American Construction Benefits Group, LLC v. Zurich American Ins. Co. There a Texas Federal Court dismissed the insured’s claims as legally insufficient in a first opinion and second opinion, but with permission for the insured to try again.

The dispute arose from an insured limited liability company’s relationship with a member limited partnership. That member contracted with LLC to obtain reinsurance for employee group health insurance. LLC’s president obtained reinsurance, but in the renewal agreed to exclude the cost of a heart transplant for a child of member’s employee. With no reinsurance, LLC paid for the $1.2 million heart transplant, under its agreement with member. LLC then asked D&O insurer to pay the $1.2 million loss under the entity coverage, claiming the loss resulted from its president’s “Wrongful Act.”

The D&O policy’s entity-coverage insuring clause provided: “[Insurer] shall pay on behalf of [insured LLC] all Loss for which [LLC] becomes legally obligated to pay on account of any Claim first made against [LLC] during the Policy Period … for a Wrongful Act taking place before or during the Policy Period.” And as common, “Wrongful Act” included “any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted [by any director, officer, or employee].” The policy also included a duty-to-defend.

The problem with LLC’s claim was that insureds can’t recover under a D&O policy for loss resulting from a Wrongful Act, if there’s no Claim for a Wrongful Act. That member sought coverage for the heart transplant from LLC was insufficient; that act didn’t qualify as a Claim for a Wrongful Act–namely, a Claim for an error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted by LLC’s president or another officer or employee, or a director. Member instead “sought coverage under its reinsurance contract regardless of [president’s] actions.”

That LLC’s members might bring a derivative suit to recoup loss for LLC was irrelevant. That such a derivative suit supposedly was “imminent” didn’t matter either. No derivative suit against LLC had been filed. So LLC’s suit against D&O insurer was premature. As alleged, there was no breach of contract and no “actual controversy” as required for declaratory relief.

In dismissing LLC’s contract claim, the Court focused on the absence of any Claim for a Wrongful Act:

As pleaded, [insured LLC] is not alleging that [member] made a claim against [LLC] for injury caused by [president’s] Wrongful Act. Instead, [insured] is alleging that it was injured because [president] committed a wrongful act that left it without reinsurance from [reinsurer] to cover [member’s] claim for the expenses of the transplant.

In dismissing LLC’s subsequent declaratory relief claim, alleging an “imminent” member-derivative suit, the Court explained:

Under the [Texas] eight-corners rule, two documents determine an insurer’s duty to defend—the insurance policy and the third-party plaintiff’s pleadings in the underlying litigation. If the underlying pleadings allege facts that may fall within the scope of coverage, the insurer has a duty to defend; if the pleading only alleges facts excluded by the policy, there is no duty to defend.

“Without an underlying pleading, [LLC’s] claim that [insurer] owes a duty to defend wasn’t ripe because the court can’t yet evaluate whether there’s a duty to defend.” “Generally, ‘[a] suit for indemnity does not arise until some liability is established and made fixed and certain. This does not occur until judgment is rendered or until the lawsuit is settled.” That hadn’t happened.

And as an additional reason for dismissal, the Court stressed the complaint “is devoid of any allegation that [the insured] will be harmed if this court withholds declaratory relief.”

So while entity coverage was broad, it didn’t transform the D&O policy’s fundamental nature from liability to first-party insurance.

We probably haven’t seen the end of this saga. And in the next round, perhaps a battle over coverage for resolution of an actual derivative suit? Stay tuned!

Tags: Texas, D&O, claim, loss, breach of contract, entity coverage, first party insurance, duty to defend

by Christopher Graham and Joseph Kelly

William Beaumont Hospital v. Federal Ins. Co., Case No. 13-1468 (6th Cir. Jan. 16, 2014) is the latest of numerous cases over many years addressing Loss under a D&O policy. It addresses “disgorgement” under a Loss definition and a narrow Michigan public-policy exception for uninsurable loss.

It involves two nurses purporting to represent a class suing William Beaumont Hospital and other hospitals under the Sherman Act, alleging a conspiracy to hold their wages down. Beaumont paid $11.3 million to settle. Its management liability insurer agreed to pay 80%; but with the right to get it back. After it sued insurer, the Eastern District of Michigan decided there was coverage. So did the Sixth Circuit: The settlement was neither disgorgement nor uninsurable under Michigan public policy, as insurer argued.

The policy included the following Antitrust Claim coverage: “[Insurer] shall pay on behalf of the Insured the Covered Percentage [(80%)] . . . of Loss, including Defense Expenses, from each Antitrust Claim first made against an Insured during the Policy Period.”

As typical, Loss included: “[T]he total amount which any Insured becomes legally obligated to pay on account of each Claim and for all Claims in each Policy Period . . . made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, settlements, costs and Defense Costs.” As is common, “Loss” also included “the multiple portion of any multiplied damage award.” As not-as-common: “Solely with respect to any Claim based upon, arising from or in consequence of profit, remuneration or advantage to which an Insured was not legally entitled, the term Loss . . . shall not include disgorgement by any Insured or any amount reimbursed by any Insured Person.”

Compensatory damages versus disgorgement: Insurer argued nurses’ suit “arose from Beaumont’s gaining of profit, remuneration, or advantage to which it was not entitled and the settlement was a disgorgement of that advantage.” Citing Level 3 Commc’ns, Inc. v. Federal Ins. Co., 272 F.3d 908 (7th Cir. 2001), it argued further that “coverage may not exist if payment represents the return of something to which the insured was not entitled, even where the underlying plaintiffs specifically requested damages.”

Beaumont argued “money unlawfully retained is not the same in its legal character as money wrongfully acquired,” and “money paid to resolve a legal dispute is not necessarily a return of something to which the payor was not legally entitled in the first place.”

The Appeals Court stressed: the Loss exception was for “disgorgement,” not “restitution;” and restitution was used elsewhere in the policy–so insurer “should be aware of the difference between the two terms.”

But that distinction didn’t appear to factor in the court’s decision. The decision instead focused largely on the fact that the nurses sought as damages for the “class” the difference between what the hospitals paid as “artificially depressed” compensation and what should have been paid.

As the Court explained: “Disgorgement and compensatory damages are closely related but not interchangeable.” Per Black’s Law Dictionary, disgorgement is “'[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.’” Per Webster’s: disgorge means “to give up illicit or ill-gotten gains;” illicit means “not permitted, not allowed, unlawful” and Ill-gotten means “obtains dishonestly or otherwise unlawfully or unjustly.” Gain means “an increase in or addition to what is of profit, advantage, or benefit . . . resources or advantage acquired or increased.” Obtain means “to gain or attain possession or disposal of usually by some planned action or method.”

And per Black’s “actual damages,” in contrast, is “'[a]n amount awarded to a complainant to compensate for a proven injury or loss; damages that repay actual losses. — Also termed compensatory damages.’”

And per the Court: “[Beaumont] never gained possession of (or obtained or acquired) the nurses’ wages illicitly, unlawfully, or unjustly. Rather, according to the nurses’ complaint, Beaumont retained the due, but unpaid, wages unlawfully.” “Retaining or withholding differs from obtaining or acquiring. [Beaumont] could not have taken money from the nurses because it was never in their hands in the first place.” And: “While [its] alleged actions are still illicit, there is no way for [Beaumont] to give up its ill-gotten gains if they were never obtained from the nurses.”

Nurses sought purely compensatory damages based on a “classic damages calculation” to put them where they would’ve been but for the wrongdoing. In fact: “‘the antitrust private action was created primarily as a remedy for the victims of antitrust violations.'”

No public policy against insurance for these damages: According to insurer: “[I]f it has to insure Beaumont, [Beaumont] will profit from its own wrongdoing and transfer the cost of returning money wrongfully withheld to the insurer;” and providing coverage “would encourage moral hazards because it would incentivize wrongful behavior.”

But per the Court: “Michigan’s public policy bar . . . is implicated only when the insured is induced to engage in the unlawful conduct by reliance upon the insurability of any claims arising from that conduct.”

AS the Court explained, Beaumont’s D&O coverage couldn’t have caused it to participate in the conspiracy to hold down wages:

[I]n addition to the damage to the reputation of Beaumont, [it] also faced up to $1.8 billion in damages. The Policy limit for anti-trust claims is $25 million – far less than the threatened $1.8 billion which [nurses] sought jointly and severally from Beaumont. No insured is likely to bet on a gain of $25 million against a loss of $1.8 billion.

“'[C]ommon sense suggests that the prospect of escalating insurance costs and the trauma of litigation, to say nothing of the risk of uninsurable punitive damages, would normally neutralize any stimulative tendency the insurance might have.’”

“[T]he doctrine that an insured may not profit from its own wrongdoing relates to intentional tortious or criminal acts.” And, as Beaumont argues, “if intentional discrimination claims are insurable under Michigan law, there can be no overriding public policy concerns in providing coverage for business injury under antitrust laws.”

Moral of the story for insurers: If you don’t want to cover a payment like this, for in effect making up the difference between what your insured paid and should have paid, you can’t rely on a disgorgement exception to a Loss definition. You also can’t rely on a public policy exception. And if you don’t want to insure “restitution,” you better add a restitution exception to your Loss definition; a disgorgement exception may not work; nor can you necessarily count on a public policy to avoid liability.

Tags: Michigan, D&O insurance, Loss, disgorgement, restitution, public policy

by Christopher Graham and Joseph Kelly

Consumers Ins. Co. v. James River Ins. Co., et al, Case No. 12-03303-CV-S-JTM (W.D. Mo. Jan. 14, 2014)

This case involves an insured’s failure to timely report a claim under D&O (US Specialty) and E&O (Houston Casualty) policies. Both policies required notice “as soon as practicable” after Claim is made. The E&O policy also required notice no later than 60 days following the policy period. The insured was an insurer that should have known better. Prejudice from the delayed notice to the insurer was irrelevant.

The underlying case against the insured insurance company was a Missouri garnishment action, including a bad faith cross-claim. Dahmer sued the insurer’s insured, Hutchinson, for serious injuries allegedly caused when Hutchinson’s vehicle struck him. Dahmer’s wife also sued. They made a limits demand in July 2007 on the insurer. But it denied coverage. Then they obtained an uncontested $2.7 million judgment against Hutchinson.

Thereafter they filed a garnishment action against Hutchinson and the insurer. The trial court granted the insurer a summary judgment based on a “salvage operations” exclusion. But the appellate court in 2010 reversed. On remand, Hutchinson cross-claimed against his insurer for bad faith. In late November 2010, Hutchinson made a demand on his insurer for $3.5 million, the judgment against him plus interest.

As of the November 2010 demand, the insurer had in effect a claims-made insurance company E&O policy, effective February 16, 2010 to February 16, 2011. It limited coverage to claims made for “wrongful acts” first committed on or after February 16, 2010. And it provided:

As a condition precedent to any right to payment in respect to any Claim, the Insured must give the Underwriter written notice of such Claim, with full details, as soon as practicable after the Claim is first made but in no event later than sixty (60) days after the end of the Policy Period. A Claim is first made when an Insured first receives notice of the filing of a complaint, notice of charges, a formal investigative order or similar document or by the return of an indictment against an Insured or when an Insured first receives the written demand or notice that constitutes a Claim under [another definition].

Beginning February 16, 2005, the insurer also had five claims-made insurance company D&O policies, each for a one year term, with the last expiring February 16, 2010. Those policies provided: “The Insureds must, as a condition precedent to the obligations of the Insurer under this Policy, give written notice, including full details, to the Insurer of any Claim as soon as practicable after it is made.” Claim included “any oral or written demand, including demand for non-monetary relief” or “any civil proceeding commenced by service of a complaint or similar pleading.”

When the Dahmers filed their garnishment action, the insurer didn’t notify its D&O and E&O insurers. When thereafter Hutchinson made his November 2010 demand for $3.5 million, the insurer didn’t notify them either.

Seven months after the E&O policy expired, by November 29, 2011 letter, insurer by its broker first notified the E&O insurer’s claims administrator (HCC Global Financial Products) of the Dahmers’ garnishment action. The notice referenced only the E&O policy.

Fifteen months after Hutchinson’s $3.5 million demand on insurer, by February 22, 2012 letter, insurer’s counsel notified the D&O insurer through its claims administrator of the Dahmers’ garnishment action including Hutchinson’s bad faith cross-claim. This letter referenced only the D&O policy. The D&O and E&O insurers had the same claims administrator, HCC.

After the E&O and D&O insurers denied coverage, insurer sued them for a declaration that they must provide coverage. But this Court, applying Tennessee law, held the E&O and D&O insurers were entitled to a judgment as a matter of law. The Court strictly enforced the E&O policy’s requirement of notice no later than 60 days following policy expiration; notice seven months after expiration wasn’t what the policy required. It also found the insurer’s 15-month delay in notifying the D&O insurer after Hutchinson’s $3.5 million demand was not notice “as soon as practicable,” given the absence of “extenuating circumstances” providing excuse or explanation. Prejudice to the E&O and D&O insurers wasn’t discussed and didn’t factor in the decision. Nor did it matter that the D&O and E&O insurers had the same claims administrator, at least because the notices were specific in identifying which policy was the subject of the notice.

In explaining its decision about the D&O policies, the Court stated:

[I]t has long been the law in Tennessee that “notice provisions of an insurance policy are valid conditions precedent to coverage, and in the absence of notice as required, no coverage is afforded.”

Moral of story for insureds and brokers: Always, always, give notice promptly to insurers; consider the issue any time something like a claim comes to you. Otherwise you may have no coverage. This has been a recurring theme on this blog lately.

Tags: Tennessee, insurance, D&O, E&O, notice

by Christopher Graham and Joseph Kelly

As discussed in an earlier post, Illinois businesses are subject to severe penalties if commissions due sales representatives aren’t paid consistent with the Illinois Sales Representative Act. Businesses run into trouble when they have an agreement with a sales representative that doesn’t address with specificity how sales commissions will be addressed when the relationship ends. Sales representatives sometimes even will argue for a commission in perpetuity for sales to a customer the representative initially brought to the business. More frequently, disputes concern a sale in progress, but not consummated until after the sales representative’s relationship with the business terminated.

The common law “procuring cause” doctrine exists in Illinois and other states to resolve the issue where the parties’ agreement doesn’t do the job. Under the “procuring cause” doctrine, sales representatives earn commissions on a sale finalized after termination if the sales representative “procured” the sale through actions before termination. See, *i.e., Scheduling Corp. of America v. Massello, 151 Ill. App. 3d 565, 568, 503 N.E.2d 806 (1st Dist. 1987). A main purpose of “procuring cause” is to prevent businesses from shirking their commission obligations right before a particular sale concludes. Id. Under “procuring cause”, a sales representative that has done everything to effect a sale is entitled to a commission. Id.. But the “procuring cause” doctrine doesn’t apply when parties have an unambiguous written agreement stating when commissions are earned. Solo Sales, Inc. v. North America OMCG Inc., 299 Ill. App.3d 849 (2nd Dist. 1998). The trick is to draft the agreement to address the issue with particularity, so there’s no debate about what was intended.

As we’ll explain in another post next month, a well-drafted sales representative agreement that clearly defines when commissions are earned also will help a business avoid the Act’s severe penalties.

Tags: Illinois, Illinois Sales Representative Act, procuring cause

by Christopher Graham and Joseph Kelly

Many people don’t like confrontation. Perhaps that’s why employers don’t conduct exit interviews with departing employees. But if an employee is subject to non-competition, non-solicitation, or confidentiality agreement restrictions, an exit interview is a way to assure compliance and identify potential problems. And an exit interview done right shouldn’t be confrontational. During an exit interview, the employer should ask the employee to sign an acknowledgment of obligations under any agreement or agreements, which should be attached to the acknowledgment. The employer also should ask the employee about the identity of the next employer. A sign of trouble may be an employee’s refusal to sign the acknowledgment or disclose the new employer. If there’s no exit interview, the employer has less chance of discovering or heading off a violation. The employer may be unable to learn that the employee is working for an industry competitor until long after the employee leaves and damage already has been done. So if your an employer, think about making exit interviews and acknowledgements part of your routine business practice.

by Christopher Graham and Joseph Kelly

American Guarantee and Liability Ins. Co. v. Cohen, et al, Case No. 113510/2009 (Sup. Ct. N.Y. Jan. 2, 2014)

Background: Investors and attorney loaned pooled funds through attorney’s “interest on lawyer account” (“IOLA”) to a real estate investment fund managed by a non-party. But the fund was that non-party’s Ponzi scheme. And the loan was a loss, which attorney learned in February 2006. Attorney had a professional liability policy. But he didn’t advise insurer of the loan loss or related circumstances. “As a condition to coverage, the policy require[d] [attorney] to notify the insurer immediately if he has reason to expect a claim may be made against him for professional malpractice.”

Attorney provided insurer a renewal application dated November 19, 2008 for a policy effective December 1, 2008 to December 1, 2009. But he didn’t disclose the loan loss or related circumstances then either.

On December 4, 2008, just four days after policy inception, attorney learned investors sued him for legal malpractice in failing to conduct due diligence and obtain security for the loans. He then notified the insurer. Insurer defended attorney under a reservation of rights.

About two years later, insurer sued attorney for a judgment declaring it had no duty to defend or indemnify him and to recoup defense fees. That’s also when insurer first notified attorney that it denied coverage. “Even in extensive correspondence from [insurer] to [attorney] dated July 16, 2009, reserving its rights to raise coverage defenses, [insurer] failed to identify [attorney’s] late notice as a potential coverage defense.”

Investors intervened in the coverage litigation to protect their interests the insurance as a source to pay their malpractice claims. They appeared to carry the laboring oar in opposing the insurer.

The Court denied insurer summary judgment on late-notice and misrepresentation-in-the-application defenses; instead, granted investors summary judgment on insurer’s misrepresentation-in-the-application defense–because (per the Court) the undisputed material facts established disclosure of the investment loss would have been immaterial to insurer; and denied investors summary judgment on its claim that insurer waived the late-notice defense. So, absent a settlement, the case will go to trial on the late-notice defense.

Misrepresentation: In granting summary judgment on the misrepresentation-in-the-application defense, the Court stressed: “Based on [attorney’s] deposition testimony, [investors] do make a prima facie showing of a reasonable basis for [attorney] to believe that he was not subject to any legal malpractice claim by [investors] arising from his involvement in their investment. [Citations omitted] The record discloses no retainer agreement to provide legal representation to [investors]. No evidence whatsoever contradicts [attorney’s] testimony that he was acting as an investor and not in any legal capacity that reasonably would generate a potential legal malpractice claim, so as to require disclosure of the investments in his renewal application.”

In granting summary judgment on the misrepresentation defense, the Court also focused on what it deemed as the absence of evidence proving attorney’s failure to disclose investor losses and related circumstances was material to insurer: “Nor do [insurer’s] conclusory affidavit and the underwriting guidelines [insurer] presents demonstrate that, even if [attorney’s] belief was not reasonably founded, and he had informed [insurer] of [investor’s] potential claim, [insurer] would not have renewed his policy. . . . Since [insurer’s] own underwriting guidelines do not contemplate a denial of coverage based on an attorney’s involvement with other persons pooling their funds in a joint investment and using an IOLA to hold the funds, the failure to disclose such facts does not amount to a material misrepresentation.”

“[Insurer’s] scant evidence of its underwriting policies and practices fails to rebut [investors’] prima facie showing of no material misrepresentation. [Citations omitted] Absent rebuttal evidence raising a factual issue of materiality, [investors] are entitled to summary judgment on the nonmateriality of [attorney’s] omission in his policy renewal application.”

“The conclusory affidavit by [insurer’s] Assistant Vice President of its Programs Business Unit, that she would have declined a renewed policy to [attorney] had he disclosed the circumstances of the failed investment made through his IOLA, falls short of the showing necessary to establish that [attorney] made a material misrepresentation as a matter of law.”

“[T]he affidavit fails to establish that [she] is an underwriter for [insurer] or any basis for her personal knowledge of [insurer’s] underwriting policies or practices.” And: “Although [she] claims to rely on underwriting guidelines to support her conclusion, . . . [insurer’s] underlying guidelines’ definition of ‘claims’ does not include claims arising from the insured’s investments unrelated to his professional capacity as an attorney. . . . Although ‘claims’ do include ‘pending disciplinary matters’ and ‘disciplinary matters where a decision . . . was rendered,’ none of [attorney’s] conduct at issue in the underlying action falls into either category.”

“[Insurer] provides no evidence of an underwriting policy or practice of denying coverage to similarly situated insureds based on potential liability for failed investments made through an IOLA. . . . Even if [she] possesses personal knowledge of such an underwriting policy or practice by [insurer], absent any corroboration by [insurer’s] underwriting guidelines or comparable documentary evidence, her insistence that she would have declined to renew [attorney’s] professional liability policy is but a conclusory subjective predilection. Without the necessary substantiation by an objective standard, such speculation does not establish the materiality of the claimed misrepresentation by [attorney] and entitle [insurer] to disclaim or deny coverage as a matter of law.”

Comment: So to avoid insurer’s misrepresentation defense, investors apparently argued attorney had a reasonable basis to believe he wasn’t their attorney, seemingly contradicting their position in the underlying malpractice case that he was their attorney. Since it wasn’t in their interests in the coverage case, investors apparently didn’t present any of the evidence they would present in their malpractice case that would prove attorney was representing them. But the insurer apparently didn’t either.

In addition, this Court deemed the insurance executive’s affidavit insufficient to create a fact issue requiring a trial on the misrepresentation defense. That appears to have been for two reasons: (1) she wasn’t the actual underwriter of this risk and so had no personal knowledge about the underwriting decision (not sure why the insurer didn’t have the actual underwriter give the affidavit); and (2) insurer’s underwriting guidelines didn’t corroborate her statement that she wouldn’t have underwritten the risk had attorney disclosed the loan loss and related circumstances. Both points or at least the latter point might be considered credibility issues for the fact finder to address. But this Court didn’t see it that way.

Late-notice defense: In seeking summary judgment on its late-notice defense, “[insurer] relie[d] on [attorney’s] use of his IOLA for the investment to establish that he was acting as an attorney for [investors], triggering his duty to notify [insurer] of the potential legal malpractice claims against him when he learned the investment failed in February 2006. [Insurer] presents no evidence of a retainer agreement establishing an attorney-client relationship between [attorney] and [investors].”

In denying the insurer’s motion for summary judgment on its late-notice defense, the Court explained: “[Attorney] in his deposition testimony, . . . denies any attorney-client relationship with [investors] and maintains that his role was limited to a co-investor and escrow agent and that he never even undertook any responsibility to collateralize the investments. . . . He further testified that, had he had any basis believe a malpractice claim against him potentially would arise from his involvement with the investment, he would have disclosed the potential claim to [insurer] when he renewed his policy. . . . [Attorney’s] deposition testimony, even had [insurer] presented contrary evidence, raises a material factual issue that his belief in the absence of a potential claim by his co-investors for legal malpractice, as distinct from any other negligence or other culpable conduct, causing the lost investment, was reasonable under the circumstances.”

Further: “The underlying claims against [attorney] are predicated on his alleged failure to secure adequate collateral for the investments. Any misconduct in using his IOLA as the escrow account caused no harm to [investors] and therefore may not reasonably be expected to form a basis for a legal malpractice claim against [attorney]. In fact [investors] do not claim any culpable conduct by [attorney] in using his IOLA as the escrow account.”

“[Insurer] has demonstrated neither an attorney-client relationship, nor any factors vitiating [attorney’s] reasonable belief of nonliability for legal malpractice, such that it was unreasonable not to have been aware of such a potential claim from his involvement in the investment before he received the summons in the underlying action. . . . Since [insurer] thus fails to establish, as a matter of law, that [attorney] unreasonably delayed in notifying [insurer] of the claims against him, [insurer] is not entitled to summary judgment awarding declaratory relief on this ground.”

Comment: The policy as a coverage condition required attorney to notify insurer immediately if he had reason to expect a claim may be made against him for professional malpractice. So he says he didn’t have reason to suspect such a claim and, for this Court, his subjective belief was enough as to create a fact issue requiring trial. The insurer would be free to attack the attorney’s credibility regarding his “belief” when the case is tried.

Waiver: Investors didn’t prove insurer waived its right to deny coverage based on the late-notice defense. It didn’t matter that insurer waited until 3 years after notice to disclaim coverage or that it failed to identify late-notice as a coverage defense when it reserved rights in July 2009. Nor did it matter that the insurer controlled attorney’s defense because investors failed to prove that attorney was prejudiced as a result. They “do not show that the underlying action is so close to trial or otherwise has reached a point where the course of litigation has been fully charted. Nor do they show prejudice by any other reason, such as [insurer’s] use against [attorney] of confidential information acquired in defense of the underlying action.”

Tags: New York, professional liability, legal malpractice, notice, material misrepresentation

by Christopher Graham and Joseph Kelly

Grubaugh v. Central Progressive Bank (E.D. La. Dec. 18, 2013 Dec. 17, 2013)

This is a case where a Court strictly enforced the reporting requirement of a claims-made policy and barred an injured party’s direct action right because of the insured’s failure to timely report a claim.

Customer claimed two bank employees, namely, his mother and sister, stole over $70,000 from his account. In June and July, 2008, he sent complaint letters to the FDIC and Louisiana bank regulator. Customer asked the FDIC to “help me get my money back from the bank for the forged checks, unauthorized debit memos, unauthorized payment of bills that do not belong to me, [and] unauthorized disbursement of my social security checks.” In his complaint to the Louisiana regulator, customer stated that the relief he sought was “having my money returned to me and having someone that can do that from [the bank] contact me.” The two regulators notified the bank promptly thereafter.

The bank had a claims-made D&O/bankers professional liability policy, effective from February 1, 2007 through November 15, 2009, and issued by Executive Risk. “Claim” under the D&O coverage section included, among other things, “a written demand for monetary damages . . . against an Insured Person for a Wrongful Act” as well as “a formal civil administrative or civil regulatory proceeding commenced by the filing of a notice of charges or other similar document or by the entry of a formal order of investigation or similar document . . . against an Insured Person for a Wrongful Act.” The policy also provided that a “Claim will be deemed to have first been made when such claim is commenced as set forth in this definition or, in the case of a written demand, when such demand is received by an Insured.” Under the BPL coverage section, the Claim definition varied slightly, in that a Claim as otherwise defined must be brought “by or on behalf of a Customer against an Insured for a Wrongful Act.”

The policy provided further that:

the Insured shall, as a condition precedent to exercising any right to coverage under this Coverage Section, give to the Company written notice of a Claim as soon as practicable, but in no event later than […] sixty (60) days after the date on which any insured first becomes aware that the Claim has been made.

Notice requirements such as the one above are in all types of liability policies, but in occurrence policies they generally are for reporting an occurrence and a suit. For claims-made policies, they are for reporting a Claim, but sometimes the deadline isn’t absolute or it’s for a set period such as 90 days following the Policy Period, and there’s separate wording for reporting a circumstance that may lead to a future Claim. The bank’s policy had a rather short 60 day absolute reporting deadline.

But the bank didn’t notify the insurer that it received customer’s complaint letters within 60 days of receiving them from regulators. Nearly a year thereafter, the customer sued the bank, unnamed bank officers, employees and others, and unnamed liability insurers for breach of contract and negligence. The bank notified its insurer promptly. That was the insurer’s first notice of customer’s allegations.

Over two years later, after the bank failed, customer filed an amended complaint, naming as additional defendants, the bank’s holding company, the FDIC as the bank’s receiver and, under Louisiana’s Direct Action statute, the D&O/BPL insurer. Louisiana is one of several states having a statute permitting an alleged injured party to sue an insurer and its insured simultaneously.

But the Court entered summary judgment for the insurer: the injured customer’s Direct Action rights were no greater than the rights of the insureds, who had no coverage. Customer’s mid-2008 complaints with banking regulators were Claims as defined by the policy, triggering the insured bank’s reporting obligation within 60 days of learning of them; the bank, by waiting about a year to notify the insurer, had no coverage and neither did customer.

According to the Court, customer’s complaints to regulators, which were forwarded to the bank, “could be considered a ‘written demand for monetary damages’ . . . .” “Black’s Law Dictionary defines a demand as the ‘assertion of a legal or procedural right.'” “[T]here is no requirement that [the customer] submit the demand directly to [the bank] and/or [holding company]. Rather, in the case of the D&O coverage section, the demand need only be made against [them] and received by [them], which is exactly what happened here. [Customer] demanded from [bank] what he alleges is legally due to him, and that demand was received by [the bank]. Further, under the BPL Coverage Section, the demand may be made by or on behalf of [the customer]. In this case, the FDIC and the OFI submitted [customer’s] demand on his behalf, thus a claim was made.”

In addition:

[The bank’s] duty to notify [the insurer] was triggered on July 11, 2008 for the FDIC complaint and July 22, 2008 for the [Louisiana regulator’s] complaint, long before [the insurer] received notice of the claim in July 2009 and long after the sixty day reporting period had elapsed. By breaching this requirement, [the bank] failed to comply with a condition precedent of the Policy and coverage was never triggered.

The bank had no coverage; so neither did the “injured” customer. Whether the insurer was prejudiced by the untimely reporting didn’t factor into the Court’s decision; it’s not even mentioned. Numerous decisions in fact strictly enforce reporting requirements in claims-made policies without regard to prejudice. See, e.g., U.S. v. A.C. Strip, 868 F.2d 181 (6th Cir. 1989); Pantropic Power Prods v. Fireman’s Fund Ins. Co., 141 F.Supp.2d 1366 (S.D.Fla. 2001).

The Court also rejected the customer’s waiver and estoppel argument, concluding “there is no evidence that [the insurer] ever took any other steps that were contrary to their intent to deny coverage.”

Moral of story for brokers, risk managers, and insureds: Promptly report to the insurer anything that smells like a Claim or potential Claim, even if you’re not sure about it’s nature. You have nothing to lose and the consequences of failing to report can be no coverage. Perhaps the bank employees receiving the regulators’ notice didn’t take the customer “complaints” seriously, particularly as they involved “theft” by the customer’s mom and sister. The bank did take things seriously when it was sued, much later – but by then it was too late. You might also consider a policy with a more-insured friendly notice provision.

Moral of the story for “injured parties” and their counsel: Your ability to collect may be only as good as your target defendant’s insurance. When your target fails to provide timely notice to the insurer, you may have no way to collect. To avoid this scenario, plaintiffs’ counsel will advise the target to provide it’s insurer notice promptly or, if possible, also will put the insurer on notice directly.

Moral of the story for insurers: A specific reporting requirement in a claims-made policy often will be strictly enforced, regardless of whether the insurer was prejudiced by delay. That scenario frequently isn’t the case for occurrence-type liability policies.

Tags: Louisiana, D&O, professional liability, direct action, notice

by Christopher Graham and Joseph Kelly

Ragins v. Hospitals Insurance Company (Ct. Appeals NY Dec. 17, 2013)

This case addresses excess and primary professional liability insurers’ obligations for post-judgment interest on a malpractice judgment against a physician.

The primary policy’s limit was $1 million. The judgment against the insured was $1.1 million. But after the primary’s insurer’s liquidator paid $1 million and the excess insurer paid $100,000, the trial court amended the judgment to add in costs and interest. The excess insurer paid only it’s proportional share of interest – on the $100,000 judgment exceeding the $1 million primary limit — rather than on the full $1.1 million judgment.

After the insured sued the excess insurer, the trial court agreed with the insured that the excess insurer should pay all interest and costs exceeding the $1 million primary limit. The intermediate appeals court reversed, agreeing with the excess insurer that it was only responsible for proportional interest. But the highest appeals court reversed.

The primary policy limited that insurer’s liability to $1 million. It also included a “supplementary payments” section. But that section obligated “the primary insurer to pay post-judgment interest only ‘before’ it has ‘paid that part of the judgment which does not exceed the limit of the company’s liability thereon, . . . .'” The primary insurer had “no responsibility for interest after paying the $1,000,000 liability limit.”

The excess policy required payment of “all sums in excess of the limits of liability of the Underlying Policy” and which the insured “shall become legally obligated to pay as damages.” Neither “Sum,” nor “damages” was defined. Under dictionary definitions — “sum” means “indefinite or specific amounts of money” and “damages” means “the sum of money which the law awards or imposes as pecuniary compensation, recompense, or satisfaction for an injury done or a wrong sustained as a consequence either of a breach of a contractual obligation or a tortious act.”

Explaining why the excess insurers must pay the interest, the court stated: “By those definitions, interest included in any judgment against [the insured] constitutes a ‘sum’ of money that is traceable to the judgment against him for ‘damages’ in satisfaction of the wrong he caused to an injured party. Therefore, if that pre-judgment interest is ‘in excess’ of the primary policy’s $1,000,000 liability limit, [the excess insurers] must pay it.”

“And, although the excess policy does not specifically mention interest as a covered ‘sum’ of ‘damages,’ that is of no moment because the excess policy does not limit the definition of ‘sums’ to any particular category of damages or liability, or otherwise exclude interest from its reach.”

So the moral of the story: If you’re an excess insurer and don’t want to pay interest, you better do better than the policy wording here. You may think that interest isn’t a “sum” your insured is “legally obligated to pay as damages.” But don’t be surprised if a court believes otherwise. Be specific in excluding interest if that’s really what you want. But any insured or broker paying close attention to your interest-exception for coverage presumably will go elsewhere for coverage.

Tags: New York, professional liability, excess, interest

by Christopher Graham and Joseph Kelly

As we’ve posted about previously, concealed carry is now the law in Illinois. Illinois businesses wanting to keep concealed weapons out of their business must post the sign approved by the Illinois State Police.

A link to a pdf of the approved sign as well as more information can be found on the Illinois State Police website here.