By Joseph P. Kelly and Shelly Hall

Scenario: Law Firm creates employee stock ownership program, or ESOP, per Client’s request. Seven years later, ESOP asks Firm to conduct a risk analysis based on how the ESOP was created. Firm tells ESOP that Client engaged in prohibited ERISA transactions when the ESOP was established. Firm doesn’t notify its malpractice carrier. ESOP eventually sues Client. ESOP’s attorney then sends a letter to Firm stating that Client-Defendant “remembers receiving advice from [Firm]” that he should take ERISA prohibited actions and if Client’s statement is true, Firm probably needed to notify its malpractice carrier.

Firm still doesn’t provide notice of a claim, but it does provide a brief summary about the matter in its next two annual renewal applications. Firm then decides to change malpractice carriers. The application asked about any circumstances that could reasonably give rise to a professional liability claim and Firm identified the ESOP matter. The application then asked whether notice was given to its current insurer. Firm answered “Yes” and “concurrently, or immediately succeeding this application, written notice will be given to the current insurer.”

The application states that there will be no coverage for any matter listed as potentially giving rise to a claim that was reported to another insurer. Despite its application answer, Firm didn’t give written notice to its current insurer. A few months later, Client sues Firm for malpractice. Firm quickly notifies its current carrier of the suit. Carrier says no coverage based on the application. Firm doesn’t notify its prior insurer until over a year later. Prior insurer denies coverage based on its policy’s reporting requirement.

Question: Both insurers were aware of the ESOP matter. Did Firm do enough to trigger coverage for Client’s malpractice suit?

The answer was “No” in Ironshore Specialty Co. v. Callister, Nebeker & McCullogh, P.C., et al, Case No. 2:15-cv-00677-RJS-BCW (D. Utah Dec. 21, 2017). Let’s take a look at the policies to see why the Court said no coverage.

• Policy #1 The front page of the first insurer’s policy states “This is a Claims Made and Reported Policy, please read it carefully.” The court highlighted the importance of reporting a claim during the relevant coverage period. The court found that Firm’s reporting obligations under the policy were clear based on the cover page disclosure, along with a statement in the Insuring Agreement that there’s coverage for claims “first made against the Insured during the Policy Period and reported to the Insurer during the Policy Period.” Accordingly, the Court found that Firm had to strictly comply with the policy’s reporting requirements and that it did not. It wasn’t enough to just list a potential claim in its renewal applications. A formal notice of claim during the Policy Period was required for coverage.

• Policy #2 The application contained a disclaimer stating “NOTICE: THE POLICY BEING APPLIED FOR WILL NOT PROVIDE COVERAGE FOR ANY CLAIM ARISING OUT OF THE MATTERS REQUIRED TO BE LISTED IN 30(a) AND 30(b) ABOVE.” The matters referred to are matters that could reasonably give rise to a claim and matters for which notice had been given to a current insurer. The Court disagreed with Firm that the the disclaimer was just a warning statement of sorts and wasn’t enough to bar coverage. The disclaimer unambiguously stated there wouldn’t be coverage for those matters.

Lesson #1: Report, report, report!

Perhaps Firm thought it should wait for a “Claim” by Client – either a written demand of sorts or a lawsuit – before giving notice to the first insurer. Maybe Firm just hoped it all would go away. Bottom line – best practice is to err on the side of caution and report potential malpractice claims. “Claims made and reported” policies like the first policy here only provide coverage if the claim is made during the coverage period and it’s reported to the insurer during the coverage period. Most policies, including the first policy, provide for reporting of a potential claim as soon as an Insured is aware and, by reporting right away, an insured can trigger coverage once there’s a “Claim”, even if the “Claim” doesn’t come occur after the coverage period. Then it wouldn’t matter that coverage was excluded in the second policy, because coverage under the first policy was secured by notice of potential claim.

Lesson #2: Comply with the policy’s reporting requirements!

Firm told the first insurer about the ESOP matter in two renewal applications. But the first policy had particular requirements for notice of a potential claim. More details were required than what was asked for in the renewal application. If Firm had complied with the first policy’s notice requirements, coverage for Client’s eventual malpractice suit likely would have been triggered.

by: Chris Graham and Shelly Hall

Summary: Today’s post focuses on a recent Seventh Circuit decision, BancorpSouth v. Federal Insurance Co., No. 17-1425 (7th Cir. Oct. 12, 2017), affirming dismissal, for failure to state a legally viable claim, of a bank’s complaint against an insurer for alleged breach of a duty to defend and pay for a $24 million settlement of a consumer class action alleging improper overdraft fees, and related “bad faith.” It involved a duty-to-defend policy and a broad “fee” exclusion and, although other policies provide otherwise, this one had no exception for Defense Expenses. At the end of this post, we discuss other cases involving similar issues, but with different policy wording and, in some cases, different results. If you’re a broker or a risk manager, this case and those discussed at the end show why you should insist on a Defense Costs exception to a fee exclusion.

The coverage suit: In BancorpSouth, a bank sued an insurer for breaching a contract by failing to defend a class action and pay for a related $24 million settlement and for bad faith. Citing the policy’s exclusion “for Loss on account of any Claim … arising from … any fees or charges,” the Southern District of Indiana, applying Mississippi law, dismissed the bank’s complaint for failure to state a legally viable claim. Given the allegations in the complaint, the Court concluded that the insurer had no duty to defend. Because the duty to defend is broader than the duty to indemnify, moreover, the insurer had no obligation for the settlement; nor was there bad faith. The Seventh Circuit affirmed.

Policy wording: Subject to the policy’s terms, the insurer agreed to “pay, on behalf of an Insured, Loss on account of any Claim first made against such Insured during the Policy Period…for a Wrongful Act committed by an Insured or any person for whose acts the Insured is legally liable while performing Professional Services, including failure to perform Professional Services.” The duty-to-defend policy included a “fee” exclusion providing that the insurer “shall not be liable for Loss on account of any Claim…based upon, arising from, or in consequence of any fees or charges.” “Loss” included “Defenses Costs” and settlement costs. But the fee exclusion had no Defense Costs exception.

Class Action Complaint: The bank customer’s “opening allegation stated: ‘This is a civil action seeking monetary damages, restitution and declaratory relief from [the bank] arising from its unfair and unconscionable assessment and collection of excessive overdraft fees.’” The complaint alleged that the bank “maximized the amount of overdraft fees it could charge customers through a variety of means, policies, and procedures” including by “reorder[ing] debts from highest to lowest, instead of chronologically,” “fail[ing] to provide accurate balance information, and purposefully delay[ing] posting transactions,” “fail[ing] to notify customers of overdrafts, despite having the capability to ascertain at the point of sale whether there were sufficient funds in a customer’s account,” and “fail[ing] to make their customers aware that they can opt out of [the bank’s] overdraft policy upon request.” The customer asserted counts for breach of contract, unconscionability, conversion, unjust enrichment, and violation of the Arkansas Deceptive Trade Practices Act. He also sought to represent a class of “[a]ll customers in the United States who … incurred an overdraft fee as a result of the bank’s practice of resequencing debit card transactions from highest to lowest.” As relief, the customer, for himself and the class, sought a declaration that the bank’s “overdraft fee policies and practices” were “wrongful, unfair, and unconscionable,” “[r]estitution of overdraft fees,”‘[d]isgorgement of ill-gotten gains,” ‘[a]ctual damages,” ‘[p]unitive and exemplary damages,” “[p]re-judgment interest,” “costs and disbursements,” and “other relief” as “just and proper.”

Duty to defend: As is typical and as was the case under Mississippi law, whether the insurer had a duty to defend “depend[ed] upon the comparison of the language contained in the policy with the allegations contained in the underlying action.” In this instance, it was about “compar[ing] … [the fee exclusion], which excludes from coverage any claim ‘based upon, arising from, or in consequence of any fees or charges,’ with the allegations in the [customer’s] Complaint.” That the complaint included allegations that didn’t mention overdraft fees didn’t matter. “[T]hese individual allegations cannot be read in a vacuum, and instead, must be read in the context of the entire complaint.” “Read in its entirety, the only harm alleged by the [customer’s] complaint is [the bank’s] maximization of excessive overdraft fees on its customers.”

As the Court explained further:

The very first paragraph of the … Complaint specifically states that the crux of the lawsuit centers on [the bank’s] “unfair and unconscionable assessment and collection of excessive overdraft fees.” Moreover, the complaint defines the class of plaintiffs as customers who “incurred an overdraft fee.” Finally, every claim for relief asserted is specifically premised on the imposition of overdraft fees. The bank argued that the insurer had a duty to defend inasmuch as, per the complaint, “policies and procedures caused the customers’ alleged injuries, and [excluded] overdraft fees were one type of damages suffered as a result.”

Rejecting that argument, the Court explained: “To be sure, language focusing on ‘overdraft policies and procedures’ appears in a number of places, but it is always connected with the wrongful collection or imposition of overdraft fees.” The bank also argued that the fee exclusion was ambiguous, inasmuch as it didn’t say whether the “fees” were “payable to or by” the bank. Rejecting that argument, the Court explained that the fee exclusion by its plain wording, broadly applied to a “Claim … arising from … any fees or charges,” whether paid by or to the bank. The Court also rejected the bank’s argument that reading the fee exclusion as including overdraft fees paid by customers to the bank would make the “coverage for ‘Defense Costs,’ defined in the policy to include attorneys’ fees, illusory.” The Court explained that the ‘exclusion has no effect on [the bank’s] recovery of any attorneys’ fees on account of claims that are based on something other than fees or charges, such as a claim based on the quality of services provided by [the bank].” The Court also stressed that an insurer’s “decision” to include a fee exclusion in a professional liability policy “serves a necessary purpose of avoiding ‘moral hazard.’” Without the exclusion, the insured “could freely create other customer fee schemes knowing that they would be readily reimbursed by” its insurer.

Comments: Here’s a summary of other recent cases addressing coverage for overdraft class actions and issues similar to those in BancorpSouth:

• Fidelity Bank v. Chartis Specialty Ins. Co., Civil Action No. 1:12-CV-4259-RWS (N.D. Ga. 2013), applying Georgia law, addressed a “fee-dispute” exclusion, applicable to “Loss in connection with any Claim made against any Insured . . . alleging, arising out of, based upon or attributable to, directly or indirectly, any dispute involving fees, commissions or other charges for any Professional Service rendered or required to be rendered by the Insured, or that portion of any settlement or award representing an amount equal to such fees, commissions or other compensations; provided, however, that this exclusion shall not apply to Defense Costs incurred in connection with a Claim alleging a Wrongful Act.” Given the “fee-dispute” exclusion’s Defense-Costs exception, the insurer funded the bank’s defense of the overdraft class action. But it refused to pay the settlement. The District Court granted the insurer a summary judgment, holding that the settlement was uninsurable because the payments amounted to restitution and in any event fell within the fee-dispute exclusion.

• U.S. Bank National Association v. Indian Harbor Insurance Company, Case No. 12-CV-3175 (PAM/JSM) (D. Minn. Dec. 16, 2014), applying Delaware law, addressed exceptions to primary and excess policies’ “Loss” definitions, for “[m]atters which are uninsurable under the law pursuant to which this Policy is construed” or “principal, interest, or other monies either paid, accrued, or due as the result of any loan, lease or extension of credit by [the bank]”; and an exclusion for “any payment for Loss in connection with any Claim made against [the bank] . . . brought about or contributed in fact by any . . . profit or remuneration gained by [the bank] to which [it] is not legally entitled . . . as determined by a final adjudication in the underlying action.” The bank settled the underlying overdraft class action for $55 million, and sought coverage for $30 million of that amount plus defense expenses, excess of a $25 million deductible. The District Court granted the bank a summary judgment, rejecting the insurers’ argument that the settlement was uninsurable as restitution. Without deciding whether restitution was insurable, the Court—citing the “final adjudication” wording in the policies’ ill-gotten gains exclusion—explained that the “policies unambiguously require that a final adjudication in the underlying action determine that a payment is restitution before the payment is barred from coverage as restitution.” See Kevin LaCroix’s December 22, 2014 D&O Diary blog post for a detailed discussion of this aspect of this somewhat controversial decision. When procuring the policies, US Bank’s broker and risk manager had no need to worry about a Defense Costs exception to a fee exclusion; there was no exclusion.

• First Community Bancshares v. St. Paul Mercury Ins. Co., 593 F. App’x 286, 288 (5th Cir. 2014) involved a fee-dispute exclusion for a claim “based upon, arising out of or attributable to any dispute involving fees or charges,” with no Defense Costs exception, but with duty-to-defend wording. The Fifth Circuit, applying Texas law, affirmed a summary judgment for the bank and against the insurer holding that the insurer had a duty to defend. “Construing the [underlying class action] petitions liberally … at least some of the allegations … are not excluded by the fee-dispute exclusion.” Some of the allegations—“regarding [the bank] providing misleading information on its account practices and customers’ account balances–… do not have a causal connection to a disagreement that necessarily includes fees ….” As the Seventh Circuit in BancorpSouth stated: “Crucial to the … [First Community] holding … was [the Fifth Circuit’s] finding that the primary harm was not the assessment and collection of fees, but rather ‘that “customers could not ascertain their account balances and could not accurately plan spending, withdrawals, and deposits.’” In contrast, the BancorpSouth underlying class-action complaint showed that “excessive overdraft fees were the central and only harm”; so there was no duty to defend or pay the settlement. Although the insurer in First Community was required to defend notwithstanding a fee-dispute exclusion with no Defense-Costs exception, it was only because plaintiff’s complaint fortuitously included some allegations falling outside of that exclusion and the bank benefited from pro-policyholder rules for determining an insurer’s obligations under a duty-to-defend policy. The bank in BancorpSouth had no such luck.

• PNC Financial Services. Group, Inc. v. Houston Casualty Co., 647 F. App’x 112, 120 (3d Cir. 2016) (not precedential) involved policies insuring “Loss,” meaning “Claim Expenses” and “Damages”—defined as “a judgment, award, surcharge, or settlement … and any award of pre- and post- judgment interest, attorneys’ fees and costs,” but with an exception for “fees, commissions or charges for Professional Services paid or payable to an Insured” (the “Professional Services Charge Exception”). “Claim Expenses” (defense costs) for a fee suit, thus, weren’t subject to the Loss definition’s Professional Services Charge Exception or to any fee exclusion; so the insurer here would have been required to pay Claim Expenses exceeding a $25 million self-insured retention. The Third Circuit, applying Pennsylvania law, held that the $102 million paid by the bank to settle the underlying overdraft charge class actions (including $30 million for class counsel fees) fell within the Professional Services Charge Exception; defense expenses presumably fell within the $25 million self-insured retention. As the Seventh Circuit in BancorpSouth explained, the insurer in the PNC case had no duty to indemnify the insured where “the class was defined as those who incurred an overdraft fee” and “settlement payments were based on the number of overdraft fees incurred.” As in BancorpSouth: “The essence of [the bank customer’s] Complaint [in PNC was] clearly [the bank’s] maximization of overdraft fees. Since there’s no other was to construe the … Complaint, [the insurer in PNC] had no duty to defend the overdraft fee claims because they are excluded from coverage.” So too in BancorpSouth.

The plaintiffs’ bar has targeted banks and others with class actions alleging they improperly charged fees to consumers. Many suits involved multiples of millions in alleged harm and resulted in multi-million dollar settlements. Defense costs also ran into multiples of millions. In 2010, new Federal rules provided consumers a chance to avoid overdraft fees on certain debit card transactions and ATM withdrawals. But, as a simple Google search will show, that didn’t end the overdraft fee class actions. Earlier this year the Consumer Protection Financial Bureau adopted a rule barring banks, credit-card companies, and financial service firms from requiring consumers to agree to arbitration clauses and class-action waivers. But the Trump administration just struck that rule. So presumably we’ll see fewer consumer class actions involving improper fee charges.

Bottom line: But if you’re a broker or risk manager, why not make sure the policy you’re buying at least has Defense Costs coverage for these types of cases.

by: Chris Graham and Shelly Hall

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The issue: Today’s post is about a recurring issue for claims-made liability insurers and their policyholders: whether a claim arises out of the same or related “Wrongful Acts” as alleged in an earlier claim. If you’re the underwriter, you won’t want to insure a claim that that arises out of the same or related Wrongful Acts as alleged in an earlier claim; or, if you wrote the risk when the earlier claim was made, you’ll at least want to make sure the earlier and new claims are treated as a single claim so that only one limit of liability applies. If you’re a policyholder, you’ll obviously want as broad of coverage as is available. The “relatedness” issue has been litgated frequently. And the litigation outcome will depend on the contract wording and the facts alleged in the underlying claims. Today’s post is about a recent case involving an “interrelated wrongful acts” definition—including pro-insurer “common nexus” wording—that meant that the policyholder would lose.

A Big Easy shoot-out, a City surveillance system, and alleged bid rigging and kick-backs: New Orleans; 2003. There’s a shoot-out. Surveillance cameras capture it. Police as a result nab the bad guys. Great thing! Let’s do it City-wide, says the Mayor. Let’s invite bids. And then the “fun” begins. There are at least three companies involved; we’ll call them “A,” “B,” and “C.” There also are City employees who, depending on who you believe, allegedly steer the work to A, B, or both in exchange for subcontracts and other “favors.” A thinks B is colluding with City employees to cut it out of the City work. C thinks A and B are doing the same thing to it.

A’s 2007 lawsuit against B: In 2007, A sues B, the City employees, and their companies. A alleges that it collaborated with the City to develop a surveillance system; the City and A signed a contract in July 2004; the City promised to keep A’s “technology” confidential; City employees told A that A needed to hire them as subcontractors, but A refused; the Mayor’s Office of Technology then contracted technology work to B; and then B and City employees stopped authorization of A’s work and failed to order and authorize payment for cameras, shared A’s confidential information, and conspired to manufacture a copy of A’s system, sell it to Monster Company, and illegally sell it throughout the State. A and B eventually settle.

B’s 2009 claims-made policy: Fast-forward to 2009. B purchases a Digital and Technology Professional Liability Policy, effective July 1, 2009 to July 1, 2010. Subject to its terms, the policy covers certain claims made during the policy period. As is typical for claims-made policies, this policy carves-out coverage for claims—associated with the circumstances of past claims, such as A’s 2007 lawsuit against B. Thus, “[a]ll claims arising out of the same wrongful act and all interrelated wrongful acts of the insureds shall be deemed to be one claim, and such claim shall be deemed to be first made on the date the earliest of such claims is first made, regardless of whether such date is before or during the policy period.” “[I]nterrelated wrongful acts” means “all wrongful acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events, transactions or causes.” So what happens next?

C’s 2009 lawsuit against B: C sues B, A, and City employees and their companies, about the same surveillance system at issue in A’s 2007 suit against B. C alleges that it co-developed the system; City employees steered the City contract to A; A in exchange agreed that City employees would assume C’s role in the project and be involved in system sales outside the City; City employees also steered City technology work to B; B in exchange steered its subcontract work to City-employees; and B and those City employees misappropriated C’s confidential information.

The coverage litigation: B tendered the defense of C’s 2009 lawsuit to its claims-made insurer, which refused to defend. B then sued for a declaration of coverage. So who wins?

The decision: In a decision involving a scenario along the lines described above, a Colorado Federal Judge said that the insurer wins. Ciber, Inc. v. ACE American Insurance Company, Civil Action No. 16-cv-1189-WJM-NYW, Dist. Court, D. Colorado, July 9, 2017. According to the Court:

Based on the broad definition of “interrelated wrongful acts” …, as well as the substantially similar factual web surrounding the [2007] and [2009 lawsuits], the Court is persuaded by ACE’s contention that the two proceedings involve a “single scheme”—namely, [(B’s)] alleged participation in a conspiracy to use city employee-run entities as subcontractors to circumvent the July 2004 Contract and misappropriate the surveillance camera project.

In the Court’s view, the allegations in the [2007] and [2009 lawsuits] both arose out of a “single scheme” directed at the developer of the wireless surveillance system (whether [A] alone or in partnership with [C], involving a single contract (the July 2004 Contract), implicating the same transaction or series of transactions involving the surveillance camera project, and seeking a single outcome (to cut out the originators of that system from current and future business dealings). This “single scheme” provides the Court with a sufficient basis upon which to conclude that the [2007] and [2009 lawsuits] share (or are connected and linked by) a common “series of related facts, circumstances, situations, events, transactions or causes.”

The 2009 lawsuit, thus, would be treated as a single claim with the 2007 lawsuit and deemed made in 2007, before inception of the July 1, 2009-2010 policy period; so there’s no coverage.

B argued that “the dictionary’s primary definition [of nexus] is ‘a causal link’ [and] courts construe this causation requirement to include both but-for cause and proximate cause”; “[s]everal courts have followed [this causation] approach in denying insurance carriers’ attempts to limit coverage under interrelated wrongful act provisions”; and that “[b]ecause there is no causal link between all claims in the [2007 lawsuit] and those in the [2009 lawsuit], there is a possibility of coverage, leaving ACE with a duty to defend.”

But according to the Court: “Looking at the plain language of the term ‘interrelated wrongful acts’ and its definition under the Policy…there is no basis to conclude that this Policy term incorporates a causal relationship or ‘but-for’ test.” The Court, thus, would “only examine the record to determine whether there is a ‘connection’ or ‘link’ between the facts or occurrences underlying the alleged ‘wrongful acts’ present in the [2007 and 2009 lawsuits].”

In reaching its decision, the Court distinguished the policyholder’s “causation” cases as based on different related wrongful cats wording. It also cited ACE Am. Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789, 798 (D. Md. 2008), KB Home v. St. Paul Mercury Ins. Co., 621 F. Supp. 2d 1271, 1277 (S.D. Fla. 2008), Nat’l Title Agency, LLC v. United Nat’l Ins. Co., 2016 WL 1092485, at *3 (D. Utah Mar. 21, 2016), and Old Bridge Mun. Utilities Auth. v. Westchester Fire Ins. Co., 2016 WL 4083220, at *4–5 (D.N.J. July 29, 2016), which rejected a “but-for” test for “nearly identical definitions of the term ‘interrelated wrongful acts.’”

Comments: Compared to this ACE policy, there are narrower “interrelated” or “related wrongful acts” definitions in certain claims-made policies including definitions requiring a causal connection, including the policy at issue in one of the cases cited by ACE’s policyholder. One claims-made community association D&O policy provides, for example, that “’Related Wrongful Acts’ shall mean Wrongful Acts which are causally connected by reason of any common fact, circumstance, situation, transaction, casualty, event or decision.” Given the “interrelated wrongful acts” definition in the ACE policy, ACE didn’t have to show a causal connection between facts or occurrences underlying the wrongful acts alleged in the 2009 suit and those alleged in the 2007 suit. Plaintiffs in the 2007 and 2009 suits differed, but both suits alleged the same scheme involving the policyholder’s supposed “kick-backs” to City employees in exchange for allegedly steering it City work. This is the kind of scenario the “interrelated wrongful acts” wording was aimed at

by Christopher Graham and Joseph Kelly

Have you received unsolicited text messages on your smart phone? Pretty annoying, right? Well someone received messages for the sale of Botox treatments and filed a Federal suit against the cosmetic surgery center that allegedly sent them. The recipient alleged violations of the Telephone Consumer Protection Act or “TCPA” and the Illinois Consumer Fraud Act. The surgery center filed bankruptcy. The text recipient was allowed to continue the suit, but only to the extent of the center’s insurance, namely, a cyber-claim endorsement under a professional liability policy. The insurer sought a declaration in state court that the endorsement provided no coverage. So what did the court decide? Is a TCPA or consumer fraud claim covered under a cyber-claim endorsement? Not under the wording of this one, according to the court in Doctor’s Direct Insurance, Inc. v. Bochenek, 2015 IL App (1st) 142919 (Aug. 3, 2015). And while the endorsement was for a professional liability insurance policy, you’ll see similar endorsements under D&O policies. So the case is worth a look even if you focus just on D&O insurance.

by Christopher J. Graham and Joseph P. Kelly

Patient sues her physician and alleged sexual assault. Patient allegedly arrived for an appointment and was assaulted by physician resulting in her loss of consciousness and then physician sexually assaulted her while she was unconscious. Physician’s practice tendered the defense of physician for patient’s suit to its professional liability insurer. Is MedPro obligated to defend physician? That was the question decided in Medical Protective Company v. David L. Turner, et al, Case No. 3:15-CV-0366-L (N.D. Tex. June 10, 2015).

MedPro agreed under its policy “to defend and pay damages” for “any claim first made, or potential claim first brought to the Insured’s attention, during the term of this policy based on professional services rendered, or which should have been rendered … in the practice of Insured’s profession as hereinafter limited and defined.”

“Professional services” was defined as “the rendering of medical, surgical, dental, or nursing services to a patient and the provision of medical examinations, opinions, or consultations regarding a person’s medical condition within the Insured’s practices as a licensed health care provider. This shall include first aid rendered at the scene of an accident without expectation of monetary compensation.”

MedPro’s policy excluded “Payment of damages (but will defend) in any claim for damages if said damages are in consequence of the performance of a criminal act or willful tort or sexual act.”

Physician’s argument for coverage was two-fold:

(1) Patient’s suit is a claim “based on professional services rendered, or which should have been rendered” because “[a]ccording to the petition, the alleged physical and sexual ‘assaults’ arose out of or occurred in connection with [physician’s] rendition or failure to render professional medical treatment that was being sought by [patient]–i.e., during an office visit and examination for the purpose of obtaining refills.”

(2) A duty to defend is expressly stated in the above sexual act exclusion.

MedPro countered that “it cannot be a ‘professional service’ for a doctor to have non-consensual sex with a patient” and physician’s attempt to to expand coverage via the exclusion “confus[es the basic structure of an insurance policy … [and physician] cannot ignore the scope of coverage set out in the insuring clause of his policy, and then argue that different, additional coverage is somehow created by a policy exclusion.”

The court sided with MedPro on physician’s first argument stating “there are no allegations in the Petition in the Underlying Lawsuit that could bring the allegations within the coverage of the Policy. Even construed liberally, and resolving all doubts in favor of the insured, the allegations of assault and non-consensual sex in the Petition do not relate to the rendering of professional services, as the alleged assault and nonconsensual sex bore no connection to ‘the rendering of medical, surgical, dental, or nursing services to a patient and the provision of medical examinations, opinions, or consultations regarding a person’s medical condition within the insured’s practice as a licensed health care provider.”

The court also rejected physician’s argument that the sexual act exclusion created a duty to defend stating that physician’s argument “misconstrues the function of exclusions in insurance policies.” According to the court:

Initially, the insured has the burden of establishing coverage under the terms of the policy. If the insured proves coverage, then to avoid liability the insurer must prove the loss is within an exclusion. If the insurer proves the exclusion applies, the burden shifts back to the insured to show that an exception to the exclusion brings the claim back within coverage.

The court’s decision leads to an interesting question–when, if ever, could a patient’s claim involving a physician’s alleged “sexual act” be “based on professional services rendered” and, thus, trigger a professional liability insurer’s duty to defend? Here, it wasn’t enough that the alleged sexual assault occurred during patient’s appointment at the physician’s office; the claim wasn’t “based on professional services rendered, or which should have been rendered…”; it was based on a sexual assault. The court’s decision appears to be consistent with how other court’s have handled the issue.

Tags: Texas, professional liability insurance, professional services, physician, sexual assualt, sexual act exclusion

by Christopher Graham and Joseph Kelly

Switching insurers? You’re considering switching the insurer for your company’s D&O, professional liability, or other claims-made insurance policies. Many insurers want the business. But, as is typical, their policies include a version of prior-and-pending-litigation exclusion.

Those exclusions generally apply to any claim based upon, arising out of, attributable to, or involving a suit or other proceeding filed or commenced before a new policy’s inception date. Similar exclusions in current insurers’ policies set the date as either policy inception dates or inception dates of policies those insurers first issued to your company.

But, as far as you know, there’s no pending or prior litigation or, if there is, your company reported it to a current or prior insurer. So you’re not concerned. You switch insurers, lower the premium and, you think, receive very similar or better coverage.

The gap: Unfortunately, neither you, nor your broker focus on a problem: the new prior-and-pending-litigation exclusions will apply if, before policy inception, a suit or other proceeding has been filed or commenced against your company, even if no one within your company knows about it.

As it turns out, moreover, your company has been sued, but hasn’t been served, and no one within your company knows about the suit or even about a potential claim. So no one can report anything to the existing insurers so their policies apply if your company eventually is served with suit papers.

Sure enough, service finally does occur when the new policies are in force and any extended reporting period or other deadline for reporting claims under prior policies has expired. You notify the prior and new insurers promptly.

The prior insurers won’t cover the suit because, under its Claim definition, the filed, but unserved suit isn’t a Claim or, even if it is, your company failed to report the Claim by the prior policies’ reporting deadlines and, thus, can’t meet that condition to coverage.

Although the new policies define Claim in a way that requires service of suit papers or at least policyholder knowledge of a demand, the new insurer won’t cover the suit because its prior-and-pending-litigation exclusion applies when a suit is filed before policy inception, regardless of whether the policyholder knows about it. You now realize that your company has a gap in coverage.

The AmerisourceBergen case: Policyholders, AmerisourceBergen and subsidiaries, International Nephrology Network (“INN”) and ASD Healthcare (“ASD”), found themselves with a gap in just that situation, as explained in AmerisourceBergen Corp., et al v. Ace American Ins Co., Case No. 2545 EDA 2013 (Pa. Super Sept. 15, 2014).

From May 1, 2006-2007, their primary professional liability insurer was Travelers. Their excess insurer was ACE. Effective May 1, 2007, ACE became primary and remained so for three consecutive one-year terms. ACE’s policies defined “claim” as “a civil proceeding against [a policyholder] seeking monetary damages . . . commenced by the service of a complaint or similar pleading” or a “written demand against [a policyholder] for monetary damages.”

ACE’s prior-and-pending-litigation exclusion applied to any “claim”:

alleging, based on, arising out of, or attributable to any prior or pending litigation, claims, demands, arbitration, administrative or regulatory proceeding or investigation filed or commenced on or before the earlier of the effective date of this policy or the effective date of any policy issued by [ACE] of which this policy is a continuous renewal or a replacement, or alleging or derived from the same or substantially the same fact, circumstance or situation underlying or alleged therein.

Unfortunately, when the policyholders switched to ACE as primary insurer, they didn’t know that Kassie Westmoreland had filed a “whistleblower” suit against them and her former employer, drug-giant Amgen, alleging violations of the federal False Claims Act, 31 U.S.C. §§ 3729 – 3733. Her qui tam suit, on behalf of the federal government, was filed in Massachusetts federal court, but under seal as the Act requires.

Whistleblowers—frequently employees of entities doing business directly or indirectly with the government—may sue on the government’s behalf and share in any recovery, but they must file their complaint under seal, without service, and serve the complaint and a “disclosure statement” on Justice Department or, for state false claims act claims, the state Attorney General. That process assures that the government can investigate before suit is disclosed to defendants and the public at large. The government may intervene in the case to pursue or dismiss it, or may allow the whistleblower to continue the case while the government monitors. If the government needs more than 60 days to investigate, it may seek a court extension of the seal period.

An extension is what happened in Ms. Westmoreland’s case—a very long extension. Ms. Westmoreland alleged that Amgen, with INN and ASD, used a kickback scheme to induce medical providers to prescribe Aransep, a drug Amgen manufactured to treat anemia. Amgen, INN, and ASD allegedly caused providers to make false representations material to paying Medicare claims for Aransep and conspired to get Medicare to pay false claims for Aransep. But neither INN, nor ASD, nor any other policyholder knew of the suit or any allegations when they switched primary insurers, effective May 1, 2007.

The Justice Department waited until February 2009, over 2 ½ years after Ms. Westmoreland filed her complaint, to advise the policyholders that it was reviewing Ms. Westmoreland’s allegations. In that same month, the Westmoreland court permitted the government to place a redacted copy of the unserved complaint on the electronic docket.

In September 2009, during ACE’s May 1, 2009-10 policy period, the Justice Department advised the court that it was not intervening in the case at that time. On October 30, 2009, also during that policy period, fifteen states and the District of Columbia filed a multi-state complaint in intervention against the policyholders and Amgen. Then in January 2010, the policyholders finally received service of original process.

The policyholders asked ACE to pay for the defense of the suit under the policy effective May 1, 2009-10. But ACE said the claim fell within the prior-and-pending-litigation exclusion, as based on or attributable to Ms. Westmoreland’s suit filed or commenced in June 2006, before the initial ACE primary policy’s May 1, 2007 inception. ACE also claimed that the policy’s “false, deceptive or unfair business practices” exclusion applied.

The trial court granted ACE a summary judgment based on both exclusions. While the policyholders’ appeal was pending, INN agreed to pay $15 million to resolve civil liability arising from its role in the marketing of Aranesp. Amgen ultimately paid over $700 million.

The appeals court affirmed summary judgment, based on the prior-and-pending-litigation exclusion. The policyholders argued on appeal that the exclusion didn’t apply because (1) although filed in June 2006, suit wasn’t served until during the May 1, 2009-10 policy period and (2) suit was filed after ACE’s one-year excess policy became effective on May 1, 2006. On the latter point, the policyholders stressed wording limiting the exclusion to when a prior or pending suit existed before “the earlier of the effective date of [the May 1, 2009-10] policy or the effective date of any policy issued by [ACE] of which [the May 1, 2009-10] policy is a continuous renewal or a replacement . . . .” According to them, ACE’s primary policy effective May 1, 2009-10 was a “continuous renewal or a replacement” of ACE’s excess policy effective May 1, 2006-07.

The appeals court rejected the policyholders’ arguments. It explained that the exclusion applied if suit was “filed or commenced” before the initial ACE primary policy’s May 1, 2007 inception, regardless of when service occurred.

And it explained that “[t]he 2009-10 primary coverage policy is a ‘continuous renewal’ of the 2007-08 and 2008-09 primary coverage policies.” But because the 2009-10 policy was primary, it wasn’t a “renewal” of ACE’s 2006-07 excess policy. Nor did it replace that excess policy. “The only policy that ‘replaced’ the 2006-07 [ACE excess policy] was the 2007-08 [ACE primary] policy.” Quoting definitions of “replace” and “renew” from Webster’s dictionary, the court explained that it “construe[d] ‘replacement policy’ to mean a ‘policy used instead of another policy’ and ‘continuous renewal policy’ to mean ‘a policy that is used again for consecutive policy periods’”.

The appeals court didn’t address the “false, deceptive or unfair business practices” exclusion.

Solutions for the gap: Perhaps if ACE matched the prior-and-pending date in the Travelers policy it replaced—a date presumably no later than the Travelers’ policy’s May 1, 2006 inception date—the policyholders wouldn’t have had a gap. But that would have been only because of the happenstance that Ms. Westmoreland’s sealed suit was filed in early June 2006. Having the new insurer match the prior insurer’s prior-and-pending date, thus, isn’t an adequate solution for the policyholder.

We suspect most underwriters wouldn’t like that solution either. That would be especially so if there’s a prior suit or other claim that could be followed up with “related” claims. Why would any underwriter want to risk having to pick up later “related” claims?

In commenting on the AmerisourceBergen case in his D&O Diary blog, Kevin LaCroix suggests amending the exclusion so it doesn’t “apply to False Claims Act complaints that were filed but not served prior to the effective date of the policy,” but then noted this would leave policyholders with other gaps because “there may be other types of lawsuits, beyond just False Claims Act claims,” where there’s delay between filing and service of suit. No doubt!

A better solution is limiting the prior-and-pending litigation exclusion to circumstances where the policyholder has knowledge of the pre-policy period suit or proceeding. In a recent post on the Professional Liability Underwriting Society blog, Fred Fisher, an attorney and president of Fisher Consulting Group, suggests an approach generally like this.

Kevin LaCroix also suggests that the “exclusion is meant to address separate litigation, not the lawsuit for which coverage is sought,” and the scenario in AmerisourceBergen “just isn’t the sort of situation to which the prior and pending litigation exclusion was meant to apply.”

In fact, if a claims-made insurer doesn’t want to cover a suit filed before its policy period, it ordinarily wouldn’t need to do so through any exclusion. Claims-made policies condition coverage upon a Claim first made during the policy period or an extended reporting period. When a suit is filed before the policy period, it ordinarily would fall outside of the policy’s insuring agreement and, thus, wouldn’t be covered. Although Ms. Westmoreland’s suit was filed before inception of ACE’s primary policy, it didn’t qualify as a claim made before policy inception because a claim, as defined, required service. So ACE couldn’t argue that her suit was outside coverage as a claim made before policy inception.

The more usual scenario for the prior-and-pending-litigation exclusion is found in HR Acquisition I Corp. v, Twin City Fire Ins. Co., 547 F.3d 1309 (11th Cir. 2008), relied on by the AmerisourceBergen court. In HR Acquisition, the pre-policy period litigation was a complaint under the federal False Claims Act filed under seal and unserved, alleging fraudulent Medicare claims. But the policyholder wasn’t seeking coverage for the False Claims Act suit; it sought coverage for a subsequent, shareholder derivative suit based on the same conduct and filed during the policy period. Any Loss from the derivative suit was excluded under the policy’s prior-and-pending litigation exclusion, as Loss based upon, arising from, or in any way related to a suit or other proceeding against an Insured which was pending or existed prior to the policy inception date, or the same or substantially the same facts, circumstances, or allegation as are the basis for such suit or proceeding.

Based on what’s in the appeals court’s opinion in AmerisourceBergen, it doesn’t appear that the policyholders argued that ACE’s prior-and-pending litigation exclusion was limited to circumstances, as in HR Acquisition, where the suit filed during the policy period was separate from the suit filed before then. That may have been because of the wording of the exclusion or also because, within the ACE policy period, multiple states had filed a consolidated complaint in intervention and even Ms. Westmoreland was on her fourth amended complaint.

Kevin also suggests that “the best way to avoid [the] problem [in AmerisourceBergen] would be to line up the language between the prior and pending litigation exclusion and the definition of claim, so that both require service of process.”

In that regard, the following prior-and-pending-litigation exclusion appears along those lines and also consistent with what Kevin suggests as the exclusion’s purpose—namely, as limited to a policy-period claim that’s related to a different pre-policy period claim:

The Insurer shall not be liable under this Coverage Part to pay any Loss on account of, and shall not be obligated to defend, any Claim made against any Insured: . . . Based upon, arising out of, or in any way involving any Claim against any Insured which was pending on or existed prior to the respective Pending or Prior Date stated in the Coverage Schedule of the Declarations, or the same or substantially the same fact, circumstance or Wrongful Act alleged or underlying such prior Claim . . . . (Emphasis added).

Similar to ACE’s policy in AmerisourceBergen, Claim as defined in the exclusion and elsewhere in the policy included a civil proceeding, but only if suit papers are served. Claim also includes any written demand, criminal proceeding, administrative or regulatory proceeding, certain investigations, and certain ADR proceedings—but only if the Insured is served with or otherwise receives the documents showing the matter was initiated.

By referring to a “Claim”—defined as a suit or the like with process or other notice—based upon, arising out of, or involving a Claim, later referred as a “prior Claim,” the exclusion necessarily contemplates two different Claims—the one for which coverage is suit and the one that triggers the exclusion.

Unlike ACE’s prior-and-pending-litigation exclusion in AmerisourceBergen, moreover, the exclusion quoted above also incorporates the policy’s Claim definition—requiring service or the Insured’s receipt of similar Claim documents—in referring to a Claim pending on or existing prior to “Pending or Prior Date”. So a policy period Claim based on, arising out of, or involving a pre-policy period filed, but unserved complaint, such as Ms. Westmoreland’s False Claims Act complaint, wouldn’t fall within the prior-and-pending-litigation exclusion. Her filed-but-unserved complaint isn’t a “Claim.” With an exclusion written like the one quoted above, the policy period derivative suit in HR Acquisition also wouldn’t have been excluded as a result of a pre-policy period False Claims Act suit that no policyholder knew about. The quoted exclusion, thus, may be the best solution for the gap.

Problems for those subject to false claims act suits: Besides the federal False Claims Act, at least 30 states and the District of Columbia have a version of a false claims act, authorizing claims by or for the government against government fraudsters, though proof of “reckless disregard” will suffice.

Policyholders subject to “whistleblower” suits include those doing business with the federal or any state government, or those doing business with those direct government contractors. Health care providers receiving payments under Medicare, Medicaid, or other government insurance programs have been frequent targets.

So have pharmaceutical companies, such as Amgen in the Westmoreland case, because an Amgen-manufactured drug, Aransep, was purchased under government insurance programs. Policyholder, INN, claimed to be a group purchasing organization for medical practice groups. While ASD, was a wholesale drug distributor.

Others targeted by false claims act suits include contractors and subcontractors for state and federally funded construction projects, educational institutions receiving student loan funds such as the University of Phoenix, financial institutions, and defense contractors. It was rampant fraud by defense contractors supplying military goods to the Union Army during the Civil War that lead Congress in 1863 to enact the federal False Claims Act.

Although the “gap” problem in this post isn’t limited to policyholders subject to “whistleblower” suits, they may be subject to a greater “gap” risk, because of the unique procedural requirements for those suits. In some matters, presumably those that are more complex, such as Westmoreland, the complaint may be sealed and, thus, unknown to the policyholder for a year, two years, or even more.

Moral of the story: whether susceptible to false claims act suits or not, mind the pending-and-prior litigation gap when switching D&O, professional liability, and other claims-made policies.

Tags: claims made, professional liability insurance, E&O, management liability, directors and officers liability insurance, D&O, EPL, fiduciary liability, prior and pending litigation exclusion, definition of claim, coverage gap, Pennsylvania, False Claims Act, qui tam

by Christopher Graham and Joseph Kelly

George Herbert Walker Bush. James Baker. John Major. Frank Carlucci. These are a few of the political figures reportedly associated with the global private equity firm known as the Carlyle Group.

Carlyle even has been in the movies. Michael Moore’s Fahrenheit 9/11 claimed that Carlyle was in essence one of the United States’ largest defense contractors, while also having an association with the Bush family and taking investments from Bin Laden family.

Today’s post isn’t movie worthy. But it’s at least blog worthy.

Back in 2006, the Carlyle Group, like other private equity companies, set up a company to invest in residential mortgage-backed securities. It seemed like a good idea at the time, right?

The shares of the company, known as Carlyle Capital Corp., were sold in private placements and then in public offerings and public trading. But, as you know—unless you’ve been living under a rock—the market for those investments collapsed in 2008. Carlyle Capital then bit the dust. And its investors, shareholders, and liquidator sued various “Carlyle” limited liability companies involved with Carlyle Capital, including one working under an investment management contract.

The LLCs naturally had professional liability insurance, including primary coverage and multiple tiers of excess coverage.

The LLCs bargained for a broad definition of Professional Services Claim and Professional Services so they’d have the broadest professional liability insurance coverage.

Professional Services included “the giving of financial, economic or investment advice regarding [a wide-range of] investments . . . ,” “the rendering or failure to render investment management services . . . ,” “the organization or formation of, the purchase or sale or offer or solicitation or for purchase or sale of any interest(s) in, the calling of committed capital to, a Fund or prospective Fund,” and “the providing of advisory, consulting, management, financial or legal advice or other services for, or the rendering of any advice to, or with respect to an Organization or Fund . . . or a Portfolio Entity . . . .”

But Carlyle’s professional liability insurers didn’t want anything to do with Carlyle Capital. Maybe they saw the train wreck coming? Maybe they didn’t? But for whatever reason, Carlyle Capital wasn’t an Insured under the professional liability policy for the Carlyle LLCs. And the LLCs’ policy also provided that “the Insurer shall not be liable to make any payment for Loss in connection with any Professional Services Claim arising from Professional Services provided to the Carlyle Capital Corp.” The exclusion thus incorporated the policy’s broad Professional Services Claim and Professional Services definitions so the Carlyle Capital exclusion was correspondingly broad.

The policy wasn’t a duty-to-defend policy. But Defense Costs were included in the Loss definition. ‘ The Carlyle LLCs demanded that the insurers advance Defense Costs for the suits relating to Carlyle Capital. The insurers said, “No.” So the LLCs sued. The insurers moved to dismiss. Who wins?

“The insurers,” said the court in Carlyle Investment Mgmt. LLC, et al v. ACE American Ins. Co., et al, Case No. 2013 CA 00319 B (D.C. Sup. Ct. May 15, 2014. The insurers had no duty to advance the Carlyle LLCs’ Defense Costs given that the Professional Services exclusion targeted Claims involving Professional Services provided to Carlyle Capital.

As the court stated, the District of Columbia’s “eight corners rule”—requiring comparison of the 4-corners of the underlying complaint to the 4-corners of the insurance contract—controls whether the insurers must advance Defense Costs, just as it controls when the policy includes a duty-to-defend. Applying that rule, the court explained:

Each claim in each complaint arises from the provision of Professional Services to [Carlyle Capital], whether it relates to the alleged false marketing of the shares to private investors . . . , the alleged failure to make required disclosures to purchasers of publicly traded shares . . . , [one LLC’s] alleged mismanagement of [Carlyle Capital] under [a management contract] . . . , the alleged misrepresentation or failure to warn investors and failure to take appropriate actions to maintain adequate liquidity when the market was showing signs of collapse and [Carlyle Capital] was over-leveraged . . . , or the operation of [Carlyle Capital] with divided loyalties by acting as ‘de facto directors’ or ‘shadow directors,’ allegedly for the benefit of other Carlyle interests and to the detriment of [Carlyle Capital] and its outside shareholders . . . .

Further: “To the extent that these claims – or some of them – would be classified as ‘management-liability claims’ in the insurance industry generally or in some other insurance contract, in this contract they are Professional Services Claims arising from Professional Services provided to [Carlyle Capital].”

The LLCs argued that “the Exclusion is narrower than the coverage and was intended to exclude only claims arising from professional services in the nature of those provided by lawyers and accountants (‘E&O’ claims), not ‘management-liability claims,’ such as those alleging acts, errors, or omissions in corporate governance, often referred to as ‘directors and officers claims’ . . . .”

But as the court stated, “Whatever might be true in the insurance industry generally, in this insurance contract, ‘Loss in connection with any Professional Services Claim arising from Professional Services provided to Carlyle Capital Corp.’ was expressly excluded from coverage.”

Several officers and directors of the LLCs also were directors of Carlyle Capital, which reportedly had its own D&O policy. No word on how those D&O carriers fared—but we suspect not well.

Moral of the story: If Carlyle wanted the terms, Professional Services Claims and Professional Services, to have narrower meanings in the exclusions it should have asked for the policies to be written another way or tried other carriers. Some courts have deemed undefined terms to have broader meanings when used in coverage grants and narrower meanings when used in exclusions. But in Carlyle’s policy the terms in the coverage grant and exclusions not only were defined, but defined the same way. A policyholder doesn’t get to pick and choose when contractually defined terms apply to a particular claim—even if the policyholder is part of the Carlyle Group!

Tags: professional liability insurance, errors and omissions insurance, E&O, private equity, advancement, eight corners rule, contractually defined terms, professional services exclusion, District of Columbia, management liability

by Christopher Graham and Joseph Kelly

Whether multiple Claims are based upon or arise out of the same or related Wrongful Acts is a recurring issue in the D&O and professional liability insurance world. The answer often determines: (1) whether a Claim made after a Policy Period nevertheless will be deemed made during that Policy Period, as is required for coverage under claims-made policies; (2) whether a Claim made during a Policy Period will be deemed made before that Policy Period, so that coverage is inapplicable; and (3) how many retentions and policy limits.

Glasscoff v. One Beacon Midwest Ins. Co., et al., Case No. 1:13-cv-01013-DAB (S.D. N.Y. May 8, 2014)], available on Pacer, is yet another case involving the multiple Claim/related Wrongful Acts issue.

In Glasgow, the FDIC sent a demand letter to a failed bank’s directors, alleging breaches of duties relating to their role in the bank’s failure, including failure to supervise, manage, and conduct the bank’s business and affairs to ensure compliance with the law and regulatory authorities. That demand letter was a Claim made during the Policy Period of the bank’s D&O policy.

After the Policy Period, Investors sued the directors based on control person and indirect liability under Arizona securities laws, for the bank president’s actions in inducing Investors to invest with two bank customers.

The bank directors argued that the Investors’ Claim and FDIC Claim should be treated as a single Claim deemed to have been made during the Policy Period, when the FDIC Claim was first made. But the Court disagreed, granting the D&O insurer’s motion for judgment on the pleadings.

The Investors’ Claim couldn’t be considered a Claim made during the Policy Period, said the Court. According to the Court, the Investors’ and FDIC’s Claims weren’t “based upon” and didn’t “aris[e] out of the same Wrongful Act or Interrelated Wrongful Acts . . .”–which were prerequisites for treating the post-Policy Period Investors’ Claim as a Claim made during the Policy Period. “Interrelated Wrongful Acts” meant “Wrongful Acts which have as a common nexus any fact, circumstance, situation, event, transaction or series of related facts, circumstances, situations, events or transactions.” The connection between the Wrongful Acts alleged in the two Claims was too “tenuous.” The directors didn’t show any specific common fact, event, or circumstance. That the two Claims “ostensibly relate to [the directors’] oversight of [the bank president]” was insufficient.

Tags: D&O, New York, directors and officers liability insurance, related Wrongful Acts, Interrelated Wrongful Acts, professional liability insurance, management liability insurance, Claim

by Christopher Graham and Joseph Kelly

Introduction: We read lots of cases about professional liability and D&O insurance. We’ve handled quite a few of them as well. Many involve policyholders losing coverage because they fail to take a simple step–namely, promptly tell their insurer about a claim or circumstance that may lead to a claim. Sometimes, as in the case discussed today, the problem arises when switching insurers, when the policyholder doesn’t report a circumstance to it’s existing insurer and fails to disclose it in an application to a new insurer.

The policyholder, as in today’s post, also may lose coverage under “prior knowledge” wording, by having a “reasonable basis to believe” that someone would bring a claim. Although there’s some conflicting decisions, the issue most often is determined based on what an objectively reasonable person would have concluded based on the facts then known, rather than what the policyholder says was its belief.

With the consequences potentially being severe, why do so many policyholders fail to report? Do they forget about their policy? Do they fail to read them? Do their brokers fail to educate them? Do they really believe a claim or circumstance is no big deal? Are they in a state of denial–hoping a circumstance will blow over and won’t result in a claim, that a claim will be dropped, that they can fix things, or that they can resolve the matter for small dollars on their own?

Some policyholders especially should know better. We had one post not long ago here where even an insurer failed to report! And today’s post is about a law firm.

Whatever the reason, failing to report can cost a policyholder big bucks. There’s really not a lot to lose by reporting. And potentially huge consequences when you don’t, as you’ll see in today’s post. Moral of the story: regardless of whether you think the matter is no big deal, report it to your insurer promptly!

One more point covered in this post: at the very end, we address the lawyers’ argument that insurer waited too long to reserve rights on a “prior knowledge” defense, another issue frequently arising in coverage litigation, usually argued as waiver and estoppel. Here the court rejected the argument, but only after deciding DC law controlled so a fairly unique Virginia statute requiring an insurer to notify a “claimant” and its counsel of the insured’s breach was inapplicable. For claims people, take heed of that statute for Virginia claims. Your duty under a liability insurance policy may be to communicate about coverage with a claimant and its counsel as well as the insured.

The story: Larry Lawyer handles medical malpractice cases. One day in 2004 a Mom and Dad ask the firm to consider bringing a medical malpractice case for their Minor Daughter. After having surgery to correct scoliosis, she became a quadriplegic. Very tragic.

Larry practices in DC. But he’ll have to sue for malpractice in Virginia. He has an associate, Lucy Lawyer, a Virginia Bar Member, who will help.

Larry’s firm files the malpractice complaint in July 2006, four days before the limitations period expires. Although required under Virginia law, the complaint doesn’t name Mom and Dad as “next friend” parties suing for Minor Daughter. That omission will become a very big problem.

Nearly three months later, in October 2006, Larry’s firm files a new complaint naming Mom and Dad as next friends. But that’s after the limitations period has expired.

About four months later, in February 2007, the court dismisses the first complaint because it didn’t include Mom and Dad as Minor’s next friends.

About four months thereafter, in June 2007, the court dismisses the newer complaint, including Mom and Dad as next friends, as too late. It’s barred by the statute of limitations. Larry’s law firm meanwhile is about a month away from renewing its professional liability insurance policy.

The firm on July 18, 2007 applies to Amy Underwriter’s company, which would be a new insurer for the firm. As typical, Amy’s application asks Larry’s firm to disclose what problems may be brewing. Although Larry knows the court dismissed Minor Daughter’s medical malpractice claims as untimely, Larry answers “no” to the following application question:

Having inquired of all partners, officers, owners and employed lawyers, are there any circumstances which may result in a claim being made against the firm, its predecessors or any current or past partner, officer, owner or the employed lawyer of the firm?

And neither Larry, nor anyone else reports the dismissal to the firm’s existing professional liability insurer as a circumstance that may result in a claim. See where this is going? Big hint: Nowhere good for Larry or his firm!

So with the application looking clean, Amy Underwriter binds coverage for Larry’s firm effective July 24, 2007 to July 24, 2008.

Ten days after the effective date, the court issues it’s order memorializing its June decision dismissing Mom and Dad’s next friend complaint as time-barred. Larry’s firm appeals.

Larry’s Firm gets through the whole policy year without Minor Daughter suing. The appeal of the dismissal of the malpractice claim is still pending. Larry’s firm still hasn’t reported a circumstance to Amy. Amy Underwriter meanwhile renews the policy for another year, effective July 24, 2008.

As is typical for professional liability policies, the insuring agreement conditions coverage on the absence of prior knowledge of a potential claim. Here’s the wording:

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as Damages for Claims first made against the Insured and reported to the Company during the Policy Period or Extended Reporting period, as applicable, arising out of any negligent act, error, omission or Personal Injury in the rendering of or failure to render Professional Services for others by an Insured covered under this policy. Provided that such Professional Services or Personal Injury happen:

A. during the Policy Period; or

B. prior to the Policy Period provided that prior to the effective date of the first Lawyers Professional Liability Insurance Policy issued by this Company to the Named Insured or Predecessor in Business, and continuously renewed and maintained in effect to the inception of this policy period:

…

2.. The Named Insured, any partner, shareholder, employee, or where appropriate the Named Insured’s management committee or any member thereof, had no reasonable basis to believe that the Insured had breached a professional duty or to Reasonably Foresee that a Claim would be made against the Insured…

“Reasonably Foresee” was defined as, among other things: “incidents or circumstances that involve a particular person or entity which an Insured knew might result in a Claim or suit prior to the effective date of the first policy issued by the Company to the Named Insured, and which was not disclosed to the Company.”

Larry’s Firm in May 2009 non-suited Mom and Dad’s remaining claims not dismissed earlier.

With the policy expiring July 24, 2009, Larry’s firm finally reports Minor Daughter’s potential claim to Amy’s company. Connie Claims by letter generally reserves rights and appoints defense counsel to investigate. This is over two years after dismissal of Minor Daughter’s medical malpractice suit as untimely. Larry later will claim he never received the letter.

The Virginia Supreme Court in December 2009 finally disposes of Minor Daughter’s claims as untimely. Mom and Dad then retain new counsel who in January 2011 tells Larry’s firm he’s taking over.

A year later, there’s still no suit against Larry’s firm or any of it’s lawyers. So good news for everyone. But the bad news: there’s still time for Minor Child to sue.

About this time, January 2012, Connie Claims supplements her general reservation of rights letter to Larry’s firm, stating her company “reserves its rights to deny coverage for [a potential legal malpractice suit] to the extent that an insured had a reasonable basis to believe that a professional duty had been breached or to ‘reasonably foresee’ that a ‘claim’ would be made against the insured before [the firm’s] policy incepted on July 24, 2007.”

Then two months later, it finally happens: Minor Daughter, no longer a minor, sues Larry’s firm and the lawyers for legal malpractice in allegedly blowing the limitations period for daughter’s medical malpractice claim. Connie’s company defends them, subject to a reservation of rights.

But it also sues the lawyers for a declaration that there’s no duty to defend or coverage otherwise, joining Minor Child as a party. So the lawyers now have two big problems: Minor daughter’s legal malpractice suit and coverage litigation they have to pay to defend and which may mean they have no insurance for Minor Daughter’s serious legal malpractice suit.

Connie’s company claims the firm and lawyers had a “reasonable basis to believe” or to “Reasonably Foresee” that Minor Daughter would bring a claim as early as February 2007, when the court dismissed the first malpractice complaint for failing to include Mom and Dad, and no later than June 2007, when the court dismissed the second complaint, including Mom and Dad, as time-barred.

Larry’s firm argues that there was no reason to believe they breached a professional duty regarding Minor Child because the error leading to dismissal was merely a “misnomer;” they also couldn’t reasonably have foreseen Minor Child’s malpractice claim before Connie’s company’s policy inception on July 24, 2007.

Then more bad news: a jury awards Minor Child $4 million on her malpractice claims against the lawyers. The court reduces the award to $1.75 million. But if Connie’s company wins and the judgment stands, Larry’s firm will be stuck paying Minor Child.

The prior knowledge decision: In Chicago Insurance Co. v. Paulson & Nace, PLLC, et al, Case No. 12-2068 (ABJ) (D. D.C. April 10, 2014), a case generally along these lines, a court granted a summary judgment for the insurer on a prior knowledge defense and against the lawyers and Minor Child.

The court found that the lawyers “had a reasonable basis to believe that they had breached a professional duty to [Minor Defendant] no later than the date of the Virginia court’s ruling on June 18, 2007 . . . [,when the court dismissed the second complaint.]” It explained that resolving the issue “is an objective inquiry that asks what a reasonable attorney would have done in the same circumstances.”

Then it went on:

[T]he [lawyers] filed a medical malpractice complaint on behalf of [Minor Child] in 2006 that did not comport with the Virginia Code requirement that a minor must sue by a “next friend.” . . . The statute of limitations on [Minor Child’s] claim expired before the attorney defendants were able to correct their mistake, and thus their error became fatal to [Minor Child’s] claims.

Further: “The [lawyers’] efforts to minimize the seriousness of their naming mistake are unavailing: not only did this last-minute ‘misnomer’ cost [Minor Child] the right to bring her medical malpractice claim in court, but also it led a Virginia jury to find the [lawyers] liable for legal malpractice.”

The court’s decision was based on wording providing that the Named Insured and certain related parties had “no reasonable basis to believe that the Insured had breached a professional duty . . . .” It was not based on the phrase, “Reasonably Foresee that a Claim would be made against the Insured.” The court explained that “whether the [lawyers] ‘reasonably foresaw’ [Minor Child’s] claim appears to be a subjective inquiry, as it looks to ‘incidents or circumstances … which an Insured knew might result in a Claim or suit.'” “But because the policy is worded in the alternative, requiring that an insured have ‘no reasonable basis to believe that [it] had breached a professional duty or to Reasonably Foresee’ a future claim, . . . , what the [lawyers] subjectively knew at the inception of the [policy] does not control when, objectively, they should have recognized the professional error.”

The court also rejected lawyers’ argument that insurer couldn’t win without expert testimony, explaining “this question is not ‘so distinctly related to some science, profession, or occupation as to be beyond the ken of the average layperson,” which is when expert testimony is a must under DC law.

The waiver and estoppel decision: The court initially decided that it didn’t need to address whether the insurer lost the ability to raise its prior knowledge defense for failing to comply with a “requirement under Virginia law that, when a liability insurer ‘discovers a breach of the terms or conditions of the insurance contract by the insured, the insurer shall notify the claimant or the claimant’s counsel of the breach … within forty-five days’ of either the insurer’s discovery of the breach or of the claimant’s claim. Va. Code § 38.2-2226 (2013).” DC rather than Virginia law applied in part because that’s where the law firm was located and policy issued. This statute isn’t what’s typically found in the various states. So claims people, beware if you have liability claims in Virginia.

The court then rejected the lawyers’ argument that the insurer waived or was estopped from raising the prior knowledge defense because of appointing counsel for the lawyers without specifically raising the prior knowledge defense earlier. According to the court: “It is undisputed that [insurer] could have discovered the facts underlying its ‘prior knowledge’ defense in March of 2010 [(just after the Virginia Supreme Court affirmed dismissal of Minor Child’s medical malpractice claims)], but it did not do so until November 2011 . . . , and did not reserve its rights with respect to that defense until January 13, 2012.”

“But D.C. law required [insurer] to reserve its rights before ‘undertaking the defense’ of the [lawyers] ‘against a litigious assertion of an unprotected liability.'” And “Given that [Minor Child] did not file her legal malpractice claim until March 13, 2012, exactly three months after [insurer] reserved its ‘prior knowledge’ defense, the timing of [insurer’s] reservation of rights notice met this requirement of D.C. law.”

The court also rejected applying waiver and estoppel because it found the lawyers’ suffered no prejudice from the delay in the insurer raising “prior knowledge.” According to the court:

[T]he twenty-two months that elapsed between the earliest date on which [insurer] could have become aware of its prior knowledge defense (March 8, 2010) and the date on which it issued its reservation of rights (January 13, 2012) did not prejudice [lawyers] because [insurer] had taken no actions that “hampered or harmed” the [lawyers’] “ability to defend [themselves].”

The court found no evidence supporting lawyers’ argument that they could have notified their prior insurer had this insurer raise “prior knowledge” sooner.

Conclusion: This was a terrible result for the lawyers. Big judgment. No coverage. No matter what they may have thought when the court dismissed Minor Child’s malpractice suit, they should have reported a circumstance or potential claim to their existing carrier before the policy term ended and switching carriers. Then when claim later arose, that insurer presumably would have stepped up. They also should have disclosed the reported circumstance to their new insurer in applying for coverage. Even if you think a court got it wrong or you can fix things, report. Otherwise you may wind up like these policyholders. You pay a good premium to make sure you have protection. Do what you need to do to assure it responds when you need it.

Tags: District of Columbia, professional liability, legal malpractice, lawyers malpractice, prior knowledge, notice of circumstance, notice of potential claim, “no reasonable basis to believe,” objective standard, subjective standard, waiver, estoppel

by Christopher Graham and Joseph Kelly

Overview: We recently covered a case here where a bankruptcy trustee claimed a D&O policy and proceeds belonged to the bankrupt company’s estate and shouldn’t be used to pay director and officer defense fees. Today’s story, also from bankruptcy land, is about another common issue following a major financial disaster. Those who caused the harm are inundated with claims or otherwise have serious financial problems. So they seek a bankruptcy “fresh start” and get a discharge, including an order preventing suit for discharged claims. What then is the injured party’s remedy? What about the liability insurance for the claims against the discharged “wrongdoer”? What if, as here, insurer argues its policy doesn’t cover the claims, because of an insured versus insured exclusion? What if, as here, the insured is a failed bank’s officer and claimant is FDIC as the bank’s receiver? Read on, as the story is about to begin!

The Story: You underwrite management liability insurance. You bind coverage for a company. Policy is issued. And, though you’re usually much better picking winners, . . . eventually this company goes bust. There are many unhappy folks. Lots of money has been lost. And they say, “Who can we make pay?” You say, “Not good.”

Investors, creditors, a bankruptcy trustee or receiver, government agencies, and the like target the company’s directors and officers. And some of them also target a perceived pot-o-gold: the management liability insurance policy underwritten by you. Yikes!

The company’s Big Chief Muckety-muck is wiped out. He was heavily invested in the failed company. That’s all lost. Lost job. Lost salary. Lost benefits. Claims galore. Solution? Bankruptcy! Discharge! No more liability.

You say, “Great. At least we don’t have to pay for that guy’s defense. And at least we’re off the hook for his potential liability to others.”

Then, much to your surprise and despite the bankruptcy discharge, unhappy camper asks the bankruptcy court to allow a suit versus Mr. Chief. Unhappy camper plans to sue the rest of the company’s board and upper management too. You say, “Bad enough that camper is suing the others. Why does camper need Mr. Chief? He has no dough. What’s the point? And doesn’t Chief’s bankruptcy discharge mean camper can’t sue him?”

Silly you. Have you heard of the “empty chair”? That’s what the defense lawyers point to when they say their clients aren’t to blame for an unhappy camper’s financial disaster. They’ll say Mr. Chief is solely responsible. He hasn’t been sued; he’s not in the court room; his chair is the “empty chair”; and the others in the court room chairs aren’t responsible.

By going to bankruptcy court, camper aims to put Mr. Chief in the chair. Keeping it warm for the trial duration. To avoid the “empty chair” tactic. And . . . to tap your management liability policy. “Chief,” camper will say, “is a ‘necessary party’ under the law.”

Now for some legal mumbo-jumbo:

As a technical matter, camper seeks to (1) reopen, if necessary, Chief’s bankruptcy case under Bankruptcy Code section 350(b) and (2) modify the discharge injunction under Bankruptcy Code section 524(a) to permit camper to proceed against an available limit of liability insurance policy under Bankruptcy Code section 524(e).

Specifically, camper asks the court to modify the discharge injunction so camper can name Chief as a nominal defendant in a suit for establishing and seeking payment from the management liability insurer. The policy you underwrote is in the crosshairs!

What to do? What to do? Well, your company tries to stop camper. And Mr. Chief does too.

Your company and Chief tell the bankruptcy court: “Isn’t bankruptcy meant to provide Chief an economic ‘fresh start’?”

“That won’t happen if camper gets to sue Chief,” says your company. “The management liability policy places the duty to defend on Chief. And while our company must “advance” fees ‘incurred’ by Chief, Chief must agree to repay us if it is later established there is no coverage for those fees.” “That’s unfair to Chief,” your company says. “An unfair burden!” “Defeats the ‘fresh start’ purpose of Chief’s bankruptcy discharge.”

Of course, none of what your company argues has anything to do with your company’s additional financial hit if camper gets to sue Chief, right? It’s just about the poor Chief. . . .

The decision: So what sayeth the bankruptcy court? Well, in In the Matter of: William H. Gafford, Jr., Case No. 11-13490-WHD (N.D. Ga. Feb. 4, 2014), a case generally along those lines, the winner is “camper” aka the FDIC!

Why?

Well, first more bankruptcy law education; as explained by the court:

The filing of a bankruptcy petition prevents temporarily the litigation of prepetition claims against a debtor [(like camper’s claim)]. . . . The entry of a discharge acts as a permanent injunction against litigation for the purpose of collecting a debt from the debtor [(here. Chief)] or the debtor’s property.

Further:

“A discharge in bankruptcy does not extinguish the debt itself, but merely releases the debtor [(Chief)] from personal liability for the debt.” . . . Following the discharge, section 524(a)(2) [of the Bankruptcy Code] enjoins “actions against a debtor,” . . . , but section 524(e) “specifies that the debt still exists and can be collected from any other entity that might be liable.” . . . Therefore, a creditor may establish the debtor’s nominal liability for a claim solely for the purpose of collecting the debt from a third party, such as an insurer or guarantor

Got that: under the Bankruptcy Code, “a creditor may establish the debtor’s nominal liability for a claim solely for the purpose of collecting the debt from a third party, such as an insurer or guarantor.” So camper aka FDIC may establish Mr. Chief’s aka Mr. Gafford’s nominal liability solely for the purpose of collecting the debt from an insurer. Here, that means the management liability insurer.

Was Mr. Chief, the failed bank’s CEO, really a “necessary party” as argued by camper aka FDIC? Yes, says the court; for the same reasons given in In re Grove, 100 B.R. 417, 418 (Bankr. C.D. Ill. 1989), also involving FDIC claims against a failed bank’s directors and officers. As the Gafford court explained:

The In re Grove court held that the relief sought by the FDIC did not adversely affect the debtors’ fresh start, and that a failure to modify the [Bankruptcy Code section] 524(a) injunction to allow the FDIC to proceed against the debtors nominally would allow other defendants to point to an “empty chair” at trial for the purposes of attributing liability, thus placing the FDIC at a “tactical disadvantage” and creating the possibility that the FDIC would “lose the potential benefit of $1,000,000.00 of insurance coverage.”

Further:

In the context of the Debtor’s being a necessary party, the Court finds In re Grove both factually similar and persuasive. If the FDIC pursues this action without nominally naming Mr. Gafford, who was the Chief Executive Officer of [failed bank], as a defendant, the FDIC would be placed in the same “tactical disadvantage” as in In re Grove.

The “empty chair” defense thus was a real concern, said the Gafford court.

But if FDIC were allowed to sue Chief now, wouldn’t that jeopardize Chief’s “fresh start” from his bankruptcy discharge, as insurer argued? What about Chief’s obligation to reimburse insurer for defense costs advances under the management liability policy? Chief, would be stuck with that, right? We can’t have that, right? Defeats the purpose of the discharge in bankruptcy.

Well, this court, while being a bit more diplomatic, essentially concluded those arguments were “hooey”! According to the court, relying on In re Grove once again:

[Chief’s] fresh start will not be adversely affected by allowing the FDIC to pursue an action naming him as a nominal defendant, solely for the purposes of pursuing liability against [management liability insurer] on the Policy, because any claims against [Chief] for defense costs were discharged in bankruptcy pursuant to section 524 of the Bankruptcy Code.

Further, per the Gafford court, “The real parties in interest, from a financial perspective, would be the FDIC and the insurance company.” Quoting from In re Grove:

“While it is apparent the FDIC will benefit from a successful pursuit of the [liability] action, it must also be recognized that [the D&O insurer] stands to benefit from the defense of the [liability] action. A successful defense equates to $1,000,000.00 not having to be paid on the claim. The true and ultimate adversaries, those who have something to win or lose, are the FDIC and [the D&O insurer].”

Per the Gafford court: “The economic interests in the present case are the same as in In re Grove. In particular, [the management liability insurer] stands to gain if it is ultimately held that there is no liability in the underlying action.”

The Gafford court also found the appeals court’s reasoning in In re Jet Florida Systems, Inc., 883 F.2d 970 (11th Cir. 1989) required allowing FDIC to sue Chief. As in In re Grove, it made no difference to the Jet Florida panel that the discharged debtor company might incur defense costs if the bankruptcy court injunction prohibiting suit against debtor was lifted to allow suit against debtor solely to tap into debtor’s liability insurance. The Jet Florida panel explained:

“We can determine no effective means of determining at this stage whether the bankrupt or the insurance company will pay the cost of the litigation. To have our ruling premised on that determination would provide an incentive for the debtor to claim to assume the burden. If that simple fact barred the plaintiff from going forward on his claim, there would exist no adversarial relationship between the bankrupt and the insurer so that we could actually resolve this crucial question, because both of those parties would have an obvious interest in demonstrating that the debtor was liable for litigation costs.”

Collusion!

Also as in In re Grove, the Jet Florida panel didn’t believe that permitting suit against the discharged debtor would thwart debtor’s “fresh start.” As the panel explained:

“[T]he practical and economic realities compel the insurance company to defend the underlying action. The insurance company may be responsible pursuant to a contract with the bankrupt, in which case it is in their direct interest to defend the action.”

The management liability insurer in Gafford argued Jet Florida shouldn’t control because, unlike the policy in Jet Florida, it’s policy required the Chief to defend and included an insured-versus-insured or IVI exclusion supposedly barring coverage. On the IVI, insurer cited FDIC v Miller, No. 2:12-CV-0225-RWS (N.D.Ga. August 19, 2013), applying the exclusion to FDIC claims.

Insurer argued further “that because the underlying contract that makes up the [management liability] Policy included specific language excluding ‘Insured v. Insured’ from [insurer’s] liability in defending lawsuits, the bargained for Policy should control, which would create financial liability on [Chief], contrary to the fresh start policy of [Bankruptcy Code] section 524.”

But the Gafford court wasn’t buying any of this, explaining that insurer’s “argument relies upon the presumption that any litigation between [insurer] and [Chief] would result in the same outcome as the Miller decision [holding the IVI exclusion applied].” (Emphasis added).

Further:

[Insurer] fails to distinguish the present case from In re Jet Florida because this Court, just as the In re Jet Florida court, has no “effective means” in determining whether [Chief] or [insurer] will pay the cost of litigation. While the Miller decision [about the IVI] appears to be similar to the issue here, the underlying coverage issue is not before the Court, and the Court cannot “predict” the potential outcome of future litigation.

As a matter of fact, the Miller court’s decision applying the insured versus insured exclusion to the FDIC’s claims in that case conflicts with other court decisions about similar wording, such as Progressive Casualty Insurance Company v. FDIC, 1:12-CV-1103-RLV (N.D. Ga. Jan. 4, 2013), and has been criticized in the blogosphere here.

Additionally:

[T]his Court agrees with the reasoning in In re Jet Florida, in that the practical and economic realities compel the “insurance company” to defend the underlying action. . . . The Eleventh Circuit further reasoned in In re Jet Florida that “if there is a dispute between the bankrupt and the insurer as to the applicability of coverage, it remains in the interest of the insurer to defend the suit.” (Emphasis added).

Finally, insurer argued “that if the Court were to allow [Chief] to breach his duty to defend under the Policy, it would do so knowing that [insurer] is essentially without process or remedy.” But according to the court, insurer “had the opportunity to object to [Chief’s] discharge” and “may seek post-discharge relief by filing a motion to reopen the case and file the appropriate pleadings.”

We’re not sure what the court was suggesting here. That insurer as Chief’s potential creditor, with the right to recoup advanced defense fees, could have prevented Chief from discharging that obligation in bankruptcy? Or that insurer after discharge might reopen Chief’s bankruptcy case to recoup fees advanced for Chief’s defense? Would that relief undermine Chief’s “fresh start”? The opinion doesn’t get into any of these issues or otherwise provide sufficient explanation. But as a practical matter, it doesn’t appear there would be much hope for insurer to recoup any fees.

Comments: It’s not unusual for a claimant to seek bankruptcy court permission to sue a party, but only for tapping that party’s insurance. D&O policies often state explicitly that “The bankruptcy or insolvency of an Insured Person shall not relieve the Insurer of its obligations under the Policy.” Sometimes there’s only a single target defendant. So there’s no issue about “empty chair.” Just a need to allow suit so claimant may prove a claim after defendant’s discharge in bankruptcy and potentially satisfy it, but only via insurance. The insurer isn’t off the hook simply because the insured is discharged from personal liability.

What was unusual here is a policy placing a defense obligation on Chief and allowing insurer to recoup advanced fees from Chief. That was insurer’s hook for arguing that allowing FDIC’s suit would deprive Chief of the “fresh start” from bankruptcy discharge. But in this court’s view, if FDIC’s suit against Chief were allowed, the real battle would be between FDIC and insurer, with Chief having no material skin in the game. Chief would have no personal liability to FDIC for the claim. Only the D&O insurance was in play. Nor could the D&O insurer recoup fees from Chief, given Chief’s prior discharge.

Tags: Georgia, management liability policy, D&O insurance policy, directors and officers liability insurance, bankers professional liability policy, professional liability, FDIC, failed bank, director, bankruptcy, discharge, insured versus insured exclusion, insured vs. insured exclusion, IvI exclusion, section 524, real party in interest, necessary party, discharge injunction