by Christopher Graham and Joseph Kelly

Surprise! Words in a contract may not mean what they say. Even when they’re unambiguous. Or even if agreed by sophisticated parties. That’s particularly true for insurance contracts. And lately it’s super-double particularly true for claims made insurance contracts.

You saw that in our recent post about California and Maryland cases involving claims made policies with reporting requirements. Although insurance buyers failed to report claims timely under contract wording, judges didn’t care. Insurers must pay unless they show prejudice from delay, the judges ruled. California judges decided that way because of judge-made “common law.” And it’s California! Maryland judges decided that way because a statute required the result, they said.

Now in the land of cheese, beer, and brats, Wisconsin judges made a decision smelling like Limburger for Wisconsin claims made insurers. The case is Anderson, et al v. Aul, et al, Case No. 2013AP500 (Feb. 19, 2014). And the insurer loses on an untimely reporting defense even though the insured wasn’t even close to meeting the policy’s reporting requirement. The problem for the insurer: a statute trumped the policy wording.

This was a lawyers’ professional liability insurer. And the law firm insurance buyer was as sophisticated as you can get. There was no lack of clarity in the policy wording. Insurer’s policy cover warned: “THIS IS A CLAIMS MADE AND REPORTED INSURANCE POLICY. COVERAGE IS LIMITED TO LIABILITY FOR ONLY THOSE CLAIMS THAT ARE FIRST MADE AGAINST YOU AND REPORTED IN WRITING TO US DURING THE POLICY PERIOD.” Insurer’s declarations page warned: “This policy is limited to liability for only those claims that are first made against the insured and reported to the Company during the policy period.” Insurer’s insuring clause conditioned coverage on “claims first made against you and first reported to us in writing during the policy period.” And it also warned that “[y]our failure to send a written report of a claim or claim incident to us within the policy period shall be conclusively prejudicial to us.”

Despite those warnings, the law firm waited until 11 months after the policy period to report a claim. But who cares, says the court! Under WIS. STAT. § 631.81, “an insurer whose insured provides notice within one year of the time required by the policy must show that it was prejudiced and that it was reasonably possible to meet the time limit.” This law firm’s notice was within 11 months. No prejudice? Insurer as a matter of law loses, at least based on the reporting defense.

For a claim reported more than a year after the reporting time limit, a claims made and reported insurer likewise couldn’t simply rely on tardiness to deny coverage. Under the Wisconsin statute, “when notice is given more than one year after the time required by the policy, there is a rebuttable presumption of prejudice and the burden of proof shifts to the claimant to prove that the insurer was not prejudiced by the untimely notice.”

The Wisconsin law applied to all liability insurance policies. There was no distinction made between claims made and occurrence policies. Who knows whether the lawmakers knew or considered the differences between the policies. But it doesn’t matter. For Wisconsin insurance buyers, buy a round of Leinie’s, Schlitz, Hamm’s, or Old Style for everyone at your local tavern to celebrate your win!

Insurers say the reporting requirement isn’t there merely to allow timely investigation and defense. The reporting and claims made requirements are the essence of the insurance. Whether prejudice resulted from untimely reporting shouldn’t matter. The reporting requirement allows insurers to close their books on risk once the reporting period ends. It also allows for more effective product pricing.

Insurance buyers argue late notice should make no difference if the insurer isn’t harmed in its ability to investigate or defend. Their advocates convinced politicos in some states to pass laws saying so, including Wisconsin. Sometimes they get judges to in effect do the same.

So watch out insurance underwriters. You may not have what you think. Make sure you consider the possibility of a statute or judge-made law and price your product accordingly.

And watch out insurance purchasers. You may have something better than what your contract’s words say, though it’s still best to simply do what your contract says you should do, timely report!

Tags: Wisconsin, professional liability insurance, lawyers professional liability insurance, lawyers malpractice insurance, D&O insurance, directors and officers liability insurance, claims made and reported, claims made, late notice, prejudice, notice prejudice

by Christopher Graham and Joseph Kelly

You underwrite claims-made D&O, and professional, fiduciary, and employment practices liability insurance. So claims trigger coverage. As a policy condition, customers must report claims as soon as practicable, but in no event later than 30 days after the policy period.

Customers include medical device companies. They need professional and commercial general liability insurance. You combine your professional liability and historically occurrence-trigger CGL products into a claims-made product. You love that product: no worries about long-tail claims from occurrences years earlier; much easier to know when risk ends; easier to price products; and, best of all, actuaries love you.

So you think your risk ends when the 30-day claim-reporting window ends unless a claim is reported. You also may have risk of a claim developing after the policy period from a circumstance reported during the policy period; or of a claim made during a 12-month extended reporting period if purchased; or of a post-policy period claim involving the same or related wrongful acts as a policy period claim. That’s it. You think.

But if your claim reporting requirement isn’t in the policy’s insuring agreement and you’re in California, think again, says the court in Newlife Sciences LLC, et al v. Landmark American Ins. Co., Case No. 13-05145 (N.D. Cal. Feb. 18, 2014).

There, a medical device company buys a combined professional liability-CGL product effective July 17, 2008-2009. It’s a duty-to-defend policy. Company is sued less than 3 months after policy inception. But it doesn’t report the claim. It buys a 1-year renewal policy. And the predecessor policy’s 30-day claims-reporting window ends; still no claim reported. Insurer closes its books.

About 2 months later, about a year after the claim, company finally reports the claim to insurer. Insurer says “Sorry, yes, the claim was made during the July 17, 2008-2009 policy period. But you didn’t report it timely. So you’re out of luck.” Company says, “But we bought another policy from you. What difference does it make? You really haven’t suffered any prejudice?”

Insurer says “Timely notice was a condition to coverage. Your claims-made policy has a reporting requirement. You ignored it. We closed our books. We price our products based on the claim made and reporting requirements. Prejudice doesn’t matter. You can’t ignore contract terms.”

Company says, “But this is California.” You must prove prejudice to avoid coverage for late notice. It sues insurer.

Insurer moves to dismiss; company’s complaint shows it didn’t comply with the claims-made policy’s reporting requirement. Claims-made policies differ from occurrence policies where prejudice is required for a late-notice defense.

The court denies the motion: “When the insurer’s affirmative defense is that the insured failed to comply with one or more policy conditions, the insurer must also show prejudice.” According to the court:

The concept of “claims made” policies has been further extended by a type of policy in which the insuring agreement specifically limits the insurer’s obligations to “claims made and reported” during the policy period. In such policies, “[t]imely reporting of the claim is thus the event triggering coverage.” . . . These policies “are essentially reporting policies.” [Citation omitted]. The reporting requirement in a “claims made and reported” policy is, thus, not a condition of coverage but part of the coverage definition itself. Whereas an insurer bears the burden to show it was prejudiced by the insured’s failure to comply with a reporting condition, it is the insured that bears the burden to show the claim was timely reported in a “claims made and reported” policy.

The court thus found the reporting requirement’s location controls whether insurer must prove prejudice from late notice. A reporting condition requires proof of prejudice. But an insuring agreement reporting requirement does not, at least if about reporting within 30 days of policy termination. But the court never really explains why the result differs because of wording location. It doesn’t appear insurer argued there was no substantive difference between locating the wording in the insuring agreement or a notice condition.

Insurer instead argued the reporting condition was incorporated into the insuring agreement. But the court didn’t buy the argument, explaining:

[T]he policies at issue are titled “claims made” policies . . . , in which the insuring agreement limits coverage to claims made against the insured during the policy period or any extended reporting periods provided for by the policy. . . . The policies also include as a condition of coverage that the insured report all claims to the insurer no later than 30 days from the close of the policy period. According to [insurer], this condition transforms each policy into a “claims made and reported” policy because all conditions of coverage are incorporated into the insuring agreement itself by a separate clause that states, “[Insurer] will pay those sums that the Insured becomes legally obligated to pay as damages because of `personal and advertising injury’ to which this insurance applies.” . . . [Insurer], however, provides no authority for the proposition that such a statement should transform each condition of coverage—and presumably, each exclusionary provision—into a term of the basic insuring agreement. Such a reading would defeat the interpretive rules discussed above, in which the onus is on the insured to prove a claim falls within the basic scope of insurance and on the insurer to prove any exclusions or conditions apply. “Although it is a well-established principle that an insurer has the right to limit policy coverage, it is also the rule that any limitation of coverage must conform to the law and public policy.” [citation omitted]

Whether prejudice is required from late notice is controlled by state law. For liability policies, it frequently makes a difference whether the policy trigger is an occurrence or claim. In many states, insurers under occurrence policies must prove prejudice to avoid coverage for late notice. The reporting requirement allows insurers to investigate occurrences and defend and settle suits. If delay doesn’t adversely affect those efforts then insurers shouldn’t avoid coverage, so say many courts.

In many states, insurers under claims-made policies in contrast need not prove prejudice to avoid coverage from late notice, at least if notice is required within the policy period or a limited window thereafter. Unlike the notice requirement in occurrence policies, the reporting requirement in claims-made policies also allows insurers to close their books on risk once the reporting period ends. The two policy types thus fundamentally differ. But for this court, all that mattered was the reporting requirement’s location. But was that a distinction that should make a difference?

A court in at least one state found location made no difference. See Navigators Specialty Insurance Co. v Medical Benefits Administrators of Maryland, 2014 U.S. Dist. LEXIS 22631 (D. Md. Feb 21, 2014). But it also found that regardless of location a claims-made insurer must prove prejudice. There the reporting requirement was in the insuring agreement, not the notice condition. And the result was driven by a statute requiring proof of prejudice for late notice, mainly applied to occurrence policies, but applied in this case to a claims-made policy.

Watch for further legislation and court decisions addressing this issue. You’ll be sure to see them!

Tags: California, professional liability, commercial general liability, CGL, notice, prejudice, notice-prejudice, claims made, claims made and reported, medical device, insuring agreement, condition

by Christopher Graham and Joseph Kelly

You’re the D&O, professional liability, or other insurer with a duty-to-defend policy. Your insured is sued in tort. You defend under a reservation of rights. But you don’t believe there’s coverage. And you don’t want to have to continue paying for a defense. So you sue for a declaration of no coverage.

You’re the insured. You’ve been sued by a party claiming injury. Now your insurer sues you. So you have two suits to address and you’re not too happy. You’re also concerned your insurer’s suit will prejudice your defense in the tort suit. You believe insurer’s suit will address issues material to your liability in the tort suit. So you argue it should be stayed. You also claim it would be bad faith for insurer to pursue a coverage suit prejudicial to your tort suit defense.

Insurer argues its suit won’t prejudice your tort suit defense and that delaying resolution of coverage would require funding a defense that isn’t covered. What’s a court to do?

Well, one court, in Federal Ins. Co. v. Holmes Weddle & Barcott P.C., et al, Case No. C13-0926JLR (W.D. Wa. Nov. 14, 2013), deferred deciding on a stay until a legal malpractice insurer and insured law firm briefed three coverage issues. As explained: “It may be that all that is needed to decide this coverage action is to apply settled contract and insurance law to a set of admitted and undisputed facts.” This court wasn’t convinced law firm’s malpractice defense would be prejudiced by addressing those three issues.

Insurer already had moved for a summary judgment. And so “the court [could] simply examine that motion to determine whether it is possible to resolve this case without causing prejudice to [the firm].” Insurer’s motion “raise[d] several arguments that could potentially resolve the question of coverage without requiring the court to find facts of consequence to the malpractice action.”

The malpractice case was about how the firm handled a pre-policy period tort suit. Insurer argued the malpractice claim during the policy period and a motion for discovery sanctions in the tort suit were “Related Claims.” In discovery for the tort suit, firm produced an incomplete claim file. After client lost at trial, the court sanctioned firm and client, finding each “‘recklessly certified’ that the claim file was complete when in fact it was not.” Client’s claim against firm in part alleged malpractice by failing to produce the entire claim file. Resolving the “Related Claims” issue wouldn’t prejudice firm’s defense in the malpractice case because it “would require the court to examine only the proximity of the relationship between the post-trial [pre-policy period] sanctions motion and [client’s policy period] legal malpractice claim.” And “[t]his inquiry does not implicate questions of causation [in the malpractice suit], it only requires the court to compare two claims to determine whether they are ‘related’ as a matter of contract and insurance law.”

Insurer also relied on prior knowledge and application exclusions. Insurer’s argument “would require the court to examine only whether [firm] knew about facts prior to January 2012 that ‘might reasonably be expected to give rise to a claim.'” Relying on Carolina Casualty Ins. Co. v. Ott, No. C09-5540 RJB (W.D. Wa. Mar. 26, 2010), the court in a similar vein concluded “[t]his limited inquiry would not prejudice [firm] in the legal malpractice action.”

So it would allow insurer’s summary judgment motion to proceed on those issues and on whether the firm must reimburse insurer for defense fees. But the court left the door open for firm to object again.

If the firm believed insurer’s arguments may prejudice its defense, it would need “to point out in a very specific manner if and where it believes resolution of these issues will require findings that would cause prejudice to its defense in the malpractice action”

“[Firm] may file a cross motion for summary judgment if it wishes, but the court will expect [it] to safeguard its own interests by raising only issues and arguments that will not cause prejudice in the malpractice action.”

The court will resolve the case by summary judgment only if it wouldn’t prejudice firm’s defense. Otherwise it would stay the case. Insurer meanwhile would continue to defend firm under a reservation of rights. Firm also agreed to indemnify insurer for defense expenses, if there was no coverage.

The court appears to have struck a fair balance between insurer and firm’s interests. Stay tuned because we may see more from this court about issues important to D&O and professional liability insurers.

Tags: Washington, professional liability, legal malpractice, management liability, D&O, duty to defend, declaratory action, stay, related claims, prior knowledge, application exclusion, prejudice

by Christopher Graham and Joseph Kelly

The 2008 financial crises continues to generate lawsuits affecting professionals, directors, and officers and their insurers. The Fourth Circuit recently addressed an insurer’s duty to defend and indemnify a real estate closing service sued for conspiring to strip equity from homeowners in foreclosure. See Cornerstone Title & Escrow, Inc. v. Evanston Ins. Co., Case No. 13-1318 (4th Cir. Feb. 19, 2014). The opinion is “unpublished” and thus non-binding in the Fourth Circuit, but parties still may cite it in arguing their positions. For D&O and professional liability insurers and their customers, the analysis of the personal profit exclusion thus potentially has broader application. This court says the exclusion won’t apply where the insured allegedly is liable and makes restitution for co-conspirators’ improper gains, but isn’t alleged to have received gains itself.

The scheme

Remember 2008. Real-estate values collapse. Home equity vanishes. Mortgages exceed collapsing market values. Or equity is substantially diminished. Jobs are lost. Mortgage payments are missed. Foreclosures ramp up.

And schemers scheme.

A foreclosure “consulting” business is born. Consultant joins forces with mortgage broker and real-estate closing service. Consultant’s market? Homeowners facing foreclosure. Its product? Sale-leaseback transactions: we’ll buy your home; you get cash for your home equity; you avoid foreclosure; we’ll lease the home to you; you stay in it; and you re-purchase it later.

And what does consultant get? A consulting fee, it says.

What does consultant really get? The fee. Plus cash homeowner was to get for her home equity. Plus monthly rent much higher than the mortgage payment.

How does consultant get homeowners’ cash for equity? Consultant tells them unspecified closing fees and charges consumed the equity and convinces them to sign over their checks.

How is closing service involved? It supposedly provides closing services for the sale-leaseback, fails to deliver checks to homeowners for their equity, and delivers them instead to consultant.

What else happens? High rent drives homeowners/now-renters from their homes. There’s never a buy-back for homeowners.

The suit

And . . . the Maryland Attorney General in 2008 sues consultant, mortgage broker, closing company and related parties. AG alleges closing service and all other defendants violated Maryland’s Protection of Homeowners in Foreclosure Act and Consumer Protection Act, by scheming to “take title to homeowners’ residences and strip the equity that the homeowners ha[d] built up in their homes.” AG also alleges closing service, by failing to disclose it provided homeowners’ equity checks to consultant, violated the Consumer Protection Act; and, in acting as settlement agent, “participated in and provided substantial assistance to [consultant’s equity-stripping] scheme.” AG identifies 13 transactions and asks for a variety of relief, including restitution.

AG not only seeks to hold closing service responsible for its alleged non-disclosure, but also for co-defendants’ acts. AG alleges the service’s “concerted action [made] the enterprise possible”; so it’s “jointly and severally liable” for each co-defendant’s acts, including failing to provide written agreements; requiring membership fees before providing consulting services; obtaining interests in homes while offering consulting; representing services were to avoid foreclosure; failing to disclose the nature of services, material terms of sale-leaseback agreements, rental agreements, and of any subsequent repurchase; failing to provide statutorily required forms and notices; failing to determine whether homeowners have reasonable ability to make lease payments and repurchase homes; misleading consumers about entitlement to closing proceeds and about placing them in escrow; taking consumers’ settlement checks; and recording deeds and encumbering properties before rescission periods expire.

Closing service denies AG’s allegations.

The policy and coverage litigation

Closing service looks for defense under a “Service and Technical Professional Liability Insurance” policy. Subject to the policy’s terms, Evanston Insurance Company agreed to pay “the amount of Damage and Claims Expenses because of any (a) act, error or omission in Professional Services rendered or (b) Personal Injury committed by [closing service].”

But insurer refuses to defend. It cites exclusions for claims arising out of (a) improper personal gain, (b) dishonesty, (c) conversion, theft, and the like, and (d) the Real Estate Settlement Procedures Act.

Closing service settles with AG by agreeing to pay over $100,000 in restitution. And it sues insurer for breach of a duty to defend and indemnify.

Insurer wins a summary judgment. AG’s claims are excluded as arising out of improper personal gain and conversion, theft, and the like. Dishonesty and RESPA exclusions aren’t addressed.

But the appeals court decides the improper personal gain and conversion exclusions are no grounds for avoiding coverage and returns the case to the district court to consider the dishonesty and RESPA exclusions.

So why the result? The duty to defend is broader than the duty to indemnify. If some claims in AG’s complaint are potentially within coverage, insurer must defend all claims, even if others are excluded. This appeals court reasoned that at least some of AG’s claims were outside the scope of the improper personal gain and conversion exclusions. So the district court was wrong in finding no duty to defend, at least based on the two exclusions it cited. Since its decision on defense was in error, and its decision on indemnity was for the same reasons, its indemnity decision was wrong too.

Personal Profit Exclusion:

How did the improper personal gain exclusion apply? It applied to claims “based upon or arising out of [closing service’s] gaining any profit or advantage to which [closing service] is not legally entitled.”

What was the appeals court explanation for why AG claims were outside its scope? The AG’s “complaint did not allege that any particular ‘profit’ or ‘advantage’ inured to [closing service’s] benefit, as [the improper personal gain] exclusion . . . requires. To the contrary, the complaint alleged that all the relevant benefits and funds went to [consultant and related parties] and, perhaps, [mortgage broker]. It was [consultant and related parties], after all, who “stripped” the equity from homeowners’ homes by contriving false fees and other reasons to obtain the homeowners’ settlement proceeds.”

“There is no allegation that [closing service] should not have collected the settlement proceeds because, as a settlement agent, the company was required to do so. [citation omitted] While the homeowners’ equity and money might be an illegal profit or advantage that went to someone after settlement, those assets went to parties other than ‘the Insured’ under the terms of [its] policy with Evanston.”

The improper personal gain exclusion also “would not apply because the underlying complaint did not allege illegal profiteering by [closing service]. Instead, the complaint alleged illegal conduct that produced incidental gains. Put another way: the Attorney General could have succeeded on its claims against [closing service] without showing that [it] received a single dollar or any other advantage, legal or illegal. In fact, many of the claims for which [closing service] was allegedly jointly and severally liable did not involve money at all, but instead alleged wrongful disclosures and misrepresentations. [citation omitted] The underlying nondisclosure claims, at a minimum, do not ‘arise out of’ the illegal profit or advantage itself, so those allegations of the complaint do not fall within the exclusion.”

“[I]t makes no difference that [closing service] received fees for the settlement services that it provided at closing when the houses were conveyed to [consultant]. The complaint does not allege that [closing service] overcharged or that it failed to provide bona fide settlement services. . . . [Closing service’s] receipt of legally justified funds does not defeat policy coverage. [citation omitted] More importantly, . . . , [AG’s] complaint did not seek damages for the ‘consideration or expenses paid to [closing service] for services or goods.’ [citation omitted] Because [AG’s] claims did not touch upon [closing service’s] settlement fees, those fees could hardly have been a ‘profit’ or ‘advantage’ that spurred the underlying claim.”

It also didn’t matter that AG sought “restitution” from closing service. “[I]n a case that involves ‘concerted action’ . . . the restitution award doesn’t necessarily aim to disgorge benefits from particular defendants. Instead, the award serves to disgorge the benefits going to the scheme as a whole. A conspiring Consumer Protection Act defendant will therefore face potential restitution anytime any of his co-conspirators enjoyed some benefit. [citation omitted] A defendant who enjoyed no personal gain could still be ordered to pay restitution if he were part of a broader concerted action that produced benefits to a fellow co-defendant.”

In deciding this point, the court relied on J.P. Morgan Secs. Inc. v. Vigilant Ins. Co., 992 N.E.2d 1076, 1082-83 (N.Y. 2013). That court found the exclusion inapplicable where the insured’s disgorgement payment “did not actually represent the disgorgement of [insured’s] own profits,'” but instead “‘represented the improper profits acquired by third-part[ies].'”

Conversion Exclusion:

How did the conversion exclusion apply? It applied to claims “based upon or arising out of the actual or alleged theft, conversion, misappropriation, disappearance, or any actual or alleged insufficiency in the amount of, any escrow funds, monies, monetary proceeds, or any other assets, securities, negotiable instruments, irrespective of which individual, party, or entity actually or allegedly committed or caused in whole or part the [excluded act].”

What was the appeals court explanation for why AG’s claims were outside its scope? Well:

In Maryland, the payee of a check (here, the homeowner) must receive the check before he or she can bring a conversion action based on a misuse or improper delivery of it. [citation omitted] Where the payee has not received the check, the payee retains a cause of action against the drawer (in this case, [closing service]) for the liability reflected in the check, but, at least at that point in time, cannot bring a conversion action. [citation omitted] In this case, [closing service] allegedly misdirected the settlement checks before they ever reached the hands of the homeowners. Thus, the necessary element of delivery for a Maryland conversion action to the payee was absent at the time of the allegedly wrongful transfer by [closing service].

What else did the appeals court say about the exclusion? The AG’s complaint included “other allegations” outside of its scope so insurer would have a duty to defend even if closing service’s alleged misdirection of homeowner checks qualified as a claim “based upon or arising out of . . . conversion . . . .”

Tag: Maryland, professional liability, improper personal gain, personal profit exclusion, conversion exclusion, duty to defend

by Christopher Graham and Joseph Kelly

So your client or customer threatens a suit. And the time for suit is about to expire. You can avoid the suit. But you have to agree to extend time to sue. Sounds good. Otherwise you’ll be defending a lawsuit. Maybe you’ll have adverse publicity too. Maybe you can work things out with no suit. Maybe they’ll just drop it. So you agree. A year passes; no suit. More time passes; still no suit. Looks like the problem is over. You say, Hallelujah!

But then the sheriff shows up with that pesky summons and complaint. The suit is by the United States for the Coast Guard. It would be too late for it to sue. But you signed a tolling agreement giving it more time. Your company was sub-contracted work to convert old cutters into new and improved cutters. One of the cutters had a structural failure. The US government alleges you “knowingly misled the Coast Guard to enter into a contract for the lengthening of Coast Guard cutters by falsifying data relating to the structural strength of the converted vessels.” It alleges you violated the False Claims Act and alleges common law fraud, negligent misrepresentations and unjust enrichment.

You have claims-made private company D&O or management liability insurance. The claim involves wrongful acts. So you notify the insurer.

But wait a minute, says the insurer. Our policy covers a Claim first made during the policy period. We defined Claim as including “a written demand for monetary or non-monetary relief.” This Claim was first made well before then, back when you signed a tolling agreement.

Your tolling agreement acknowledges you were informed by the government that it believed it “may have certain civil causes of action and administrative claims against [you] under the False Claims Act, [citation omitted], other statutes and regulations including the Program Fraud Civil Remedies Act, [citation omitted], equity, or the common law, arising from [your] performance of conversion work on the U.S. Coast Guard Deepwater Program’s 110 Foot Island Class vessels.” And your agreement also states that, “as consideration for the United States not filing, or initiating claims against [you] under the False Claims Act, [citation omitted]or the Program Fraud Civil Remedies Act,” a certain period would be excluded to determine the timeliness of “any civil or administrative claims.”

You argue the Claim at least for negligent misrepresentation and unjust enrichment was first made when the government sued you. Those two claims aren’t explicitly mentioned in the tolling agreement. And they were in a suit filed during the insurer’s claims-made policy period. Insurer says pound sand! You say see you in court!

So what does the court decide? Insurer wins, as explained in XL Specialty Ins. Co. v. Bollinger Shipyards, et al, Case No. 12-2071, (E.D. La. Jan 3, 2014). As the court explained:

The tolling agreement between [subcontractor] and the United States stated that the government believed that it had claims against [subcontractor] arising from its performance of the conversion work for [general contractor], and memorialized [subcontractor’s] agreement to toll the statute of limitations so that the parties could discuss settlement of those claims before engaging in litigation. Clearly, then, under the language of the D&O Policy, the United States’ “claim” against [subcontractor] was first made in 2008, over two years before the policy period began.

So, as an insured, what should you do when asked to agree to toll the time for suit? Well, you better consider whether you have professional liability, D&O, or other insurance? And if you have insurance, you better notify your insurer. It appears this insured may not have had a management liability policy when asked to sign the tolling agreement. We say that because the insured didn’t sue under any policy in effect then.

But if it did have a policy then, it should have notified its insurer promptly after the government threatened suit and before signing any agreement. For an insured, the wisest course is to give prompt notice of anything that might be a Claim or turn into one.

Tags: Louisiana, D&O, tolling agreement, management liability policy, private company D&O policy, claim, policy period

by Christopher Graham and Joseph Kelly

You have a contract. You’re obligated to pay a third party. And naturally, being a capitalist, you’d prefer not to take the hit. You’re creative. And you’re savvy about insurance. And you think, gee, maybe my D&O or professional liability insurer can pay instead of me. So you ask. But they refuse. They say: “That’s your contract, not our policy obligation.” So off to court you go. And the wearers of black robes decide who wins and loses! And so it was in Entitle Ins. Co. v. Darwin Select Ins. Co., Case No. 13-3269 (6th Cir. Jan. 29, 2014.

This time the insured was a title insurer. Its contracts were with mortgage lenders and real-estate sellers and buyer-borrower. The contracts were closing protection letters. And under those contracts, title insurer agreed to indemnify lender, seller, or buyer for certain misconduct by title insurer’s closing agent. The misconduct was agent’s theft. And the theft was of a whopping $3.9 million in escrowed funds.

Yikes, says title insurer. That’s a lot of dough! And, yes, we issued closing protection letters. And so yes, we have to make those who have them whole. But gee wiz, we really would prefer not to take a big hit. Title agent has no money; so out of luck there. But how about Darwin’s professional liability policy? What does that policy provide? Does it fit the claim and cover the loss?

Under the insuring agreement, Darwin agreed that it “will indemnify the Insured for Loss, including Defense Expenses, from any Claim or Extra-Contractual Claim first made against them during the Policy Period or any applicable Extended Reporting Period … for Professional Liability Wrongful Acts committed on or after the date of incorporation or formation of the Named Insured and prior to the end of the Policy Period.”

“Professional Liability Wrongful Act,” in the definitions, means “any actual or alleged act, error, omission, misstatement or misleading statement, in the performance of or failure to perform Professional Services … by any Insured, or by an individual or entity for whom the Company is legally responsible.”

Okay, that’s great–so it can be an actual or alleged act “by an individual or entity for whom the Company [(title insurer)] is legally responsible”? Wouldn’t that include the thieving title agent who stole the $3.9 million, you ask? And as title insurer, isn’t it “legally responsible” for what title agent did? And so shouldn’t Darwin as professional liability insurer pay?

No, says the court. Under the contract between title insurer and agent, the scope of the agency was limited to issuing title policies. It included nothing else; and, thus, none of the closing and escrow services title agent offered.

Title insurer’s liability for agent’s acts was limited to acts within the scope of agent’s very limited agency. And when agent stole the $3.9 million it was acting for itself rather than within the scope of the agency. “To the extent that [title agent] performed closing and escrow-related services for the clients, [it] did so on its own behalf”–so said the appeals court.

Although title agent had many victims, title insurer made whole only the victims having closing protection letter contracts. All victims purchased title insurance from title insurer via the rouge agent. But only some victims paid extra for a closing protection letter. Title insurer paid victims only because of it’s legal liability under closing protection letter contracts, not because it was “legally responsible” for the rouge agent’s acts.

As the court explained:

[Title insurer] asks that we interpret its insurance policy to allow [title insurer] to secure business by making contractual guarantees to its clients regarding the performance of third-party business partners that are not its agents and then force its insurer to foot the bill when that third-party fails to perform according to [title insurer’s] guarantee, despite [title insurer’s] disavowal of all non-contractual responsibility, legal or otherwise. Because this interpretation directly contravenes the language of its professional liability insurance policy, we must decline E[title insurer’s] request.

The district court also had held the claimed amounts weren’t “Loss” because the Loss definition carved-out “amounts due pursuant to an express contract or agreement . . . .” And it held that title insurer’s liability fell within an exclusion “for actual or alleged liability under any express contract or agreement.” As the district court explained, the closing protection letters were “a debt [the title insurer] voluntarily accepted, not a loss resulting from a wrongful act within the meaning of the Policy.” To hold otherwise would mean a party could “enter into a contract safe in the assumption that if he later decides to engage in an act which might be considered a breach, the insurance company will step forward to cover the consequences of his act if he was wrong; and if he was right, he still walks away with no consequence to himself. Such a practice is inimical to the entire concept of insurance.”

The appeals court didn’t address these issues because it didn’t have to. But they are additional arguments insurers will make when faced with insurance claims such as in this case. This type of litigation is seen with some frequency. And you should expect to see more of it, especially when there’s big money at stake making litigation cost easier to swallow.

Tags: Ohio, professional liability, title insurance, loss, contractual liability, contract exclusion, wrongful act

by Christopher Graham and Joseph Kelly

May a liability insurer use an exclusion to avoid an indemnity obligation if it breaches a duty to defend?

As we discussed here, New York’s highest court last year initially said no. But when asked to reconsider, a majority of the court said yes. See K2 Investment Group, LLC, et al v. American Guarantee & Liability Ins. Co., 2014 NY Slip Op 01102 (Feb. 18, 2014).

There has been much commentary about K2 in the blogosphere. There is after all a lot of New York insurance business. The original decision also adopted a minority position. And it departed from long-standing New York precedent.

And it was that long-standing precedent, Servidone Construction Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985), which lead the majority to change its decision. As it explained:

Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985. When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while it is not inexorable, is strong enough to govern this case.

The majority also noted cases from Hawaii and Massachusetts following Servidone and that a “federal district judge, writing in 1999, said that ‘the majority of jurisdictions which have considered the question’ follow the Servidone rule.” *See Flannery v Allstate Ins. Co*., 49 F. Supp. 2d 1223, 1227 (D. Col. 1999); *compare Employers Ins. of Wausau v Ehlco Liquidating Trust*, 186 Ill. 2d 127, 150-154 (1999) and Missionaries of Co. of Mary, Inc. v Aetna Cas. and Sur. Co., 155 Conn. 104, 112-114 (1967)(noted as minority view cases).

That Servidone involved a settlement rather than a judgment was deemed a distinction without a difference. And contrary to what the dissent argued, the original K2 decision couldn’t be reconciled with Servidone because both cases addressed whether an insurer could raise an exclusion despite breaching a defense duty.

The dissent argued that under Servidone, an insurer in breach of a duty to defend may avoid an indemnity obligation based on “non-coverage,” but not an exclusion. It explained:

Noncoverage involves the situation where an insurance policy does not contemplate coverage at its inception. For example, a homeowner’s policy would not provide malpractice liability coverage. Exclusions, in contrast, involve claims that fall within the ambit of the policy’s coverage parameters but are excepted by a particular contractual exclusion provision. Hence, a homeowner’s policy might contain an exclusion for certain types of water damage to the house.

The dissent argued “‘[u]nder those circumstances [(namely, non-coverage)], the insurance policy does not contemplate coverage in the first instance, and requiring payment of a claim upon failure to timely disclaim would create coverage where it never existed.'” [citations omitted]. An exclusion differs because it’s a way to avoid coverage that otherwise exists, so says the dissent.

The dissent also argued that Illinois, Massachusetts, and Colorado decisions cited by the majority applied the rule that an insurer breaching a duty to defend may raise a defense of non-coverage, but not an exclusion. *See also Alabama Hosp. Assn. Trust v Mutual Assur. Socy. of Alabama*, 538 So 2d 1209, 1216 (Ala. 1989)(cited by the dissent for the same rule).

None of this persuaded the majority.

Although not cited as a basis for the majority decision, plaintiffs were lenders who sued an entity and its owners to collect on a $2.85 million debt. But then also alleged one of the owner borrowers was their lawyer for the loan and committed malpractice by failing to record a mortgage securing the debt. After his insurer refused to defend, the lawyer allowed a default judgment against him exceeding the $2 million policy limit, though plaintiffs had demanded only $450,000 to settle. Then following the default, the lawyer assigned his rights against the insurer to the plaintiff lenders, who sued the insurer to collect. The lawyer apparently wouldn’t have to pay. And the default was only on the malpractice claim, not on the claim against the lawyer/owner/borrower to collect the $2.85 million debt.

With the majority decision, the insurer will be permitted to prove at trial that the judgment was really about lawyer’s as borrower/business owner, rather than as plaintiff lenders’ supposed lawyer. The insurer may now rely on: (1) a “status exclusion” for a “Claim based upon or arising out of, in whole or in part . . . D. the Insured’s capacity or status as: 1. an officer, director, partner, trustee, shareholder, manager or employee of a business enterprise . . . ;” and a “business pursuits” exclusion for a “Claim based upon or arising out of, in whole or in part . . . E. the alleged acts or omissions by any Insured . . . for any business enterprise . . . in which any Insured has a Controlling Interest.”

The dissent also was troubled that if the insurer defended the insured lawyer it could have addressed the status issues in the underling malpractice suit. It explained:

If, as the majority asserts, [lawyer’s] liability for professional negligence may have partially arisen from his actions as both an attorney and a manager of [a business] — and was therefore precluded under the “insured’s status” or “business enterprise” exclusion clauses — [insurer] should have fully participated in the underlying action and attempted to establish the basis for the exclusion. I believe that these issues should have been resolved in the original action rather than being delayed for years. The majority’s decision to authorize additional litigation and fact finding will prolong final resolution of this matter even further.

But this argument didn’t sway the majority either, particularly given Servidone.

Although now resolved in New York courts, we may see legislative attempts to change the rule and expect the debate isn’t over elsewhere. See our blog discussion here about Columbia Casualty Company v. Hiar Holdings, LLC, No. SC93026 (Mo. Aug. 13, 2013)(failure to defend foreclosed insurer’s coverage defense and opened up limits).

Tags: New York, duty to defend

by Christopher Graham and Joseph Kelly

Claims-made insurers limit risk by insuring only those claims alleging wrongful acts after a certain date. Their means for limiting risk often is a prior acts exclusion. The date often is before, rather than at policy inception and thus is known as a retroactive date.

But what if a Claim alleges wrongful acts before and after the retroactive date? Insurers also typically limit their risk to claims alleging wrongful acts unrelated to wrongful acts before the retroactive date. They typically wish to avoid insuring a Claim having anything to do with the pre-existing wrongful acts, even if it also alleges new wrongful acts.

But when are pre- and post-retro date wrongful acts related? Insurers address the issue through varying policy wording. But regardless of the wording, it’s a frequently litigated issue.

And so it was in American Guarantee & Liability Ins. Co. v. The Abram Law Group, et al, Case No. 13-13134 (11th Cir. Feb. 14, 2014). In that case, developer and bank sued lawyers alleging in count one malpractice in a January 26, 2006 closing for acquiring vacant land, with bank financing. That January date was before the May 1, 2006 retroactive date in the lawyers’ professional liability policy.

But developer and bank in a second count in the same suit alleged lawyers and title company committed fraud and conspiracy in an April 23, 2007 closing for a loan for developing the vacant land into a subdivision. The second closing thus was after the May 1, 2006 retroactive date.

In the first closing, the lawyers allegedly failed to identify exceptions to “good title.” So developer acquired land with unexpected title exceptions; and bank’s mortgage was subject to those exceptions. After the first closing, developer identified the exceptions. But the lawyers through the April 2007 closing allegedly covered up their earlier malpractice and made it appear that the exceptions weren’t an issue. They did so to avoid liability to developer and so title insurer wouldn’t have to cover the title exceptions. The lawyers also were title insurer’s agents and faced liability to title insurer for any mistakes. Developer and bank’s fraud and conspiracy allegations thus were based on the lawyers’ alleged post-retro date cover up of their pre-retro date mistakes.

The defendant title insurer meanwhile cross-claimed against the lawyers to indemnify it for any judgment for developer and bank involving the January 2006 loan and for negligence in failing to identity title exceptions. So the cross-claim only alleged wrongful acts before the May 1, 2006 retroactive date.

As is typical, this insurer used a prior acts exclusion to limit risk for claims alleging wrongful acts before the May 1, 2006 retroactive date. It also limited risk for claims alleging wrongful acts after the retroactive date, where the Claims nevertheless were based on wrongful acts before the retroactive date.

This is the wording insurer used: “This policy specifically excludes coverage for Damages and Claim Expenses because of Claims brought against any Insured based on any act or omission or any Related Act or Omission that occurred or is alleged to have occurred prior to 5/01/06.”

The insurer defined “Related Act or Omission” as “an act or omission that forms the basis for two or more claims, where a series of continuous, repeated, interrelated or causally connected acts or omissions give rise to one or more claims….”

In the prior acts exclusion, the phrase “that occurred or is alleged to have occurred prior to 5/01/06” modified the phrase “Claim brought against any Insured based on any act or omission or any Related Act or Omission.” It would have made more sense for the exclusion to read: “This policy specifically excludes coverage for Damages and Claim Expenses because of Claims brought against any Insured based on any act or omission that occurred or is alleged to have occurred prior to 5/01/06 or any Related Act or Omission that occurred or is alleged to have occurred on or after 5/01/06.” (Emphasis added).

But the Appeals Court didn’t address that issue and it made no difference in the result at least because the evidence was that the Claims, even those involving post-retro date wrongful acts, otherwise were based on an act or omission that occurred or was alleged to have occurred before the May 1, 2006 retro-date.

According to the Appeals Court: “Though [lawyers] contend Count Two alleging fraud in the underlying lawsuit relates only to the April 23, 2007, Development Loan closing and thus is covered under the policy, the acts and omissions giving rise to the malpractice claim from the January 26, 2006, Acquisition Loan closing also undergird the fraud claim regarding the Development Loan.”

“The alleged negligence involved in the Acquisition Loan closing is the necessary predicate to the fraudulent scheme to extinguish the 2006 lender’s title insurance policy and fraudulent insertion of additional exceptions to the 2007 title insurance policy. Further, the [other] claims . . . all flow from [lawyers’] alleged failure to disclose the restrictions and easements in the January 26, 2006, closing.”

So: “The district court did not err in determining the acts and omissions surrounding the Acquisition Loan closing form the basis of the claims regarding the fraud alleged during the Development Loan closing . . . .”

The Appeals Court also stated that the district court did not err “in finding the other acts or omissions surrounding the [post-retro date] Development Loan closing were interrelated to or causally connected to the acts or omissions at the [pre-retro date] Acquisition closing. Cf. Cont’l Cas. Co. v. Wendt, 205 F.3d 1258, 1262-63 (11th Cir. 2000) (applying plain meaning of the term “related” to a dispute over insurance coverage).” But with the way the prior acts exclusion was worded it’s hard to understand why that would make a difference. The act and omission and “Related Act or Omission” addressed by the prior acts exclusion were all described as before the retro-date. The exclusion thus didn’t explicitly address the relationship of pre- and post-retro date wrongful acts. That made no difference here. But it might in another case. So an insurer with a prior acts exclusion like this would be well-advised to revise it.

Tags: Georgia, professional liability, prior acts exclusion, interrelated or related wrongful acts

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