The Intersection of the ACA, ERISA Litigation and Insurance Coverage
For those of you who have a professional or personal interest in the ACA, litigation arising from it and insurance coverage for litigation it is likely to spawn, I am speaking on a webinar this afternoon that covers those subjects. If you are interested in listening in (and/or amusing yourself by asking complex questions that will stump the panelists, which is how I amuse myself when I am in the audience), the webinar, hosted by Strafford, is “Liability Insurance for ERISA Plan Sponsors: Maximizing Coverage Under Employee Benefits and Fiduciary Liability Policies - Securing Coverage for Civil Damages and Tax Assessments Arising From the ACA and Other Claims," and its at 1 pm this afternoon. You can register here.
Sorry for the short notice, but I have been tied up with depositions and with trying to finish yesterday's somewhat complex post on the intersection between Tibble and Shakespeare.
Notes on DRI's Upcoming Data Breach & Privacy Law Conference
It’s not possible to ignore data breach and cyber security issues anymore, even if you want to and even if, as a lawyer, you think it is outside your practice area and instead the responsibility of some other group of lawyers in your firm. I have written before on this blog about the significant importance of these issues to benefit plans and their vendors, as they control more personal financial and identifying data than almost any other entities operating in the United States economy. At this point, you cannot even open up the Wall Street Journal without coming across news of a major data breach or related legislative or industry activity. A couple of years ago I spoke nationally to a major financial and insurance company on the risks and the nature of insurance coverage for them, including under cyber policies (you can find my slides here), and things have simply ratcheted up exponentially since then.
Colleagues of mine at the DRI are hosting DRI's inaugural Data Breach & Privacy Law conference in Chicago on Sept. 11-12, 2014. The conference will cover everything from the Anatomy of a Cyber Attack to the Theories of Civil Liability for a Data Security Breach to the Insurance Coverage Issues Implicated in Data Breach Claims. You can find the brochure and registration materials here.
Of interest to me is the focus on insurance coverage issues, which was also the focus of my earlier talk on the issue of data breaches. It’s interesting to me because, as some of you may know from previous posts and articles or from hearing me speak, my view of insurance coverage law is animated by my more than quarter century experience working with it, going back to the tail end (that’s an insurance coverage pun, get it?) of the asbestos coverage wars and the start up of the environmental coverage wars. When you look back over the history of the field, coverage lawyers – especially on the policyholder side - were able to build huge practices in the ‘80s and ‘90s on the back of those types of big ticket exposures, and many have spent the decades since looking for the next big ticket coverage disputes that could sustain such practices, generally without finding anything comparable. Do you remember Y2K? Policyholder-side coverage lawyers were bulking up – at least in their marketing – in anticipation of a big boom in losses and related coverage disputes, but that boom went bust almost as soon as the calendar flipped. Some, incidentally, who had a long enough history in the industry anticipated that, as I can remember Jerry Oshinksy, who built one of the largest policyholder side practices of the asbestos/environmental coverage era, commenting in 1999 that Y2K would not generate the work driven by that earlier era. Data breach, though, may finally be that new area of liability that generates large amounts of coverage work that coverage lawyers have been waiting for since the Wellington Agreement came into being, the California Coordinated Asbestos Coverage trial ended, and Superfund prosecution wound down, given the scale of the breaches we now see on a regular basis.
How to Trigger Insurance Coverage for an ERISA Claim
Well, how can I not comment on this, given the focus of both this blog and my practice? The Second Circuit was just presented with the question of whether an insurer has to provide a defense to a company and its officer, under the employee benefits liability portion of a policy, for an ERISA claim related to a retaliatory discharge/reclassification claim brought by an employee of the insured. The employee claimed, in essence, that she had been retaliated against for complaining of sexual harassment.
Now, coverage by insurers for complaints alleging sexual harassment or similar claims under standard CGL policies have their own complicated backstory, revolving around the question of whether, no matter what is actually alleged in the complaint by the employee, the acts in question are intentional, dishonest or otherwise harmful in a manner that precludes coverage. Some of this history goes back to at least the 1980s, and, having been involved with a client’s rollout of the coverage, it played a role to some degree in the creation and eventual acceptance of EPLI – or employment practices liability insurance – coverage.
The insurer here took the same tack with regard to the ERISA claim at issue, and, given the history noted above and the nature of the claim, understandably so. The issue, though, as the Second Circuit found, is that the ERISA claim itself did not require any type of intentional misconduct, which is basically true across the board with most types of ERISA claims, and held that the insurer therefore could not deny coverage for the ERISA claim based on an exclusion for dishonest or malicious acts. The Court found that the ERISA claim could, in essence, simply be a claim for negligent conduct – at least as pled in the complaint – and thus the insurer could not deny a defense to the insured based on such an exclusion, which would not reach a claim of negligence.
There are a number of lessons here for both insured companies (and their officers) who are sued in ERISA cases and for their insurers. First, don’t assume that principles related to coverage of employment related claims will transfer to an ERISA claim; they may very well not do so. Second, you have to pay close attention to the true nature of an ERISA claim (including its key legal elements) before deciding whether or not there is coverage, and not simply to the surrounding factual allegations relating to the insured’s conduct (which in most harassment and similar claims are usually pretty egregious, at least as alleged by the plaintiff).
Anyway, here is the decision, which is Euchner-USA, Inc. v. Hartford Casualty Insurance Company, and here is an article providing a nice summary, for those of you who don’t want to read the full decision.
Reinsurance, Arbitrations and the Ever Increasing Authority of the Arbitrator
There has been a literal rush of interesting decisions out of the First Circuit and the Massachusetts District Court in the last few weeks, and I am going to try to catch up and comment on them over the next few days. One that jumped out at me, for various reasons, is a decision on whether an arbitrator or instead a federal court decides the collateral estoppel effect of a preceding reinsurance arbitration between an insurer and its reinsurers. In Employers Ins. Co. of Wausau v. OneBeacon American Insurance, the First Circuit concluded that it was an issue for the arbitrator to decide, and not for the court. There were several things that jumped out at me about this decision that made me want to note it and comment on it.
First off, I tried a reinsurance case in the Massachusetts state court’s business session years ago, which was fascinating, as much as anything, for the fact that it was in court at all. As the Employers Ins. opinion reflects, reinsurance disputes are almost always subject to arbitration. In my case, the dispute concerned money owed under a missing reinsurance contract from the 1960s, and no one could establish either its existence or, if it existed, its relevant terms, including whether it required arbitration. As a result, the case became one of the rare reinsurance cases to be tried, requiring first a ruling over the existence and terms of the reinsurance certificate and then one over the amount owed under it. The opinion in Employers Ins. really is, in some ways, about the vacuum-sealed nature of the reinsurance industry and disputes within it, in the sense of they are always, with extraordinarily rare exceptions, kept locked up tight within a system of arbitrations. It is nearly a purely private dispute resolution mechanism that controls that area of business, and the opinion in Employers Ins. reinforces that point, by the degree to which it emphasizes that the plaintiff could not avoid the arbitration system and move its dispute into court.
Second, the case reflects the simple fact that once a business commits to an arbitration regime, they are not getting out of it. The standards for attacking an arbitration ruling in federal court make it nearly impossible to overturn a ruling and, as the Employers Ins. decision makes clear, even the most creative attempts to get around arbitrating a dispute after a company has agreed to that path are likely to be rejected out of hand by the courts. When it comes to arbitration, companies need to understand that the old rule of in for a dime, in for a dollar governs things: if you agree to an arbitration approach, you are stuck with it and are very unlikely to ever be able to get out from under that approach.
Insurance Coverage for Disgorgement or other Equitable Remedies
You say disgorgement, I say damages. Sorry, I couldn’t, try as I might, make that fit into the old lyric “you say tomato, I say tomahto, lets call the whole thing off,” but the sentiment fits. In this recent Sixth Circuit decision, reported on here, the Court addressed the question of whether certain employment related damages could be considered disgorgement by the employer, which would not be covered under the employer’s insurance policy because it excluded disgorgement, or should instead be treated as traditional damages, which are covered. The Court concluded that the sums that were awarded could more fairly be described as damages owed to the claimants, and not as disgorgement of ill-gotten gains, and were therefore covered.
Its an interesting decision that raises two issues that companies that defend against employment related claims should always be aware of. First, that there is always room within their insurance policies to look for potential coverage, particularly given the growth of employment practices liability insurance over the past decade and more. Second, that the question of what constitutes disgorgement, or other equitable remedies which are also often not covered, can be a tricky question, and is not always obvious on first review. All sorts of policies limit coverage to awards that constitute damages as that term is understood in the law, often without defining the term, while excluding or otherwise precluding coverage for disgorgement or other types of losses that fall within the realm of equitable relief. It is important to make a thorough and accurate analysis of whether the sums at issue are properly construed as damages or instead as equitable relief in this realm, both for insurers deciding whether to provide coverage and for insureds electing whether to challenge a denial of coverage.
Cyber Insurance for Cyber Risks
I have maintained a healthy interest in cybercrimes, cyber risks and related liability exposures, for at least two reasons central to the topics of this blog. The first is that, other than credit card companies, probably no one holds more protected personal information than the entities involved with ERISA plans, from health insurers to mutual fund companies to plan sponsors to record keepers. The second is that, from an insurance coverage perspective, developments in this area echo – more than vaguely even if less than resoundingly – the impact on insureds and on the insurance industry of the expansion of environmental liabilities approximately thirty years ago. Then, as now, you had the sudden creation of new potential liabilities – in that case, environmental exposures – that were not foreseen and taken into account by insurers in setting premiums, followed, in short order, by two developments: first, litigation over whether the exposures should be covered under previously issued policies that were not necessarily underwritten in a manner that would account for those risks and then, second, by the industry altering forms and policy language (such as the wording of pollution exclusions and the increased use of the claims made form) in reaction to those events.
You can see the beginnings of exactly those same events now, with regard to the rise of liability for cyber-crimes and related computer security breaches, as insureds, insurers and their coverage lawyers debate the extent to which standard general liability policy language captures or instead excludes those risks, while at the same time the industry develops products and policy language to respond to those exposures. A colleague and I presented this exact theory, as a lens for understanding the insurance coverage issues raised by cyber liabilities, in a major presentation last year, which is captured in this PowerPoint presentation.
I thought of this today, as I read this article pressing the idea that courts will be expanding the liabilities imposed on corporations for data and similar breaches. If the author is right, both the amount of insurance coverage litigation over coverage for cyber liabilities and the creation of new policy language by the insurance industry to deal with the issue will expand hand in hand with that development, in the same way both moved in tandem with the increase in environmental liabilities thirty years ago.
In Deepwater Now: Texas Supreme Court Weighs in on Additional Insured Issues
I absolutely love this story on the Fifth Circuit asking the Texas Supreme Court to consider the scope of insurance coverage for claims arising out of the Deepwater Horizon oil spill loss; the case itself is fascinating as well. The reason is that insurance coverage law is an odd little area, in that massive numbers of decisions in that area are issued each year, and yet most do little more than move the chains a little bit in terms of refining or redefining the law in this area. This point is well-illustrated, for those of you who like support for a proposition, by Randy Maniloff’s on-going series of excellent coverage newsletters, aptly titled Coverage Opinions, which details the continuing flow of judicial decisions in this area.
At the same time, though, the history of insurance coverage law is written in big letters, by the big dollar cases that bring out the best lawyers and arguments that the industry and the policyholder bar have to offer; it is these cases that drive the development of the case law in new directions, and often rewrite the framework in which insurance coverage disputes are analyzed and decided for the next few decades. It was the big money exposures of asbestos and Superfund – issues now so old that they could have been referenced in a retro-movie like Argo, in the same way it featured rotary phones to add period authenticity - that gave rise to much of the case law that currently governs most disputes over trigger and allocation. Likewise, the issues at the heart of the Deepwater Horizon coverage dispute are additional insured and coverage for contractual indemnity obligations that have been floating around insurance coverage law for the entire length of my career, with often inconsistent results; a major decision in a high profile case like Deepwater Horizon is almost certain to reframe those discussions for many years going forward.
How to Look Smart About McCutchen and Heimeshoff Without Really Trying
I have often joked that, to seem intelligent at social events, a person really just has to have two things handy – the first, a Noam Chomsky reference, and the second, a Shakespeare quote, preferably from a lesser play. If you are good, you can find a way to fit one or the other into any subject of conversation. Personally, I rely on “there are more things in heaven and earth than are dreamt of in your philosophy” (which I also find is often an especially good rejoinder in court to legal arguments proffered by opposing counsel), and Chomsky’s media coverage study, when I am trapped in a conversation with no way out, but to each his own.
I was thinking of this when I read the Workplace Prof’s excellent and extensive blog post on the two latest developments at the Supreme Court concerning ERISA law, the first being the very recent decision in US Airways v. McCutchen, which I suspect will soon be reduced to the defense assertion that courts must always apply the plan terms as written, and the Court’s grant of cert in Heimeshoff v. Hartford, on the application of statute of limitations to benefit claims under ERISA. You don’t have to really study the source material on either of these cases to hold forth on them at this point, because you can just read the Prof’s post, and be all set to pontificate on them without a problem. Less tongue in cheek, it really is worth reading, if you want to understand, with a limited investment of time, what these two cases are about and why they matter.
I would also throw in, with regard to the opinion in McCutchen, two additional comments that you can borrow, if you really want to look erudite without doing any homework on your own first. One, it really is a well-written piece of work, taken simply as an example of the written form in the legal context, without regard to how one may feel about the merits of the decision. I would suggest it to connoisseurs of the form for a read, under any circumstances. Second, the case, although an ERISA decision, has an easy transition to the doctrines of insurance law, where subrogation and the impact of the common fund doctrine are in play on a routine basis; it adds additional support for any argument that the common fund doctrine should always apply in that circumstance. In this regard, feel free to drop a knowing reference to footnote 8, if you really want to appear in the know.
Using the Economic Loss Doctrine to Defend Company Officers
One of the interesting aspects of litigating ERISA cases is the extent to which, for me anyway, it is part and parcel of a broader practice of representing directors and officers in litigation. From top hat agreements they have entered into, to being targeted in breach of fiduciary duty cases for decisions they participated in related to the management of an ERISA governed plan, directors and officers of all size companies spend a lot of their working life operating – in terms of legal issues – under the rubric of ERISA. In some ways, this is even more true of officers of entrepreneurial, emerging or smaller companies; due to the relative lack of hierarchy or distinct departments, in comparison to the largest corporations, officers of these types of companies often find themselves involved to one degree or another in almost every aspect of the company’s business, including retirement and other benefits that are likely to be governed by ERISA.
For me, one of the more interesting aspects of representing officers and directors in litigation is the question of when, if ever, they can be reached personally for actions that one would otherwise expect to be the responsibility of the company itself. Although lawyers are all taught in law school about the sanctity of the corporate form and the protection against liability it grants to company officers, lawyers quickly learn that, in practice, that is a principle more often honored in the breach. Both common and statutory law offer plaintiffs various ways around the protection of the corporate form, including, when it comes to retirement or benefit plans, breach of fiduciary duty claims under ERISA. The theories of piercing the corporate veil and participation in torts can also be exploited to avoid the shield against liability granted by the corporate form in many types of cases, although those can be difficult avenues to use to impose liability on a corporate officer.
All of these issues have one thing in common, which is a question of line drawing, consisting of determining exactly where the line should rest between the protection of the corporate form and the ability to impose liability on a company’s officers. One aspect of this line drawing that has always held great interest for me is the economic loss doctrine, which holds that contractual liabilities cannot be used as the basis for prosecuting tort claims. In the context of defending officers and directors against claims for personal liability based on a company’s actions, it serves as a strong defensive line against imposing tort liability on a corporate officer for the contractual liabilities and undertakings of the company itself. You can find a good example of this defense tactic in this summary judgment opinion issued by the business court in Philadelphia last week in one of my cases, in which I defended a corporate officer in exactly that type of case.
Empirical Proof of What I Always Thought (And Said): The Benefits of Litigation over Arbitration
This is great. I have lost count of how many times I have explained my view that arbitration is not, by definition, preferable to litigation for resolving disputes, and that instead, in each and every given case, a party should think carefully about which dispute resolution forum is preferable. I have written and spoken on the idea that, initially, company decision makers should put aside the assumption that arbitration will save money, because it generally does not. There are more controls on the litigation process than are built into the arbitration process and, as a result, if one side or another is interested in bogging down the process in excessive discovery, motion practice, or other efforts, they can more easily run up the costs in an arbitration than they can in litigation. Arbitration, as a result, is only less expensive if both parties set out in good faith to make it that way. If one party sees a tactical benefit in doing otherwise, though, the dynamics of arbitration make it far too easy to turn arbitration into an expensive, time consuming, seemingly never ending event. Judges, as a general rule, won’t allow this to the same extent in court.
Second, there are tactical considerations in deciding between arbitration and litigation, which have to do with the strength of a party’s case, and whether that strength is based on legal arguments or instead on facts. It is my view that a case based on legal theories is better prosecuted in court, for at least two reasons. First, motions to dismiss and summary judgment are effective avenues in that forum to have the court rule, relatively early on, as to the strength of those legal defenses. Arbitration panels are, for various reasons, more often inclined to hold all such issues over for the final hearing, eliminating the possibility of an early outcome without having to engage in a full evidentiary hearing on the evidence. In my experience, the only real consistent exception to this dynamic in arbitrations is when the arbitration panel is chaired by a well-regarded retired judge, who may be inclined to incorporate more of the courtroom structure into the arbitration process. Second, in a case built on legal theories, it is always better to have a second chance to press that theory if it is rejected the first time around, which litigation allows by means of appeal. Arbitration generally doesn’t allow that, as state arbitration acts and the Federal Arbitration Act generally impose very limited rights of appeal from arbitration rulings.
In this excellent article in Inside Counsel, authors Alan Dabdoub and Trey Cox provide empirical support for these views, which have, until now, been based simply on my own years of arbitrating and litigating cases, and of observing the difference between the two. The authors use a comparative study of 19 different cases, about half in arbitration and about half in litigation, to demonstrate that litigation, and not arbitration, can often be the faster and less expensive path for resolving disputes. It is well worth a read.
Back to the Future: Insurance Coverage Law from Asbestos to Cyber Risks
This is a very fun – if you can use that word for insurance disputes – discussion of the United Kingdom’s Supreme Court determining what trigger applies under insurance policies issued to insureds sued for asbestos related injuries. Its partly fun because it replays a highly contentious and, for all involved, expensive chapter in American legal history, namely the decade or so long battle in the United States courts to decide which insurance policies were triggered by – and thus had to cover – injuries caused by asbestos exposure. The courts here struggled for many years to decide which of many possible triggers apply, including: a continuous or multiple trigger which found coverage under all policies in effect from the time the worker was exposed to asbestos through the incubation period in the worker to the time the worker’s illness actually came to exist; an exposure trigger, making policies in effect when the worker was exposed to asbestos applicable; a manifestation trigger, under which policies in effect when the asbestos related disease manifested itself apply; and an injury-in- fact trigger, under which the policies apply that were in effect when a worker, previously exposed to asbestos years before, actually suffered injury from the exposure. Because of the diverse American legal system, with its numerous federal circuits and 50 state court systems, no one, single rule was ever settled upon as universally applicable. It appears in the UK, though, they are settling on one single rule, at least according to the article.
Some of you, particularly those of you who have heard me speak over the years, are familiar with my view that modern American insurance law, for all intents and purposes, springs out of the trigger of coverage and other disputes from the early 1980s concerning coverage for asbestos related losses, and in particular out of the D.C. federal court’s adoption of the multiple trigger standard for applying general liability policies to asbestos losses; in part, these events became the touchstone for coverage disputes to come because of the ease with which court decisions on these issues could, by analogy, be extended to other types of long tail exposures, such as environmental losses and other types of toxic torts, in which - as with asbestos - the event that would eventually cause injury (whether to person or property) happens years before either injury occurs or is learned of. In my view, before then, insurance law had changed little (speaking broadly) for generations. After the explosion in coverage litigation over asbestos, close textual analysis of key terms in insuring agreements, policy definitions and exclusions became crucially important and widespread, far more than it was before these watershed events; indeed, some of the methodology applied by courts at that time and the decisions they made in interpreting policy terms still reverberate in coverage decisions today. Many issues and developments in the insurance industry and the law of insurance coverage can be traced back to these events, from the expansion in use of the claims made policy form to the existence of significant, always on-call insurance coverage practice groups representing policyholders.
A few months ago, I spoke on the subject of cyberinsurance before a large insurance industry group, and the organizing principle of my talk was the idea that the evolution of coverage forms and coverage litigation involving insurance for cyber exposures was mimicking, and would continue to mimic, the industry’s past experience with both asbestos and – in terms both of temporal proximity and legal analysis – its close cousin, environmental exposures. The reality is that, while past performance may not guarantee future results, the development of new insurance coverage exposures as well as of policy forms to deal with them always harken back at this point to the legal and industry developments of 30 years ago that arose out of asbestos and environmental exposures, but almost never, interestingly enough, to legal and industry developments that predate that.
At the Intersection of Insurance and Plan Fiduciaries
Well, given the title of this blog, I couldn’t exactly let this decision pass unnoticed. In this decision from the Court of Appeals of New York, Federal Insurance Company v. IBM, the Court denied insurance coverage for IBM under an excess fiduciary liability (apparently) policy, for a settlement by IBM of a claim that amendments to benefit plans in the 1990s violated ERISA. The Court, in short, found that the claim did not invoke IBM’s status as a fiduciary under ERISA, essentially because it involved settlor, rather than fiduciary, functions. The Court applied standard rules of policy interpretation, under which insurance policy language must be given a reasonable construction under the circumstances, to conclude that policy language that applied to claims against a fiduciary involving ERISA meant claims where the insured qualified as a fiduciary under that statute, and did not, contrary to IBM’s arguments, involve any broader meaning of the word fiduciary.
Three points about the case interested me, which I thought I would mention. The first is the case’s status as an exemplar of a phenomenon of insurance work that I have frequently mentioned in the past, which is that all major litigation disputes end up in court twice: the first time as against the insured, and the next time as against the insurer, involving the question of whether that first dispute is covered under the insurance policies held by that insured.
The second is that the case illustrates one of the most important aspects of another theme of this blog, which is the importance of what I have come here to call defensive plan building, which is a fancy way of saying developing benefit plans and affiliated structures that protect plan sponsors and fiduciaries from liability. Having liability insurance in place to protect them from the costs and potential liabilities of litigation is crucial. While in this case IBM can easily afford the uncovered exposure, this will not be the case for the vast majority of plan sponsors. Careful attention to the scope of, and holes within, insurance coverage for benefit plan operations is crucially important.
And finally, the humorous aspect of the decision is the third item, consisting of IBM being put in the position, to seek coverage, of having to argue for a broad definition of fiduciary in the context of a plan dispute. As we know from the controversy over the Department of Labor’s recent attempt to expand the definition of fiduciary under ERISA to catch more fish, most entities run from the label of fiduciary like a groom from a shotgun wedding.
Liability Seen Through a Looking Glass, or Determining Insurance Coverage After the Fact
I have written before and no doubt will again that one of the most interesting aspects of insurance coverage law is that all the flotsam and jetsam of American economic life eventually washes up on its shores; by this, I mean that whatever issues of liability are working their way through the court system will eventually show up again, sometimes in Alice in Wonderland looking glass fashion, in court as an insurance coverage dispute over whether there is coverage for that particular type of liability.
It happened again here, in this case involving whether insurers have to cover Bear Stearns’ consent decree and disgorgement related to securities trades, with the court, as explained in this article here, finding that there was no coverage. Two points jumped out at me about the story, which I thought I would mention, the first substantive and the second of more academic interest. Substantively, what is of interest is the court’s firm ruling against insurance coverage of the disgorgement of ill-gotten gains. This is a common issue under many types of insurance policies and under different provisions of the policies, from the insuring agreement to definitions of covered damages to exclusions, and the court comes down firmly and cleanly on the side that disgorgement is not covered, basing the finding in part on the public policy impact of allowing coverage of such a loss. Of less substantive interest is the fact that this is one of those coverage cases where, as noted above, the past repeats itself, only in a through the looking glass kind of way. I say this because the coverage case turned on the court and the parties going back to issues that the insured must have thought were resolved by its consent decree in the original action, in which it specifically avoided any finding of knowing misconduct, and litigating them anew, with different and more comprehensive findings, to decide coverage. The coverage litigation, in many ways, required litigating an issue that the insured was able to avoid having decided in the underlying case in which liability was imposed on it, and which the insured probably hoped or perhaps even thought was closed after the original case ended, only to have the issue examined yet again, in a new light, in the coverage case.
Then and Now: Proving a Duty to Defend By Using Evidence Outside of a Complaint
You know, this is actually of more personal interest to me than it is probably of importance to insureds, insurers and their lawyers with regard to determining whether a duty to defend exists in a given case. That is because the rule reflected in the case I am about to tell you about is sensible, intuitive, and consistent with the direction that the case law has been trending for a number of years, and thus should be of no surprise to anyone working in the area of insurance coverage law. As this neat article, with its neat four paragraph synopsis of the case’s key holding, explains, the United States District Court here in Boston has issued a ruling holding that, where the facts between those alleged in the complaint against the insured and those offered to the insurer by the insured differ, the insurer must investigate those competing versions of events before deciding whether to deny a defense to the insured on the ground that the complaint only alleges an excluded claim. There is a practice tip in there, which is that, when representing an insured served with a complaint whose allegations are both inaccurate and uncovered, counsel for the insured should provide the insurer with evidence showing a different factual scenario, one which could be covered and which would at least trigger a duty to defend. There is nothing new in this, and the law in Massachusetts has provided this opening to creative coverage counsel for insureds for decades, going back at least as far as the question of insurance coverage for a dispute between Vanessa Redgrave and the Boston Symphony Orchestra in the 1980s. That said, though, I would suggest that for many years, lawyers for insureds did not come close to taking full advantage of that opportunity and tactic. This District Court case, Manganella v. Evanston Insurance, makes clear both that they should, and that the better lawyers now have begun fully exploiting that avenue for obtaining coverage.
I say this is of personal interest because, many years ago, I represented a party in a major coverage case involving whether particular allegations of sexual misconduct of an uncovered type alleged in a complaint, which were in turn denied by the insured, could be covered and require a defense. Courts at that time focused solely or at least heavily on the alleged misconduct in making that decision, and, as a general rule, would not have considered the insured’s argument or evidence that the truth was different than that alleged in the complaint in deciding the question. Manganella makes clear the extent to which the law has evolved since that time, as it reflects a belief that the actual facts, if different than that alleged in the complaint, should be considered by the insurer and then by the court in determining whether there is a duty to defend in that type of a situation.
Denial of Benefit Claims, The Repeat Player, and Saving Money on Litigation
One of the first posts I wrote on this blog was about insurance coverage and the concept of the repeat player. The idea behind it was that insurers use the same counsel over and over again in coverage disputes, with the result that they put on the field – to use a sports metaphor – counsel who have a great deal of experience with the specific policy provisions at issue and a deep reservoir of knowledge about the effect of different fact patterns on the application of those provisions; the post pointed out that insureds are therefore not well served by using their general outside lawyers to represent them in such disputes, but are instead better served by finding their own “repeat players” to represent them in such cases, who can match the other side’s lawyers in expertise on and familiarity with the insurance policy types, terms and principles at issue.
The same holds true in ERISA litigation, particularly in the realm of denied benefit claims, whether they be short term or long term disability claims, health insurance, 401k issues, pension disputes, employee life insurance or other types of benefits made available by employers. Under ERISA, such benefits are governed by the terms of the plans under which they are provided, and litigation over any of them is subject to certain rules that are consistent across the field, such as those concerning the standard of review, the impact of conflicts of interest on the part of the administrator of the benefit plan, the contents of the administrative record, exhaustion of administrative remedies, regulations governing claims handling, and the scope of discovery. Most plan sponsors and administrators use “repeat players” to represent them on denial of benefit claims, to such an extent that some obtain discounted pricing in exchange for using the same counsel over and over again. This is actually beneficial to all involved on the defense side of such cases, as it creates a dynamic not just of cost savings for the plans, but also of the development of the level of expertise that comes through regular handling of the same type of cases, in this instance denied benefit claims under ERISA; this manner of developing expertise through repetition is exactly what is meant to be captured by the short-hand phrase “repeat player,” and this type of a consistent, mutually beneficial relationship between plans or administrators and their lawyers on such cases is how that expertise gets developed and brought to bear.
Interestingly, one should note that there is nothing unique to the defense side when it comes to the benefit of using a “repeat player” in denial of benefit claims under ERISA. You will have to trust me when I tell you that I routinely see the difference when, on the other side of the “v.” from me, is a lawyer who regularly represents plan participants in such disputes, as opposed to a general practice lawyer who represents plan participants only occasionally. This area of the law, like many others, is one where plaintiffs – who unlike the defendants may rarely be involved in such cases – also benefit from retaining a “repeat player.”
Mark Herrmann, the Chief Counsel for litigation at Aon, the insurance brokerage, wrote – whether he meant to or not – of this phenomenon in his piece the other day for Above the Law on “flotsam and jetsam,” in which he discussed the benefits to in-house legal departments of identifying areas of legal work that a company can bundle up and turn over, en masse, to an outside lawyer, who will handle the entire line of work for a fixed, and reduced, yearly retainer. I have over the years met with in-house benefit people and made the same suggestion with regard to a company’s handling of benefit claims, explaining that they are perfect for assigning to one counsel in exchange for a fixed fee payment structure for several reasons, including: (1) they are predictable in terms of time and cost investment, partly because discovery is limited; (2) the exposure to the company is narrow and predictable, because of the limited remedies available under ERISA and the ability to quantify the benefit amounts at issue under the relevant plan terms; and (3) the legal principles are consistent and should be well-known to defense counsel. This combination of predictability of the case with the expertise of the “repeat player” makes benefit claims perfectly suited to being bundled up in their totality and assigned to one outside counsel for a long period in exchange for cost savings to the company assigning the work.
Now as I noted, I have broached this idea over the years with plan sponsors and administrators, but I have to say I have never explained the concept quite as well as Mark Hermann did in his story. Writing as an in-house lawyer, he does a better job, I think, of isolating and describing the benefit to businesses in taking this approach than I have been able to do as an outside lawyer who can do no more than look through the window at the pressures, demands and needs of client companies. If you are in the benefits business, though, when you read his piece on it, think for a moment about how perfectly his description of “selling off” these types of cases fits the environment in which companies handle denial of benefit claims under their company benefit plans, and how well his idea would work for those types of claims.
Fiduciary Liability: Risks and Insurance
What’s that old saying - your lack of foresight doesn’t make it my emergency, or something to that effect?
I am a little guilty of that here, in my advice to you, at the relative last minute, to hurry up and register for a webinar on the intersection of insurance law, ERISA and fiduciary liability. It is not that last minute, really, in that the webinar isn’t until Thursday, but still, I certainly could have given you more notice.
Either way, I wanted to recommend this upcoming presentation, “ERISA Fiduciaries Under Attack: Key Litigation and Regulatory Developments,” presented by blogger Susan Mangiero and a cast of thousands (well, two actually, but they are good ones), which will cover fiduciary liability issues and the management of those risks through fiduciary liability insurance. As you will no doubt note immediately, the presentation strikes right at the intersection of the two main topics of this blog.
Speaking for myself, I think there is a great deal of misunderstanding out there as to the scope and usefulness of insurance coverage in this area. I don’t think I have previously seen a webinar directly targeting this issue, so I think it’s a good one, and I highly recommend it. You can find out more about it on Susan’s blog, here.
Book Review of "General Liability Insurance Coverage: Key Issues in Every State"
Why do I blog? For the swag, of course. Well, no, not really, but I did just receive a review copy of Randy Maniloff and Jeffrey Stempel’s new General Liability Insurance Coverage deskbook, and it is tremendous. The book bears the subtitle “Key Issues in Every State,” and that phrase on the book’s cover is a perfect example of truth in advertising. The authors take the primary key issues in handling general liability claims, from the beginning (whether there is a duty to defend) to the end (how should recovery from the insured be allocated among multiple insurers) and provide a detailed synopsis of the law, with citations to key authority, on each issue in every state. Although that sounds like a recipe for a dense, possibly impenetrable text, here at least, in these authors’ hands, it is not, which should come as no surprise to anyone who has read any of Randy’s annual reviews of a preceding year’s top insurance coverage decisions. The book is instead, if such a thing is possible in this context, a breezy read.
Substantively, I am more and more impressed each time I turn to it. In the first 24 hours it was on my desk, I referenced it as a starting point for research into the issues in two or three different cases. For someone like me and most other experienced insurance coverage practitioners, who are already more than conversant in the broad themes of insurance law, the devil is in the details on a daily basis; we spot the issues right off the bat, and then need to ascertain how a particular state’s law handles those issues. Randy and Jeffrey’s book provides a ready starting point for research into a particular state’s law, and in many cases, an answer right off the bat to how a particular state handles certain issues, such as whether an insurer can obtain reimbursement of defense costs or how that state determines the number of occurrences under a general liability policy.
For anyone who deals with insurance claims issues on a daily basis, whether as a coverage lawyer or a claims professional, I can’t recommend it highly enough. Insurance coverage, as a practice area, is such a research intensive activity that anything that reduces the time needed to research and answer a question makes the practice more fun and saves clients money, all at the same time. This book does that.
Now if you don’t write a blog, you can’t count on swag to get a copy, but you can get it here.
Directors and Officers Coverage, Exclusions and the Magic Words "In Fact"
Here is a terrific article on the lessons about directors and officers insurance that should be taken from a series of rulings that eventually ended coverage for the Stanford Financial executives. I have said many times that because the scope of D & O insurance is so dependent on the scope of the exclusions, it is important to analyze and understand them when the policy is being acquired, and not wait until after a claim is made, when it may well be too late. That is, in essence, what happened to these executives; as the authors of the article point out, had they sought narrower exclusionary language when they acquired the policy, they might well have avoided the rulings against them that ended their insurance coverage. Of more precise importance, I have discussed in prior posts the significance of exclusions that apply if a certain conduct “in fact” happened; the article addresses the meaning of this language in depth, and contrasts it to other wording that, if used instead, would narrow the scope of the exclusion and, by extension, expand the scope of the coverage.
Drum Roll Please . . . The Top Ten Insurance Coverage Decisions of 2010
Nothing proliferates around the New Year like top ten lists; I blame David Letterman for it, and believe some academic somewhere in a popular culture department should examine the pre- and post - Letterman frequency of top ten lists in American society. That said, though, my all time favorite top ten list was Letterman’s top ten children’s book titles that haven’t been published but should be, which included my favorite book title (fictional or otherwise) ever, which was “Daddy Drinks Because You Cry.”
My second favorite top ten list comes out every holiday season, and is Randy Maniloff’s Top Ten Insurance Coverage Decisions of the expiring year, an article that he always manages to make both educational and amusing at the same time, which is an extremely hard trick. He’s pulled that off again this year, and so for my final post of 2010, I send you to it to read.
Depends on What You Mean By "Related"
Well, here’s a story on an unpublished Ninth Circuit decision on the impact on the duty to defend of related claims provisions in claims made insurance policies. Although policies vary in the language and structure they use to accomplish it, these provisions essentially declare a claim made during a policy period to be linked to earlier events or an earlier claim if they all arise from related events, with there being no coverage if the earlier related events occurred before the policy period of the policy under which coverage is being sought. The operation of these provisions is of crucial importance for the operation of claims made insurance policies and for insurance programs built on them, in that a claims made policy is built around the idea that the policy will only provide coverage for claims - such as lawsuits - actually first made against the insured during the effective period of that policy, and that the policy won’t provide any coverage if the loss for which coverage is sought relates to a claim that began before the commencement of that policy period. Claims made policies are priced on only covering claims actually first arising during the policy period - and not on covering those that started before the policy period or were not made until after it ended. By precluding coverage when a particular claim actually stems from events or another claim that predated the policy, the related acts language is the mechanism for effectuating this intent. I will warn you up-front that this is a very simplistic introduction to a fairly complicated subject, but it captures the idea.
The article discusses an example of a court refusing to apply such language in that way, by instead finding events that predated the policy to not be related to the claim made during the policy period and for which coverage is sought. The article, however, overstates the case by making it sound as though there is some sort of blanket prohibition against this approach to limiting coverage under claims made insurance policies, and that courts simply won’t find a claim during a policy period to not be covered when it is related to events that occurred before the policy period. That is, however, overstating the case. This issue is inevitably highly fact specific, and courts look closely at the factual interrelationship of the events at issue to decide this, rather than simply rejecting outright the assertion of such a linkage or denying the legitimacy of policy terms voiding coverage in the presence of such a linkage. While it is fair to say that, to some extent, such linkage is in the eye of the beholder and thus the denial of coverage on this ground is never simply an easy, mechanistic activity, it is simultaneously unfair to present it - as the article at least intimates - as a policy defense that is not accepted by the courts or ever applicable.
A Good Reason to Read Your Insurance Policy
Wow. This is a fascinating insurance coverage story - I know, people who don’t practice in that area will email me in droves to tell me there is no such thing, but still - that illustrates some important points. It is the story of the corporate officer of a juvenile facility that was involved, apparently without his knowledge, in bribing a judge to feed kids to the facility, and who has now been found to have no coverage, including of his defense costs, for the claims against him that resulted. There are two teaching moments in this story. The first is an insurance law point: despite his lack of involvement in the events at issue, he lost coverage because the policy contained exclusions that barred coverage for claims arising from the criminal acts of any insured, and it is well established that exclusions that apply when “any insured” commits the excluded act preclude coverage for all insureds, even those who played no role in the acts that triggered the exclusion. In contrast, policies often include exclusionary language that is much narrower and prevents exclusions from applying to insureds who were not actually involved in the excluded conduct, such as language stating that the exclusion only applies to “an insured” or “the insured” who commits the excluded act (rather than to “any insured”) or language stating that the exclusion does not apply to an insured who did not “in fact” participate in the conduct that triggered the exclusion. The insured in the story has learned the hard way that an exclusion that applies when “any insured” commits an excluded act deprives uninvolved insureds of coverage as well.
This leads to the second teaching moment provided by the story, and which echoes something I have often said in posts: insurance coverage cannot just be purchased and ignored until the time, if ever, a claim arises. It is important in advance to understand the scope of what is being purchased and what is excluded. The “any insured” problem posed in this case could have been avoided had the insured and its broker sought out a policy that uses narrower exclusionary language to avoid the exclusions applying to innocent insureds. I suspect without knowing that for a few dollars more, the company could have found a policy along those lines. It’s a day late and a dollar short to figure this out after the fact.
Doubling Down: Protecting the Director or Officer Against the Unknown and Unforeseen
Here’s a little story that rung an old bell for me, and provides an object lesson on a point I have made in the past in various forums concerning the protections against liability that need to be sought by officers and directors. The story concerns a decision out of the Tenth Circuit finding that a company did not have to indemnify one of its former corporate officers in total for legal fees related to the officer’s defense of a securities fraud case, despite a written agreement that appeared to impose such an obligation. I have not studied this case enough to hazard a guess as to whether the former officer, or the company indemnifying the officer, might have had access to coverage of those defense costs under a directors and officers policy. However, the case illustrates a principle I have often mentioned with regard to issues concerning service as a director or officer of a company - there is no way to know for certain long in advance of any particular claims being made whether the company will stand by an apparent obligation in its by-laws or other documents to indemnify an officer, nor can one be absolutely certain in the abstract whether the officer will have coverage against any such future claims under a directors and officers policy. There are too many variables to be certain, as the story reflects and evidences. As a result, as I discussed in detail here some time ago, it is important for directors and officers to protect themselves by doubling down on their protections, and requiring both broad indemnification protections in the company’s documentation and that the company acquire directors and officers coverage that is as broad as possible. That way, if and when a claim is made, if one of the two (the company or the directors and officers insurer) balks at paying for the defense of the officer or director, a second avenue of potential payment still exists. Certainly, as appears to have been the case in the little exemplar story discussed in this post, there may be claims in which neither will have to pay for all of the costs of defending the officer or director against a claim, but at least this two pronged approach gives the officer a reasonable shot at having someone pay those fees for him or her.
An Emerging Consensus on Arbitrating Complex Commercial Disputes?
Well, I have written extensively on my skepticism about commercial arbitration as a tool for solving commercial disputes, and my belief that the courtroom is a better forum for most complex cases. It would take a lot of links to cover my past discussion of the pros and cons of this type of dispute resolution, and my reasons for thinking it a far weaker forum for a dispute between corporate entities than the courthouse. If you click on the category “Arbitration of Coverage Disputes” or the category “Arbitration” over on the left side, however, you will quickly find my past discussions of this topic. If you don’t want to do that, however, you could read this article here, which nicely sums up the same calculus that underlies my earlier posts on the efficacy, and sometimes lack thereof, of commercial arbitration.
Interesting Developments in the Insurance Coverage World
I thought I would pass on two interesting insurance coverage stories, with some thoughts on each. The first is this one here, about the New Jersey Supreme Court finding that an insurer that loses an insurance coverage action can be ordered to pay attorney’s fees incurred by the insured in a separate but related coverage action in another jurisdiction. A prevailing insured’s right to recover fees incurred in an insurance coverage dispute with its insurer is a slow moving but inexorable carve out from the American Rule, which holds that parties are responsible for their own attorney’s fees, and somewhere down the road we are likely to find it has become the overwhelming majority rule in this country. The expansive reading of that obligation imposed in this New Jersey decision is reflective of that trend.
The second is this one, about a finding that an insurer had no duty to defend its insured against a class action seeking only economic losses based on the risk of bodily injury, rather than seeking recovery for bodily injury itself actually suffered by the class plaintiffs. The court found that the insurer had no duty to defend because coverage was limited to claims for bodily injury, and the action did not actually seek to recover for identifiable physical injury. This case caught my eye because it reflects a narrow, highly technical reading of the policy language and of the coverage it granted, pursuant to which the court refused to expand the coverage to include a defense obligation simply because the case pled against the insured had some relationship to possible allegations of bodily injury; the duty to defend is often interpreted by courts to be so broad that often courts, and sometimes even insurers, view the duty as triggered if the claim even comes close to fitting the terms of coverage. You can call this kind of a horseshoes approach to determining the duty to defend, as in close is good enough to do it. The court here did not buy it, and in that it is a moral victory for those of us who understand insurance policies as contracts whose terms should be honored and applied as written.
The Attorney-Client Privilege in Insurance Litigation
My in-box, like most of you I assume, is inundated on a day in, day out basis with offers of webinars, seminars, and the like on every topic under the sun that the sponsors think I might even conceivably have any interest in or professional connection to. Most I ignore without even opening, as not even close to being on point with my professional interests and concerns. Even of that remaining subset of ones that have something to do with my work, or my blogging interests, or my professional development, I seldom pass them along in a post because they often appear to simply be lawyers over-complicating and over-analyzing what should be, and normally is, a relatively simple point or area of law (what, lawyers making something more complicated than is necessary? Who’d have thunk it?). My favorite in this regard are the seminars that are routinely touted to me about the complexities of the tripartite relationship in the insurance context, an area of law in which there is, frankly, little complexity and most of the rules of which I summed up right here in this post some time ago.
A different species of educational opportunity, however, consists of those that actually provide a detailed level of analysis on a question that is in fact complicated, and that presents nuances that need to be dealt with in the day to day hurly-burly of practice. This webinar here, on the attorney-client privilege in the context of insurance coverage counseling and litigation, looks on its face to fall into that category. The privilege, in this context, is a lot of fun for a litigator, like me, who enjoys working with the rules of evidence, and exploiting - or conversely defending against - gaps in the protection provided by the privilege. Two issues that quickly jump to the forefront of my mind even as I write this post - both of which appear to be covered by the webinar - are the interrelationship of the privilege with bad faith litigation, including in particular the impact on whether and how to use an advice of counsel defense, and the possible risk of disclosure by means of discovery from an expert witness. There are many more, but they seem to fall within the broad categories listed in the webinar’s agenda, so rather than my reciting them, you may just want to take a listen.
An Employer's Guide to Health Reform
I expect to be litigating, down the road, issues, complications and conundrums created by health care reform. Let’s be honest - its impossible to imagine any large structural undertaking not generating problems, including unforeseen ones, that will have to be resolved by the courts. For now, though, the issue is more one of planning for changes, and what needs to be done now to accommodate them. My colleague George Chimento, whose paper suggesting that employees should not be given the option of managing their own 401(k) accounts is discussed here, passes along this client advisory on “Baby Steps: an Employer's First Year under Health Reform,” which addresses these changes.
A Nicely Supported Overview of Global Warming Litigation and its Impact on Insurers
Well now, I think this is exactly what I said in this post here, as well as elsewhere on this blog in the past. Global warming litigation is heating up (pretty funny pun, huh?), litigation costs from the defense of those cases pose a significant threat to the insurance industry, and insurance coverage litigation to sort out coverage for those costs is bound to follow on the heels of such global warming cases. This story that popped up in my in-box today does, however, provide the most systematic overview of these points that I have seen to date. It’s a particularly provocative read right now, as I look out my window here in Boston at temperatures in the mid-forties and sunshine, even though its still just the beginning of March.
A Parable About the Cable Man
For reasons too obscure and uninteresting to mention, I have had almost nothing to do with the cable tv industry since, well, it was invented. What’s a DVR, anyway, and why would I want one? But yesterday, I had to obtain digital cable from my local cable company, and called them, braced to be gouged. Instead, I was offered a special deal for a year, much less than I was expecting to pay, with stuff I would never pay for thrown in. A few hours later, of course, the reason occurred to me. The cable monopoly I recall from my youth is not what I was dealing with, and I was instead talking to a cable company that had competition from dishes - Dish.com, I guess? - and the local telephone/internet/cable company, so instead of gouging me, they had to offer me a deal they figured would keep me as a customer. Classic economic, legal and antitrust theory holds that there are really just two ways to police pricing - competition or, in its absence, regulation. Competition, of course, is why I got my sweet deal on cable yesterday.
So what does this have to do with the topics of this blog? Seems like plenty, in that it is the absence of above board open competition that is at the root of much of the problems discussed in these pages concerning ERISA governed plans. I have discussed in many posts that the problem with health insurance coverage through employers has much less to do with the question of whether employers want to provide it than it has to do with the ever escalating cost of health insurance and the fact that providing health insurance is a punishing cost. Employers, in my view, are unfairly demonized as trying to avoid providing health insurance, but it is the cost that is driving their increasing balkiness about being, as I have described it in other posts, unofficially deputized as the providers of health insurance in this country. From where I sit, one of the fundamental problems with acts mandating health insurance provision or payments by employers is that they don’t account for this, either by reducing health insurance costs or by recognizing the business costs imposed by these types of statutes. Does anybody really think that the restaurants targeted by the San Francisco statute are swimming in profits? This article here, profiled on the Workplace Prof blog, describes this exact concern about costs as the driving force behind employer, and particularly small employer, health insurance decisions.
And perhaps one solution to the problem of the cost of providing health insurance - perhaps the most important one - is that what is good for the cable industry should also be sauce for the gander, i.e., much greater competition among, and significantly less market control by, health insurers, as pointed out in this op-ed piece here by Robert Reich (when even the archetype liberals are arguing that market competition is the answer to all evils, you know the world has turned upside down).
And the same thought continues across to 401(k) plans, and the ongoing issue of fees and costs in investment options, and how they are disclosed. What if, instead of arguing after the fact about whether the fees in a particular plan were too high, prudent fiduciary practices were deemed to require a competitive process for selecting investment options, in a manner forcing putative vendors to put their lowest cost options forward to win the business? Isn’t that what all the complaining about large asset plans that don’t use their size to win better pricing is about, after all? Instead of just complaining in the abstract that plan sponsors should have acted that way, or engaging in after the fact litigation to try to police how much should have been charged in fees, wouldn’t it make more sense to just require a fully competitive process among vendors for selecting investment options, conducted by fiduciaries - or their delegates - who have the knowledge base to understand the pricing structure of the proposed options?
In that version of the world, it would be a fiduciary obligation to impose a fully competitive, open call for investment options, and to select the best - including on fees, costs, disclosure and performance - from among them, with it being a fiduciary breach for failing to pursue this process (rather than it being a fiduciary breach for ending up with fees that are too high). The focus would return in this way to fiduciary practice, both in terms of judging conduct as meeting or failing to meet the standards of a fiduciary and in terms of whether to impose liability, rather than on an after the fact, necessarily subjective evaluation of the amount of fees, costs, or disclosure in a particular plan that resulted from the fiduciary’s decisions.
Open competition would certainly drive down the fees and costs in plans, while simultaneously giving fiduciaries a clear standard - namely their obligation to decide on the basis of such competition - against which to work. I can’t help but think that, like the cable customer, plan participants will end up with better and cheaper products to pick from, while plans - and their insurers - will spend substantially less on litigation costs.
How Will Climate Change Affect LTD Carriers?
Who knows? The only link between the two subjects that I know of right now is that this blog post is going to touch on both issues.
There are a couple of stories I thought I would pass along today that may be worth reading. In the first, here, I am quoted on climate change litigation and the potential costs to the insurance industry. Personally, I am hard pressed, as a litigator who spends a lot of time dealing with issues related to the admissibility of expert testimony under the current federal court structure, to imagine plaintiffs who are pressing a climate change case ever being able to prove causation, or, for that matter, even being able to submit expert testimony to prove causation. Take one particular hypothetical case, a claim that in essence pollution increased the ocean level and is responsible for some particular piece of coastal property damage. How would you ever prove causation in a federal court between the pollution and the rise in the water level, given the strict standards for admitting expert testimony under current federal law? Or for that matter, even if you could prove that element, how would you ever prove one particular defendant’s factory - or even those of an entire particular industry - was the cause, as opposed to hundreds of millions of automobiles or a million factories in China, just to give two examples? I don’t see the current state of the scientific research being sufficient for a court to allow experts to testify to the elements of causation needed to recover on these types of claims. That said, though, I also don’t think much of the theories used to recover the GNP of a mid-size country from the tobacco industry, but all that took was a couple of courts to give credence to such theories, and you know how that ended up after that. All it would take is one judge somewhere to allow plaintiffs to go forward on these types of claims, and industry - and quickly their insurers - will end up, at a minimum, footing the bill for very large defense costs in response to such cases.
The second story, here, I pass along just because it is fascinating, to anyone who handles long term disability cases or likes statistics, or both. Who knew doctors claimed long term disability at a disproportionate rate?
Climate Change Litigation and Insurance Coverage
I have posted in the past about how everything eventually makes its way through the insurance industry, in terms of any types of new lawsuits or liability theories, and as this article makes clear, litigation over climate change will be no different. The suits are coming, and while their viability is yet to be determined, they will pose challenges for the insurance industry, because the development of theories of liability in this area will eventually lead to demands for insurance carriers to cover the defense costs or liabilities arising from those theories, just as occurred with asbestos and pollution, and almost certainly with the same types of pitched battles over the existence of coverage as occurred in those areas. This will raise a whole host of issues for carriers that will mimic the types of issues that played out with regard to the large scale - and often unanticipated - exposure posed by environmental litigation and asbestos, only on a broader and probably even more complicated level. Just think, for instance, about how difficult it will be to develop exclusions against climate change lawsuits, if that is the direction insurers elect to go, that are broad enough to encompass the as yet unknown range of legal theories, while still being concise enough in their wording to avoid being declared ambiguous.
On Fiduciary Liability Insurance
I have written before that one of the things that makes insurance coverage law interesting is the fact that almost every trend in liability or litigation eventually shows back up in insurance disputes, in a sort of fun house mirror sort of way. Whether it is corporate exposure for asbestos liabilities, or the sudden invention of Superfund liability, those liability risks eventually end up in insurance coverage litigation over the question of whether insurers have to cover them. I cannot think of one major doctrinal development in tort liability or one trend in liability exposure in the last 20 to 30 years that has not, eventually, resulted in litigation to determine whether insurance policies cover the new exposures flowing from those developments and trends.
Anyone who reads this blog knows that ERISA governed plans, and in particular pension and 401(k) plans, have become a huge target for large dollar claims over the past several years. Just a click through the posts on this blog detail many of the claims, such as stock drop and excessive fee litigation, that are working their way through the legal system. And with this, hand in hand, has come a new focus on whether plan fiduciaries have appropriate insurance coverage in place for those risks. Some do, some don’t, and others - consistent with insurance coverage litigation trends in the past when relatively new theories of liability have had to be analyzed under policies written before the theories themselves were developed in depth - won’t know unless and until courts pass on the meaning and scope of their policies. But here, though, is a good initial primer on the question and here, likewise, is a webinar that looks likely to provide much greater detail on the subject. One thing that is for sure is that this is an area of the law that anyone involved with the representation of plan fiduciaries needs to have more than a passing familiarity with at this point.
Two Farmers Walk Into a Trial . . . .
Well, just finished a trial, which has kept me from posting for a week or two, and I don’t have anything substantive to say about the topics of this blog today. I thought, though, that I would share a humorous anecdote told by a witness at my trial, who used it to illustrate a defendant’s habit of raising serial defenses, one after the other, and each less plausible than the one before:
Two farmers live next door to one another. One farmer has a cabbage, the other farmer has a goat. They wake up one morning, and the first farmer discovers that his cabbage has been eaten; he says to the other farmer, your goat eat my cabbage. The second farmer responds: “What cabbage? You never had a cabbage - and if you had one, it wasn’t eaten; if it was eaten, it wasn’t eaten by a goat; if it was eaten by a goat, it wasn’t eaten by my goat; and if it was eaten by my goat, he’s insane.”
Funny to me, anyway. The perfect illustration of pleading in the alternative.
Preemption, the Supreme Court, and Job Losses
I had two disparate items that I wanted to post on, one of which I didn’t really think had anything to do with the subject matters of this blog but that, nonetheless, was too cool a graphic not to pass on. Sitting here this morning, though, I figured out how to hook them together, so here goes. The first is the report, which many of you have heard by now, that the Supreme Court has sought the government’s views on whether to accept cert with regard to the Ninth Circuit’s ruling on preemption and the San Francisco health insurance mandate. I can throw out two, or actually three, quick thoughts on that one. First, dollars to donuts says the government’s advice is to not grant cert, and to wait and see whether federal health care reform either directly or in a de facto manner moots the entire question. Second, the reality is that, under current doctrines, that statute is preempted; the Supreme Court doesn’t necessarily have to overturn any precedents to find otherwise, but it is going to have to shift the analyses of the preemption case law to find that this statute is not preempted. Third, I can’t say - as one who has watched the questionable implementation in Massachusetts of its state legislated, and presumptively preempted, employer mandate - that I agree with those who think that preemption should be set aside to allow states to become bastions of experimentation on health insurance reform; anyone who has followed my posts on the Massachusetts statute knows I don’t think the states have the pocketbook or the firepower to handle the issue successfully.
What was the second item, the one that wasn’t clearly on point to this blog? Its this graphic representation of job losses and gains throughout the business cycle for different metropolitan locations across the country, a link I have shamelessly pirated this morning from the Workplace Prof blog. My first response to it was that I loved the graphical representation of complex data; it’s the same thing a trial lawyer has to do in a case of any level of complication, which is make the background information understandable, and this graphic does that beautifully. Trial graphics in particular have to serve this purpose, and this graphic could be the exemplar of exactly what computer generated graphics for trial should be: easily understandable and visually interesting representations of what otherwise would be difficult to grasp or, at best, tedious to follow information. But how do I link this graphic to this blog post? Easy, by using it like a trial graphic to make a point. If you move the time line to 2009 on the graphic, you will see the massive amounts of job losses - there is no better illustration of the point I have made time and again about employer mandates, which is that employers have enough on their plates without being made the official provider of health insurance (they have long been the unofficial one, but employer mandates push that responsibility even further). Employers should create jobs, not spend their time worrying about the costs and administrative burdens of legislated mandates such as the San Francisco ordinance or the Massachusetts Health Care Reform Act - this, in fact, may be the most concise justification for preemption of such acts I can think of.
What Goes Up Just Keeps Going Up - Health Costs and Employer Mandates
For a long while, I have felt like a lone voice or (to mix my metaphors) at least the skunk at the garden party, when I have criticized employer mandates and, even more so, the Massachusetts Health Care Reform Act. As I have frequently discussed in various posts, the problem with these statutes is that they don’t target the real problem in the provision of health insurance by employers, which is cost - that is what is driving employers to reduce or not provide such insurance to their employees. Mandating insurance, payments or penalties simply penalizes employers for not being able to afford to do something that, pricing being better, they would have done - and historically did do - on their own, which is provide health insurance as an employee benefit.
Marcia Angell, a prominent Massachusetts physician, made this exact point about the Massachusetts Health Care Reform Act, when she explained that its fundamental flaw is that:
In Massachusetts [which enacted an individual mandate in 2006], there is no real price regulation. Essentially what the mandate does is say to people, you will go into this treacherous market and buy insurance at whatever price the companies choose to charge. In effect, it’s delivering a captive market to these profit-oriented companies. . . . Massachusetts already spends one-third more on health care than other states, and costs are rising at unsustainable rates. As a result, they’re chipping away at benefits, dropping beneficiaries and increasing premiums and co-payments.
Now, the Boston Globe today has an article reiterating and driving home this same point, in which it reports that “[t]he state’s major health insurers plan to raise premiums by about 10 percent next year, prompting many employers to reduce benefits and shift additional costs to workers.” The article goes on to point out that controlling costs was supposed to go hand in hand with the mandate imposed by the state’s reform act, but that obviously has not occurred.
I have said it before and I will say it again - mandating expensive coverage that is only getting more expensive is not a solution, and no state has pockets deep enough to solve this problem on its own.
On Coverage for Financial Investigations, and an Echo from the Past
Little time to blog today - plus I still have to get up the latest chapter of our on-going serialization of Robert Plotkin’s book, The Genie in the Machine - but I did want to pass along, with a couple of brief comments, this excellent article on the question of whether there is coverage for governmental investigations under directors and officer or professional liability insurance. The article focuses really on two points. First of all, that there may be such coverage, but the time to determine that is not after a claim is made; the time to do so is in advance, when you are negotiating for the policy. This is a basic point I frequently make in seminars - a company needs to survey its potential exposures in advance, and structure the insurance it is purchasing to make sure that, to the extent the market will allow it, coverage is acquired in advance for those potential exposures. This is work your insurance broker and/or your outside coverage lawyers can help with, and it will cost a lot less than fighting later over whether or not there is coverage for an exposure that, with foresight, could have been anticipated and explicitly insured against. Second, the article discusses in depth the question of whether the investigation notice constitutes a claim that would trigger insurance coverage. This is a very interesting and subtle point, and the outcome can vary depending both on the jurisdiction involved and the particular language used to define the word claim in the particular policy at issue. On a more philosophical level, this point is interesting to me because it references back to something I have discussed elsewhere on this blog, namely the idea that all modern insurance coverage law harkens back to the doctrinal shifts that occurred as part of the large dollar insurance battles over coverage for asbestos and environmental exposures a quarter century ago; in this particular instance, the question of when notice from a government agency qualifies as a claim - which is discussed in this article with regard to an investigation into financial behavior - was first really developed in case law considering whether environmental clean up demand letters and notices constituted a claim that could trigger insurance coverage.
Do I Need a Coverage Lawyer?
I have written, in various blog posts, highly detailed, rational and analytical explanations of why parties to an insurance coverage dispute should retain experienced coverage counsel to represent them; I have given long, detailed, argumentative explanations of the same point in a number of seminars. Often the analysis revolves around the fact that, if the other side has an expert in this area but you don’t, you are committing the legal equivalent of bringing a knife to a gunfight. No matter what anyone tries to tell you, you can’t make do with a generalist when you are engaged in a significant dispute over insurance coverage.
Thus, I chuckled when I came across this article here, by an insurance professional, in which he presented a humorous list of what he has learned in 19 years in the insurance industry. If you combine several items in his list, you end up with what may be the most perfect short answer to the question of “should I hire a coverage lawyer and if so, why” that I have ever seen. The answer, in short, is that:
There is nearly ALWAYS more than one possible answer to a coverage question. One is just more correct than the others based on the particular situation. . . . .Fifty states, hundreds of courts, thousands of differing opinions and interpretations. You can be right in some states and wrong in others. . . . It's NEVER ok to guess at the answer to a coverage question.
On Preemption of Pay or Play Acts and the Supreme Court
File this, I suppose, in the department of inevitable events - lawyers representing the restaurant industry have filed to have the Supreme Court review the Ninth Circuit ruling finding that the San Francisco pay or play ordinance is not preempted by ERISA. This is one of those instances where you can bet how the case will come out the same day the Court announces whether it will hear the case; if it does, the statute is going to be found preempted and the Ninth Circuit overruled, for reasons I referenced in passing here.
I do have a reason for posting on this, beyond wanting to get on board early with a prediction for the outcome (even Paul Secunda, back in his days as the Workplace Prof, would never have called a case before it was even accepted for hearing!), and that is this quote from the restaurant group’s lawyer, courtesy of the National Law Journal:
"One of the most important issues that we are debating in the country today is how health care is to be provided," said Jeff Tanenbaum, chairman of the labor and employment group in the San Francisco office of Nixon Peabody, who represents the Golden Gate Restaurant Association, which filed the petition on June 5. Golden Gate Restaurant Association v. City and County of San Francisco, No. 08-1515.
"This case comes down at a time when that debate is the focus of tremendous attention at the federal level. It is an issue that needs to be addressed at the federal level," he said.
I have said it time and time again on this blog, that ERISA preemption serves the admirable, even if perhaps inadvertent, role of forcing health care to be tackled at the only level it can be adequately addressed, the federal one, and not at the level of state governments, which simply don’t have the resources to pull it off, as this article here reminds us yet again (and this one too). I am happy to hear someone else say it as well.
The Massachusetts Health Care Reform Act as a National Model . . .
Maybe of what not to do.
I couldn’t let this go by without noting it - he has a Nobel after all and I, well, I have a sixth man award from a high school basketball team. Paul Krugman on health care reform:
Without an effective public option, the Obama health care reform will be simply a national version of the health care reform in Massachusetts: a system that is a lot better than nothing but has done little to address the fundamental problem of a fragmented system, and as a result has done little to control rising health care costs.
I think I have read that description of the Massachusetts act before. No, wait, I think I wrote it.
Maniloff, Sotomayor and Insurance Coverage Law
Just too funny not to post this today, even though this was supposed to be a post-free Friday while I finish up a brief. Randy Maniloff of White and Williams has done a (mock) thorough piece of opposition research into the new Supreme Court nominee and discovered, somewhat apparently to his shock, that her rulings reflect a consistent trend of finding in favor of insurers, rather than insureds, on coverage and bad faith issues that have come before her. His piece detailing this is here.
My take? The decisions and quotes Randy highlights reflect a focus by the judge on the specific facts of the cases and on the details of specific insurance coverage doctrines, rather than a looser approach of relying on easy maxims that tend to add up to nothing more than the tie goes to the runner, which in this area means the insured, such as “ambiguous provisions must be construed against the insurance company.” When you focus on the facts of the cases and the details of this area of the law, you don’t end up with any sort of an insured oriented bias, and instead you often find that the insurer’s decision is upheld because the insurer used that same focus in the first instance in making its own decision with regard to coverage.
Kudos to Randy, for again using humor to shed some light into the dark corners of insurance coverage law, this time, whether intentionally or not, on the extent to which judicial approach affects the outcome of coverage cases.
Thanks to Point of Law for passing his piece along.
The Massachusetts Health Care Reform Act: Demonstrating that ERISA Preemption is Health Care Reform's Best Friend
Well, I have argued more than once on these electronic pages that ERISA preemption, rather than being the whipping boy of choice for people who advocate state level health insurance mandates, should be understood as a key element in bringing about any type of effective change to the health insurance system. Why is that? Because ERISA preemption forbids the states from enacting health insurance reform statues since states cannot enact them without either deliberately or unavoidably rejiggering employer provided - and thus ERISA governed - health plans, meaning that any real change from the current employer provided (and voluntary) health insurance system can only take place on a national level. And why is this in turn good? Because states are kidding themselves if they think that they can, financially, pull off reform of the system on their own, as this article here demonstrates yet again. Although buried behind the praise for the fact that the state reform has increased access by decreasing the numbers of uninsured, the article notes that affordability problems have arisen, which cannot “be blamed on the state's overhaul, but on a much larger and troubling national trend [which is that] [h]ealthcare costs, in general, are increasing faster than inflation.” The city of San Francisco, or the Commonwealth of Massachusetts, cannot solve that problem, and they can’t fund it on their own, either. It’s a national problem, and one that ERISA preemption demands be handled nationally.
Thoughts on Costs and Fees in 401(k) Plans
In my last post, I mentioned a seminar I gave recently on insurance coverage issues and commented on one of the themes of my presentation. Another theme I emphasized in that talk was the fact that modern insurance coverage law is basically 20 years old, with its fountainhead being the development of the law of insurance coverage to account for the complexities and size of the asbestos exposures that confronted much of American industry at that point; from that development of the case law would come further refinement and expansion of the relevant doctrines as the courts, insurance companies and industry subsequently struggled to allocate financial responsibility for the surge in environmental clean up actions. Insurance coverage law before then was essentially a backwater of random, not necessarily sophisticated decisional authority; since then, it has become a complex weave of interdependent theories and doctrines.
I mention this because I am reminded of it by the current state of the law concerning fee and cost issues in 401(k) plans. To some, it may be a weird correlation, but not to me. I have written before about how the Seventh Circuit’s decision in Hecker provides a broad range of issues that warrant review and thought, some of which I have touched on in my posts and others of which I have not. I suspect there will come a time in which we will think of the law on this particular subject as being divided into two eras: before Hecker and after Hecker. And by that, I do not necessarily mean that the case law will start to follow Hecker and reform or solidify the landscape on this issue as a result. That might happen, but I am skeptical, at least in the longer or middle term. There are many issues in Hecker that were not played out fully in that decision or in the record underlying it in my view, and I suspect they will be in later cases, or by legislation or regulation, in ways that will change how we think about this type of issue, both from what existed before Hecker and from what Hecker itself suggests.
I am thinking in particular today of the court’s treatment of the amount and lack of transparency of the fees and costs in the plan before it as essentially not important, for all intents and purposes, either to participants, or, seemingly, to the court’s analysis of the plan’s obligations. A deeper look at the role of costs and fees, along with their impact, I suspect, might suggest an entirely different outcome to excessive fee cases such as Hecker, and it would not surprise me if at least some other courts in the future engage in such a closer examination and come to a different conclusion as a result. What has me thinking about this today? It is this excellent post by Ryan Alfred of BrightScope on the range of fees and costs in funds, a fiduciary’s obligations to understand all of them, and the lack of transparency as to exactly what plans are actually paying in fees and costs. Moreover, he points out the systemic differences among how different knowledgeable parties - experts may be a fair statement - calculate such fees and costs. This analysis suggests that fees and costs are nowhere near as simple to interpret and analyze as the Hecker court’s analysis assumes them to be, given that the court analyzed them on a motion to dismiss without detailed factual development of the evidence on the fees and costs in question. My educated guess, using Ryan’s analysis as a backdrop, is that a court may reach an entirely different understanding of fiduciary obligations in this regard if it first engages in a thorough factual development of the record on this issue before ruling, which the Hecker court did not.
Corporate Insurance Programs: Thinking Critically Before You Buy
I gave a seminar recently to a group of in-house counsel on insurance coverage, and the theme of my talk was the need to go beyond - or at least look behind - standard insurance packages to instead tailor the insurance program to the specific needs and exposures of the particular company in question. For instance, policies often exclude or are silent - leaving it for debate at a later time, such as after a claim is made - on whether there is coverage for awards of attorneys fees or punitive damages. Companies, I suggested, need to survey their potential exposures and analyze whether, given the types of claims made against them historically and the jurisdictions in which they operate, they are at risk of such awards; if so, they then need to tailor their insurance programs accordingly with regard to such exposures, at the time of acquisition, rather than worrying about it only after a claim is made against them.
As a result, I greatly enjoyed this piece out of the New York Times, which gives that same advice from a practical perspective for smaller businesses. The article, in particular, focuses on the need to carefully consider the trade off between how much of the company’s revenue to tie up in insurance costs versus the potential costs to the company of a particular type of claim if it is not insured against.
The Supreme Court, Suffolk Superior Court and Ed Zelinsky, All Commenting on the Breadth of ERISA Preemption
Two interesting things worth passing along this week on the topic of ERISA preemption, both reinforcing its breadth. The first is this well-written analysis of preemption out of the state trial court in Massachusetts, unusual for the reason that, normally, if ERISA preemption exists, the case ends up by original or removal jurisdiction in federal court; you seldom see a state trial judge write extensively on this subject as a result. Moreover, you don’t always see any judge write this well and accurately on the subject:
This Court finds that these claims for contribution are barred under the ERISA preemption provision, 29 U.S.C. §1144(a), which supersedes "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . ." 29 U.S.C. §1144(a). "State law" under ERISA is not limited to state statutes; it includes judicial decisions declaring the common law of the state. 29 U.S.C. §1144(c) ("State law" includes "all laws, decisions, rules, regulations or other State action having the effect of law, of any State"). . . . To determine whether State law, namely, the common law of misrepresentation, "relates to" an employee benefit plan and is thus preempted, we must look to Congress's intent. "The purpose of Congress is the ultimate touchstone." Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 138 (1990), quoting Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 208, (1985). There can be no doubt that Congress intended that ERISA's preemption provision be broadly construed. See Ingersoll-Rand Co., supra, 498 U.S. at 138; Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46-47 (1987). The provision's "deliberately expansive" language was "designed to 'establish pension plan regulation as exclusively a federal concern.' " Pilot Life Ins. Co., supra at 46, quoting Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523 (1981). See Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 98-100 (1983). "A law 'relates to' an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan." Id. at 96-97. "Under this 'broad common-sense meaning,' a state law may 'relate to' a benefit plan, and thereby be preempted, even if the law is not specifically designed to affect such plans, or the effect is only indirect." Ingersoll-Rand Co., supra, 498 U.S. at 139, quoting Pilot Life Ins. Co., supra, 481 U.S. at 47.
In spite of its undeniable breadth, ERISA's preemption provision does not apply to every State action that affects an employee benefit plan. "Some state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan." Shaw, supra, 463 U.S. at 100 n. 21. . . .Here, the alleged claim under the common law of negligence would directly relate to an ERISA plan because it would require a state court to determine the duty owed by these fiduciaries to an ERISA plan with respect to their investment of Plan monies. See Zipperer v. Raytheon Co., Inc., 493 F.3d 50, 53-54 (1st Cir. 2007) (finding that a negligence claim was preempted because it was based on the defendant's record-keeping responsibilities under an ERISA plan); Donavan v. Robbins, 752 F.2d 1170, 1180 (7th Cir. 1985) (declaring it "extremely unlikely that Congress would have wanted ERISA fiduciaries to be subject to the vagaries of state contribution law"). Even if the Massachusetts common law of negligence were to mirror precisely the fiduciary duty owed under federal ERISA law governing the investment of ERISA funds, the mere possibility that it would differ and be in conflict with ERISA's objectives is sufficient to require this state court to forbear from touching the contribution claim.
The case is Edward Marram as Trustee of the Geo-Centers, Inc. Profit Sharing Plan & Trust v. Kobrick Offshore Fund, Ltd. et al., out of Suffolk Superior Court, and you can find it at 2009 Mass. Super. LEXIS 85.
The second is Edward Zelinsky’s detailed analysis of the Ninth Circuit’s decision on the San Francisco health insurance ordinance, in which he lays out, in formal, analytical fashion, what many of us already concluded on a gut level - that the statute is a preempted invasion of rights controlled only by ERISA, no matter the false distinctions created by the Ninth Circuit in an attempt to avoid that conclusion. Writes Professor Zelinsky (courtesy of the Workplace Prof blog):
An exploration of the most recent decision of the U.S. Court of Appeals for the Ninth Circuit in Golden Gate Restaurant Association v. City and County of San Francisco (Golden Gate III) indicates that ERISA Section 514(a) preempts the San Francisco Health Care Security Ordinance. Two premises guide this exploration of Golden Gate III. First, employers’ ongoing payments to health care administrators, such as insurance companies, constitute employee benefit “plans” for ERISA purposes. Second, employers’ contributions are central features of their employee plans.
This first premise indicates that a San Francisco employer which regularly contributes to San Francisco pursuant to that City’s health ordinance thereby creates a “plan” for ERISA purposes. The ERISA status of this plan purchasing municipally-administered medical services is the same as the ERISA status of an analogous employer-financed plan paying a private administrator for comparable health care: As to all of these plans, ERISA Section 514(a) preempts state and local regulation.
Moreover, it is not persuasive for purposes of ERISA Section 514 to say (as does the Ninth Circuit) that San Francisco, by its health care ordinance, regulates employers’ health care contributions, but not employers’ health care plans. Contributions are central features of employers’ health care plans for their employees. By regulating employers’ contributions, San Francisco regulates employers’ plans.
Frankly, I thought the Supreme Court made clear in an offhand comment in Kennedy v. Dupont that the San Francisco statute, were it to come before it, would be found preempted, when the Court, in a gratuitous aside completely unnecessary to decide the issue before it, commented that a state law is preempted when it would “undermine the congressional goal of ‘minimiz[ing] the administrative and financial burden[s]’ on plan administrators.” Can you think of a better description of what the Rube Goldberg contraption that is the San Francisco ordinance does than that? And the same, by the way, holds true for the equally Rube Goldbergesque Massachusetts health care reform act as well.
Look, once again, many people may want these types of health insurance expanding statutes to exist, and the political consensus in Massachusetts means that such a statute is operating without court challenge, but that doesn’t mean they are not, in fact, preempted. They are, absent an actual change in the scope of preemption by the Supreme Court.
Other People's Money, Cumis Counsel and the Tripartite Relationship
We have talked before on this blog about the tripartite relationship among insurers, the defense counsel they appoint, and the insured; this is a topic of wide interest to all sides in the insurer/insured relationship, and, in fact, my handy dandy two minute guide to the relationship’s issues is among my most read pages. However, there is a twist in the normal relationship reflected in that guide when, rather than the typical situation where the insurer is appointing defense counsel to represent the insured, the insured is a fortune 100 or so company with its own preferred counsel and wants the insurer to simply pay for that counsel, and not to appoint its own selected counsel to defend the insured against a covered lawsuit. In that scenario, the relationship becomes a little off balance, and not really the sort of equal, three sided triangle that one usually envisions when referring to the tripartite relationship. In that scenario, rather, the defense counsel is much more the handmaiden of its usual client, the insured, than it is controlled by or answerable to the insurer, and the insurer is placed in the awkward position of being expected to primarily simply pay the bills for the insured’s defense. You often run into the old “other people’s money” problem when that happens, where the insured and the defense counsel have no real economic incentive to control costs, because the costs of the case are being paid by a third party, the insurer, to whom neither is really answerable; after all, the insured is still going to continue to use its favored outside counsel in the future, regardless of whether the insurer, who paid the bills in that case, was or was not happy about the defense lawyers’ billing practices, effectiveness or cost efficiency in that case. Various states, to varying degrees, have rules - whether statutory or judge made - in place that try to control for that dynamic, most famously California, which by statute obligates the insurer to only pay counsel in that situation the same rates it normally pays to counsel the insurer itself retains to defend cases of that type. What happens when the insured and its outside counsel don’t want to live by those rates, however, is the subject of this story right here.
Deconstructing the Language of Insurance Policies
I have been thinking a lot recently about the development and history of particular aspects of insurance policy language, and how they reflect the continuing efforts of drafters to take language that can often be imprecise and refine it to more accurately reinforce what the insurer actually intends to take on as a covered risk. Over time, many policy forms are revised as insurers find that limited knowledge about a particular type of risk at the time a policy provision is first crafted or changes in the development of the law in a particular area after the initial drafting mean that the original language chosen by the policy drafters did not accurately enough capture the extent to which an insurer meant to include, or instead exclude, a particular exposure from coverage. Historically, for those old enough to remember it, my favorite example was the exclusion written by many carriers before asbestos litigation broke out in waves, that precluded coverage of claims for asbestosis. Personally, I have little doubt that those who drafted that policy language thought they were saying by that language that the policies do not cover any bodily injury/tort liabilities arising from the mining, sale, use, etc. of asbestos and asbestos based products, and that based on what the authors knew of the subject at that time, they thought they were writing such a broad limitation on coverage. As time moves on though, it becomes clear that many suits arising out of asbestos involve other physical ailments, and not just the particular disease of asbestosis. End result? Courts find that the exclusion does not apply to the other types of injuries, since they fall outside the express wording of the exclusions, which were only written as applying to asbestosis, even though the authors undoubtedly understood the word asbestosis to mean something much more than just the specific disease that would bear that name. Indeed, what possible logic could there be behind intentionally excluding just the tens of thousands of claims for asbestosis, and not the tens of thousands of claims arising from other, similar diseases that stem from asbestos exposure and inhalation?
The history of pollution exclusions in liability policies is much the same, and another classic example. It has only taken some forty years for policy language to catch up to the extent of exposure created by environmental liabilities, and the industry has spent an untold fortune covering such claims and defending against claims for coverage of such claims in the interim. That this occurred is completely understandable, as the extent of exposure for pollution losses expanded exponentially only after much of the (then) standard policy language governing this issue was written.
Of course, a sane person might ask why I am spending so much time thinking about this these days, and there are a number of answers to that question, some even halfway legitimate or rational. But the reason is primarily that very interesting articles on the historical development of particular pieces of policy language or structure keep crossing my desk, and they keep reinforcing these points.
Here are two of them. First, the D & O diarist, Kevin LaCroix, has as well written a history of the development and adoption of the breach of contract exclusion that has become standard in many forms of policies as I have seen anywhere. As he explains, insurers always understood that the insuring agreement in their policies covered tort liability, and did not expand coverage to contractual liability; in essence, insurers and insureds alike understood that policies did not cover an insured’s failure to comply with its contractual undertakings, without any need for particular or express policy language detailing that point. However, as Kevin captures in his piece, over time this understanding started to fade into the ether, and insurers found it necessary to add a specific exclusion to policies expressly stating what had, in the past, simply been understood by all concerned, without any need for an express exclusion to that effect.
The second is this historical overview of the development and expansion of claims made policies. In this instance, as the author explains, claims made policies were developed for a particular type of exposure, but because of the usefulness of that structure with regard to such issues as setting premiums and other practicalities of the insurance business, it expanded into other forms of coverage, becoming, eventually, the industry’s “go to” form of coverage.
All of these examples bring one back to the same point, which is that the seemingly dry, contractual recitations in insurance policies are actually only the current manifestation (pun intended, for any insurance coverage lawyers reading this) of what is actually a living, breathing, ever evolving form of literature.
Some Notes on Fair Share Acts and the Economics of Health Insurance
I have argued many times on these - virtual - pages that fair share acts, and their backers’ obsession with trying to circumvent ERISA preemption, puts the cart before the horse, in that they focus on putting more health insurance obligations on employers without addressing the real reasons that employers struggle to provide health insurance, which is its ever expanding cost. Stories like this one here make me think that I have understated the case, and that demanding more insurance out of employers, without tackling the cost problem first, isn’t just putting the cart before the horse, but is actually just plain wrong headed, and bordering on the willfully obtuse (not to put too fine a point on it). It is all well and good to insist that everyone should have health insurance and access to health care, but simply blindly assuming that employers can pay for it is a mistaken premise that sits at the base of all fair share acts. It is cost that is driving the access and uninsured problem, an issue that is not addressed to any real degree by fair share acts, including the one in Massachusetts and the San Francisco version that has so far managed to survive preemption challenges.
Randy Maniloff's Top Ten Insurance Coverage Decisions for Dummies and the Rest of Us
Some bloggers blog their way to greatness, other bloggers have greatness thrust upon them. For some reason, that line popped into my head when Randy Maniloff’s always entertaining article on the top ten insurance coverage decisions of the past year appeared, like manna from heaven, in my in-box yesterday, providing one weary blogger - i.e., me - with a gift wrapped post for this morning. Substantively, there is much to be gleaned from the article and the cases it reviews, on issues ranging from the current state of trigger of coverage problems to an excellent decision on handling duty to defend disputes concerning obviously intentional conduct that has been pled as negligence for purposes of triggering insurance coverage, all written with the author’s trademark good humor and style (something anyone who reads a lot of insurance coverage briefs, opinions, articles and - yes - blogs can attest is not always present in written work in this area of the law). Moreover, the author has tossed in a free extra, a truly comical special section titled “Coverage for Dummies: The Top Ten," which collects ten excellent examples of people doing really dumb things and then demanding that their insurers protect them against the outcome.
And best of all, in what can only have been a transparent attempt by the author to garner a review on this blog, one of his top ten decisions (non-dummy division) is an ERISA case, the Supreme Court’s decision in MetLife v. Glenn. More seriously, its inclusion is almost mandatory in any collection of the most important decisions affecting the insurance industry (which, obviously, underwrites and administers the vast majority of employer provided disability plans), as it is guaranteed to generate more subsequent court rulings than any other insurance related decision of the past year, as the courts of each circuit move, over time, to realign their jurisprudence to accord with Glenn.
Intellectual Property Exclusions and Trends in Insurance Coverage Law in Massachusetts
At this point, I think we are entering a new era in Massachusetts law concerning insurance coverage, one different than any I have seen before in my decades of litigating such cases in the Commonwealth. In this brave new world, policies are apparently applied as written, and insureds cannot just claim ambiguities or that they had expectations - somehow reasonable despite being contrary to the actual wording of the policy - of coverage somehow different than that actually provided. That, at least, is the moral of Finn v. National Union, decided last week by the Supreme Judicial Court. In essence, the court enforced the plain language of an intellectual property exclusion in the policy, despite attempts by the insured to argue that it did not necessarily encompass some of the factual variation of the particular claim at issue, and the court expressly held as well that the reasonable expectations doctrine is inapplicable because the exclusion unambiguously precluded coverage. The court, interestingly, didn’t even elect to stop there, deciding to also hammer home the point that the plain language of unambiguous policy provisions controls, by pointing out that extrinsic evidence supporting a contrary reading of the policy cannot be considered in the absence of ambiguity; this is contrary to decades of actual practice in the state’s trial courts, where lawyers for policyholders would regularly toss anything and everything possibly pointing towards coverage into their arguments. The novelty of this idea in Massachusetts practice is illustrated by the fact that the court actually had to go back almost 40 years and then another 40 years more to find two Massachusetts cases to cite to that effect, despite how widely accepted and uncontroversial this idea is in other jurisdictions. A new day dawning? Maybe, but it certainly fits with my sense of the development of insurance coverage case law in this state over the past few years.
Legal Services as Commodities, and the Role of Insurance in that Process
The macro view of trends is often fun, but detailed analysis of what is really going on is often more fruitful. A long, long time ago - in blog years, anyway, which given the youth of legal blogging is akin to dog years - I wrote this post about how the rise of employment practices liability insurance would inevitably lead to a certain level of price pressures, standardization and commoditization with regard to employment law services. This excellent article here details the underlying developments that drive this type of commoditization of legal services.
Plain English and the Insurance Coverage Lawyer
I have written before about why insurance companies use experts on insurance coverage, and why policyholders need to use them too. Indeed, there is little doubt in my mind that lawyers who aren’t specialists in the field often put their clients at a disadvantage when they engage insurance companies in disputes over insurance policies without bringing in someone with years of experience interpreting and arguing over the language in policies. This case here out of the Massachusetts Appeals Court yesterday, involving a seemingly routine dispute over which of two insurers should foot the bill for an accident involving an automobile, illustrates the point beautifully. The court’s decision - which placed the risk on an auto insurer and liberated a general liability insurer - pivoted on one issue, consisting of what exactly is meant by the three mundane words “arising out of.” Plain English words, of course, ones that we have all used since we were children and which everyone knows the meaning of. But to understand and interpret an insurance policy, you need to understand the gloss on those words that generations of insurance coverage litigation have grafted onto them and, indeed, to apply the relevant policy terms you have to give a more precise definition to that term than most individuals would bother to give to it in daily speech. Here’s how Massachusetts law now defines those three little words:
Our cases indicate that the expression "arising out of," both in coverage and exclusionary clauses,
"must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law. Indeed, cases interpreting the phrase ... suggest a causation more analogous to 'but for' causation, in which the court examining the exclusion inquires whether there would have been personal injuries, and a basis for the plaintiff's suit, in the absence of the objectionable underlying conduct."
Bagley v. Monticello Ins. Co., 430 Mass. 454, 457 (1999), and cases cited.
The statement in Ruggerio, supra at 797, that "the expression ['arising out of'] does not refer to all circumstances in which the injury would not have occurred 'but for' the involvement of a motor vehicle," does not weaken the broad standard of Bagley, and that standard has been quoted by the Supreme Judicial Court with approval. See Fuller v. First Financial Ins. Co., 448 Mass. 1, 6-7 (2006). Put another way, what is required for injuries to "arise out of" the loading of a vehicle is a reasonably apparent causal connection between the loading of the vehicle and the injury. See Ruggerio, supra at 798; Metropolitan Property & Cas. Ins. Co. v. Santos, 55 Mass.App.Ct. at 795.
Plain as day, right?
A Random Walk Through the Ninth Circuit's Preemption Ruling
Disparate thoughts. Connect the dots. Or maybe more unintended consequences. Take your pick. While many advocates of health care reform cheer the Ninth Circuit’s conclusion that ERISA does not preempt all state pay or play laws, I am a little dubious as to whether this represents anything more than a Pyrrhic victory for anyone actually interested in ensuring that everyone is insured. Report after report, many of them credible, tell us that employers, who provide most of the country’s health insurance, are aghast at the idea of losing ERISA preemption, and would consider it one more reason not to continue to provide health insurance to employees and to instead pull back from that role. I am hardly inclined to think that, should employers relinquish that role, state or federal governments are prepared fiscally or intellectually to step into the breach and effectively fill that hole well. I thought this before, in the past, and wrote about it in a number of postings (such as here), when we saw the financial costs of Massachusetts’ reform plan balloon, supposedly unexpectedly; I thought it again when we saw the effectiveness of federal government regulation of Wall Street; and I thought it for sure when I read Paul Krugman this morning.
Perhaps this obsession among health reform advocates with defeating ERISA preemption is a case of putting the cart before the horse; maybe we should first have effective non-employer health insurance structures in place, before we go trying to dismantle the preemption structures on which employers rely in choosing to provide health insurance to their employees.
Prior Knowledge Exclusions: An Ever Shifting Line in the Sand
Who knew what and when did they know it?
No, I am not talking about the Wall Street bailout; I am talking about something really interesting, prior knowledge exclusions in insurance policies (well, interesting to me anyway). Prior knowledge exclusions basically work like this: they say that there is no coverage under a liability policy if the insured knew or should have known, prior to commencement of the policy period, that activity it was involved in would result in a claim against it. But how much knowledge the insured must have had, and how certain it must have been that its activities would lead to a claim in the future, have always been the tricky questions in applying these types of exclusions. Set the standard too low and the exclusion encompasses too many prior events, deleting coverage for losses that the insured may have literally had to be prescient to have anticipated; set the standard too high and the exclusion loses its intended effect of preventing insureds from buying policies to protect itself from things that it, but not the insurer selling the policy, knows is lurking in the closet.
This story here concerns the interesting case of a large law firm that apparently knew a client was engaged in misconduct with regard to securities, thereafter bought a professional liability policy, and wanted coverage under that policy for the claim eventually made against it as a result of its legal work for the client engaged in the misconduct. A New York appeals bench concluded that the standard for denying coverage on the basis of a prior knowledge exclusion had to require more than just knowledge of the client misconduct and the ability to anticipate that claims against the insured might possibly arise as a result, but also some level of participation in the misconduct by the insured law firm itself that would justify a belief on its part that it might be subject to liability. As the article describes the court’s conclusion:
Here, while evidence strongly suggests that defendant Gagne and other firm members subjectively either believed or feared that the firm might be subjected to professional liability claims by entities claiming injury as a result of SFC's conduct, his or the firm's subjective belief that a suit may ensue based upon SFC's misconduct is not enough," Saxe wrote.
"In our view, the policy cannot be properly read to require Pepper Hamilton to notify its potential insurers of its client's misconduct and its own recognition that it may be subjected to legal claims brought by those insureds as a result of its client misconduct," the judge added.
However, the panel held that "if it is ultimately established that the law firm participated in the misconduct, such as by preparing documents on behalf of the client knowing that the documents contained false or insufficient information, or by knowingly creating the forbearance payment mechanism ... then application of the prior knowledge exclusion could be justified."
Frankly, from where I sit, that finding seems to put the bar a little high, essentially concluding that evidence of an active role by an insured in actual wrongdoing is necessary to invoke this bar to coverage. The exclusion itself, which is contained in a policy purchased by a quite sophisticated and knowledgeable insured, does not state that it only applies to active wrongdoing before the policy period that leads to a claim, but is instead written more broadly and for broader purposes. Moreover, this interpretation leaves coverage in place for losses, such as this one, where it is fair to say that the insured could have foreseen the exposure before issuance of the policy but it does not appear that the insurer could have done so and thereby built the risk of it into the premium charged for the policy.
Is ERISA Preemption Coming to the Massachusetts Health Care Reform Act?
You know that theme music from the movie Jaws? Cue it up - the sharks are circling the Massachusetts Health Care Reform Act. Hard on the heels of the recent reports that the state is going to have to increase the financial obligations of employers to maintain the near universal coverage called for by the act comes this story noting the same thing I said yesterday, that increasing the obligations the act imposes on employers will likely provoke a preemption challenge. The story quotes a D.C. lawyer, Kevin Wrege, who says that several law firms there are getting ready to file suit over this and that "[a]ll they are lacking is a paying client and a green light." (I think that quote is what started the Jaws theme playing in the juke box of my mind.)
More substantively, here is an interesting survey piece from the Congressional Research Service (really, one of the jewels of the federal government, a source of generally thoughtful non-partisan analysis, in my experience) on ERISA preemption and its application to “pay or play statutes.” In particular, the piece focuses on the Massachusetts statute, and on the question of whether the First Circuit will find it preempted if it is challenged. In essence, and not too surprisingly, the author finds that the statute will likely be found preempted if the First Circuit follows the reasoning of the Fourth Circuit in Fielder (concerning the Wal-Mart Act in Maryland), but not if the First Circuit follows the reasoning to date of the Ninth Circuit in the on-going litigation over the San Francisco ordinance.
The piece also provides an interesting and detailed explanation of the provisions of the Massachusetts statute, and how it operates. The article parrots something I have said often on this blog, which is that it is likely that the low burdens at this point placed on employers by these provisions of the act is the likely reason no one has challenged it to date as preempted. When you read the piece, you will see pretty clearly both how low those burdens are at this point (it is hard, for instance, to imagine any major employer not already being in compliance just as a matter of course with the “play” requirements of the statute as they are described in the article, thus precluding the statute from significantly affecting them or their bottom lines) but also the avenues for those burdens to be increased.
Thanks is due to BenefitsLink, by the way, for passing the report along.
Massachusetts' Pay or Play Act: The Triumph of Hope Over Experience?
I have said it before and I will say it again: the day they fess up to the real costs of insuring the uninsured in Massachusetts and admit they need to pass that cost onto employers is the day before someone files a lawsuit asserting that the Massachusetts Health Care Reform Act is preempted. Take a look at this, and this.
A Real World Legal Guide to Issuing Reservation of Rights Letters
Permalink | Now this is neat. Here is something that, at least to insurance coverage people, is actually pretty cool. In a world in which most published articles in the legal realm take place on a somewhat airy level, we don’t see enough pieces that provide practical information that is useful in dealing with the nitty gritty aspects of day to day work, particularly concerning those aspects of business life that require making practical use of legal standards and controlling principles. In the world of insurance, one of the most important points at which legal principles and day to day practicalities collide is in the position letters, such as reservation of rights letters, that insurers issue in response to notices received from insureds concerning claims made against them. This article here surveys the key issues that impact issuing those types of letters.
While I don’t necessarily agree with each and every point - many are subject to judgment calls - in the article, most are right on the money, and it certainly surveys the majority of the key issues that at least have to be considered in preparing a reservation of rights letter.
Understanding ERISA Preemption as a Legitimate Congressional Policy Determination
Permalink | Many, many people object to ERISA preemption, viewing it as some sort of nasty trick that defendants use to avoid liability in ERISA related cases. Do a quick search for ERISA and preemption on Google Blog and you will find that out pretty quick. But to me, they misunderstand preemption, which was a legitimate policy choice by the Congress that passed ERISA to maintain one consistent federal policy and body of law for purposes of employee benefits. It is worth noting that, some thirty years, countless judicial decisions enforcing preemption, and even more countless numbers of critics later, Congress still has never acted to change that - to, in effect, preempt preemption. Stories like this one here, about the funding problems with Massachusetts’ much lauded - and legally questionable under preemption standards - pay or play law validate Congress’ decision in this regard, as it demonstrates the sheer impossibility of executing effective major change in any significant area of employee benefit law - in this instance with regard to health insurance and health care - on a state by state level. As the article discusses, Massachusetts finds itself unable to fund the universal health care initiative it passed, to much self-congratulation, recently, and is now forced to change the financing structure that it originally relied upon and which was the basis for the law’s enaction and lack of preemption challenge; as I have discussed in the past on this blog, the Massachusetts act, unlike pay or play statutes and ordinances in virtually every other instance, has not been challenged in court as preempted simply because the direct financial burden on the business community was, as enacted, minimal, but I have predicted before that: (1) the statute will inevitably result in an increase of the costs passed onto the business community; and (2) a preemption challenge will come not long after that occurs. As the article reflects, the first one of those events is knocking at the door right now; the second one won’t be long behind it.
Insurance and the World at Large
Permalink | I am asked on occasion about the topics of this blog and their connection to my practice, more particularly how I ended up focusing the blog on its two primary subjects. For years, my litigation practice has focused primarily on three areas: intellectual property, ERISA and insurance coverage, in no particular order. A joke which I have long used and which always fails to elicit anything more than a pained half-smile is that 50% of my practice is insurance coverage, 50% of my practice is ERISA litigation, and 50% of my practice is intellectual property litigation.
Why did the blog end up focusing on two of those topics - ERISA and insurance coverage - and not the third, intellectual property? Well, one reason is that my experience is that intellectual property cases are heavily fact driven more than they are a product of interesting evolution in case law, limiting the appeal of blogging on them, and another is that, as a very knowledgeable legal blogging guru told me when I started the blog, there were already a lot of - mostly very good - intellectual property focused blogs; all you have to do is take one quick look at William Patry’s copyright blog to see how well tilled that soil already is.
But beyond that, and in contrast, I have found that my other two primary areas of practice, which are the central focuses of this blog (although as the digression section over on the blog topic list on the left hand side of your screen reflects, I do on occasion venture here into intellectual property issues of interest to me), provide a rich vein of endlessly interesting topics and legal developments. ERISA litigation, for instance, is a remarkably and endlessly evolving area of the law, as the courts develop what is in essence a federal common law covering the field, and as the courts deal with new types of retirement plans, plan investments, and increased litigation over both. And the intersection of insurance and the business world is a truly fascinating place to be, as the two come together at every major point in the economy and at every major issue in it as well. Here’s a good story, about the general counsel at Lloyd's of London, that makes that point.
Who Let the Additional Insured Out? Who? Who?
Permalink | It seems like these days I have been reading a lot of interesting things on the subjects covered by this blog, many of which I either haven’t been able to pass along because of time constraints, or haven’t passed along because there isn’t enough to say about them to warrant a full blown post. I am going to take a shot at passing these types of interesting little pieces along though, when I can, and I will start today with one, which is likely to be of interest to those of you who read the insurance coverage posts on this blog. Over the years, the question of who, beyond the actual named insured to whom a policy is issued, qualifies as an insured for purposes of a particular policy has consistently appeared on my desk, in a range of guises, under a variety of policies, and with regard to an extensive array of issues that are troubling clients. Here is a nice technical piece on just what are the different types of policy language that are added to policies for the purposes of adding other parties, besides the named insured, to insurance policies as insureds.
And yes, the title of this post is intended to be sung (quite softly in an office environment) to the tune of this extremely annoying ditty.
On the Impact of Reservation of Rights Letters
Permalink | I have written before on a number of occasions about the tripartite relationship that comes into play when an insurer retains defense counsel to represent an insured against a covered lawsuit. In particular, I have discussed my views that the relationship is nowhere near as complicated as many people make it out to be, and that the proper scope of the dealings among all the players in that three sided transaction can be summed up in three handy rules of thumb, which, conveniently enough, you can find right here.
However, what is more complicated and what many people seem to have less understanding of is what are the insured’s rights when the insurer - whether it or instead the insured has selected and is paying the defense lawyers - is limiting its coverage by means of a reservation of rights, which is in essence a letter stating that the insurer will cover only parts, but not all, of any possible loss in a particular case. In many jurisdictions, these circumstance gives rise to a number of substantive powers and subtle leverages on the part of the insured, and likewise to many express duties and subtle pressure points on the part of the insurer. Those, much more than the much simpler dynamics of the tripartite relationship, are worth knowing about, and if you think so too, you may want to attend this teleconference on the subject, scheduled for tomorrow.
More on the Arthur Andersen Ruling
Permalink | I like the legal issues raised by it; bigger media outlets like the big numbers involved. Either way, the story gets big play. Here’s the National Law Journal’s article on the Seventh Circuit’s ruling on the lack of coverage for Arthur Andersen’s pension obligations, a ruling I discussed in detail in this post here.
On Discovery Problems and Solutions
Permalink | Here’s an interesting law review article, passed along in detail by the Workplace Prof, on problems, and potential solutions, in managing discovery. Discovery, to beat what must now be a dead horse, has become infinitely more complicated and expensive - with far more consequences for mistakes - in any type of complex litigation with the adoption of the federal rules governing electronic discovery (and in fact with the rise of computerized data itself). Regular readers know that I have argued before in this space that the courts need to develop a jurisprudence that analyzes the need for and cost of electronic discovery - which can often involve massive amounts of computer generated and/or stored data - in much greater depth than the more superficial analysis of discovery disputes that has historically been the norm: in essence, courts should engage in a more searching inquiry into disputes over electronic discovery, given their costs and how much of such data is likely to be irrelevant in any given case, before granting extensive discovery into electronically stored data. At a minimum, there should be a degree of inquiry that, even if it won’t allow conclusive enough findings to decide to outright not allow such discovery, will still allow an intelligent, reasoned limitation on exactly what the scope of that discovery should be. I would argue that, in cases that warrant it, it would even be appropriate to hold a mini-trial type proceeding, maybe of two or three witnesses, and then to rule on to what extent such discovery is warranted. This approach would be a far cry from how courts have traditionally addressed discovery disputes, but, as the article suggests, it is past time for the courts to begin applying a more systemic and in-depth approach to controlling discovery.
This is particularly important in the areas covered by this blog, ERISA litigation and insurance coverage litigation, where computerized data, communications and information processing, is almost literally the coin of the realm. Electronic discovery is therefore truly a major cost-driver and risk factor in these areas of the law. The development, at the boots on the ground level of magistrate judges (to whom discovery disputes are often assigned), special discovery masters and trial judges, of the law of electronic discovery provides an opening for courts to really address these issues, in the manner suggested by the article and with fresh eyes, and its an opportunity that should be taken advantage of, one that calls for curiosity, innovation and reasoned experimentation. I will give you one example, to make my point. One of my partners was recently handling a massive, multi-party litigation, in which there were numerous interrelated legal and factual issues, some of which may be outcome determinative. Rather than engage in the traditional approach of years of discovery with only minimal court oversight, followed by summary judgment motions, the court instead ordered some discovery, followed by summary judgment motions on the key potentially outcome determinative legal issues, followed by, if any party believed further discovery was needed to resolve those issues, the filing of Rule 56(f) affidavits to justify such discovery; the court would then decide what further discovery would be allowed before it would rule on the legal issues. The end result was order out of what otherwise could have been chaos, and a case that stayed on track towards resolution. It’s a good example of a court proactively using existing procedural tools to narrow the issues, and decide on what issues further and potentially expensive discovery is actually needed. This appears to be exactly the type of use of existing procedural tools and focus on the timing of discovery that the article's author is advocating as the means to improve discovery.
What Happens When ERISA and the Law of Insurance Coverage Collide?
Permalink | Wow, I guess this is really Seventh Circuit week here, with, I guess, a particular focus on the jurisprudence of Judge Easterbrook, whose opinion in Baxter I discussed in my last post. This time, I turn to his decision from Wednesday in Federal Insurance Co. v. Arthur Andersen, which strikes right at the intersection of the two subject areas in the title of this blog, insurance and ERISA. The Arthur Andersen opinion concerns the extent of coverage, if any, for Arthur Andersen’s massive settlement of lawsuits related to its retirement liabilities upon its well publicized, post-Enron collapse, under a policy covering breaches of fiduciary duty. The court found that there was no coverage, for a number of reasons, the most salient of which being that, first, the losses in question were the actual pension amounts, which the policy does not cover (it instead covers only other losses related to a pension plan, separate from the actual amount of the pension benefits in question), and second, that although the claims in question related to pension plans, they were not actually for breaches of fiduciary duty related to such plans, which is all that the policy actually responds to. There are some interesting lessons for plan sponsors and plan administrators in these findings: first, that it is important to remember that, in buying fiduciary liability coverage, this is not the same thing as insuring the benefits owed to pensioners themselves, and, second, that the exact scope of the coverage is narrow and limited by its exact terms, which may not extend coverage to the specific allegations of any particular lawsuit arising from the pension plan. What’s the take away? A close look by an expert is needed when selecting insurance coverage for pension plans and the people who run them, if for no other reason than to have an accurate understanding of the extent to which potential problems with the plans may actually be covered.
Beyond these lessons in the case for people on the ERISA side of this blog’s title, the decision provides a fascinating run through a number of complicated insurance coverage topics for those of you who are interested in the insurance coverage half of this blog’s title. The judge - or perhaps his clerk, I don’t know the practices in that particular court - writes fluidly on the law of estoppel, waiver, the duty to defend, and the respective rights of the insurer and the insured when it comes to control of the defense and settlement of a covered lawsuit.
Legal Rights That Are Protected In Courts, May Well Be Lost In An Arbitration
Permalink | I haven’t commented in the past on this, because there was too much else going on directly on point with ERISA. However, as many of you may know, the Supreme Court issued an opinion a week or two back in essence concluding that parties may not contract between themselves to allow a court to review an arbitration award beyond the limited review provided for under the Federal Arbitration Act. As I have discussed on this blog more times than I care to remember, commercial arbitration suffers from a number of problems, and I have suggested in the past that commercial entities who want to arbitrate should take preemptive steps to solve those problems at the time they agree to arbitrate. Probably the biggest barrier to arbitration serving as a forum for complicated commercial disputes is that the Federal Arbitration Act effectively provides no substantive oversight of an arbitration ruling, making the arbitrator’s ruling the final decision, and only allows judicial review for the purpose of addressing any serious procedural errors during the course of an arbitration. Commercial entities have been well advised in the past to try to negotiate around this problem, to leave some type of judicial review in place that will provide oversight of an arbitration panel that is akin to what a federal appeals court provides to a trial court. The Supreme Court’s opinion effectively deprives parties who wish to arbitrate from agreeing to allow such a review by a federal court, making arbitration a forum that, quite simply, isn’t appropriate for a party that wants to maintain rights of appeal should the original decision maker - whether an arbitration panel, a trial judge or a jury - err significantly on either the particular law or the application of that law to the facts proven in the case.
Frankly, from a substantive real world approach, it’s the wrong decision. Arbitration can work for commercial entities, but not in a cookie cutter manner and only if they can negotiate around the problem of limited judicial review. The Supreme Court’s ruling precludes contractually remedying that problem. As a hypothetical question for a federal courts class, it might be the right answer; in the real world, it certainly isn’t. Indeed, I have commented in the past on empirical and anecdotal evidence that commercial entities are losing interest in resolving complicated business disputes by arbitration, and this ruling isn’t going to reverse, or even slow, that trend.
What’s the occasion for this soliloquy? This article right here, out of Texas Lawyer, which hits these notes right on the head (I like a good mixed metaphor on a Monday).
The Hard Headed Business Case for ERISA Preemption of State Health Insurance Mandates
Permalink | Why does ERISA preemption matter in the health insurance context, and why do many people think it should preclude state health insurance mandates, such as the Wal-Mart law already deemed preempted in Maryland and the San Francisco ordinance that is currently the subject of litigation over the question? Leaving aside the legal reasons why the acts are preempted, it is because employers, who provide most of the health benefits in the country, rely upon the stability and predictability generated by ERISA and the preemption doctrine. That, in any event, I think is a fair reading of this article here.
A Blog to Pass Along, and Some Thoughts About the Supreme Court's Interest in ERISA
Permalink | Lots going on, lots to talk about. Let’s start with this one, which, coincidentally, allows me to kill two birds with one stone. You may recall that some time back I mentioned that I had come across two interesting blogs that I wanted to pass along, one of which was The Float, covering primarily investment related issues and their intersection with ERISA. I mentioned I would pass along the other blog in a subsequent post, which, almost inevitably since I had promised to do so, I never did, as breaking news and a pending trial shunted it to the side. Well, that other blog is this one, Benefits Biz blog, by the benefits and executive compensation lawyers at Baker & Daniels, which I have found to be a consistently interesting read. Moreover, I return to it today to pass that link along because of a very interesting post they have concerning a case that the Supreme Court has now elected not to add to its docket, concerning the relationship of age discrimination laws and employer provided health insurance benefits. As many already know and as I have discussed in the past here on this blog, the Supreme Court has shown a continuing interest in all things ERISA, with three cases either already decided or added recently to its docket. The Supreme Court’s lack of interest in this particular case perhaps hints - I am reading tea leaves here now, in the august tradition of Kremlinologists and other students of secretive institutions - at the outer limits of the Court’s interest in the subject of ERISA. The cases accepted for review to date by the Court emphasize litigation issues and, in particular, the effect of the evolution of retirement benefits from pensions to 401(k) plans on the litigation environment. This is not a fair reading of the case passed on by the Court that the Baker & Daniels’ lawyers discuss in their post; we may be able to infer that if you want to attract the Court’s interest in an ERISA case right now, you better make it about litigation and defined contribution type plans.
A Potpourri of Interesting California Insurance Coverage Decisions
Permalink | Still on trial, but I did have time this afternoon to read this interesting piece, summarizing a number of interesting appellate decisions over the past year from California courts on a range of insurance coverage issues, running from post-claim underwriting of health insurance to the scope of coverage granted by directors and officers policies. The cases include one that provides an interesting analysis of the scope of the attorney-client privilege in the context of insurance, an issue I have talked about at some length in the past on this blog. You can find the article right here. For those of you interested in the subjects covered by this blog, it is probably a worthwhile read.
Gone Fishing - Not Really
Permalink | I am starting a trial today, so my posting will be sporadic and erratic at best. As I did the last time I was trying a case, I will try to at least find time to pass along new court decisions, publications, or events of significance while I am on trial, even if I don’t comment much on them in the posts; if they warrant it, I will return to the posts later to discuss the issues in more detail.
A Break from LaRue: Anticipating Insurance Coverage Disputes Over Climate Change Exposures
Permalink | Can’t do LaRue all the time, every post, although, frankly, the more one thinks about the Supreme Court’s three opinions, the more one can come up with to talk about. I will return to various issues raised by the opinion here and there, as time and interest allows. For now, though, I think I owe some posts that can be attributed to the insurance litigation side of this blog’s title to readers who are interested in that topic, and I have been thinking - when not obsessing over whether individuals can sue for mistakes in their 401(k) plans, that is - about all the legal seminars and publications that have been showing up in my in-box lately anticipating insurance coverage litigation over climate change issues. One of the interesting things about these is that they are showing up in droves now, long before suits seeking to recover for climate change losses have even been pursued. As I have said before on these electronic pages, insurance is the real leading edge indicator for a lot of issues, and one of them is climate change; the insurance industry will be one of the first to be heavily impacted by increased climate related losses, through its coverage of property and liability risks, and will, concomitantly, be one of the first to take concrete business steps in response to global warming. This early media drumbeat over insurance coverage issues related to climate change litigation reflects an eternal truth: that any possible new area of business liability, such as over climate change, will simultaneously spawn a cottage industry in representing businesses against insurers over those new liabilities. On a more substantive note, the particularly interesting thing to me about the seminars I am seeing is that these educational materials present the issue as essentially an extension into the climate change area of the legal developments generated during the last broadly contested, high stakes area of coverage disputes, namely environmental losses related to Superfund and other environmental liabilities. It’s a logical step, if one thinks about it: the environmental coverage disputes revolved primarily around the environmental impacts of the dumping of pollutants, and the new climate change issues will also concern environmental impacts, only in this instance ones that stem from the global warming impacts of certain business practices. The earlier environmental coverage rulings issued primarily in the late eighties and early nineties are thus a natural base on which to analyze the insurance coverage issues raised by climate change liabilities. In a way, it even fits the historical development of insurance coverage law. The environmental coverage litigation really expanded from, and built upon, the mass tort coverage disputes of asbestos, most concretely in the extension of trigger of coverage issues decided in that earlier context into the environmental pollution context; it only makes sense that the same historical evolution would continue into the next “hot” (pun intended) realm of insurance coverage litigation, in this instance by taking coverage decisions related to environmental polluting and rejiggering them to apply to climate change exposures.
A Couple of Other Perspectives on LaRue
Permalink | There’s a lot out there on the Supreme Court’s ruling in LaRue, and I thought I would pass along today a couple of articles and blog posts that approach the issues raised by the case from a slightly different perspective than simply the technical legal issues raised by the case. Employee benefits lawyer George Chimento discusses the LaRue decision in this client advisory here, with a focus on a particular question, namely, whether in light of the problems posed by LaRue type cases, it makes any sense to sponsor a 401(K) plan that allows participants to pick and choose among investments. He makes a compelling argument that it just may not make any sense to do this, given the liability risks, amply illustrated by the LaRue case, and the investment skills of the average participant. He sums that issue up in this paragraph from his article:
With all this additional liability, is it wise to sponsor self-directed plans, with the extra expenses associated with open-end mutual funds and daily investment switching? Are participants really better off self-managing their retirement assets, doing something they were not educated to do? Perhaps it's safer, and better for all parties, just to have an "old fashioned" managed fund, without participant direction, and to employ properly certified investment managers who can be delegated fiduciary liability under ERISA. A dividend of LaRue is that it may cause employers to step back and reconsider the current, expensive, and dangerous fad of self-direction.
And Kevin LaCroix, a lawyer/expert insurance intermediary, tackles LaRue in this interesting blog post on his well-regarded D&O Diary blog, in which he focuses on the issues for fiduciary liability insurance raised by the case. One interesting point he makes is that the availability of coverage may be affected by exactly that split between the Justice Roberts’ concurrence and the other two opinions, related to whether or not claims of this nature should actually be prosecuted only as denial of benefits claims, or instead as breach of fiduciary duty claims. Anyone interested in the insurance implications of LaRue should find it a useful and informative post.
Want to Learn More About the Tripartite Relationship?
Permalink | One of the widest read and linked to posts I have written recently was this one here providing the law of the so-called tripartite relationship in thumb nail fashion. Interest in this topic surprises me to a certain extent, because very much the point of the post was that, despite all the seminars and publications addressing the topic, I really think the rules governing the relationship among insureds, insurers and insurer appointed defense counsel boil down to a pretty simple set of working principles, which I discussed in that blog post.
However, it is clear that many people have a great deal of questions about the topic and want more education on the subject, and I can think of no better sources to answer such questions and provide education on it than the panelists on this upcoming seminar on the topic; among the panelists is Marc Mayerson, who writes the Insurance Scrawl blog on insurance coverage topics.
Money Talks, Even About the Massachusetts Health Care Reform Act
Permalink | A number of different things I want to talk about, including an interesting decision discussing the obligations of plan sponsors when it comes to selecting advisors and some interesting thoughts on QDROs. I will sprinkle those in later, but for now I thought I would pass along Steve Bailey of the Boston Globe’s column today on the issues raised by the Massachusetts Health Care Reform Act, which basically mirrors what I have said in prior posts, such as my last one, about the statute and issues with its implementation. A couple of interesting tidbits to point out though, from his column. First note his reference to the fact that the statute effectively left the business community off the hook (in truth, this is only true financially, and even then only partly so; they still bear some administrative headaches, and some currently modest financial exposures), which fits exactly with my explanation in the past as to why the statute has not faced a preemption challenge in court to date. Second note his reference to the idea that the political and legislative will to continue with the program is strong. All well and good, but the issue now is the plan’s escalating costs, which are going to have to be borne by taxpayers or else by the business community; one wonders about the commitment of those who will actually have to pay the bill for this program. Anyone going to ask them?
The Massachusetts Health Care Reform Act as Evidence of the Need for Preemption
Permalink | Stories like this make clear that advocates of state fair share plans who like to point to the Massachusetts Health Care Reform Act as a shining exemplar of what could be accomplished if only ERISA preemption would go away are barking up the wrong tree. Rather, the article, with its discussion of spiraling costs to the state and the state’s need for federal funding to remedy the resulting shortfalls demonstrates the opposite, namely that, as I have argued in other posts, there is real reason to doubt whether the problem of the uninsured is one that can be cured on a state by state basis. Indeed, the fact that the Commonwealth needs significant - but as yet unpromised - infusions of federal money to effectuate coverage of the uninsured suggests that this problem cannot be solved by states and instead can only be solved on a larger playing field, namely at the federal level with the type of resources that only the federal government can commit to the issue. And if the issue can only be solved on a national level, and not on a state by state level, then isn’t that an argument for preemption? I hate to be a cynic, and prefer the title of skeptic, but there are a lot of reasons that ERISA preemption both exists and is valuable, and it is not the bogeyman preventing health insurance in this country that many of its critics make it out to be. There are real, fundamental problems in trying to increase health insurance coverage in this country, ones that are not solved by these state acts, which, as I have discussed before, basically play at the margins without addressing the real problem - cost - that is handicapping both the ability of employers to continue to provide health insurance to their employees and the ability of Massachusetts to actually successfully pull off its health insurance experiment.
And Still Another View on Preemption and the Massachusetts Health Care Reform Act
Permalink | I’ve noted in the past that the problem with state health care reform acts mandating health insurance is that they don’t tackle the issue that is deterring employers from providing broader health insurance benefits, namely the ever increasing and rapidly escalating cost of health insurance. In response, Massachusetts lawyer David Harlow argues on his blog that incremental steps towards resolving this problem are moving forward on their own schedule, separate from state legislation mandating employer provided health benefits, and cost control will come in time. Personally, I am skeptical that governments can actually control these costs, or even significantly reduce their annual rate of increase, but I would be happy to be wrong.
Someone Else's Thoughts On Preemption and the Massachusetts Health Care Reform Act
Permalink | People with thin skins - or who can’t laugh at themselves - shouldn’t write blogs. I got a good chuckle out of this over my morning coffee this morning.
The Lessons of the Massachusetts Health Care Reform Act's $400 Million Shortfall
Permalink | There’s a lot to be said about the preemption issues raised by state health insurance mandates and the assumptions that underlie the beliefs of those who argue that ERISA preemption should not be allowed to prevent states from experimenting with acts intended to remedy the problem of the uninsured. Articles like this one here, however, suggest the naivety of some of those assumptions, such as the idea that states are likely to really manage the problem in a more effective way than employers, operating under ERISA preemption, have managed to do so to date. Moreover, the article, in its discussion of the huge and apparently unexpected, or at least unplanned for, increase in the cost of insuring the uninsured under the Massachusetts Health Care Reform Act, really drives home a point I have made in other posts, that the problem with these statutes is that they do nothing to address the real problem affecting employer provision of health benefits, namely the extraordinary cost of providing those benefits; as the article reflects, Massachusetts’ much lauded experiment doesn’t target that at all, but simply shifts the pockets that will have to fund those extraordinary and ever increasing costs. And finally, if you look closely at some of the numbers discussed in the article, you come to understand the answer I have given to people who have wanted to know why no one has yet challenged the Massachusetts act as preempted; as I have told people, it’s not because the act isn’t preempted, it is instead because the financial costs to employers have yet to warrant such a challenge. The article explains that the state is anticipating some 400 million dollars in additional costs to provide health insurance under the statute to the uninsured, costs to be assumed by the taxpayers rather than by businesses through any obligation under the mandate to provide insurance; in this way, the Massachusetts statute is much more a mechanism - Trojan horse, some might say - to transfer the costs of the uninsured onto the tax rolls, rather than, by employer mandates, onto the business community. I think it is a safe bet that, had the act been drafted to transfer more of the health insurance costs onto the business community rather than onto the state taxpayers, you would have quickly seen a preemption challenge mounted. And finally in this regard, note the article’s reference to the amount of money that employers have paid to date for not providing the health insurance required by the statute, which is the underwhelming amount of 5 million dollars. I suspect Wal-Mart spent not too much less in legal fees to get the Maryland Fair Share Act overturned, and those aren’t numbers, spread across an entire business community, that are likely to provoke any economically rational business person to want to fund litigation over the act. Start to see those numbers creep up substantially, however, and you can safely plan for a preemption challenge.
Niche Insurance and Government Investigations
Permalink | I had two different, perhaps more substantive things in line to talk about today, but I think I am going to push them back to later in the week, to instead pass along a highly entertaining article (at least to people who really like the ins and outs and oddities of the insurance industry) that showed up on my doorstep in yesterday’s New York Times. I have talked before about a number of themes in insurance coverage, including niche coverages and the difficulty for individuals of funding their own defense against complicated lawsuits; both of these themes came together right here, in this recent post about directors and officers coverage and in particular concerning a niche product targeted solely at protecting former directors and officers.
This story here out of the New York Times is perhaps one of the more remarkable tales of niche insurance coverage, and tells the tale of a specialty insurance agency that exists solely to sell insurance to CIA, FBI and similar government employees that covers them against lawsuits and government investigations arising from their work. I have to admit, I have always wondered about this a little bit, as congressional investigations and government prosecutions of a variety of federal law enforcement and similar employees have piled up over the years, a curiosity that may have begun all the way back when I used to see Robert McFarlane, implicated in the Iran Contra affair, in the hallways of the office building where I had one of my first post-collegiate jobs. The article explains that the policy covers tens of thousands of government employees, is relatively inexpensive and provides “up to $200,000 in legal fees for administrative matters like investigations by Congress or an inspector general, or cases involving demotion or dismissal [plus] [a]n additional $100,000 is available for legal fees in criminal investigations, and the policy pays up to $1 million in damages in a civil suit.”
An insurance/business note that you should not overlook in the article is that the product really drives home the impact of risk sharing across a broad insured population. The coverage, which provides a fair amount of dollars of protection (although, as the article points out, probably nowhere near enough to cover the legal costs generated in the highest profile cases), costs each insured only a few hundred dollars, a pretty big gap between premium and the potential payout. However, when you note that the policy is purchased by tens of thousands of employees but only a tiny handful ever end up needing the specialized coverage it provides, you can see how the numbers work out to allow the insurer to provide such coverage at such a low and manageable cost for the insureds.
Insurance Coverage, Tuberculosis, and that Guy on the Plane
Permalink | You see, everything at the end of the day is about insurance. Risk sharing that allows smaller businesses to move forward with operations, plaintiffs’ decisions over who has enough insurance to warrant suing, even the economic dislocations of climate change - everything comes back to the insurance industry. Here’s a great example, and an amusing one. Remember the lawyer who flew across the Atlantic after being diagnosed with tuberculosis? And who naturally was thereafter sued by other passengers who became quite worried about what they might have picked up from the guy? (Your faithful correspondent here moves three rows away on a commuter train if someone even sniffles, so I certainly have sympathies for those other passengers.) Well, he notified his homeowner’s insurer of those cases and the insurer is paying to defend him, but it has now launched the real battle, namely litigation over whether or not there is coverage for these claims against him; if there isn’t, he’s stuck paying any judgments or settlements. You can find the whole story here. A couple of interesting side points. First, there is no doubt the insurer is, as the article suggests, taking the right tack here; the proper approach is to defend and simultaneously ask a court to declare whether there is any coverage. This is particularly so in this instance because of the second side point, which is that, on first glance, those coverage defenses of the homeowner’s insurer noted in the article aren’t the best; without even knowing the facts beyond what I’ve read in the media in the past or reading the complaint, I can spot the potential holes in their arguments from here. When coverage is particularly debatable, it makes no sense for an insurer to simply deny coverage and leave the insured on its own, because of the potential exposures - a long story, best saved for another day - that can attach to the insurer if it is wrong in deciding that there is no coverage; rather, the best tactical play in that situation is to defend the insured, and to not deny coverage unless and until a court agrees there is no coverage. The downsides to the insurer in that situation are nothing more than the costs of litigating the coverage question and possibly, depending on the jurisdiction, having to pay the insured’s costs in the coverage litigation if the court decides there is coverage; that’s a heck of a lot cheaper than the potential liabilities, including bad faith judgments, that can attach to an insurer that simply denies coverage on its own, and is later found to have been wrong.
On Directors and Officers Insurance
Permalink | Earlier in the week, I promised to pass along over the course of the week some interesting articles on insurance coverage issues that I had been reading, and here we are, the end of the week already, and I haven’t done so, having been waylaid along the way by breaking news like the Ninth Circuit’s stay of the ruling that San Francisco’s health insurance ordinance was preempted. So in this post, I will pass along two more of the articles, both having to do with directors and officers insurance, a topic that I have mentioned in the past often raises problems for practitioners and clients, particularly in terms of understanding the scope of the coverage it grants and the nature of its exclusions. The first is this outstanding article here, laying out a road map for in-house counsel at publicly traded corporations over how to protect themselves from the various liability traps that have appeared for such corporate lawyers by navigating them through the ins and outs of the insurance coverage that may be available to them in that role. The article explains that many corporate counsel faced with problems from backdating inquiries and similar exposures will not in fact be protected by the directors and officers insurance purchased by their employers, and instead need to have their companies purchase a stand alone policy directed at covering the unique risks faced by in-house counsel to protect them against all of the investigations and lawsuits written up on the front pages of the business pages.
The second is this terrific interview here, in the Metropolitan Corporate Counsel, that really breaks down the structure of directors and officers insurance and the variables at play in obtaining it. One of the things I liked best about the article is that it reinforces the same point I often make when discussing directors and officers coverage and protection for people serving in that role, as I did here in this post, which is that directors and officers need to protect themselves by creating two separate lines of protection: first, they need to be guaranteed indemnification under the company’s by-laws against claims filed against them in their role as directors and officers, and then second they need to be protected as well by directors and officers insurance purchased by the company. In that way, the indemnification agreement can protect them against claims that might fall into exclusions or other gaps in the directors and officers coverage, thus keeping them free from personal exposure, and the insurance can protect them should the company go belly up or otherwise fall down on its obligation to indemnify them.
And this last point leads me to another topic that has crossed my path recently, namely the need to make sure that former directors and officers of public companies can rest their heads comfortably at night, without tossing and turning worrying about the possibility that their prior service as corporate officers might come back to haunt them, in the form of being named as a defendant in suits based on events that took place while they served on a board. Given the headlines in the papers and the increased risks of such service, one can understand how former board members may be concerned about personal liability after leaving a board. One answer to their concern is policies targeted directly at the risks and exposures of retired or former directors and officers, written for the express purpose of insuring them against claims instituted after they stop serving in that role. In much the same way that, as noted above, directors and officers insurance for current board members provides an additional level of shielding from potential personal liability, this product does the same thing for board members after they stop serving; one company providing the product, and more information on this type of insurance product, is here.
The Ninth Circuit on the San Francisco Health Insurance Mandate Ordinance
Permalink | Workplace Prof has the story here of a three judge panel out of the Ninth Circuit staying the district court ruling that the San Francisco ordinance mandating the provision of health insurance by employers was preempted, and provides a link to the ruling. I second the surprise he describes in his post over the conclusion that the ordinance could legally be found to not be preempted, but in light of the media coverage of the appeal over the last week or so that I have been seeing indicating that the particular three judge panel hearing the action for a stay appeared critical of the lower court ruling, the fact that the stay itself was imposed doesn’t stun me.
The panel’s ruling consists primarily of drawing distinctions among the facts of leading Supreme Court preemption decisions and the details of the San Francisco ordinance, rather than of any sweeping view of preemption that would place mandates and fair share acts outside the scope of preemption, something which would set up a direct conflict with the Fourth Circuit’s ruling in Fielder, which found the Maryland Fair Share Act to be preempted. The distinctions that the panel relies upon are in many ways in the eye of the beholder, and it would be just as easy to argue the opposite, that the similarities of the San Francisco ordinance to the facts of the leading preemption cases mean that the ordinance should be understood to be preempted. The ruling also reflects, although obviously the panel is controlled by Ninth Circuit law in areas not yet passed on by the Supreme Court, a heavy reliance on Ninth Circuit decisions that do not necessarily reflect where this issue will end up if and when the Supreme Court finally weighs in on the preemptive effect of ERISA on state health care mandates and fair share acts, something which one can bet will happen sooner rather than later if the eventual ruling out of the Ninth Circuit on the San Francisco ordinance sets up a direct conflict with the Fourth Circuit’s ruling in Fielder.
The Three Rules of the Tripartite Relationship
Permalink | We’ve been a little ERISA heavy here for awhile now, somewhat to the detriment of the insurance litigation half of the blog’s title, simply because of the range of interesting events that have taken place under the ERISA rubric lately. While all that was going on, though, a particularly good collection of articles on different insurance coverage topics have crossed my (electronic) desktop, and I want to pass them along as well; I will try to scatter them in with other posts over the next week or so, until I exhaust them.
One I wanted to pass along is this article here, by two prominent policyholder attorneys, on the tripartite relationship, which concerns the potentially conflicting loyalties of defense counsel appointed by an insurer to defend an insured against a lawsuit that may or may not be covered. This problem stems from the fact that insurers are often obligated to provide insureds with a defense against cases that may turn out, upon further development of the facts of the case, to not actually be covered, in which event the insurer will not have to cover any judgment or settlement, and might even be entitled to recoup from the insured the amount paid to defend the case in certain circumstances and jurisdictions.
Although there is much written and said about the tripartite relationship, the whole topic comes close to falling into the much sound and fury signifying nothing realm, although not completely because there is some substance to the issue, only not as much as lawyers like to make it out to be. The whole issue can really be boiled down to three handy rules of thumb. First, the defense counsel appointed by the insurer must focus only on defending the case as though the insured were his or her only client, and cannot muddle about between the insurer and the insured over any coverage issues that remain outstanding. Second, the insurer needs to retain separate lawyers, in the role of so-called coverage counsel, to take the factual information developed by defense counsel in defending the case and evaluate how it affects coverage. And third, an insured must remember that the defense counsel is solely going to defend the case, without regard to coverage disputes and is not looking out for the insured’s interests with regard to whether any recovery in the case will actually be covered; the insured has to instead hire independent coverage counsel of its own to take steps to parlay the evidence developed by the defense counsel into a commitment of coverage by the insurer.
ERISA Preempts Another One: Striking Down the San Francisco Ordinance
Permalink | Well, I have talked before about dog bites man stories, and here’s another one. The United States District Court for the District of Northern California has now ruled that San Francisco’s ordinance requiring certain health care expenditures by employers was preempted by ERISA. The Workplace Prof sums up the ruling here, although he is wrong that there is any disjunct between the court’s recognition that ERISA protects plan participants and the court’s finding that the ordinance is preempted; ERISA does impose certain statutorily created protections for plan participants, as the court recognized in finding the ordinance preempted, but simultaneously imposes certain corresponding protections for those who sponsor plans, such as employers, including that the federal statute alone is to govern their obligations, which is the whole point of the statute’s express and broad preemption provision.
Anyway, the ruling is here, and don’t say I didn’t warn you, as I did here, that this statute was doomed to be preempted. These first generation attempts to impose health insurance mandates on the business communities, such as this San Francisco ordinance, and the New York local ordinance discussed here, and the Maryland statute struck down by the Fourth Circuit, simply universally run afoul of the preemption provisions of ERISA. Maybe states will do better when they move onto some sort of health insurance 2.0 approach that accomplishes the same goals in a framework that does not impose administrative and fee obligations on employers - which are the consistent failings of all of the statutes and ordinances to date that have been struck down or eventually will be on grounds of ERISA preemption - but I will believe that when I see it.
One thing of particular note that caught my attention in the court’s ruling in this case, by the way, was its discussion of how the statute ran afoul of ERISA preemption in light of the Fourth Circuit’s ruling in Fielder, which struck down Maryland’s Fair Share act as preempted. As I have discussed before, I believe that the Maryland legislature enacted in that instance about as bad a statute for purposes of trying to avoid ERISA preemption as any advocate of state fair share and health insurance acts could have envisioned, and thereby created a leading ruling that could not help but lead to the preemption of many subsequent state and local health insurance ordinances. This case out of the Northern District of California is a perfect example proving my thesis; while the San Francisco ordinance would likely have been struck down as preempted on its own accord in any event, having the Fielder ruling in play made doing so easy for the court.
You know, much of the progressive legal developments of the last forty years, from civil rights to the environment, was driven by pressing test cases that were carefully selected to move the ball forward; allowing the Maryland statute to have become the bellwether on this topic was, for those clamoring for state regulation of employer provided health insurance, the exact opposite of those historical examples.
Age Discrimination, or a Rational Response to Economic Factors?
Permalink | Take a few days off, and news just keeps on piling up. In the next few posts, I am going to try to pass along some of the more interesting events, articles, court decisions and stories that crossed my desk over the past several days, starting with this one, a story out of the New York Times today that does an admirable job of explaining a new regulation out of the EEOC allowing employers to provide different health benefits to retirees under 65 than to retirees over that age. The idea behind the regulation is that employers ought to be able to move retirees eligible for Medicare into that program and off of their books, and at the same time, be encouraged to maintain benefits for younger retirees -who are not eligible for Medicare - by knowing that they don’t have to pay for medical benefits to the same extent for the class of older retirees. This is still more of the playing at the margins of the health insurance crisis that we also see, as I discussed here for instance, with state fair share acts; the real problem is the cost to employers of providing health insurance benefits, and steps like this regulation are directed only at making a bad situation a little better, without addressing the fundamental economic problem that creates the need for these half-steps, namely the extraordinary cost to employers of providing health insurance to employees and retirees.
California, Fair Share Acts and Preemption: Have We Learned Anything At All?
Permalink | I’ve got a few things lined up this week to talk about, running from long term disability benefits litigation to avoiding ERISA litigation to subprime mortgages, but first I am going to veer off of my planned course to pass along and comment on a pair of interesting posts that showed up in my in-box today. They are both on the subject of California’s interest in trying to enact a fair share type statute imposing employer mandates and requiring the provision of health insurance, and you can find them here and here. I have talked before about the fact that California, like other state and local governments who tread this path, are likely walking right smack into the buzz saw of ERISA preemption, and much like the legislature of Maryland did in enacting its fair share act that was struck down by the courts, appear to be simply sticking their heads in the sand when it comes to this issue. That’s really the point of the two posts, which ask why the state government in California is moving in this direction without anyone even addressing this issue or trying to resolve it preemptively, before enacting a law that parallels laws that have been struck down from coast to coast (see this post here and here, for instance) as preempted. I asked the question before about the Maryland statute, the so-called Wal-Mart act, as to how the Maryland legislature could have gone down this road without having considered the ERISA preemption problem in advance, and these posts suggest that California is doing the same. Perhaps I need to create a category over on the left side of this blog titled “those who ignore the past are condemned to repeat it,” for the sole purpose of covering the seemingly endless examples in the area of health insurance of one state after another repeating the earlier mistakes of other state governments.
One of the posts on California’s efforts in this regard, namely this one here, suggests that some elements of the state government effort believe that the state can craft a statute that will not run afoul of ERISA or be preempted by ERISA. I am pretty skeptical that this is anything more than whistling past the graveyard. The closest I can come to an example of a state fair share type act that has not yet been found preempted is the Massachusetts health care reform act, and in my view, the only reason that hasn’t been declared preempted yet is that its burdens on employers are sufficiently limited at this point that no one has been motivated to challenge it in court. If anyone thinks that the entire business community (who, in the clever words of the New Yorker, have been unofficially deputized to carry the costs of health insurance in this country) would take a pass on this as well and allow a bellwether state like California to enact such a statute without it being challenged, I’ve got a bridge in Brooklyn that I’d like to sell you.
State Mandates and Health Insurance Pricing
Permalink | Well now, this morning I came across this interesting post here, on the State Policy Blog, comparing health insurance pricing in one semi-unregulated state insurance market (Colorado) and in a state, Massachusetts, with a state mandate requiring health insurance. As you can see from the post, the numbers show pricing is significantly higher in Massachusetts, which obviously now has a health care reform act in place that effectively requires employers and individuals to purchase health insurance, than it is in the unregulated portion of the Colorado market. The author’s intent is to demonstrate that state mandates and state regulation drive up pricing, but I am not convinced that the simple comparison of pricing demonstrates this at all. Initially, I can’t vouch for the actual data, or for the author’s characterization of the Colorado market in comparison to the Massachusetts market. But even if you take the numbers at face value, they threaten to prove nothing more than the truth of the old saying that there are three kinds of lies - lies, darn' lies and statistics. This is because, as discussed in prior posts such as this one, Massachusetts has very high costs of actual medical care compared to other regions of the country, for reasons that may very well be unique to Massachusetts and possibly as well to the few other areas of the country that, like Massachusetts, have a particularly high concentration of major teaching hospitals. Its been years since I have been to Colorado, but I don’t think, to my recollection and on my general reading, that it’s health care and health insurance market fits that description. As a result, comparing Colorado health insurance pricing to Massachusetts’ health insurance pricing is simply comparing apples to oranges - or maybe, given the states we are talking about, to cranberries - and tells you nothing about the effect on pricing of state mandates such as the one recently enacted in Massachusetts. That said though, it’s an interesting question how state mandates impact pricing compared to markets without state mandates in place, and I would love to see a carefully constructed economic study on the subject. Anyone seen any? If so, I’d love to see it.
Is It Just Plain Rational for Insurers to Pull Back from Coastal Markets?
Permalink | Anyone interested in the topics of this blog is probably familiar with the media coverage of homeowners insurers raising rates and/or simply withdrawing from writing homeowners insurance in coastal regions, including not just in the traditional hurricane regions of the south but up through New England as well. Many stories are replete with sturm und drang about the issue, ranging from political criticism of insurers to questioning of the companies’ motives. Studies like this one here, however, suggest that it is instead entirely rational for insurers, who should have a long term perspective in mind, to substantially reduce their exposure to coastal risks. The long term potential loss exposure in those markets is clearly growing exponentially, and it would be fundamentally irrational for insurers not to recognize and respond to it.
I have written before about the idea of insurance and insurers as leading indicators, and that is what you are seeing in this scenario as well. If insurers are unwilling to expose themselves to the increasing risk posed by coastal development in the era of global warming, then it may be that they are on to something, and the political sturm und drang should be directed at ameliorating the risks they are forecasting and trying to avoid, rather than at them for doing so.
Permalink | The media is ablaze with discussion of this whole Dickie Scruggs indictment/bribery circus. I don’t expect I am going to have much to say about it - ever -on this blog; not to put on airs, but although insurance is in the title of this blog, I try to focus the subject matter on substantive insurance issues, and I don’t think this qualifies. But like most people, I can’t take my eyes off a good car wreck either, and like many lawyers, I am fascinated by the story. Bribe a judge? And not only that, but to get him to send something to arbitration? Excuse me? But really, the only thing I wanted to say was that for those of you who are interested in this very interesting event, far and away the best, most thorough, most nuanced and most objective coverage anywhere is by David Rossmiller on his blog, Insurance Coverage Law. You can tell from his coverage that David was a professional journalist before becoming a lawyer before becoming a blogger. This story is right in his wheelhouse - it’s a breaking journalistic story (much more than it is a legal story), that calls for an in-depth knowledge of something David has been following closely on his blog for a long time, the Hurricane Katrina insurance coverage litigation.
High Health Care Costs and the Impact on Fair Share Acts
Permalink | Okay, I mentioned on Friday that I had come across some other interesting blogs and sites over the last few weeks that I wanted to pass along, and that I would do so over the next few days. I jumped off track on doing that right off the bat with this morning’s post on insurance and prior knowledge issues, but now I will return to one of those other blogs I wanted to pass along.
I have talked a lot about the Massachusetts Health Care Reform Act, and one of the things I discussed recently was Professor David Hyman’s article in which he pointed out that the "Massachusetts Health Care Reform Act has problems [unique to it] that stem from the particularly high cost of health care in Massachusetts relative to the rest of the country.” On this point, John Aloysius Cogan Jr., the Executive Assistant for Policy and Program Review for the Rhode Island Office of the Health Insurance Commissioner, recently had a terrific post on his Regulating Health Insurance blog that breaks down the component costs of health insurance and analyzes what elements are driving the high cost of health insurance. Echoing Professor Hyman’s point that it is the high cost of the health care itself that is problematic, John carefully documents that the high cost of health insurance is in fact driven by the cost of medical care itself and not, as is frequently argued and assumed by critics, by insurer profits. It’s an interesting analysis that fits well in any consideration of the merits and problems of state health insurance reform acts. Of course, the willingness of the public and the political class to accept John’s assertion that the driving factors in high health premiums are the costs of medical care itself isn’t helped by stories like this one here.
Insureds, Prior Knowledge and Insurance Coverage
Permalink | One of the more ambiguous and gray areas in insurance coverage law is the question of when an insured is or should be aware that a claim is on its way. The law recognizes that this can certainly occur at some point before the insured actually is handed suit papers by a process server, but the law is certainly not crystal clear as to when that is. This is a question of particular importance for insureds because various contractual policy terms in a policy and various common law principles read into the insurance relationship can all preclude coverage if that date is deemed to be before the effective date of the insurance in force when the insured actually is served with the suit papers. For instance, many policies contain terms precluding coverage if the insured knew or should have known of the potential claim before a policy took effect and, for that matter as well, failure to disclose an expected claim in applying for a policy can result in the policy being voided for misrepresentation in many jurisdictions.
Of interest on this topic is this article here at Law.com concerning whether attorneys, covered under professional liability policies, are on notice in this manner whenever an unhappy client complains about a case or, if not whenever the client complains, how much complaining is necessary for the insured to be aware that a claim is likely and to lose coverage as a result if and when that client does file suit. A new declaratory judgment action filed in New Jersey seeks to answer that particular question. Of particular interest to me, however, is the fact context in which the complaining arose. It concerned a client unhappy with the terms of a settlement negotiated by the insured attorney. It’s a cliche of mediation, uttered by every mediator trying to push two unhappy parties to reach agreement on a resolution, that “a good settlement is one where both sides are unhappy.” Well, if that’s the case, then does the complaining after the fact mean that the lawyers involved are always thereafter on notice of a potential claim that they have to report to their malpractice insurers? It would be kind of silly to have a legal rule holding that the usual griping that often accompanies settlement has to be reported to the lawyers’ insurers to protect their rights to coverage in those one out of a million times that the complaining eventually morphs into a malpractice suit. Admittedly, this is something of a deliberately far fetched example, but it does point out the practical considerations that have to be factored into the question of how far in advance of the filing of suit the insured’s obligations can attach. Too far in advance, and the legal rule creates an unworkable, burdensome scenario for all involved, including insurers who would have to process multiple and unnecessary notices concerning many events that will never lead to suit; not far enough in advance and insurers lose the protections those policy terms and common law doctrines were intended to provide.
Pay or Play Acts: There's No Free Lunch
Permalink | I have written before that the underlying structural problem with fair share and similar acts, like the Massachusetts Health Care Reform Act, that seek to mandate the provision of health insurance by employers is twofold: first, they play at the margins of a problem that is fundamentally about the base economics of health care costs and, second, they are walking advertisements for the law of unexpected consequences. Two stories that showed up on my (electronic) doorstep yesterday illustrate this beautifully. In the first, Healthcare Reform: The Economics of Pay or Play Employer Mandates, two Cornell University economists explain that, as expected, mandating the provision of health insurance will reduce employment levels among the exact population of lower waged - and presumably lower benefitted - workers that the statutes are intended to help by mandating that health insurance be added to their employment compensation. The authors further argue, however, that the statutes are “blunt instruments” for targeting the problem of the uninsured, as they have negative impacts on employees who already have health insurance through other sources, including by reducing employment levels of such employees. The point, in many ways, of this and other criticism of these statutes is that they look good on the surface, and certainly score political points in some instances for those who have championed them, but in practice they are nowhere near a panacea for the growing problem of the uninsured, a problem I have explained in past posts is one of fundamental economics related to the extraordinary costs that providing health insurance imposes on employers. And that leads directly to the second story of interest, from yesterday’s New York Times, explaining how Wal-Mart, the direct target of some of the pay or play mandates, such as the one enacted in Maryland, having defeated in court statutory attempts to force it to increase its health insurance spending, is beefing up the level of health benefits provided to its employees on its own as being good business and sound economics. The problem with health insurance and the issue of the uninsured is about fundamental economics, and these pay or play mandates, because they can’t repeal whatever laws exist in the dismal science, can’t strike at the root causes of the issue.
Bad Faith, Sureties, Insurance Coverage, and Punitive Damages: Who Gets the Check When the Misconduct Ends?
Permalink | Here’s a neat little story out of the Massachusetts Lawyers Weekly today on a Massachusetts Appeals Court decision holding that the surety on a construction contract does not cover, under the construction bond it issued, punitive damages awarded for the bad faith conduct of a principal of the construction company covered under the bond. Although turning on the specific language of the bond and what losses it extended to, the ruling parallels the common issue arising under insurance policies of all types as to whether a policy’s coverage extends to punitive damage awards and, in fact, whether public policy even allows parties to insure punitive damages awards, an issue I discussed awhile back in some detail in this post here. The primary issue in those cases is twofold: first, whether the policy language extends coverage to punitive damage awards and then, second, whether allowing a party to insure against such an award provides the wrong marketplace incentives with regard to corporate conduct and should not be allowed as a result.
Those same two issues were in play in this surety bond case, with the Appeals Court first concluding that the language of the bond does not extend to the punitive damages award itself, and second, that expanding the language to cover such awards would risk undermining the entire surety bond system in the state. The court’s conclusion on this issue is summed up in this paragraph from the opinion:
By its terms, then, the bond did not cover punitive damages, payment of which is payment for punishment, not for "labor, materials and equipment" [which is what the bond stated it covered]. See Gasior v. Massachusetts Gen. Hosp., 446 Mass. 645, 653 (2006) ("purpose of punitive damages has been described as punishment and deterrence rather than compensation of an injured party"); Kapp v. Arbella Mut. Ins. Co., 426 Mass. 683, 686 (1998). To conclude that the bond encompassed punitive damages would be to rewrite the agreement Travelers made with Peabody and to risk diluting through punitive awards to a few subcontractors and materialmen the "security to [all] subcontractors and materialmen on public works," LaBonte v. White Constr. Co., 363 Mass. 41, 45 (1973), that the bond is designed to afford. See New Hampshire Ins. Co. v. Gruhn, 99 Nev. 771, 773 (1983).
I can’t say I disagree with the court on either aspect of its reasoning. Standard rules of contract interpretation, properly applied, cannot support a finding that the relevant language of the bond extended coverage to punitive damage awards, and the policy reasons for not extending coverage in general to such awards is frequently compelling in insurance coverage cases, just as it was in this case.
The case itself is C & I Steel v. Travelers Casualty and Surety, and you can find the opinion itself here.
Suicide Exclusions Under ERISA Plans, and the Impact, If Any, of the Standard of Review
Permalink | There’s an interesting, if brief, ERISA case out of the United States District Court for the District of Massachusetts decided last week that enforced a suicide exclusion in an employer provided supplemental life insurance program. The court found that the evidence in the administrative record supported the administrator’s determination that the employee had committed suicide within two years of electing the coverage, and that the benefits were therefore not available because the plan excluded death by suicide in the first two years of coverage. The case itself is not very noteworthy, other than to the parties themselves of course, except for one thing that jumped out at me. Many critics of the current legal regime under ERISA complain that the arbitrary and capricious standard of review that applies to cases, such as this one, where the administrator retains discretion to interpret and apply the plan, terribly distorts the outcome of cases in ways unfair to claimants. I have argued before that I am not convinced that, in the vast overwhelming majority of cases, this is true at all. Rather, most of the time, the same administrative record that would justify upholding a denial under the arbitrary and capricious standard on the theory that the administrator’s decision is reasonable given the evidence in the record, also contains enough evidence to prove the administrator correct under a de novo standard of review, where the court makes its own independent determination of the claimant’s entitlement to benefits. This case illustrates that point yet again: while the court upheld the ruling while applying the arbitrary and capricious standard, the evidence detailed in the opinion should have led to the exact same result even if the issue were considered de novo or the case treated as simply a breach of contract case under standard common law governing contracts. Indeed, in my other hat as an insurance coverage litigator, it seems clear to me that the result here, on the evidence detailed in the opinion, would have been the same even if this policy was not controlled by ERISA and was instead simply a private contract of insurance between the deceased and the insurance company; the policy language and the facts would have led to a finding of no coverage even if litigated as an insurance coverage, rather than an ERISA, case. The case is Keiffer v. Shaw Group, and you can find it here.
Robert Kingsley, Insurance Industry Oracle
Permalink | In the first and so far last of our series of interviews with people of interest in the insurance and ERISA communities (I will do more at some point, but the interview post turns out to be the most difficult and time consuming to do well, which is probably why most people leave them to professional journalists turned bloggers like Peter Lattman at the WSJLaw blog, who do them really, really well), veteran insurance executive Robert Kingsley discussed the pace of consolidation in the insurance industry. Asked whether he saw that trend continuing, Robert noted that “there is little doubt the pace of consolidation will accelerate” and explained that in an industry, such as insurance, flush with capital, consolidation was inevitable. Robert had more to say on the subject, and you can find it here.
I am reminded of Robert’s comments by this story here in Massachusetts, that Spain’s largest insurer has now offered to pay $2.2 billion for comparatively small Massachusetts insurer Commerce, with the intention of using it as a platform to grow its business in the American market. Commerce was previously known primarily as a Massachusetts company focused on automobile insurance.
One of the interesting aspects about the news coverage of the Commerce acquisition is that the Spanish insurer, Mapfre, already operates in some 40 countries, but has a relatively small footprint in the United States and intends to use the purchase as a primary vehicle to expand its operations here. As Robert pointed out in the interview he did for this blog, insurers are making growth promises to investors that cannot be met by organic growth, which is driving the need to grow through acquisitions; that drive to grow appears to have played a large role in this purchase as well.
I Can't Believe Its Not Butter: How Many Deductibles Apply to Claims Involving a Butter Like Substance
Permalink | Here’s a tasty little tidbit for you insurance coverage junkies out there. Law.com has this interesting article on a ruling as to the number of deductibles that apply to suits alleging lung injuries from the flavoring used in manufacturing microwave popcorn. As the article explains, a New York state appeals court has found that the “supplier of the buttery substance used in microwave popcorn must pay a minimum $50,000 deductible for every worker at a Missouri plant who successfully asserts a claim that the flavoring caused lung problems or other respiratory ailments.” The issue before the court was whether certain policy language in the manufacturer’s insurance policies, which stated that the policies’ deductibles applied per occurrence, meant that one deductible applied to all such claims or instead one deductible applied to each such claim. As the article lays out the court’s reasoning, the court found that the structure of the policy language led naturally to the latter interpretation. Determining the number of claims or occurrences, including for purposes of determining how many deductibles apply, is a common problem in insurance coverage law, one that is oft litigated. The article’s presentation of the court’s reasoning suggests that the court approached this issue in an entirely appropriate manner, as it focused on the actual policy language used to reach its determination.
One View on What's Wrong With the Massachusetts Health Care Reform Act
Permalink | In yesterday’s post on Darren Abernethy’s paper on Fair Share statutes, I ended up riffing on the question of whether the Maryland legislature, by putting before the courts a particularly bad version of such a statute, had distorted the development of the law of ERISA preemption in a manner that would only hurt the cause of those who favor state health insurance mandates. I wondered whether the case law would develop differently if more balanced statutes, like the Massachusetts Health Care Reform Act, were analyzed by courts without the landscape of ERISA preemption having already been filled in by the decision holding the Maryland act to be preempted.
Critics of the Massachusetts act would likely argue that the Massachusetts version is so rife with problems that it is just as well if the legal environment, now that the Fourth Circuit has found the Maryland version of these types of laws to be preempted, is not too welcoming to such acts. That seems like a fair conclusion after reading law professor David Hyman’s piece on the “good, the bad and the ugly” in the Massachusetts statute, in which he pretty much takes the statute to task for being a poorly designed piece of state law. The Workplace Prof passed the article along, and you can find it here.
To the extent that the author’s analysis of the statute is right - that as economics and policy it just doesn’t work - it seems to support two points I have raised before on this blog concerning the Massachusetts act. First, that the questionable elements of the various acts enacted by the states suggest that federal preemption is a good thing, as a bulwark against what may be ill-conceived ideas by state governments when it comes to the topic of health insurance reform. And second, that the problem with these types of acts is that they play at the margins, and neither can nor do address the real cause of the problem of the uninsured, namely the incredible - and ever increasing - costs to employers of subsidizing health insurance in this country. This second point is one that appears to animate Professor Hyman’s piece, as he reflects on the fact that the Massachusetts statute has problems that stem from the particularly high cost of health care in Massachusetts relative to the rest of the country, as well as on the fact that the statute’s mandates are distorted by the high rate of health care inflation.
Preemption of Fair Share Acts: Did the Maryland Legislature Manage to Set The Whole Issue Back a Thousand Years?
Permalink | Here is Darren Abernethy’s law review note on preemption of state fair share acts that mandate that employers provide certain levels of health insurance. His note, which I have discussed before, is very well done, and Darren has generously allowed me to share it here in full. As readers may recall from earlier posts, Darren discusses the fact that the Maryland Fair Share Act, which as he points out in his note targeted Wal-Mart, was found by the Fourth Circuit to be preempted, and Darren proposes ways to create statutes of this type that might avoid preemption. It’s a terrific note, and in particular his history of the preemption jurisprudence is an excellent tutorial on that particular issue, and I myself will be quick to cite it on that point when briefing the issue in the future.
One particular aspect of Darren’s note struck a chord with me, and provoked a somewhat chilling thought. In discussing ways to craft these types of legislation that might avoid the preemption problem, he recommends - in essence - that such legislation be broad based, which is the opposite, in many ways, of the Maryland Fair Share Act, which I have argued before can be seen almost as a punitive statute aimed at only one employer. We all know the old saying that bad facts make bad law (or is it hard cases make bad law?), and the question that arises is whether that is a fair understanding of the Fourth Circuit’s Fielder decision that found Maryland’s Fair Share Act to be preempted. The Maryland statute clearly aimed at only one employer and was drafted to avoid implicating favored large Maryland employers such as Johns Hopkins Hospital, and that aspect of the statute can be seen in the district court and Fourth Circuit rulings as at least influencing, and possibly animating, the holdings by those courts that the statute was preempted. Might things have come out differently in the district court and the Fourth Circuit absent that factor? The statute might still have been found to be preempted, but it seems to me that those courts may at the least have been more open - even if still finding the act to be preempted - to nudging the law of preemption along in a way more favorable to these types of statutes had the courts been presented with a better and fairer looking attempt to mandate health insurance benefits. In essence, would the development of this area of the law be a little different if the leading court of appeals analysis of such a statute were, for example, of Massachusetts’ somewhat problematic but nonetheless broader health care reform act, than it will be given that the Fielder decision striking down the Maryland act now holds place of pride in that area of the law? Did the Maryland legislature, by putting one of the worst possible versions of such a statute before the courts, prevent the law from moving in a direction that might have helped such statutes avoid preemption?
Electronic Discovery and the Calculus of Arbitration
Permalink | I have written before about electronic discovery and the amendments to the federal rules governing that discovery, and my theme has often been that the courts need to develop a jurisprudence concerning electronic discovery that carefully weighs the expense of the discovery versus the need for it before granting extensive (and expensive) electronic discovery. In this article here, DLA Piper partner Browning Marean points out that the expense of electronic discovery can often be so burdensome that it forces settlement without regard to the merits of a case; as he puts it in a very clever turn of phrase, “the possibility of extortion by discovery is too real a prospect.” I have said it before and I will say it again: we are at the opening phases of the development of the law of evidence and discovery in this area, and the courts need to establish a body of precedent governing this type of discovery that prevents electronic discovery from having this effect.
At the same time, I have discussed as well on this blog the consensus that arbitration is a poor forum for most complex cases and is often not an improvement - in terms of costs, efficiency or outcome - over litigation. The electronic discovery amendments to the federal rules may be in the process of changing that. Unburdened by the federal rules themselves or the developing case law concerning electronic discovery, an arbitration panel is free to fashion much narrower electronic discovery and to impose much stricter controls over it than courts are currently tending to impose,
all on the thesis that a large part of an arbitration panel’s job is to effectuate arbitration’s promise of cost effective dispute resolution. As a result, as electronic discovery costs go up in federal court, the comparative cost advantage of arbitration - which has been disappearing over the years - increases, possibly changing the calculus for litigants over whether or not to agree to arbitration.
One Proposal for Enacting Fair Share Legislation While Simultaneously Avoiding ERISA Preemption
Permalink | We previously mentioned William and Mary law student Darren Abernethy’s upcoming law review note presenting ideas on how to enact so-called fair share legislation - which attempts to obligate employers to provide certain levels of health insurance coverage - without running afoul of ERISA preemption. His note is now out, and those of you who, like me, don’t subscribe to the William and Mary Law Review, can access it right here. Here’s his abstract on what the note argues:
This Note examines Maryland's preempted statute and the United States District Court case that granted its opponents declaratory relief. After reviewing the Fair Share Act, the federal ERISA statute, and the significant changes in Supreme Court jurisprudence towards ERISA preemption in the past decade, this Note will offer new approaches through which states can modify the analytical framework outlined by the Fair Share Act to achieve improvements in the state-financing of Medicaid through large private employers. The goal of this Note is to analyze ways to fit future "fair share" legislation within the non-preempted confines of ERISA.
The proposed modifications include: (1) rewriting "fair share" laws as unequivocal, non-regulatory Medicaid taxes from which compliant employers may become exempt; (2) dulling the sharp edge of the FSA's punitive texture through decreasing the 100% shortfall tax to 35-50%; (3) expanding the options that employers have as "outlets" for meeting the 8% health expenditure benchmark, such as through an increase in non-medical fringe benefits, thus giving the statute a less coercive feel; (4) a "total package" benefits approach analogous to unpreempted ERISA prevailing wage cases; and (5) a state-initiated higher minimum wage for very large employers, with an incentivized exemption provision stating that an employer can revert back to the state or federal government's general minimum wage if the employer spends a certain percentage of payroll wages on employee health insurance.
We Take Requests: More on Excess Insurance
Permalink | A loyal blog reader wrote in recently noting a glaring omission of this blog, notably the absence of a subcategory heading over on the left hand side of the blog collecting case law and comments on excess insurance issues. I have added the menu option over there, so readers can find excess cases easily. And to get the ball rolling, I have relocated one of my favorite insurance related blog posts from the past few months, discussing the obligations - or lack thereof- of excess carriers to follow the settlement decisions of underlying primary carriers, over to that new category heading. You can find it there now.
But as a grand opening special, I also thought I would note today this decision out of the United States District Court for the District of Rhode Island discussing a range of issues involving both primary and excess coverage for that golden oldie of insurance coverage law, environmental clean up. The issue that was most interesting to me in the opinion, as it has the most transferability to other types of cases, has to do with when an excess carrier’s defense obligations kick in. The case presented the old chestnut of when an excess carrier, whose policy technically does not attach - or come into play - on a loss until the policies underneath it have been exhausted, begins to have a defense obligation with regard to the claim at issue. The court acknowledged the general rule, relied upon by the excess insurer to try to avoid a defense obligation, that the excess carrier cannot have an obligation to contribute to the defense until the loss exceeds the primary coverage. However, the court manipulated that principle to tack a current defense obligation onto the excess carrier even though the primary policy underneath it had not yet been exhausted by finding that the excess carrier’s defense obligation was triggered without regard to whether or not the underlying primary policy had already paid out its full policy in defense costs, so long as the insured’s incurred defense costs already exceeded the amount of the primary policy. Its an interesting result to me, because the biggest issue, in my book, when it comes to excess policies is the tricky interchange of how and when obligations move out of the primary policy and onto the excess carrier. This case is a neat example of that.
The case is Emhart v. Home Insurance, and you can find it here.
Is Global Warming A Horror Movie Waiting to Happen for the Insurance Industry?
Permalink | My colleague, computer patent guru Robert Plotkin, once referred to insurance as a leading indicator when it comes to the issue of global warming, and I have talked before about the idea that governments and societies will act to curb global warming and to deal with related problems only when we reach the point that these problems pose severe economic problems for major sectors of the economy. I have written before about how truly fundamental this issue is, in particular, for the insurance industry, and about the fact that changes in insurance coverage are likely to be the first major noticeable economic response to the issues posed by global warming.
Now, I recognize that sounds like the sonorous introduction to some Ken Burns special on PBS, but it’s a hard topic to delve into while maintaining a warm and good natured tone. And the reason for that is laid out right here, in this fascinating opinion piece from the Washington Post on the response and thinking of leading elements of the insurance industry, including Lloyd’s, to global warming. The article lays out both the risks to the industry posed by climate change (risks the article describes as going right to the question of the sustainability of large sectors of the insurance industry) and the insurance industry’s response to the problem, which is to call - out of its own self-interest - for governments to address and remediate the problem.
You can get a pretty good flavor for what the article presents as the industry’s perspective on the problem right here, in this quote from the article:
Ten years ago, Peter Levene, chairman of Lloyds of London, was skeptical about global warming theories, but no longer. He believes carbon emissions caused by human activity are warming the Earth and causing severe weather-related events. "At Lloyds, we feel the effects of extreme weather more than most," he said in a March speech. "We don't just live with risk -- we have to pick up the pieces afterwards." Lloyds predicts that the United States will be hit by a hurricane causing $100 billion worth of damage, more than double that of Katrina. Industry analysts estimate that such an event would bankrupt as many as 40 insurers. Lloyd's has warned: "The insurance industry must start actively adjusting in response to greenhouse gas trends if it is to survive."
Pretty much what I said here, but I have to admit, the thought’s much more sobering coming from Mr. Levene than coming from a blog post.
Reinsurance and LaRue, All in the Same Post
Permalink | Instead of posting twice in the same morning, I am going to try to address two distinct substantive issues, one involving reinsurance and the other ERISA, all in the same post, hopefully without turning this post into some sort of Frankenstein monster combination of topics that instead should have been kept entirely separate.
On the first, ever wonder why so many reinsurance companies are domiciled in Bermuda? I thought so. The New York Times has an excellent article today explaining why, and as one might have guessed, it has to do with taxes. As the New York Times sums up the matter:
At issue are federal rules that allow insurance premiums to be shifted from the United States to offshore affiliates — which reduces taxes — and allow the proceeds to be invested tax free, increasing the profit to parent companies. . . .The core of the dispute is an unusual tax treaty with Bermuda. It allows insurance companies based on the island to deduct from their American taxes premiums that their subsidiaries in the United States collect from American customers and send back to the headquarters abroad. In Bermuda and other tax havens, the money is invested tax free. This money is moved, under the law, through the purchase of reinsurance by the affiliates from their parent companies.
Personally, I really like Bermuda and have long wanted to have reinsurance clients there that would justify my opening an office in Bermuda, which I suspect influences my views on this issue, and so I will therefore keep them to myself.
The second is an ERISA issue, involving the Supreme Court’s decision to hear LaRue v. DeWolfe, Boberg and Associates. This case, which I discussed here and here, involves whether a plan participant can sue under ERISA to recover losses suffered only in that participant’s account, and not across the plan as a whole. As I discussed here, it makes sense that a participant can do so and I expect the Supreme Court to rule to that effect. The defendants, in an attempt to avoid the Supreme Court ever reaching this issue, moved to dismiss the appeal as moot on the ground that the plaintiff had cashed out of the plan and therefore cannot proceed with a claim against the plan for losses incurred in the plaintiff’s now cashed out account; whether such cashed out participants can proceed with such cases is something of a hot topic that has been decided in differing ways by trial level judges in the federal system, including by judges sitting in the same federal district court, as I discussed here. Well, Workplace Prof and SCOTUSBLOG are reporting that the Supreme Court has denied the motion to dismiss on that ground and the Supreme Court will go ahead and hear the case.
There, I did it - two items on two different issues, all for the price of one admission.
Looking To Learn More About Commercial Arbitration?
Permalink | Fair’s fair, I suppose. As I discussed here, a growing consensus has emerged concerning the limited value and not so limited failings of arbitration as a forum for resolving complex disputes; as I have discussed in other posts, such as here, the efficacy and value of arbitration really depends on the particulars of the specific case a party is presenting.
In the interest of equal time, I suspect the American Arbitration Association would disagree with that consensus, and I suspect you can find much of how that organization views arbitration in the AAA’s Handbook on Commercial Arbitration, which I just received a sales pitch for. For those of you with an interest in commercial arbitration, a lot of the topics in the handbook look right on point and concern issues I have talked about on this blog, such as management of the complex case and judicial review of arbitration decisions. For anyone interested in more detail and greater depth on some of the issues related to arbitration that I have discussed on this blog, this book is a good place to start.
Should Credit Scoring Be Used to Set Auto Insurance Rates?
Permalink | For those of you who don’t know, Massachusetts is in the process of dragging its insurance system out of some sort of strange, almost pre-Thatcherite British collectivist era, and into the modern American economic hurly-burly that marks pretty much every other part of consumer life. Today’s Boston Globe has an interesting little article on the contretemps over the insurance commissioner’s willingness to allow auto insurers, in bringing marketplace competition into that market, to use credit scores in underwriting or setting premiums. The critics hold that insurers should not be allowed to use this information at all, on the thesis that it discriminates against low income purchasers of insurance. Could be, but maybe not: the article doesn’t exactly present any objective evidence as to this one way or the other. But what was interesting to me is that its focus on credit scores makes it appear as though reliance on socioeconomic data in rate setting in Massachusetts’ auto insurance market would be some sort of departure, and for the worse, from past practices that existed under Massachusetts’ prior regulatory auto insurance pricing system. Although auto insurance and pricing for it isn’t my gig, my recollection is that, even under the prior system, rates varied depending on the consumer’s zip code, or at least on where in the state they lived and garaged their cars. There is little doubt in my mind that place of garaging led to lower rates in wealthier communities, and thus the place of garaging approach similarly structured auto insurance pricing on the basis of income levels. That may or may not be a good thing, but one thing is for sure: the proposal to do it now through credit scoring isn’t some break from a past in which income levels were not a factor in setting rates. The only thing different is that now it would be a declared factor, in the form of credit scoring, if critics are right that scoring runs in tandem with income level (which may or may not be true), rather than hidden from sight by means of rate setting on the basis of location of residence.
Some Interesting Papers on the Issue of State Health Reform Mandates
Permalink | I have posted a fair amount on the impact of what are becoming known generically as “Fair Share” statutes, which are attempts to “reform” health insurance on a state level by means of mandating that employers provide health insurance benefits. I have talked about three main themes in my various posts on this topic, all of which stem from a certain skepticism as to whether these types of legislative responses to the problem of the uninsured are as well thought out as they are well intended. The first is the question of whether they are preempted by ERISA, and whether the rush by many states into this topic is a waste of resources, on the thesis that these state initiatives are likely to be found preempted, under the current state of the law. The second is the question of intended and unintended outcomes, and whether many of these state laws are really well thought out, or, two, whether the legislatures enacting them really know what they are getting into (for instance, just think of the Maryland legislature naively believing it could enact a statute that only mandated health insurance for Wal-Mart employees without running afoul of ERISA preemption, which of course ended in the federal courts striking the act down as preempted). And the third, finally, is the fact that these acts don’t target the real problem underlying the high rates of the uninsured, namely the ever increasing costs of health insurance. I have talked about all of these quite a bit, and you can find posts on them by clicking on the preemption, health insurance, or Massachusetts Health Care Reform Act headings over on the left hand side of this blog.
Here’s a couple of interesting articles I wanted to pass along that hit on at least two, and maybe three, of these themes. The first is this article here, titled “Labor Market Effects of Employer Provided Health Insurance,” which explores the question of how mandating that employers provide health insurance, as many of these state reform acts do, impacts employment. One of its findings? That mandating health insurance for all workers does in fact distort the labor market, but that even more interestingly, although perhaps as one would expect, “mandating the insurance only for full-time workers leads to higher [rates of] coverage than [without a mandate, but also to] an increased number of part-time workers.” If, as one would expect and this article suggests, there is a trade off between employment and the extent to which state laws mandate health insurance coverage, one would hope that state legislatures carefully analyze this issue before joining the current rush to mandate health insurance coverage.
Now, I am beginning to feel obliged by the tenor of my posts on this issue to note that I don’t disagree that the rate of the uninsured in this country is a real problem, and that my skepticism really runs to whether the increasing number of state attempts to address the problem - something they are probably foreclosed from doing by ERISA preemption anyway - represents the most thoughtful and effective way to tackle this problem. And this thought leads to the second paper I wanted to mention, which is law student Darren Abernathy’s upcoming law review note addressing the question of how to draft these types of laws to avoid ERISA preemption. This, at least, is a thoughtful attempt to get around some of the problems that arise when states target the problem of the uninsured by means of health insurance reform statutes. We need more of that type of forward looking and proactive analysis, and less of the willy nilly charge into the issue we are seeing by many state and local governments, who, having apparently learned nothing from Maryland’s experience, just keep enacting legislation on the slim hope that it won’t be preempted, rather than on an analysis and strategy that might place the statutes they enact outside the scope of ERISA preemption.
All You Need to Know About Anti-Concurrent Cause Policy Language, Hurricane Katrina and Insurance Coverage Law
Permalink | What is the sound of the internet clapping? Who knows. A healthy round of applause is due, though, for prominent insurance coverage blogger David Rossmiller, who has spent the last several months on his blog -aptly named the Insurance Coverage Law Blog - detailing and dissecting the insurance coverage disputes arising in the aftermath of Hurricane Katrina. Really, probably no one has covered that aspect of the disaster more thoroughly and consistently, in any media. Appleman on Insurance has now just published his 42 page treatise on the history and application of the anti-concurrent cause language in insurance policies, with a focus on its application to losses arising from Hurricane Katrina. David has now posted the article on his blog, right here.
David, incidentally, somehow manages to practice as a partner in a Portland firm, post to his blog every single work day (even on vacation), and still write scholarly articles like this one. Either he doesn’t sleep, or the three hour time difference between where he is - Oregon - and where I am -Boston - somehow gives him a 27 hour day.
Bowater, Preemption, the Wall Street Journal Law Blog, Massachusetts Health Care Costs, and Whatever Else Is On My Mind This Morning
If David Rossmiller can do a potpourri to avoid writing a full fledged blog post then, by gosh, so can I. Conveniently enough, I had some three small items on my mind this morning anyway, all of which I will mention here in one fell swoop:
? More on Bowater: For those of you who were interested in yesterday’s post about the First Circuit’s ruling in Bowater, concerning termination of a benefit plan and a foul up in executing it as part of a corporate acquisition, the ever watchful S.Cotus, who never misses anything on any subject at the First Circuit over at Appellate Law & Practice, has this in-depth review of the Bowater decision. S.Cotus delves into the labor law issues that were also at play in the case, in addition to the ERISA issue that I commented on yesterday.
? I posted earlier in the week on the question of rising health insurance costs and how that was the elephant in the room that all of these state based attempts to reform health insurance were avoiding, and how that justified the preemption of those state acts in favor of a federalized and consistent nationwide approach to the problem. The Boston Globe has a detailed article today laying out the extent of the increase in health insurance costs just here in Massachusetts. The essence of the article is in the opening paragraph: “Massachusetts health insurers are predicting their rates will increase by about 10 percent next year for most residents covered through employer health plans, marking the eighth consecutive year of double-digit premium hikes.” Funny, but Massachusetts just implemented health reform legislation, so how can this be? The answer, I suspect, is in this post here.
? And finally, on a sillier note, the Wall Street Journal Law Blog is fascinated right now with preemption, posting several times on various applications of the doctrine in the last few days. Yet despite the fixation on preemption, they omit entirely what we all know is the most important and interesting application of preemption, namely ERISA preemption. While I write slightly tounge in cheek on this point, the truth is that, as we see with the attempts of states to legislate health insurance coverage in the face of ERISA preemption, this is in fact the one area of preemption that consistently affects broad numbers of everyday, real life people, as opposed to the smaller subset of directly affected businesses involved in the preemption cases discussed by the Wall Street Journal Law Blog over the last couple of days.
Why Health Care Inflation Numbers Justify ERISA Preemption of State Health Care Reform Legislation
Permalink | Someone once said that Marx was wrong about a lot of things, but he was right that everything is economics. Nothing illustrates this maxim more than the various attempts by states to get around ERISA preemption - such as discussed here and here - and mandate health insurance coverage in one manner or another. These attempts by states - which are simply doomed to eventual court declarations that they are preempted- seek to force employers to expand health care availability and, in some cases such as Massachusetts, to get those who fall outside of the employer provided health insurance system to buy their own coverage. The problem is that these legislative attempts don’t affect the real problem, which is that the costs of providing health insurance has escalated to the point where employers face huge financial disincentives to expand their offerings of health insurance and uncovered employees cannot afford their own policies. Here it is in stark black and white (literally, since it comes from the NY Times, rather than from the USA Today, where I guess it would be in stark color): “[t]he cost of employer-sponsored health insurance premiums has increased 6.1 percent this year, well ahead of wage trends and consumer price inflation, but below the 7.7 percent increase in 2006, the Kaiser Family Foundation reported today.” Beyond that, the article points out that “health costs had increased 78 percent since 2001, more than four times as fast as prices and wages.”
The ever increasing impact on the bottom line of providing health insurance is why the employer provided system isn’t expanding to cover more people, and why the uninsured cannot insure themselves. Although the Massachusetts reform act takes some steps towards altering that dynamic, at least with regards to those not covered by employer provided plans and who must instead insure themselves, the simple fact is the various state reform acts aren’t really directed at fixing this fundamental base line problem (and they probably can’t attack this problem effectively on a state by state basis, just further driving home a point I have made previously, that the availability of health insurance coverage probably should not be addressed on a state by state basis, should be addressed on a national basis, and that ERISA preemption of these types of state acts is a good thing as a result). Unless and until the base problem of the economic numbers is tackled, these reform acts aren’t targeting the actual disease, just some of the symptoms of it.
More on Preemption and Health Care Reform in California
Permalink | I posted a couple of days back about California’s interest in enacting a state health care reform law that, like the current law in Massachusetts and the Maryland Fair Share Act that was struck down by the courts, operates at least in part by imposing new obligations on employers who provide health insurance to their employees. In the post, I noted my skepticism that the state could pull this off without running afoul of ERISA preemption. The National Law Journal has an interesting article, available here, on the same subject, from which I took away two thoughts. The first is that the consensus opinion is exactly the one I voiced earlier this week, that California’s attempt is almost certain to be subject to preemption if challenged in court. The second is that any statutory enactment of this nature in California is, in fact, certain to be challenged in court, and quickly, if only because of California’s bellwether status in American economic and political culture, and the possible influence on other states if such a statute is allowed to stand in California.
California, Health Insurance and ERISA Preemption
Permalink | There’s an entertaining little story today in the Boston Globe on the question of whether, in the next few weeks, the California legislature and the Governor will roll out a state plan to reform health insurance by adding fees and other obligations to the employer provided health care system with the intent of providing universal health insurance, similar in some ways to what Massachusetts has done. I have talked frequently here about Massachusetts’ plan, which is in its earliest stages of implementation, with some concomitant glitches. Readers of this blog know I am highly skeptical of the ability of states to fashion these types of plans without running afoul of ERISA preemption, and, without knowing the details of the California plan, I am pretty skeptical they can pull it off either. In a nice little juxtaposition, for those of you who are interested in the question of how ERISA preemption impacts these types of attempts by states to change the health insurance paradigm, Sharon Reece out of the University of Maryland Law School has a very timely paper that is just out addressing the barrier posed by ERISA preemption to these types of state laws. The paper itself is available here, and the post from Richard Bales at Workplace Prof that brought it to my attention a few weeks back is here.
Bad Faith Failure to Settle and the Obligations of Excess Carriers
Permalink | I wanted to return for a moment to a decision from the Massachusetts Supreme Judicial Court from earlier this month, Allmerica Financial Corporation v. Certain Underwriters at Lloyds' London, in which the court held that an excess carrier that had issued a follow form policy to an insured was not bound by or required to follow the settlement decisions of the insured's primary carrier, to whose policy the excess carrier's policy followed form. For those of you who may not be familiar with follow form policies, they are excess policies that incorporate - or borrow or "follow form" to - the same terms and exclusions as are contained in the primary policy issued to the mutual insured of both the excess carrier and the primary carrier. There's nothing very surprising in this holding, and anyone knowledgeable about the practices of the insurance industry since the time of, oh, say the end of the civil war, would know that excess carriers who have issued following form policies do not abdicate to the primary insurer the right to decide whether to spend the excess carrier's money as part of a settlement. So nothing too surprising in the court's opinion, to that extent.
But what might be surprising to some or interesting to others is the fact that, while the law may well be that excess carriers are not bound by the settlement decisions of underlying primary carriers, they may well be exposed to significant bad faith liability, in particular under Massachusetts' unfair trade practices statute, if they refuse to join in on such a settlement. As a general rule in Massachusetts, by statute insurers are obligated to agree to a reasonable settlement of a claim and, by statute, can be hit with multiple damage awards if they fail to do so. Now, think about it, and play out the scenario in which the primary carrier elects to settle, even if the amount will exceed the limits of the primary policy and require some payment by the excess carrier. Presumably, the primary carrier is doing so because settlement on those terms is reasonable. Well then, what about the excess carrier? If it refuses to go along, has it committed a breach of the obligation to reach a reasonable settlement by refusing to participate in the settlement reached by the primary carrier, which was premised on the participation of the excess carrier in the settlement?
There are a lot of ins and outs to this, and I would have to write a full blown law review article here to address them all. But for now, my point is only this. It is one thing for the state's highest court to say that an excess carrier is not obligated by the terms of a follow form policy to join in a settlement reached by the primary carrier, but it is an entirely different question whether other sources of legal obligation, such as the state's unfair trade practices act, impose an obligation to the contrary. I would argue that they don't and shouldn't, but outside of the digital confines of this blog, I certainly don't get the last word on this subject.
It should be noted, however, that the Supreme Judicial Court did nod at this issue in its opinion, and in so doing suggested both that excess carriers have a great deal of leeway in deciding whether to settle a case where the loss will be in excess of the primary policy's limits and that it should not be easy to show that an excess carrier committed bad faith by declining to participate in an arguably reasonable settlement to which the primary carrier was willing to commit. The Court, in a footnote, explained that the question of the excess carrier's bad faith obligations was not at issue, but cited Hartford Casualty Insurance Company v. New Hampshire Insurance Company, a 1994 decision, as reflecting current Massachusetts law on the duty an excess carrier “owes to its insured not to act negligently in refusing to settle a case.” Indeed, the Court then went one step further and, in a different footnote, expressly declared that the Court’s conclusion in Allmerica with regard to the follow form obligations of excess carriers with regard to settlements “should not be construed to limit the settlement responsibilities of insurers articulated in” Hartford Casualty.
The Hartford Casualty case set forth a very high standard for imposing bad faith liability on a carrier that fails to settle a case, finding that there is only a bad faith failure to settle if no reasonable insurer at all would have failed to settle the case on the terms presented to it. That's a pretty high standard. I would argue, given the Supreme Judicial Court's deliberate citation of that case in two footnotes in a case, Allmerica, that didn't require the Court to even address issues of bad faith failure to settle, that the Court was reinforcing that bad faith failure to settle claims can only be maintained against excess carriers - even ones that issued follow form policies and even where the primary carrier wants to settle - if the very high bar set forth in the 1994 Hartford Casualty case is met.
The Joint Defense Privilege in Massachusetts, With a Little Insurance Thrown In For Good Measure
Permalink | Here's a dog bites man story: the joint defense privilege exists in Massachusetts. For those of you who are unfamiliar with the topic, the joint defense privilege allows parties on the same side of the dispute in a multiparty litigation to share information amongst themselves and their various attorneys without waiving the attorney client privilege. Normally, the privilege only attaches to information kept in confidence by a party and its attorney, and if they disclose it to anyone else, the privilege is lost (or waived, as the litigators say). However, the joint defense privilege allows parties who have a shared interest in litigating against yet another party to disclose information to each other without waiving the privilege. The Massachusetts Supreme Judicial Court has now officially recognized this principle, but what makes it a little bit of a dog bites man story is that Massachusetts lawyers and trial court judges have been acting for decades as though the joint defense privilege exists. The Supreme Judicial Court acknowledged this in its opinion, stating:
Although this court has not had occasion to consider the common interest doctrine or any of its components, there is no doubt that attorneys and their clients have relied on its implicit existence. It is evident from cases such as Commonwealth v. Beneficial Fin. Co., 360 Mass. 188 (1971), the longest criminal trial in the history of the Commonwealth, that joint defense arrangements have been used in criminal trials in Massachusetts for a substantial period of time. Indeed, in The Society of Jesus of New England v. Commonwealth, 441 Mass. 662, 666 (2004), we noted without comment that the defendants in that criminal case had entered into a "Joint Defense Agreement." The principle, at least in the litigation context, is incorporated into Proposed Mass. R. Evid. 502 (b) (3). The parties have brought to our attention numerous well-reasoned decisions of judges in the Superior Court recognizing the validity of the joint defense privilege in civil cases.
It is not surprising, by the way, that the issue came up, and was finally decided by the Supreme Judicial Court, in an insurance related case; insurance disputes routinely involve multiple parties, from primary carriers to excess carriers to insurance agents to third party administrators, and on and on. It is very difficult for all of the parties on one side or the other of the case to align their positions and litigate effectively without sharing privileged information.
Life Insurance, Good Health, and the Reasonable Expectations Doctrine
Permalink | Wow, here is a great insurance coverage story out of the Massachusetts Lawyers Weekly, concerning a state trial court decision over the impact of a particular clause in a life insurance policy. The case involved a life insurance policy containing a clause under which the policy only became effective if the insured was in good health at the time of issuance. The life insurer had a medical exam conducted on the applicant for the coverage, and found him to be healthy enough for the policy to be issued. Two weeks later, however, he was found by his own physicians to have a terminal disease. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.
The state trial court, probably rightly so, ruled against the insurer, restricting the good health clause to limiting coverage if the insured knew or should have known that he was not in good health, and rejected the insurer’s argument that the clause instead applies on an objective level and precludes coverage if the insured was not in good health at the time of issuance, without regard to what the insured or anyone else actually knew at that time. The court’s choice seems to me to be a reasonable and fair result. But what is really interesting about it is that in doing so, the trial court rejected 85 year old precedent to the contrary, finding that it was outdated and that changing the rule to instead apply in the manner selected by the trial court better conformed to the reasonable expectations of the insured.
I have talked before in this blog about the reasonable expectations doctrine, and about the idea that it can be understood as a tool for the court to look at an insurance contract and give it the most realistic and sensible interpretation for the parties given that the parties themselves at the time of contracting are limited in their ability to anticipate the future events over which they are contracting and have only a finite capacity for capturing all possible contingencies in the policy language. This case represents a perfect example of that use of the doctrine, particularly so given the extraordinary rarity of the fact pattern at issue. Really, what reasonable insured or insurer - particularly after the insurer had arranged for a pre-coverage medical examination of the applicant - would have anticipated this exact fact pattern? And for that matter, what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill?
More Thoughts on Whether the Massachusetts Health Care Reform Act is Preempted
Permalink | Wow, don’t think Massachusetts’ health care reform law doesn’t dictate to employers what type of health insurance to provide, only in a more subtle way than the state of Maryland did with its Fair Share Act based - but unsuccessful, thanks to ERISA preemption- attempted bludgeoning of Wal-Mart? At the risk of picking a fight, which isn’t the reason I write this blog (trust me, with my practice, I have enough fights going on at any given time, without looking for one more), this seems to be what Brian King, over at his ERISA Law Blog, thinks. But it is hard to square that view with this article right here, from the Boston Globe today, explaining how the state’s largest health insurer has abandoned plans to offer employers the opportunity to provide employees with a healthcare plan involving only a 33% contribution by the employer, because of pressure from the state government, which wants higher contribution limits so as to better implement the state’s health care reform act.
Now I am not saying that a one third contribution by employers is what we should want, but there may well be businesses for whom that type of plan makes sense, and for whose employees it is a better option than whatever else the employer could afford. And there is little doubt, as you see in this article, that this is a choice that is being taken away from employers by state action, as a result of the health care reform act. In essence, the state is dictating higher employer contribution limits, apparently wanting them to be at 50% or better.
Now Brian’s post is about preemption, and whether the state act imposes the types of restrictions on employers that could render the act preempted. Requiring these higher levels of contribution by employers doesn’t necessarily mean the act is subject to ERISA preemption, but it is the kind of action that defeats the argument that the state’s health care reform act only minimally infringes on employers’ operation of their benefit plans and thus is not invasive enough to warrant preemption, an argument that I seem to see more and more when it comes to the Massachusetts health reform act.
Leased Employees, Insurance Coverage, and the Fun House Mirror
Permalink | I have a high school education in physics, but I seem to remember that physics teaches that for every action, there is an equal and opposite reaction. One of the things I like about insurance coverage litigation and counseling is it is much the same; things happen in the real (i.e., non-insurance) world, and the world of insurance coverage reacts. In this way, insurance coverage law and the industry itself act as almost a fun house mirror of events in the real world, mirroring, but with some distortion, what is going on out there.
This article here, on the insurance coverage issues raised by the use of leased workers, is a perfect case in point. On the one hand, you have the real world, in which companies seek to reduce labor costs by leasing workers, while on the other hand, you have a legal regime starting to fix the spot at which liabilities related to leased workers should rest. As the writer points out, these events require companies to realign their insurance coverages, or otherwise risk absorbing unexpected, uninsured, potentially significant losses.
The author addresses “a recent decision by Judge F. Dennis Saylor IV of the United States District Court in Massachusetts [that] raised a red flag for employers seeking to reap [the] benefits” of reduced costs by the use of leased workers. In the case at issue, an injured leased employee was not barred by Massachusetts’ workers compensation statute from suing the company that was making use of his services, but, at the same time, that company did not itself have coverage under its general liability policy for claims brought by such leased workers. The claim, as a result, essentially fell into the gap between workers compensation insurance and the company’s liability coverages, leaving the company itself fully exposed to the risk of injury to the leased employee.
And returning to my point about how insurance coverage and insurance policies end up reflecting back what is going on in the real world, the author explains the cause of this phenomenon, noting that:
a CGL policy usually contains an “employer exclusion,” which excludes injuries to the employer’s employees sustained within the scope of their employment for their employer. The “employer exclusion” operates in a fairly straightforward manner when the injured employee was hired directly by the employer and is a traditional employee of the employer. The exclusion becomes more complicated when the injured worker is a person who was leased, furnished or provided to the employer by an employee leasing firm. Due to the popularity of this type of alternative staffing arrangement, the typical CGL policy includes provisions stating the exclusion applies to “leased workers.”
So, at the end of the day, as companies shifted to leased workers, their insurers shifted right along with them, preventing the risks of those workers from being passed onto them, unless, as the author of the article points out, the company is willing to pay additional premium dollars to obtain coverage of those leased employees.
ERISA and Same Sex Marriage
Here’s a great story out of Boston, by means of the Workplace Prof, that touches on several obsessions of this blog - ERISA, the federal arbitration act, and court review of arbitration awards. As the Prof explains in this post here, a federal judge for the District of Massachusetts is seeking amicus briefs related to whether or not the court should affirm or instead vacate an arbitrator’s finding that an employer could limit ERISA governed health insurance benefits provided to employees’ spouses only to spouses of the opposite sex. The arbitrator had determined that the benefits were collectively bargained for and that the limitation was appropriate under the collective bargaining agreement.
Now, presumably, the matter is before the District Court here on a motion by the losing party in the arbitration to vacate the award, given that the court is asking for amicus to address the question of whether the arbitration award and the employee benefit plan approved of by the arbitrator violate a clear Massachusetts public policy, given the state’s protection of same sex marriages. The court is inquiring as well into the question of whether that public policy, if it can trump the arbitrator’s award and thereby justify setting aside the arbitration award, is itself trumped by ERISA preemption, with the result, presumably, that the benefits offered by the employer have to be left as is.
There aren’t many states where this issue could really come into play, one would think, although I don’t know how many other states other than Massachusetts allow gay marriage, and thus can have employee spouses who are not of the same sex. Beyond that, the court’s response shows a serious involvement by the court in the question of whether an arbitration award was proper, which I have argued before in this blog is the appropriate approach of a court presented with a challenge to an arbitration award. While one might say the court is really reaching out quite far to address this issue, more than one would normally expect from a district court judge, I will take that any day over the situation I have noted in other posts on this blog, where judges sometimes seems to simply reflexively approve arbitration awards, or at least start with some sort of barely rebuttable presumption that the award should be upheld, both of which are approaches that I do not believe are justified under the Federal Arbitration Act. In addition, it is not particularly out of the norm in this particular federal district to reach out for help from the legal and business community in this way in this type of a case, as I can recall other judges in this district requesting amicus briefs on difficult questions involving the interplay of ERISA and federal or state anti-discrimination laws. Moreover, other judges, as discussed in this post of mine from a little while back, in this district are likewise continuing to struggle with the impact of ERISA on employers as they try to figure out how to structure their employee benefits when it comes to spouses, partners and other dependents, in this brave new world we live in here in the Commonwealth of Massachusetts.
Incidentally, the underlying arbitration award is one that I discussed here, in this post, some time ago, in case you want to know more about the underlying controversy.
Cost of Living Benefits and Disability Benefits
Permalink | There are some who believe that insurance policies are by definition ambiguous - mostly lawyers who solely represent policyholders for a living - and others, on occasion including judges, who sometimes seem to believe that unless a policy specifically excludes something, than it is either ambiguous and provides coverage or simply provides coverage because the policy didn’t come out and say it does not. None of this is correct. Instead, the question of what policies cover should turn on the specific language of the policy in question and the rules of policy interpretation that apply in the specific jurisdiction in question.
The First Circuit applied this proper approach correctly here in this case, Prostkoff v. Paul Revere Life Insurance Company, where the parties disputed whether the plaintiff was entitled to cost of living increases in his disability benefits after the age of 65. The court correctly concluded that the policy language was not ambiguous and that the policy should not be construed to grant such coverage.
There isn’t much law talked about in this case, so I am not sure of its value to practioners, outside of the unlikely event that someone, somewhere, is presented with the exact same dispute over the availability of cost of living adjustments to disability payments after the age of 65. At a minimum, it’s a case that may be worth citing simply as an exemplar of the right approach to interpreting and understanding policy language that may not be perfectly clear on its face.
At the Crossroads of Trade Dress Infringement, Restaurants and Insurance Coverage
Permalink | There is a very interesting and entertaining article - if you like law, food, restaurants, intellectual property, or any combination of them - in the New York Times this morning, about a seafood restaurant suing a newer, competing restaurant for, basically, replicating - allegedly, as the two restaurants don’t look all that much alike to me in the limited pictures that ran with the article - the older restaurant’s menu and look.
Although the article pitches the issue and the lawsuit as new, I actually participated in litigation of the exact same case, for all intents and purposes, some fifteen or so years ago, involving two Boston area seafood restaurants, and whether the newer one had committed trade dress infringement. The end result? The newer one was really, right down to the style of its menu and pretty much everything else you can think of, cloning the older restaurant, and I know from personal experience that the public was actually confused about whether the new restaurant was affiliated with the older one, because prior to the lawsuit I had always assumed they were affiliated. The newer restaurant settled by agreeing to a number of changes that would clearly differentiate the two restaurants, and both restaurants remain thriving, expanding businesses almost two decades later, an amazing thing given the short shelf life of most restaurants.
And beyond the curiosity factor of the case described in the article, we can actually bring this story back around to the title subjects of this blog, by noting that, in that case years ago, the newer restaurant later litigated with its insurer whether there was insurance coverage for that lawsuit and its costs of retrofitting the restaurant to distinguish it from the other restaurant as part of the settlement. The restaurant lost the suit, not because the policy did not cover it, but because the restaurant defended and settled the case brought against it by the older restaurant before even notifying its insurer about the loss. Under the state of the law in this jurisdiction at that time, the restaurant was found to have forfeited coverage under its policy because its actions breached the notice and no voluntary payments clauses of the policy to the prejudice of the insurer (the outcome of that coverage litigation might arguably be different today under current law in Massachusetts, or at a minimum, the restaurant would have stronger arguments for coverage today despite these facts then it did then). And why did the restaurant delay? Because it didn’t know there might be coverage under its policy for the claim, or just assumed there would not be, illustrating the first rule of being a policyholder: always, always notify your insurer whenever a claim arises, and let the insurer figure out whether or not there is coverage for the claim rather than making your own guess.
Me and LaRue, and Business Insurance Too
Permalink | There is an article in Business Insurance magazine this week, the June 25th issue, on the Supreme Court accepting review of the LaRue decision, in which I am quoted. The article is here - subscription required - and if you read it, you will note that it ends on my comment that I expect the Supreme Court to overturn the Fourth Circuit. A short article intended really just as a little news blurb on the subject for the benefit of the magazine’s business management oriented readership, the reporter did not have the space to go into why I think the Court will overturn the lower court decision, but I, obviously, have the space to do so here. So to the extent anyone is interested in the question, here’s my thinking.
First, I don’t really expect the Court to do much, if anything, with the question of the scope of equitable remedies issue. If anything, given the language of the statute, despite the fact that many people want the Court to expand individual remedies and available damages under ERISA - including, I have found in my litigation practice, many District Court judges who are displeased with the limitations of the statute but nonetheless consider themselves duty bound to enforce its restrictions on recovery - the Court has probably read the range of equitable relief that can be pursued in as broad and pro-plaintiff a manner as the language allows, with its test of whether the relief sought would be equitable or not way back in the days of the divided bench. There simply isn’t much more you can do with the statute’s restriction of recovery in certain circumstances to equitable relief unless you are simply going to ignore the actual language of the statute and rewrite it by judicial fiat, which this Court certainly isn’t going to do and arguably, the thinking of Ronald Dworkin and his heirs aside, no court should do.
In a way, this issue is a perfect parallel to a long running and common problem in the insurance coverage field, in which there was an oft litigated dispute over whether insurance policies, because they only cover claims for damages, cover lawsuits seeking equitable relief, the issue being that the policies only cover damages and equitable relief is something different than damages. In both insurance coverage and ERISA cases - such as LaRue - the simple fact of the matter is that equitable relief does mean something particular, something that is different than a claim for damages, and the question is what is the impact of that difference.
Second, with regard to the more fundamental question of whether the individual plan participant could recover just for losses to his account in the plan, yes, I do think the Court will overrule the Fourth Circuit and find that such an individual plan participant can bring such an action. I can never recall whether the saying is that the Court follows the election returns, or is that the Court doesn’t follow the election returns, so I looked it up, and in fact the saying is that they follow the returns, although every author who writes this then adds qualifiers to the comment, such as in this piece here. Either way, the kind of relief sought by the plaintiff in the LaRue case, to be able to enforce his investment instructions in his own retirement savings account, clearly fits with the current Zeitgeist and, more interestingly, is of a piece - and a natural fit with - the changes to retirement savings plans put into place by the Pension Protection Act. Beyond that, the statutory language that is at issue in this part of the case is completely open to either the interpretation selected by the Fourth Circuit, or that sought by the plaintiff, and thus the Court can realign this part of ERISA without doing any violence to the statutory language. Combine these things, and I get a reversal.
Why You Should Hire a Lawyer With A Black Belt in Commercial Arbitration
Permalink | You know, the term martial arts is really just an umbrella for a whole range of more particular styles of physical combat, and the diversity is actually kind of fascinating. What does this have to do with anything? Well, I was reminded of this by this post from the Adjunct Law Prof on a ruling by the Virginia state supreme court concerning the grounds on which one can challenge an arbitration ruling when the arbitration is governed by the Virginia state arbitration act. Litigation is much like martial arts, in the sense that we subsume within that phrase a lot of areas that actually have their own specific quirks, and for which experience in one area may not necessarily transfer to success in another. Commercial arbitration, as the Adjunct Law Prof’s post reflects, is one such area. States have their own arbitration acts, unique to their states, and the federal system has its federal arbitration act, which is what most people talk of when discussing the law of arbitration. But the outcome of an arbitration can vary depending, as that post shows, on which particular arbitration act governs an arbitration. The Adjunct Law Prof’s post explains that the outcome in Virginia under that state’s arbitration act would be different under both New York law and in the federal system.
And thus among the black arts of arbitrating cases is knowing when, and how, to maneuver around various state arbitration acts and the federal arbitration act, and knowing how to get the best act for your case to be applicable. And subtleties like that are why it is important to hire a lawyer skilled and experienced with arbitration, rather than to just assume that litigation is litigation, and that a different set of skills is not necessary for the subset of litigation known as commercial arbitration.
On Blogging and Canadian Insurance Coverage Law
Permalink | I just stumbled, metaphorically speaking, across this excellent blog on Canadian insurance law, and thought I would pass it along. I guess that makes this Canadian law day here on the blog (take a look at the last post). Maybe tomorrow we will go back to America.
The Massachusetts Health Care Reform Act and the Purposes of Preemption
Permalink | I have been meaning to come back to some issues concerning the Massachusetts Health Care Reform Act, the state’s potentially groundbreaking attempt to combine individual, employer and government roles to provide health insurance coverage for most of the Commonwealth’s uninsured, and now seems like a good time to do so, with its effective date coming up right around the corner. I have discussed before the question of whether the Act may be preempted by ERISA, and, if challenged, it would not surprise me if the employer obligations under the Act are struck as preempted. At the same time, it is important to bear in mind that the requirements imposed on employers by this particular statute are relatively benign, and this Act is nowhere near being the sort of heavy handed smackdown of particular targeted employers that was the now preempted and not particularly lamented law passed by the Maryland legislature that targeted Wal-Mart.
At the same time, the underlying issue with regard to preemption of state regulation of employer provided health insurance has to do with whether we should insist upon maintaining one consistent overlay of federal law and regulation on the subject, as is the case if state acts of this nature are consistently preempted, or whether we should instead, as the old saying goes, allow “a thousand flowers to bloom,” in the guise of allowing multiple different state experiments to address the problem of the uninsured. If the latter is to be the case, then that is where you really begin to run into problems of the type that underlie the preemption debate. It is one thing to say that the Massachusetts Act imposes only the most benign of record keeping and costs on nationwide employers, so perhaps preemption should not apply to it. But the issue becomes something entirely different when you instead consider having 30 or 40 or 50 states come up with their own experiments that likewise impose only minimal obligations on employers, each one so relatively benign, standing alone, that it is hard to justify declaring it preempted; when you combine all of those different regulatory regimes, however, then you start to get into the kind of conflicting and burdensome web of state actions that can become a real and legitimate burden to a nationwide employer. It is that ultimate result, that web of inconsistent state by state mandates, that the preemption requirement under ERISA is intended to guard against.
And a couple of other points on this question beg to be mentioned, although I don’t feel like I have seen them anywhere with regard to the preemption question. First, if you take away consistent overarching federal control of the question and allow state by state regulation of employer provided health insurance, how quick will we start to see a “race to the bottom” mentality, with at least some states looking to impose the least health care requirements possible on nationwide employers so as to attract businesses to relocate or at least site facilities there? We have seen it in the past with other subject areas that states pitch as competitive advantages over other states; I see no reason why health insurance should be one that is immune from such economic pressures and realities. There are certainly aspects of the Massachusetts Health Care Reform Act that I can think of right off the top of my head that a competing state could leave out, while incorporating in their own statutes all the other aspects of the Massachusetts Act, that might well tilt the balance - in at least a close case - for an employer deciding where to site its business.
Second, the idea of preferring state regulation of a health insurance marketplace that is predominately an employer provided product is premised, at heart, on the assumption that the state approaches will be an improvement over what could be done under the sort of federalized employer provided system we currently have. How confident really are we about this? It is probably fair to say we really won't know until at least some state - here Massachusetts - is allowed to impose its own regime and we wait and see how well it works out.
And when you consider all of these issues, this is when you start to get an inkling of why solving the uninsured problem on a federal level, rather than on a state by state level, with a consistent overall approach structured on the already existing infrastructure of the employer provided, ERISA governed model, may actually be the better approach.
The First Circuit on Professional Liability Insurance
Permalink | What SCOTUSBLOG does for the Supreme Court - maintaining a steady and running review of goings on at the high court - Appellate Law and Practice does for the First Circuit, only with a little more humor and quirkiness than SCOTUSBLOG employs. A regular check of Appellate Law and Practice ensures that you don’t miss anything at all, yet alone anything of importance to your own practice areas, that takes place at the First Circuit.
I mention this today because Appellate Law and Practice has the story of a decision out of the First Circuit last week concluding that, as is in fact the rule, business decisions and activities that are not unique to the type of professional services conducted by an insured are not within the scope of that insured’s professional liability coverage. To quote Appellate Law and Practice,
In short, under what the First thinks is Massachusetts law, professional “Errors and Omissions” insurance (in this case for an insurance broker) doesn’t cover business decisions, which, in this case was a breach of an exclusivity agreement that resulted in an arbitration award. Or, in the words of the First, “A promise by an agent to represent one insurer exclusively for certain lines of insurance is not itself a professional service, nor does a diversion of business in breach of such a contract comprise the performance of professional service. The closest cases interpreting Massachusetts insurance law hold that overcharging clients in fees, even though for work done in a professional capacity, is not itself a professional service covered by malpractice or E&O policies.”
The First Circuit is right about this issue, and between rulings out of that circuit and from the state courts, Massachusetts is becoming a jurisdiction in which this rule is clear and can be expected to be enforced. Not all jurisdictions are like that about this issue, and it can sometimes be hard to convince a court that this is the rule, because it is a limitation on coverage that is generally not expressly laid out in professional liability policies and is instead something that logically flows from the language and structure of the policy. This is not the case in the First Circuit or Massachusetts, however, where the courts clearly get this point.
More Recommended Reading: The Cavalcade of Risk
Permalink | The Cavalcade of Risk: 1st Anniversary Edition, is now up at Insure Blog. Noting that “it was a year ago this week that we published the first Cav,” Insure Blog explains that the Cav is intended as a round up “of interesting/unusual risk-related posts from around the blogosphere.” One of my posts is up on the Cavalcade, but perhaps of more interest to those of you who already read my posts, so are a number of other, interesting posts on insurance, employee benefit, and pension issues from some of my favorite bloggers. I recommend you take a quick gander, and hope you enjoy it.
Misrepresentations and Voiding Insurance Policies: What is the Effect of Silence?
Permalink | Interesting case out of the Massachusetts Appeals Court at the end of last month on one of the more difficult questions in insurance coverage law, which is when does an insured commit a misrepresentation in providing information to its insurer such that the policy should be deemed void. Lots of tricks and ins and outs on that one.
In the latest wrinkle, the insurer of a commercial auto policy sought to avoid coverage because the insured had never notified it, upon renewals of the policy, that the company for which the policy had originally been written had in fact been dissolved, and that, while the auto remained in use and listed under that policy, the company to whom the policy was issued was no longer in existence. The Appeals Court found that, absent actual inquiry from the insurer upon renewal into the question and a misrepresentation by the insured in response, the policy could not be voided for misrepresentation; the insured’s silence alone, without more, did not rise to actionable misrepresentation.
The court summed up the law in Massachusetts on misrepresentations and insurance policies, and extended it to the scenario presented by the case, as follows:
Peter [the insured] does not dispute that he was required to provide accurate information in the original application for insurance and inform Quincy [the insurer] of any material changes that occurred between the time of the application and the inception of the policy. See Chicago Ins. Co. v. Lappin, 58 Mass. App. Ct. 769, 780 (2003) (applicant has duty to inform insurer of changes prior to inception of policy that render initial representations untrue). He also does not dispute that Quincy could have insisted on updated information at each yearly renewal of the policy, and that upon inquiry as to changes, he would have been obliged to answer honestly and accurately. However, he contends that where the policy did not impose such an obligation, and where neither Quincy nor Fair & Yeager [the insurance agent] requested such information nor conditioned renewal upon completion of an application or questionnaire, he was under no obligation to identify the matters that the insurer might deem material and notify it of such changes. Contrast Hanover Ins. Co. v. Leeds, 42 Mass. App. Ct. 54, 60 (1995) (insured's failure to disclose in renewal application that location of insured vehicle had changed concerned the calculation of risk at the time the renewal application was submitted).
Whether Peter's silence amounts to a misrepresentation turns on whether the obligation is one of inquiry by the insurer or sua sponte disclosure by the insured when neither a policy provision nor a renewal application or questionnaire requires such information of an insured. Does an insurer have a duty to identify and ask its insured for information that it deems material (relevant to the risks being underwritten during the period of insurance or renewal)? Or does the insured have a duty to identify what is material and notify the insurer of such changes from prior policy periods?
We conclude that, when neither a policy provision nor a renewal application requires the insured to provide updated information to the insurer, the insured's failure to do so is not a misrepresentation within the meaning of G. L. c. 175, § 186. In such circumstances, the onus is on the insurer to identify the information that it considers material and request from the insured updated information concerning any changes. Absent such obligation or request, the insured's silence is not a misrepresentation within the meaning of the statute.
I am not sure I disagree with the court at all; it seems easy enough for an insurer to always ask at renewal even a broadly phrased question such as whether any facts at all stated on the initial application for coverage have changed, which should thereby place the onus instead on the insured to fess up facts such as those at issue in this case and allow the policy to be voided if the insured doesn’t do so. On the other hand, if the insured actually had any reason to know that the information in question would be relevant to the insurance company, but didn’t disclose it, I am hard pressed to understand why that type of active and knowing decision not to disclose should not void the policy. Perhaps the tipping point on this issue is in the fact that this case involved an auto policy, and not some other form of coverage. There is an extent to which auto policies really exist for the benefit of the public at large placed at risk by the automobile, rather than for the benefit of the insured himself, who can protect his assets through umbrella policies and other avenues; the mandatory nature of auto coverage is there to make sure that those injured have recourse to insurance benefits of the tortfeasor, and perhaps making it easier, rather than harder, to void such policies would run opposite of that public interest.
In any event, the case is Quincy Mutual Fire Insurance Co. Vs. Quisset.
Commercial Arbitration and the Federal Arbitration Act
Permalink | Very few things can still reduce me to an adolescent rumble of uttering very, very, very cool, and it is particularly remarkable when something in the practice of law has that effect. These three posts, from Workplace Prof, Adjunct Law Prof Blog, and SCOTUSBLOG had that effect on me when I came in to them on my desktop this morning. They all discuss the fact that the Supreme Court has accepted a case presenting the question of whether parties to arbitration agreements can contract around the Federal Arbitration Act and change the extent of judicial review of an arbitrator’s ruling. As I have discussed in a number of posts in the past, I am one of many people who have a healthy skepticism about commercial arbitration, and one of my many concerns with the format has to do with the extremely limited judicial review of arbitration decisions, even ones that are obviously and fundamentally flawed. I discussed this point in some detail here. For those clients who are interested in arbitrating, I often counsel close analysis of the pluses and minuses of doing so, and in particular I recommend attention to the arbitration agreement itself with the idea of adding into it particular protections or litigation tools that would otherwise be missing from the process. Now, it looks like the Supreme Court will be addressing the question of to what extent parties can actually do this. As I said, very, very cool, at least to those of us with a long standing interest in the pros and cons of arbitration, and how to improve it by private agreement.
Alternative Energy, Insurance and Economic Forces
Permalink | This article on an upcoming law review study on the role, effect and potential liability exposure of the insurance industry with regard to climate change provides the perfect opportunity for me to branch out into a new line of discussion on this blog on another issue that is of professional and intellectual interest to me, alternative energy and the climate change debate. To be more precise, what has long interested me about this subject isn’t the doom and gloom sci-fi stuff, but the more prosaic question of the economic and marketplace realities and the myriad ways in which they interact with the need to reduce both oil dependency and greenhouse gas emissions. It seems to me that the profit motive is the real stick that will drive the changes needed to solve this problem and that the marketplace will pick what companies will win and what ones will lose as a result of this environmental issue. A simple example: as gas prices continue to move up, and as Toyota expands availability and lowers the cost of its hybrid engines, competitors who fall too far behind in the race to put oil efficient engines in their cars - anyone in Detroit listening? - will inevitably lose ever more market share to Toyota. It is a safe bet that oil usage per car in first world economies will inevitably decline, simply driven by gasoline pricing and the decisions of millions of individual consumers to avoid overpaying at the pump, and the companies who can cater to that dynamic will win in the marketplace, to their benefit as well as to that of the environment.
But this dynamic doesn’t have to be driven by pure marketplace forces alone. Instead, government tax and regulatory policies can goose those marketplace incentives significantly, prodding automobile companies to win the race against their competitors to produce the most gas efficient autos possible while simultaneously encouraging consumers to punish companies that fail to do so out of their own self-interest in avoiding high gasoline prices. That, in essence, is the point of this recent op-ed piece by the good folks at MIT.
And this article on the role of the insurance industry in climate change can be understood as making the same macro point - that climate change is an economic issue, and how the problem plays out depends on how those economic actors most affected by it respond to it. And for those of you who might be inclined to downplay the extent to which climate change will impact this industry, British insurance blogger ReRisk had this terrific post some time back, illustrating the property damage in the London market should sea levels rise over time. As he points out, will insurers actually continue to provide property coverage long term in such threatened areas? And if so, should forecasts of rising sea levels bear out, just imagine the loss payouts by the insurance industry.
Massachusetts Insurance Coverage Law in a Nutshell
Permalink | I wanted to pass on to you a case out of the United States District Court for the Northern District of Ohio that was issued about the time I was trying a patent infringement case last month, and which I wasn’t able to comment on then as a result. With a little more time now, however, I wanted to go back to it and mention it here, because, despite being out of Ohio, it applies Massachusetts law on the duty to defend under insurance policies and on the rules for interpreting insurance policies. The court provides a terrific, and easily quoted, summation of the rules in this state on those issues:
Under Massachusetts law, as in most jurisdictions, "the question of the initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions . . ." Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct. 316, 318, 458 N.E.2d 338 (1984). The duty to defend arises if, in comparing the policy terms with the third-party complaint, "the allegations of the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms . . . Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy." Id. (quoting Vappi & Co., Inc. v. Aetna Cas. & Sur. Co., 348 Mass. 427, 431, 204 N.E.2d 273 (1965)) (citations omitted); see also Simplex Techs., Inc. v. Liberty Mut. Ins. Co., 429 Mass. 196, 197-98, 706 N.E.2d 1135 (1999) (quoting same). The insured bears the initial burden of proving that a claim falls within the grant of coverage. See Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 321, 568 N.E.2d 631 (1991).
"It is well settled in [Massachusetts] that a liability insurer owes a broad duty to defend its insured against any claims that create a potential for liability." Simplex, 429 Mass. at 199 (quoting Doe v. Liberty Mut. Ins. Co., 423 Mass. 366, 368, 667 N.E.2d 1149 (1996)) (emphasis supplied by Simplex court). The cause of action stated in the complaint need only give rise to a possibility of recovery, "there need not be a probability of recovery." Id. (citation omitted) (emphasis added). Indeed, a duty to defend may arise "even if the claim is baseless." Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir. 1997) (applying Massachusetts law); see also Sterilite, 17 Mass. App. Ct. at 324 ("the insurer stands in breach of its duty even if the third party fails in the end to support any such claim of liability by adequate proof."). In addition, "[t]hat some, or even many, of the underlying claims may fall outside the coverage does not excuse [the insurer] from its duty to defend the actions." Simplex, 429 Mass. at 199 (quoting Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 322, 568 N.E.2d 631 (1991)).
Massachusetts courts have explained that, "when construing the language of an insurance policy, it is appropriate 'to consider [whether] an objectively reasonable insured, reading the relevant policy language, would expect to be covered." Nashua Corp. v. First State Ins. Co., 420 Mass. 196, 200, 648 N.E.2d 1272 (1995) (quoting Hazen Paper Co. v. U.S. Fidelity & Guar. Co., 407 Mass. 689, 700, 555 N.E.2d 576 (1990). Further, "an insured is entitled to the most favorable interpretation of the policy language when there is more than one rational interpretation of the policy language, or where the policy language is ambiguous." Id.; see also Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 12, 545 N.E.2d 1156 (1989) ("Where the language permits more than one rational interpretation, that most favorable to the insured is to be taken.").
The case is Royal Insurance Company v. Boston Beer Company, 2007 U.S. Dist. LEXIS 25513 (D. Ohio 2007). The decision comes out of a court that, unfortunately, does not make all of its opinions available for free on line, something that all courts frankly should do, and so I cannot provide a link to the opinion.
The Operations of Third Party Administrators
Permalink | Third party administrators and claims adjustment companies play a significant role in my practice because they often administer ERISA governed plans and adjust claims under insurance policies on behalf of insurers. As a result, I have long been interested in how they are run, staffed, marketed and the like. For those of you who may share an interest in this subject, this interview with the general counsel of Crawford and Company provides some insight into the operations of these types of companies.
Still More on the Pros and Cons of Arbitration
Permalink | I just read that commercial arbitration isn’t a panacea. Hmm, where have I seen that before? Oh, I know, I wrote it here, and here, and here. Anyway, if you want to read it all again, how arbitration poses special risks and problems that may well outweigh its benefits, here’s the latest to that effect.
Risk Transfer, Major League Baseball and Insurance
Permalink | It’s a truism that insurance greases the skids for the entire economy; as a risk sharing mechanism, it allows businesses and individuals to move forward knowing they won’t bear the entire cost if something goes wrong. David Rossmiller’s ongoing coverage at his blog of the response of coastal states to a decrease in available homeowners coverage post-Katrina can be understood along these lines as the story of what happens when the availability of risk sharing of this nature is severely reduced. Another good example is here, in this story out of the New York Times today, of baseball teams’ decisions to obtain insurance covering them against the risk of a high priced player becoming disabled during the season; the insurance reimburses the team for some part of the contract still owed by the team to the player. Interestingly, much the same way homeowners insurance has become more expensive and less accessible in coastal areas because of recent hurricane losses, professional baseball teams have run into the same pricing and availability problem with regard to this type of disability coverage because of large losses recently paid out by insurers on certain former players who were unable to finish out their contracts. I guess both stories, the one in the Times and the one David has been extensively covering at his blog, evidence the same thing: the never ending tension between insurers’ recent loss history and the market’s appetite for ever more insurance, only at a price the consumer is willing to pay.
Insurance Coverage Litigation and the Elastic Concept of Ambiguity
Permalink | When I was taking constitutional law in law school, I had a professor who liked to say that what standard of review the Supreme Court applied to certain types of issues depended on whether or not the justices wanted to uphold or instead overturn the statute before them; a more cursory level of review guaranteed that it would be upheld, and a more searching standard of review would inevitably lead to the statute being struck down. Readers of this blog who are lawyers probably had constitutional law professors who said much the same thing (even then, it didn’t sound particularly original to me).
The concept of ambiguity can sometimes play much the same role in insurance coverage disputes. Courts sometimes invoke it as a handy, out of the blue lightning bolt to tilt the case in favor of the insured, often, frankly, without providing much intellectual support for concluding that the particular insurance policy term involved is in fact ambiguous. Better courts and judges don’t do this, but it happens enough to be a given risk that must be accounted for by any insurance company involved in insurance coverage litigation. Most jurisdictions have a variety of legal rules that buttress the ambiguity question, which in theory should make the interpretation of debated policy terms more complicated than the simple syllogism of ambiguity equals coverage.
What brings these thoughts to mind is that David Rossmiller has a nice post today on the ambiguity of the manner in which courts find ambiguity in insurance policies. Better still, David provides a link to an excellent article on the subject that presents a perfect example of a court subtly handling the ambiguity question in a manner that should be the norm, and never the exception. If you want to know more on the elastic concept of ambiguity and its role in insurance coverage litigation, his post and the article he links to are a fine place to start.
Waterfront Property and the Costs of Homeowners Insurance
Permalink | Rising home insurance costs in beachfront areas is a trendy topic, and the Boston Globe weighed in on it yesterday, in this article discussing consumers on Cape Cod joining together to question the industry’s rate setting. The article’s lead (or lede, as I have learned from former newspaper reporter turned lawyer and blogger David Rossmiller) frames the topic of the article, pointing out that “a growing army of homeowners have watched as home insurers have left Cape Cod and remaining companies insist they must raise rates because of hurricane fears.” For those of you who are more interested in the substance of the criticisms across the country of rate setting and market departures by homeowners insurers in response to hurricane projections than in the joining together on the Cape of consumers to challenge it, David Rossmiller at the Insurance Coverage Blog has been covering this issue in great detail, with a focus on Florida and the Hurricane Katrina affected regions. That’s the place to go for more on this issue.
Preemption and Health Insurance Benefits
Permalink | Maryland has given up the fight over its Wal-Mart bill, which essentially targeted Wal-Mart and tried to force it to increase the health care benefits provided to its employees; as many of you will recall, the Fourth Circuit and the district court both found the act to be preempted by ERISA. Most commentators, including this one, agree that it is preempted, under current law. Maryland officials will not try to take the issue to the Supreme Court, feeling that they are unlikely to be successful. I suggested as much a while back, in this post.
An interesting counterpoint, for those of you with access to the National Law Journal and/or its subscription only website, is an opinion piece by law school professor Ed Zelinsky, whose work I have commented on in the past here in this blog, that Congress should address the problems of availability and affordability of health insurance by revoking federal preemption of the issue and allowing states to pass their own initiatives to try to solve the problem. I guess I have a few thoughts and concerns on that issue, the first of which is that, for every example, such as Massachusetts’ effort to provide universal health insurance for the currently uninsured, of a broad based effort to address a fundamental problem, there is a countervailing example, such as the Maryland act, of a statute that is narrowly crafted at only one small piece of the problem, often one, such as Wal-Mart, that can be easily vilified. In addition, state by state regulation in other areas is certainly not devoid of a “race to the bottom” mentality, where states seek competitive advantage over others in attracting employers by imposing lesser burdens on companies than do other states. I would hate to see that happen in health care and health insurance, which is an area already bedeviled by enough problems; a universal, national health care solution, rather than the removal of preemption with a resulting state by state system, avoids this problem.
Unfunded Pensions and Green Mountain Captives
Permalink | Interesting collection of articles across the mainstream business press today for those interested in the subjects covered by this blog. Two interesting pieces - one factual, one commentary - on the rickety condition of state and municipal pensions, and their impact on the fiscal health of states and local governments. Still more interesting, at least to me, is this article from the New York Times on how Vermont is the new Bermuda, only sans golf courses, and the new Cayman Islands, only sans beaches, at least when it comes to domiciling captive insurers.
Problems in Long Term Care Insurance and Lessons for the Rest of Us
Permalink | I criticized the New York Times a couple weeks back about an article on the NFL’s pension and disability plans, basically because the article was animated by an underlying ignorance of recent legal events concerning those plans. It may, perhaps, have been too much to expect that the reporter would have a full understanding of the subtle interplay of the legal and factual history involving that plan, as it played out in the case of former Steeler Mike Webster and his family’s attempt to obtain the benefits to which he had been entitled. Indeed, I recently received a nice note from the wife of a retired player noting that she was just happy to see the Times mention anything about the problem of retired players and long term damage inflicted on them by the sport.
But fairness - along with a couple of points about the article that are germane to the subject matter of this blog - compels me to point out that a prominently placed article in yesterday’s Times, about the claims processing and claim denials of certain companies providing long term care insurance to the elderly, embodies what that paper can do better than almost anyone else, which is put in the person power and intellect to evaluate, and then report on, issues involving massive amounts of information. For those with any interest in long term care insurance, or who may be forced to select a company to buy such coverage from, the article is excellent reading.
Moreover, there are two particular “take aways,” as they say, that jump out at me from the article, and which apply not just to long term care insurance but to all insurance purchasing decisions, from personal policies up to corporate liability policies. First, the article distinguishes the high rate of complaints against certain insurers from the much lower rate of complaints lodged against other insurers. In this area of insurance as well as every other, all companies are not alike. In seminars and in meetings with business lawyers and their clients, I tell people all the time that you need to decide among competing quotes on more than just price, and instead have to make an informed decision about the nature and quality of each of the insurers competing for your business. There is almost always room to quibble over the exact scope of coverage or an exclusion when a claim is made, and some insurers, almost by their DNA, will give the insured the benefit of the doubt on those issues in deciding whether to cover the claim; other companies may well not. This is something that always needs to be factored in when selecting a carrier, rather than just accepting the cheapest quote for the same limits of coverage. The insured needs to have advisors, whether insurance brokers or experienced insurance coverage lawyers, who can inform the insured about those kinds of differences among the insurers offering to underwrite the risk before a decision is made as to which carrier to sign up with. An ounce of prevention being better than years of insurance coverage litigation later, so to speak.
And the second point is on the same theme. The article references as well that the carriers with, according to the article, shall we say debatable claims practices, had undercut the market in their pricing to build up market share, only to later discover that their premium dollars could never cover their claims exposure. In any field of insurance, you can almost always find some carrier or another underpricing the competition in an effort to build market share. While that lower price may be a short term benefit for the insured, there can be longer term costs to taking advantage of that price reduction and joining that particular carrier. The most obvious ones are that the carrier may well change - in fact will probably have to change - its pricing down the road, forcing insureds to either go looking in the market again for a new carrier or accept a large premium hike, one that may well eliminate whatever pricing benefit the insured received the first time around. The carrier may also, having underpriced, have little appetite for covering claims where coverage is in dispute, possibly leading to claim denials that might not happen with a market rate carrier. And finally, in an example I’ve seen frequently enough to be wary of, the underpricing can lead to such limited ability to withstand a large hit that a few significant claims drives the carrier to simply abandon that product line, throwing the insured into the marketplace, looking for coverage from carriers it had previously rejected in favor of the underpricing competitor.
Disgorgement, Directors and Officers Insurance and the Meaning of Loss
Permalink | Ten, twenty years ago, insurance coverage litigation was predominately about broad issues and big ticket items, about the extent of insurance coverage across decades of policies for long term environmental pollution or for tens of thousands of asbestos related bodily injury claims. The actual coverage issues themselves tended to be of a big picture nature - such as whether years of dumping of pollutants was an accident for purposes of insurance policies, for instance - and were frequently not heavily focused on very narrow and highly technical aspects of policy language. Insurance coverage litigation today is, in contrast, much narrower in its focus, much more technical (see my post here, for example, about the years I once spent litigating the effect on coverage of the absence of the letter “s” from a particular provision in an insurance policy); it’s not necessarily better or worse than the whole forest picture cases of the past, just different.
A perfect example is in this (very good) article on the subject of whether disgorgement or restitution constitutes loss covered by directors and officers insurance. As the article explains, the issue revolves around the question of whether any particular recovery from directors and officers should fall within a policy’s specific definition of loss - these types of policies typically cover “loss” as defined in the policy, rather than damages, as is typically covered under liability policies - and on whether the exact recovery from the directors and officers in the particular claim at issue fits that definition.
For insurance coverage lawyers, it’s the kind of thing that is fun to fight over, but it is definitely the type of dispute where you are really focusing on a particular tree in the forest, and not (to happily and intentionally mix my metaphors) on a bigger picture. It is also the type of issue that shows why directors and officers insurance is often its own little planet when it comes to evaluating insurance coverage, because this particular issue is driven by the fact that the structure of and coverage under directors and officers policies focuses on the defined term loss. Business liability coverages, in contrast, do not center coverage on this concept, and instead are built around coverage for damages, and the question of whether disgorgement or restitution can constitute damages for purposes of such policies is quite different than the question of whether or not they constitute loss for purposes of directors and officers policies.
Insurance Coverage for Pension Plan Fiduciaries
Permalink | There is an interesting interrelationship between the two primary subjects of this blog, ERISA litigation and insurance coverage, and one that I had not really thought much about until Rick Shoff, who works with Mike Pratico over at CapTrust Financial Advisors, raised it in a conversation recently. As I have mentioned in the past, Mike and his colleagues at CapTrust serve as fiduciary advisors to retirement plans and their sponsors, and he and Rick commented to me about the issue of errors and omissions insurance and the necessary amount of coverage for fiduciary advisors.
Two points came out of our conversation that I thought I would pass along. First, what is the appropriate amount of coverage for a fiduciary advisor under its E&O insurance? What should the relationship be between the limits selected and the amount of assets in the plans that the advisor works with? Obviously, the limits can’t match the asset amounts, as any good advisor is likely advising on plans with assets far higher than the amount the advisor could purchase in E&O insurance, at least not without paying every penny the advisor earns over to the insurance company as premiums (and even then, I doubt limits that high could be obtained). It also would not be necessary, since an advisor’s potential exposure to a lawsuit undoubtedly would never equal the total amount of the assets in a particular plan, but instead would equal only some portion of it that was supposedly affected by an error by the advisor. My own take is that the proper policy limit is somewhere around the amount that would make a plaintiff in a hypothetical claim consider settlement within the policy limits, without trying to obtain an excess verdict that the advisor itself would have to pay.
The second issue that popped up is the range of actors out there who are involved in providing advice to retirement plans, participants and the like. It may well be that not all such companies and consultants, even if they have professional liability or general liability insurance coverage, are actually covered for claims arising out of their role in providing such advice. Many policies, unless they are specifically underwritten to cover a professional engaged in ERISA related activities, contain exclusions for ERISA related claims that would preclude coverage of claims involving ERISA governed plans. As a result, a plan sponsor cannot assume that all advisors to a plan actually have coverage for claims arising out of their activities, and the sponsor must instead actually examine their advisors’ insurance coverage to know whether or not this is the case.
The Duty to Disclose Possible Exposures When Applying for Insurance Policies
Why do we have insurance coverage lawyers, and why, as Mark Mayerson has written, has “insurance-coverage law . . . developed over the last 20 years into a rarefied specialty practice”? Because when lawyers who don’t know their way around the subject get involved with insurance coverage, problems just pile up. A case out of the New Jersey Supreme Court reflects this dynamic. In that case, as this article describes it, a law firm retained to represent a business in a dispute won a judgment that was then overturned because the lawyers had blown the statute of limitations. But that wasn’t the worst part for the attorneys who lost that case; they then turned out to not have coverage for the resulting legal malpractice claim, because they had failed to disclose the potential error and potential claim on their application for professional liability insurance. Now even if they had disclosed it, they may well not have been covered for it, as the insurer may have refused to issue a policy without excluding any claims that might arise out of the disclosed events. However, one will never know, because what we do know for sure is that a failure to disclose on an application a potential claim is a quick way to lose coverage. Indeed, as the article sums up:
[T]he ruling sends a clear signal to attorneys: Be forthcoming, and err on the side of discretion, when applying for malpractice insurance. "Law firms have to disclose in the application any potential error they've committed," [one of the lawyers involved] says. "Here, they knew there was a likelihood a complaint was going to be filed. If there is any basis to believe you have breached a duty, there is a good chance you're going to be sued." The insured's lawyer . . . does not disagree in principle. "It is in an attorney's best interest to disclose to its carrier any possible mistake because then the carrier is responsible," he says. "You're putting the carrier on notice."
Animators at Law and Sophisticated Trial Graphics
I recently had a fun virtual meeting, by conference call and downloads, with Animators at Law, who produce 2D and 3D trial graphics, and in particular with Christine McCarey, a former in-house counsel and now the company’s national director of business development. I have been at this long enough to remember when trial graphics were big glorified poster boards or, worse yet, were projected by what appeared to be simply updated versions of the overhead projectors that jurors, typically recoiling in fright, remembered with horror from junior high school.
Well, that was then and this is now. Christine, tracking my professional interests, showed off some great pieces of work from a range of intellectual property and insurance coverage cases that were both imaginative and informative; in this visual age, they are the kind of things that a jury will actually note and remember. I particularly liked two examples, the first a graphic from a trade dress infringement trial that showed the defendant’s product literally morphing over time from its original design into a design that perfectly mimicked the plaintiff’s product (for those of you who don’t do this kind of work and wouldn’t know trade dress infringement from a cocktail dress, that kind of a match puts the defendant in the position of having to rely on technical legal defenses, while letting the plaintiff reinforce in the jury’s mind that, hey, the competing products look too much the same for this to be legal).
The second example that I really liked was a series of exhibits from an environmental insurance coverage case. What I liked best about them was that they took what is in essence a dry textual issue - what does insurance contract language mean and how does it apply to these facts - and transformed it into something visual and catchy. That’s no mean feet, and it’s a long way from those bar graphs showing layers of excess policies that passed for exhibits in insurance coverage cases lo these many years ago.
Fun stuff, and if you have an interest in state of the art trial graphics, you could certainly do worse than talk with Christine.
Directors and Officers Insurance, Backdating and Effective Coverage Counsel
Permalink | Sometimes when I give seminars on directors and officers coverage, I like to pass along a story I once heard of a law professor who gives his students what he considers an impossible hypothetical, namely, how would you respond to a client who walks in the door saying that she has been asked to join a board of directors and needs to know whether the company’s directors and officers insurance is sufficient protection for her. The reason the hypothetical is impossible, the professor posits, is because no one can say whether the directors and officers policy is sufficient in the abstract, and the scope of its coverage can only be understood by waiting to see the latest theories of liability being asserted against directors, and then examining how insurers are responding to them under the language of the directors and officers policies that they issue.
Now I have always thought that story overstates the case a little bit, in that certainly most areas of directors and officers exposure are sufficiently well developed that one can look at a directors and officers policy and provide a present or future board member with at least some general sense of the scope of their insurance protection. This is, after all, why people and companies hire insurance coverage lawyers: because they have the experience and knowledge base to understand a policy and provide some guidance, even in the abstract, as to what it covers and what it does not.
That said though, the story I noted above rang clearly in my head - and rang true - the other day when I came across a New York Times piece (only available by subscription or to those of you who still have Friday’s paper lying about) on the expanding risk of personal liability for directors based on backdated option grants. Two things jumped out at me. The first is that if there was ever an object lesson as to the need for directors and officers coverage, and why no one should ever leave home for a board meeting without it, this is it. Counsel to board members must look in advance, preferably at each renewal, at the scope of coverage being acquired for directors and officers exposures and the potential exposures of the board members, and make sure that the best product available on the market, the one that is best suited for those board members and their exposure risks, is obtained.
The second thing that really drew my attention was that the story fit perfectly with the law professor’s hypothetical, although in a way that may reflect insurers being at risk as much as the directors. To what extent are lawsuits and liabilities arising out of this newest scandal, if that is in fact what we should call it, within the coverages provided by directors and officers policies, most of which were drafted before the expansion of this fast growing risk? Does it fit within standard coverages that were already in play, or within standard exclusions already contained in the policies? Or is it a risk of a nature no one anticipated, and insurers are sitting there with policies that don’t have language that controls this risk? The answers to these questions are going to make a big difference in who actually ends up paying if directors are personally liable for these type of stock option manipulations - the officers themselves (or the companies they serve if they are obligated to indemnify the directors) or the insurers who issued directors and officers policies to those companies.
The Idea of Single Payer Health Insurance
Permalink | Well, health insurance really isn’t a major focus of this blog, although we do comment on it from time to time, and it certainly touches on both focuses of this blog, ERISA and insurance. Employer provided health insurance has always done well by me and mine, so I don’t really have a vested interest in this topic, but the always interesting Robert Frank has this to say today in pitching the merits of converting to a single payer health insurance system. Its well-written, persuasive and elegant, but I think he gives short shrift to two particular points in making his case, possibly because of limitations on the article’s length and the fact that one could obviously - and many have - address these two issues in great depth and across many pages. In the first instance, he is a little too glib in assuming that, given the economic benefits of the current system to many of those involved, the economic and political barriers to removing health insurers from the equation can be easily overcome. In the second instance, he is a little too quick to assure us that, since his son was happy with his medical care in Paris, we can all assume that the accessibility and availability of care enjoyed by those of us who are in fact currently insured will not suffer by a move to a government based single payer system. I have little doubt there is plenty more evidence out there on this last point one way or the other, and that it was the restrictions of newspaper writing that limited how much he could put in on that issue and caused him to instead rely on the shorthand of a personal anecdote. At the end of the day, however, these two points that he simply assumes are not barriers to a single payer system are, in fact, the real political and economic issues that confront any attempt to move to such a system.
I was going to write about something else today - about a particular technical, tactical issue in litigating insurance coverage and ERISA, particularly breach of fiduciary duty, cases - but I came across something else that was too intriguing to me to pass up, and I will return later this week to the issue I meant to discuss today. What caught my eye was this article on cyberinsurance, which I liked for a number of reasons: one, it is a good article on the topic; two, it sounds cool, what with the word cyber in it; and three, it mingles my interest - reflected by the existence of this blog - in technology with my professional interest in insurance coverage.
And just what is cyberinsurance? It is a specialty insurance product covering the risks inherent in reliance on computer data and computer generated, stored and manipulated information. As the article points out, most traditional insurance products relied on by businesses do not provide much, if any, coverage for the risks related to a business’ reliance on this type on technology, so a few insurers have created specific policies targeting this risk. The policies cover:
First-party business interruption covers revenue lost during system downtime caused by accidents and security breaches. Losses during catastrophic regional power outages are typically excluded, but that's little different from standard exclusions for floods or other "acts of God."
First-party electronic data damage covers recovery costs associated with compromised data, such as virus infections.
First-party extortion covers ransom demands of hackers who claim to control systems or data and threaten to do serious harm.
Third-party network security liability covers losses associated with the compromise and misuse of data for such purposes as identity theft and credit card fraud.
Third-party (downstream) network liability covers judgments from lawsuits initiated by those harmed by denial-of-service attacks and viruses sent out over your system.
Third-party media liability covers infringement and liability costs associated with Internet publishing, including Web sites, e-mail and other interactive online communication.
One of the more interesting things from an insurance coverage standpoint about the article, and about this product, is that, as the article points out, “[u]nlike traditional insurance policies, cyberinsurance has no standard scoring system or actuarial tables for pricing premiums,” and instead each company that offers the coverage must investigate the potential insured’s exposure and develop a price point for that particular insured that adequately captures the risk.
Robert Kingsley on Insurance Industry Consolidation, and the Pros and Cons of Hiring Lawyers
This blog serves many purposes, at least in my mind. Among them is to bring to the reader information he or she may otherwise not have access to, and another is for me to investigate things in the insurance and ERISA fields that I am interested in. I think both of these purposes are well served by a recent discussion between the blog and Robert Kingsley, who until last year was the President and CEO of Financial Pacific Insurance Company, a California based insurer; Rob left the company after closing its sale to the Mercer Insurance Group. Rob spoke with the blog recently to provide some insight from inside the insurance industry:
Blog: You have certainly had a close up view of the trend towards consolidation in the insurance industry, having just overseen the sale of one insurer to another. Any thoughts on whether this trend will continue, accelerate, or instead slow down?
Rob: In a declining rate environment with the pressure to grow and companies flush with capital there is little doubt the pace of consolidation will accelerate.
Blog: Is the trend towards consolidation a positive or instead a negative for the industry?
Rob: I think consolidation is a good thing for any industry so long as the markets remain competitive and the barriers to new capital and new ideas remain relatively low. The fact of the matter is that smaller, entrepreneurial organizations innovate in ways the larger companies, due to their sheer size, are incapable of.
Blog: What about for the consuming public?
Rob: So long as the market remains competitive the trend toward consolidation will help consumers. For one thing, as companies grow through consolidation they achieve greater economies of scale in their expenses and a portion of the savings will be passed on to consumers in the form of lower rates.
Blog: What is driving the urge to merge in the industry?
Rob: The industry is over capitalized and companies have made certain growth and profit growth ‘promises’ to investors, which are simply not achievable through organic growth.
Blog: Big insurers, smaller insurers? Who’s got the bigger upside at this point?
Rob: I may be biased (having a small company background) but I am a believer in the small insurer. I think they generally know their markets better and react and respond to opportunity more effectively than their larger counterparts. It’s not a universal rule, but on average, smaller niche companies have outperformed their larger peers. Conning has performed a couple studies on this subject.
Blog: There is probably no bigger consumer of legal services than the insurance industry. From your point of view of having led a company that consumes those services, what is your biggest complaint about lawyers and the services they provide to clients?
Rob: The big disconnect is that the lawyers are selling time and the insurance companies are buying results. That’s all I say about that subject (note my wife is an attorney).
Blog: What’s the single biggest thing lawyers could do to better serve clients like the company you headed?
Rob: Financial Pacific had (has) an in-house law firm that handled 80% or more of our litigated cases. The reason we formed that firm was to change the economics of the loss adjustment process. When a carrier is paying an hourly fee to an attorney it can affect the carrier’s settlement appetite and price point. Turning that variable cost into a fixed cost allows the carrier to cleanly evaluate the merits of the litigated case without being affected by the ‘meter is running’ mentality. Law firms that are sensitive to that dynamic and/or are willing to be evaluated and compensated based on their results (their outputs) as opposed to their inputs (hours) would be valuable and highly coveted.
Blog: Rob, thanks for your time.
Improving the Insurer Insured Relationship
Permalink | This post from Legal Sanity, in which the writer talks about the importance of mutually beneficial business relationships, defined as those in which each side essentially is watching out for the other even more than for itself, caught my attention, although not, I am sure, for the reason the writer intended, who wrote it with an eye toward the subject of business development for lawyers.
It instead registered with me because I have been looking these days for a neutral umpire for an insurance coverage arbitration before the American Arbitration Association, an issue complicated by the fact that, almost like combatants in a civil war, coverage lawyers are almost always predominately in one camp or the other, either generally representing insurers or instead generally representing insureds. This dynamic can make it very difficult to find an experienced insurance coverage lawyer to serve as an arbitrator who is not seen by one side or the other as excessively aligned with the interests of one or the other of these frequently warring camps.
But if, as the Legal Sanity post suggests, the best business relationships are mutually beneficial rather than adversarial, is the insurance regime really best served by a sort of wary, arms length cold war relationship between insureds and insurers? Don’t both, at the end of the day, really have the same fundamental primary goal, namely the lowest amounts of loss possible under insurance programs? And couldn’t an approach aimed at the two sides working together more, rather than more often than not just crossing swords in litigation after the fact, go far toward reducing both insurers’ losses and insureds’ corresponding premiums?
I will give a concrete example. Many commercial insurance programs mandate arbitration of disputes as one of the terms of the policy. But what if they mandated mediation as a first step in any dispute over a denial of coverage, with both sides expected to bring to the mediation the same level of legal representation, preparation and analysis as they would bring to a court proceeding? Isn’t it possible it could end up with better outcomes for both sides, at less expense and with the possible result of a more trusting long term relationship between businesses and insurers, parties who, after all, have been in a closely entangled business relationship for decades and will continue to be so for as far forward as the eye can see?
The Tripartite Relationship and the Attorney Client Privilege
Permalink | One of the more unwieldy of legal fictions is the so-called tripartite relationship among the insured, the insurer, and the defense counsel defending the insured against the claim. Duties run every which way in the relationship, and this beast is at its most cantankerous when one gets into the question of how the attorney client privilege fits in. In particular, if the insured and the insurer end up in a coverage dispute, the question of who has access to the communications between the insured and the defense counsel - just the insured, or also the insurer - quickly becomes a bone of contention.
I have talked before about the difficulty presented by this issue, and how it impacts insurance coverage and bad faith litigation. How exactly is an insurer to get at all the evidence of what happened in the underlying case, or at all of the facts that might shed light on whether or not the loss, in truth, is within the scope of coverage, if much of the evidence on that is laid out in the communications of the party who was actually on the scene - the lawyer litigating the case? A quick example highlights the problem. Suppose, for example, the issue presented is whether a settlement entered into by the insured was actually for losses within the scope of the coverage rather than just having been styled in that manner to try to place the loss within the coverage, and was actually paid for uncovered parts of the lawsuit. What more telling evidence could there be than the information communicated, orally and in writing, to the insured from the defense lawyer negotiating the settlement? After all, she is giving the advice on the settlement and structuring its terms - so if there is a question of whether the settlement is actually covered, shouldn’t that evidence both be admissible and discoverable?
Would seem so, but that isn’t necessarily the law. Which leads me to the real point of today’s post, which is to recommend Marc Mayerson’s review of the case law on this question.
Hurricane Katrina Coverage Litigation
Permalink | Unlike the postman (neither sleet nor rain, etc.), I am easily diverted from my appointed rounds. This is another way of saying that contrary to what I said in my last post, I am not returning right away to a run down of a handful of interesting ERISA decisions handed down in the First Circuit just before the holidays. I am digressing from that topic today for the simple reason that if you have any interest in the Hurricane Katrina related coverage litigation that is swamping - pun intended - the states affected by that hurricane, you'll find no better analysis and discussion of that subject than that offered today by David Rossmiller on his blog. I wanted to make sure I passed that along today.
Intellectual Property, Advertising Injury Coverages, and Licensing
Permalink | At the risk of turning this into blog reader month, I thought today I would pass along this article on the use of intellectual property in growing a business that was passed along to me by blog reader Mike Kraft of Customer Standpoint, who specialize in the analysis of the customer experience. It may not be entirely on point for this blog, but for those of you who may come here looking for information on advertising injury coverages, which, as I have discussed before, can cover some intellectual property claims against insureds, it is a good overview of how any business, including insured companies, put intellectual property assets to use.
Moreover, you can see in the article the range of activities - beyond just inventing technology, which is the popular image of intellectual property development - that businesses engage in involving their intellectual property assets and, if you think about it, you can spot all the different possible points of liability exposure in those actions. Advertising injury coverage can insulate a company against liability on at least some of those fronts, and the question for lawyers and brokers who represent insureds who engage in these types of activities is how to structure an insurance program that protects against all the other liabilities as well.
Legal Malpractice and Professional Liability Policies
If an attorney gets duped into executing a check and distributing its proceeds as part of an elaborate fraudulent check scheme - an act which will then of course inevitably get him sued - is he covered for that act under his professional liability coverage? A Massachusetts Superior Court judge has astutely, and on the correct reasoning, found that the answer is no. As I have discussed in other posts, Massachusetts law is clear that professional liability coverages are subject to what is in effect an extracontractual limitation on coverage, namely a requirement that the loss arise out of the unique specialty of the type of professional covered by the policy, and not out of routine practices that, one, did not require that specialized expertise and, two, could have occurred in any type of business. Judges and courts sometimes get fooled by this, and don’t recognize that this limitation exists because it is not expressly stated in the insuring agreement of professional liability policies. However, rationally, that restriction is clearly inherent in the simple statement in professional liability insuring agreements that claims arising out of the insured’s professional services are what is covered; the absence of this restriction would transform a professional services policy into an extraordinarily broad general liability policy covering practically anything and everything that happens in a professional services business.
The trial judge in this case didn’t get that wrong, granting summary judgment to the insurer, and finding, in part, that:
Massachusetts courts have interpreted a professional act to be 'one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominately mental or intellectual, rather than physical or manual. ...' ... When deciding whether an act is 'professional' in nature, the court has 'look[ed] not to the title or character of the party performing the act, but to the act itself.' ... Therefore, tasks a professional performs are not covered by professional liability insurance if they are '"ordinary" activities "achievable by those lacking the relevant professional training and expertise."' ...
Although there is no appellate decision dealing with the precise factual situation involved with this case, there are decisions to assist the court in understanding the nature of professional legal services and its boundaries. . .
With the guidance of these cases, this court finds that Wolsky's actions that amounted to the receipt, endorsement, and deposit of a check, and the distribution of funds did not require a lawyer's specialized knowledge, labor, or skill, i.e., they were not professional services. ... Wolsky was merely an essential pawn in an elaborate fraudulent check scheme, a role which did not call upon his professional skills but rather required Wolsky's blind trust to act as a facilitator to convert a check to cash.
The case is Fleet National Bank v. Wolsky v. American Guaranty & Liability Insurance Company (Civil Action No. 04-CV-5075), and you can find more on it, including a source to order the entire opinion, here.
Malicious Prosecution in Massachusetts
When I first saw this headline - “Doctor can sue insurance company for malicious prosecution” - in the local legal newspaper, my first thought was they are running a dog bites man story to open the new year. Why, after all, would an insurance company be immune from being sued for malicious prosecution? But when you delve a little deeper, you find the story, and the case it discusses, are much more meaningful than the headline suggests. In the case, Chervin v. The Travelers Insurance Company, the issue really wasn’t whether an insurance company could be sued for malicious prosecution, but instead what must be proven to sustain such a claim, whether against an insurance company or anybody else. The Supreme Judicial Court took the opportunity presented by the case to bring the law on this cause of action into the modern era, and to determine what the elements of that claim should be today.
For insurance companies, it’s a particularly useful case in that it really presents the parameters that cabin an insurance company’s decision to file a subrogation or other action against a third party as a result of a loss covered by the insurer. For that reason alone, it is worth a read. The case, ably briefed for the insurer by loyal blog reader and stellar local youth soccer coach Scott McConchie, can be found here. Unfortunately, however, the Lawyers Weekly article with the questionable headline quoted above, has vanished from the internet in the twelve hours since I came across it.
The Eleventh Most Important Insurance Coverage Decision of 2006
Permalink | End of the year lists, to alter an old off color joke, are like opinions: everyone, it seems this time of year, has one. Some are superficial, silly and cursory, like this one here, and others, like Randy Maniloff’s list discussed in my last post, are substantive. For those of you who couldn’t get enough of Randy’s breakdown of the leading coverage decisions issued in the last year, David Rossmiller has his own interesting take on Randy’s top ten list here, including David’s wish that one of his favorite cases - from the Hurricane Katrina coverage cases - had made the list. For myself, I would have included a recent decision out of the Massachusetts Supreme Judicial Court in the list of top ten decisions, in which the state’s highest court cabined a developing trend in Massachusetts court decisions shifting the insured’s costs of litigating coverage disputes onto the insurer, at least in cases where the insured prevails in establishing coverage. I discussed that case here.
And why would I have included it in a list like Randy’s? Because beyond just its holding, I think, when you combine it with other decisions out of that particular court in the last year or so, you see a court beginning to rethink a tendency reflected in the state’s common law to favor insureds in coverage disputes, and to disconnect insurance coverage law from contract doctrines and the actual terms of the insurance policy to do so. We see, in cases such as this one, a swinging back of the pendulum, towards a more level field in the courtroom, at least at this point in this state. Time will tell whether this trend is real, and if it is, the results themselves will tell us whether it is a good thing. But for me, having watched a few generations of the Supreme Judicial Court approach this subject area in differing ways, this is what I make of the recent run of decisions out of that court.
And maybe, in honor of New Year’s, that is my own little take on the crystal ball: that we will see this trend continue in the Massachusetts Supreme Judicial Court, with an inevitable trickling down to the state’s intermediate appellate bench and its trial courts.
Ten Exciting Moments in Insurance Coverage Law, 2006
Permalink | Here is an article insurance coverage litigator Randy Maniloff is publishing in Mealey’s early next month discussing Randy’s picks for the ten most important insurance coverage decisions from across the country over the past year. The cases cover issues ranging from the absolute pollution exclusion to junk faxes, and a range of topics in-between.
While the article is useful as a primer for staying up to date on what has occurred in the insurance coverage field over the last twelve months, what I think I like the best about it is it demonstrates the breadth of issues at play in this field. Most people - including many lawyers - look at an insurance policy and see a seemingly impenetrable document; in addition, many lawyers who don’t work in this field don’t realize how diverse an area of practice it really is. Insurance coverage lawyers, however, look at insurance policies and see the untold number of issues that lurk within them, and know the range of legal and factual issues that practicing in this field can present to the practitioner. The breadth of Randy’s article really drives home that point.
The Blue Cross Blue Shield Law Department
Permalink | This is insurance - health insurance, anyway - and health insurance from Blue Cross Blue Shield will often be provided under an ERISA governed plan. So, although it may not be all that edifying on anything we discuss on this blog, I nonetheless feel obliged to pass along a link to this article, which is an interview with the Chief Legal Officer of Blue Cross Blue Shield of Massachusetts.
Deja Vu All Over Again All Over Again
Permalink | Jeez, didn’t I just say this same thing, in less words, a few weeks ago? What really bothers me is I don’t know whether I should interpret this as a case of great minds think alike, or as evidence that my original thought, published here, just wasn’t that original (even if it was new to me).
OneBeacon and Media Professional Liability Coverage
Permalink | This is an interesting little article - really a press release from OneBeacon about a new product the company is marketing - about a suite of insurance products targeted at the needs of small to mid-size media companies. Among the product’s constituent parts is media professional liability coverage, which the article points out includes coverage for “defamation, invasion of privacy, copyright and trademark infringement, emotional distress, trespass, and misappropriation of likeness.”
There are a few things that are interesting about this. The first is that I have long thought - and have written, such as here - that coverage for copyright, defamation, invasion of privacy and similar exposures is worth buying for any company that may face such claims. Media companies, in particular and quite obviously, face this exposure every day. These cases are almost never, in my experience, easy to get rid of cheap if you are a defendant. Sometimes this is because liability is clear - for instance, there is so much similarity between the challenged publication and the publication written by the plaintiff that a finding of copyright infringement is almost certain - and the plaintiff, as a result, has little motivation to compromise the damages and has, instead, a motivation to exaggerate them. Sometimes it is because the plaintiff has a legitimate claim to recover attorney’s fees if it prevails, so there is a motivation to keep on going in the hope of recovering the attorney’s fees the plaintiff has already expended. I could bore you for an hour listing these types of variables that can make these types of cases hard to settle. But the point is that they often are, which makes them expensive to defend, even under the best of circumstances. Big companies obviously don’t have to worry that much about those costs, but smaller companies, who are the target market for this product, clearly do. And that is why this is a market that would be well served by this product.
The second thing I wanted to mention is the wonders of marketing. The media professional liability coverage included in this suite, at least as described in the article, is essentially the old standby advertising injury coverage that has long been sold as an accompaniment to general liability policies. This is a neat rejiggering of that product to target a particular niche market.
Attorney's Fee Awards, and the Duty to Indemnify
Permalink | I have written before about the American Rule - which requires parties to a lawsuit, in the absence of a fee shifting statute or contractual agreement, to pay their own legal fees - and the exception under Massachusetts law that runs in favor of insureds who prevail in coverage cases against their insurers. The Supreme Judicial Court has now established that this exception runs only to disputes over an insurer’s duty to defend, and not to disputes over the duty to indemnify. Thus, while an insured who proves that its insurer breached a duty to defend can recover from the insurer its legal fees in proving this point, the same is not true for an insured who proves that its insurer breached the duty to indemnify. Here’s the story, with a link to the case.
This resolves an unsettled point of Massachusetts law, as to whether the right to recover attorneys fees runs along with a claim over the duty to indemnify, or instead only along with a claim for breach of the duty to defend. It turns out to be the latter only.
In the long run, it’s a better decision than the opposite holding would have been. A decision to deny indemnity without a reasonable basis for doing so is already punishable in Massachusetts under the state’s consumer protection act. When, in contrast, a denial of indemnity is reasonable, an insurer should be able to try to prove that its coverage determination was correct without having to factor in the risk of having to pay the insured’s legal fees if a court finds that the insurer’s interpretation of its coverage obligations, while reasonable, was wrong.
Investment Management Fees, and Contract Geeks
Two things to chew on over the holiday, other than the turducken (I have always wanted to use that word in a sentence), one to know about before it occurs, the other to note before it disappears. I guess I could take that dichotomy a little further, and note that one concerns the first half of the blog’s title, and the other, the other half.
The first: Susan Mangiero, who writes the excellent blog Pension Risk Matters, is hosting a webinar on November 28 covering issues related to investment fees, the management of 401(k) plans, and fiduciary obligations. The webinar, covering “401(k) plan fees - what they are, how they can affect reported performance and the fiduciary practices that address investment management fees” is driven by the fact that:
In the aftermath of the Pension Protection Act of 2006, 401(k) plan sponsors are required to carefully select "fiduciary advisors", identify appropriate default investment choices for participants and comply with more rigorous federal reporting procedures. All of this could spell trouble for retirement plan fiduciaries who fail to realize that regulation, public awareness and employee angst put them in the spotlight as never before. This is especially apropos with respect to plan fees.
You can find more information on the webinar here.
The second: Insurance coverage lawyers, almost by definition, have to be contracts geeks. At the end of the day, what they are really doing is fighting over the language in contracts, a particular type of contract certainly, but contracts nonetheless. And here, before it vanishes from the internet, is the story of how much money there is in not being a contracts geek.
Insolvency Funds and Why the Rich Should Know Better
Massachusetts, like most and I would assume all states, has a number of legislatively created entities that participate in or affect the insurance market in one way or another, including an insolvency fund intended to cover losses underwritten by, yes, insolvent insurers.
The soon to be outgoing governor of the Commonwealth has now signed legislation exempting high net worth individuals - i.e., what normal people call rich people - from the fund's protection. Under the change in the legislation:
A high net worth policyholder is defined as one with a net worth exceeding $25 million on Dec. 31 of the year before the year in which the insurer became insolvent. The Massachusetts Insurers Insolvency Fund (MIIF) will not be obligated to pay first party claims to a high net worth insured. Government entities are not included in the definition.
Now, personally, I don't have a problem with this, not the least of which is because it certainly doesn't affect me or anyone I know, and I doubt I'll ever manage to fall within the new exemption. But it also doesn't bother me, and is unlikely to ever affect me, because I investigate the insurers that I buy coverage from, and am pretty sure they are all financially sound. I don't just chase the cheapest deal, which may make me a sucker, or it may make a sound consumer. But what I do know it tells me is that anyone who is a shrewd enough businessperson or investor to have enough money to fall within the exemption is certainly shrewd enough to pick an insurer that is unlikely to end up under the umbrella of the insolvency fund, and ought to be expected to invest the time and money needed to pick such a carrier. I don't know if this was the reasoning behind making this change, but this reason alone justifies it.
Underwriting, Math and the Future of Insurance
Permalink | Information, and the ability to manage it in ever more clever and analytical ways, is fundamentally changing industry after industry. This article details the impact that ever more sophisticated management of ever more extensive information is currently having, and will in the future have, on the insurance industry. The conclusion? Those insurers that can best collect and break down massive amounts of historical data in ways that will allow them to exploit the industry’s most profitable nooks and crannies will come to dominate the market, and those that can’t, well, those companies are dinosaurs but just don’t know it yet.
I’m not a stock picker, and I don’t even play one on a plasma TV, but want my guess as to where to make a lot of money? Figure out what insurance companies are going to be able to master the new data focused world and can finance the type of sophisticated quantitative analysis this brave new world requires, and then buy and hold their stocks for the next decade or so.
The Attorney-Client Privilege in Insurance Coverage and Bad Faith Lawsuits
Like all of you, I am sure, I receive almost daily pitches in my in-box for seminars, podcasts, books and publications that promise to educate me on various topics that the pitchers have decided I must be interested in. Of course, these may be the same marketing wizards who send me twenty pitches a day for on-line pharmacies, so I may be giving them too much credit when I assume they are actually targeting their offerings to my professional interests in such topics as patent litigation, ERISA and insurance coverage. Nonetheless, sort of like playing horseshoes, they do sometimes come close to the mark with the offerings they email me.
This one caught my eye the other day, for a teleconference on the attorney-client privilege, with the hook that the privilege is supposedly under assault in the context of insurance coverage litigation. The short version pitch that was sent to me goes like this:
The sanctity of attorney-client privilege has been shaken by court decisions allowing discovery of attorney-client communication in the context of certain insurance lawsuits. Attorneys and clients must always be conscious of preserving the privilege, but insurance disputes gives rise to unique areas of concern.
In insurance cases, counsel often become involved prior to litigation, during the claims process - for coverage advice or to assist with investigations. These pre-litigation communications often end up subject to discovery.
Some courts have found the privilege waived in bad-faith suits where the insurer relies on an advice-of-counsel defense - sometimes even without that defense being raised. Insured's counsel also argue that attorneys who participate in insurance investigations are not providing legal advice but are acting as adjusters whose communications with the insurer are not privileged.
Now, I have litigated these issues a number of times. While I have sometimes won these disputes outright, more often than not, the court finds a way to split the baby and give some limited and controlled discovery while at the same time imposing some restrictions intended to protect the primary communications at the heart of the attorney-client relationship, namely those in which actual legal advice itself is transmitted.
There are a couple of points that jump out at me about this whole issue that I wanted to mention. The first is that there is some truth to the argument that it is hard to investigate the facts at issue in both insurance coverage and bad faith litigation because of the attorney-client privilege and work product doctrine, and it is often necessary to carve out some exceptions to those protections against discovery to allow discovery in those kinds of cases to proceed. This often holds true for both insurers trying to learn the underlying facts of the claim over which coverage is being disputed and for insureds trying to learn the facts of what the insurer did with regard to coverage, or the denial of coverage, for such claims. The simple fact is that lawyers for the insured, in defending and settling the underlying claim, and lawyers for the insurer, in providing coverage analysis and recommendations, are participating in activities that are at the heart of insurance coverage and bad faith litigation, but do so while engaging in what would normally be privileged communications. Effective prosecution and defense of these types of lawsuits therefore often raises the question of the extent to which discovery is proper in light of, or instead precluded by, the attorney-client privilege.
The second point that jumped out at me is that this is another one of those issues that is, much like what I talked about in my post yesterday, deja vu all over again. It seems like every several years - maybe it works out to be once every generation of seminar presenters - the books and the articles and the seminars appear declaring the attorney-client privilege to be under assault as a result of discovery rulings issued in the context of insurance coverage and bad faith litigation. I don't know for sure, but it sure seems to me that, despite these periodic "the sky is falling" pronouncements, the attorney-client privilege is still alive and well, and being raised in response to all sorts of discovery requests.
Viruses, Asbestos and Exclusions
I am fascinated by this new exclusion that is being drafted and for which approval is being sought, which seeks to exclude claims arising from viruses - not the computer kind, but things like avian flu. I understand the intent, but for any of you who, like I, have been at the insurance coverage business long enough, it ought to ring a bell in your memory about the "asbestosis' exclusions that were at play in the asbestos coverage litigation boom. For those of you who aren't old enough to remember it, the central theme was whether exclusions written to exclude asbestosis were meant to - and did - exclude other asbestos caused diseases, or instead only excluded claims where the victims actually developed the particular disease of asbestosis. For those of you who would like more than just this thumbnail history of the issue, try this case, Carey Canada, Inc. v. Columbia Casualty Co., 291 U.S. App. D.C. 284 (D.C. Cir. 1991).
If we are at all lucky, this new virus exclusion will never come into play on a large enough scale for it to matter, but if it does, one can predict deja vu all over again, to quote Yogi Berra - you can foresee plenty of coverage disputes over whether a particular virus or bacteria or ailment falls within the description of virus included in the exclusion's language, and over which ones do not. Experience suggests to me that the limits of the written word, and the outside limits on the skill set of even the best drafter of policy language, makes it awfully hard to draw a clear line on viruses within, and viruses without, the exclusion.
Insurance Fraud and Securities Litigation
I don't think I can recommend a better read for a Friday afternoon than this article on the apparently questionable rise and apparently imminent fall of the securities litigation powerhouse Milberg Weiss. You couldn't make this stuff up, and I don't think John Grisham or anyone else could have invented the panoply of players, and the complex web of relationships, detailed in this article.
One interesting thing about the article is the description of one of the key players as having made a living off of insurance fraud, an abusive insurance bad faith claim, and questionable disability claims before finding, at least according to the article, a more profitable line of work in serving as lead plaintiff in securities class actions. Is insurance fraud the gateway drug to bigger crimes?
Claims Adjusters: Long Hours but No Overtime
Well, for those of you readers who work inside of the industry, instead of for it or agin' it, I guess we can put this in the category of news you can use (I guess good news if you are in management, bad news if you aren't). The Ninth Circuit has concluded, reversing the District Court, that numerous claims adjusters - employed or previously employed at the insurance company Farmers Group - are exempt employees who are not entitled under federal law to overtime compensation. The case is here.
Personally, I don't know quite what to say about this. At a minimum, no matter what Dickie Scruggs wants people to think, many of the claims adjusters I deal with put in a lot of hours and work quite hard, probably beyond what others would do for the same amount of pay. On the other hand, I know enough about wage and labor laws to know that alone doesn't get you overtime pay.
Insurance Coverage Trial Exhibits
I added a new category today, Insurance Coverage Trials, as a place to collect useful tips, ideas and articles on trying insurance coverage cases that might be useful to readers of this blog who either try such cases or hire (and thereafter manage) lawyers who try such cases. What prompted this idea was a long and very comprehensive pretrial conference in a patent infringement action I am litigating, during which I got to thinking about trial graphics and other fancy doodads and geegaws to submit to the jury; this in turn reminded me of Marc Mayerson's terrific, near scholarly recent piece about designing and admitting into evidence trial graphics in insurance coverage litigation. Marc talks in detail about best practices in designing these types of trial aids, and about the rules for getting them before the jury. What I like best though, I think, is that his post is really focused on design issues, and about what types of graphics best communicate information to a jury.
Readers of other posts of mine, like this one here, know I have a layperson's interest in design (the very thing which got me interested in intellectual property litigation and rights in the first place), so it is fun for me to see a lawyer address from a somewhat different direction, namely that of graphic design, a subject - trial graphics and exhibits - that litigators normally don't consider from that perspective.
MassMutual Arbitration Award
Here is the story of the $50 million payday that the fired chief executive of MassMutual Financial Group has been awarded in an arbitration. There are a lot of lessons here, and maybe the first one is that in some instances it may just be better to be wrongly fired than rightly employed. Of course he was making over $11 million a year when he was fired, a fact apparently justified by the company's growth cited in the article.
But beyond that, the better lesson may be that it is simply not wise to just insert arbitration agreements willy nilly into employment contracts and other agreements. As the article points out, the award only came to light because the arbitration award is being appealed to the courts. As the article also rightly - and correctly - points out, the grounds on which a court can overturn that award are pretty narrow, a point I have discussed before. In comparison, of course, if a trial court had imposed that award, at least one, and perhaps two, levels of appellate review would remain before courts possessing broad powers to overturn the award.
I have often said that companies that want to be able to assert their full panoply of legal rights should avoid arbitration like the plague, and I am betting that MassMutual, stuck with a huge arbitration verdict against it and a limited ability to overturn it, recognizes that now. This is particularly interesting because it reflects in a way on something I discussed the other day, that statistics indicate that the most sophisticated companies are avoiding inserting arbitration clauses in their contracts, and this MassMutual result suggests the wisdom of that.
Contract Law and Insurance Coverage
Although we treat insurance coverage cases as contract disputes, I am not altogether convinced that the law of contracts really is the animating principle behind insurance coverage decisions. Certainly, at the very least, one can't take a gander at a standard contracts hornbook (that is lawyer talk for a book that provides a readers digest type summary of an entire legal subject) and really have any idea from it how to resolve an insurance coverage dispute. At a minimum, it is certainly the case that only by adding quasi-contractual principles - such as the reasonable expectations doctrine - to the traditional rules of contract law that the contract law regime can be seen as explaining the outcome of insurance coverage cases.
Whatever the case may be on that front, one of my favorite blogs, covering decisions out of the First Circuit, has the story of a recent decision from the First Circuit that applies the old law school contracts class chestnut of mutual mistake to an insurance coverage dispute. The post and the case are interesting reading, for those of us who like either contract law or insurance coverage, or worse yet, like me, both.
More Pros and Cons of Arbitration
I have written before about my view that arbitration is not necessarily preferable to litigation, and that, in my experience, litigation can be the better forum for resolving disputes. I know this runs contrary to the usual platitudinous bon mots frequently tossed off about the wonders of arbitration, but hard earned experience tends to discredit flowery sentiments of that ilk. As I discussed here and here, I am skeptical that arbitration is the better dispute resolution method for many cases or is in the best interest of all parties to a contract, including an insurance contract.
It turns out that many sophisticated commercial actors hold the same thought, and don't freely give up the courtroom, with all of its attendant protections (many of which are absent from arbitrations), as the forum for resolving their commercial disputes. Two law professors have analyzed this question statistically, and document this fact here, in this newly published scholarship. To the extent that there is such a thing as the wisdom of the crowd, this article seems to show that my gut sense about arbitrations, borne out of years of resolving disputes in a variety of forums, is on the money.
On Suing Insurance Companies
I spoke awhile back on the phenomenon of lawyers suing insurance companies just because that is where the money is. As a long time coverage and bad faith litigator, it has always been clear to me that there is at least some of that going on (which is not to suggest that no such lawsuits have merit, as clearly many do). Turns out that what empirical data there is, such as the numbers discussed here and here showing the disproportionate degree to which insurance companies are involved in litigation, are consistent with my gut sense on this point.
Insurance Coverage and Personal Jurisdiction
Every state has its litigation tricks and traps, and we all know that there are some states that insurers would simply rather steer clear of. With this in mind, some insurers try to control what states' litigation risks and regimes they will be exposed to by limiting the states in which they write business. But covered risks are often mobile, and even when they are not, we all know that an insured's business operations in one state may expose it to liability in another. As a result, as this story reminds us, an insurer can find its obligations and exposures governed by the law of a state whose law it never intended to subject itself to.
Attorney Fee Awards in Insurance Coverage Litigation
When I was first starting out as a lawyer, stuck with research assignments that required figuring out all aspects of a particular state's law on a particular issue, I always liked to begin by looking for a federal district court decision on the subject, because the federal court decisions had a tendency to include a comprehensive summary of all the law in the state in question on the issue in dispute. This saved the work of reviewing multiple state court decisions, each of which tended to address only one narrow part of the overall issue without discussing other state court decisions that addressed other aspects of the issue. I have always attributed this, by the way, to the federal courts' greater access to law clerks, who could be counted on to turn opinions into minor treatises.
Anyway, here is a perfect example of this phenomenon, only here on an issue that matters to this blog: namely, when can an insured obtain recovery of attorneys fees under Massachusetts law from an insurer in a lawsuit over coverage. Massachusetts state court decisions establish that coverage litigation is an exception, at least here, to the American rule, and that in Massachusetts, it is loser pays, at least if the insurer is the loser in the case.
But the Massachusetts state court decisions to this effect are spread across several cases and could arguably be limited to their facts, unless you synthesize them and push their reasoning one step further. The federal district court in Massachusetts has taken this last step for us, reviewing the Massachusetts state court decisions on this issue and concluding that they add up to an insured being entitled to recover the attorneys fees it incurs in establishing either a duty to defend or a duty to indemnify on the part of the insurer, without limitation to whether the policy in question provides first party or instead third party coverage.
Hurricanes and Homeowners Insurance
Well, I just got lucky. Vain as I am I went looking for my name on other blogs, and came right to David Rossmiller's latest post (I'm just kidding - I read his blog regularly), which in turn led me to a new blog he is reading out of Britain on reinsurance named ReRisk. And why did I get lucky, besides just the fact that it was instantly clear that ReRisk is a fun read? Because of this. I have talked in other posts about my preference for facts, for hard verifiable numbers, when analyzing arguments and problems, and I have a particular preference for this with regard to insurance pricing and availability issues, since much of the public discussion on that topic tends to be primarily posturing and not about a rational discussion of the economics of the matter (see this post here, for instance).
At the same time, both on this blog and elsewhere, there has been plenty of discussion about insurers repricing or not offering homeowners insurance in coastal areas based on hurricane prediction models, including some articles pointing out that the pricing changes are because hurricanes are becoming a bigger threat or were at least previously undervalued as a threat (see this post here, for instance). And yet I don't ever recall seeing much real data showing or instead disproving that statement. Until here, in ReRisk's post from a couple weeks back. I am not sure his chart answers the question of whether insurers are right that the threat is increasing (although quite clearly, even if the hurricanes themselves aren't increasing, the ever increasing construction on the coasts makes a modern hurricane far more risky fiscally than were hurricanes in the past), but it is certainly very entertaining food for thought on these issues.
Coastal Homeowners Insurance - Distorting the Market or a FAIR Complaint?
Here's an interesting story today about the Massachusetts Attorney General challenging the rate increases that have been approved for the state's homeowners' insurer of last resort, the FAIR plan. The problem is one that is riling coastal homeowners' insurance markets up and down the eastern seaboard, namely the rate increases being imposed by insurers - and in particular state mandated insurers of last resort for homeowners who cannot obtain insurance in the private market - on coastal properties so as to account for hurricane risks. I have talked before about the real question with regard to what rate increases the FAIR plan should be allowed to impose, and the consumer and sometimes political opposition to what would otherwise appear to be appropriate increases by the FAIR plan and similar plans. The issue that it presents is to a large extent a question of the degree to which we should be comfortable letting the market set the rates, or even the availability, of insurance for such homes, or whether the market for such coverage should be distorted by state regulated insurers and the pressure on them to charge less than may be correct from an actuarial perspective.
While one might initially be inclined to view the Attorney General's response to the rate increases by the FAIR plan as being exactly this type of political pressure to distort the rates away from what a private carrier would charge for the same coverage, it is not that easy to immediately dismiss his assertions that there are problems with the hurricane models used to support the rate increases, at least without further independent investigation of that charge. Having saved a collapsing health insurer from dissolution some years ago, he has a certain credibility on these issues. And as a lawyer, and in particular an insurance coverage specialist, I am happy to consider a challenge to an insurer's decision that can be decided on the basis of a careful analysis of an insurer's underlying factual reasoning and evidence, which is all the Attorney General seems to be asking for.
Discovery of Reserves and Other Repetitive Events
Here is a nice post on whether claim reserves are discoverable in insurance coverage or bad faith litigation, with some case law on the topic as well. The discovery of claim reserve information is one of those issues that is a consistent point of dispute from one coverage or bad faith action to the next. In fact, given how much it comes up, it is kind of amazing the amount of time and money spent - some would say wasted - in insurance coverage and bad faith litigation over discovery issues such as this one. Some of that, it is fair to say, is driven by the fact that insureds and claimants in such lawsuits are often convinced there is some document somewhere in the insurer's files that is the key that will unlock the entire case, and are determined as a result to obtain every single piece of paper possessed by the insurer that they can grab hold of. In truth, there almost never is such a key stone document, and even when there is, you can be pretty certain it isn't going to be found in the claim reserves or in similar information, such as reinsurance documents, that are likewise routinely the source of a tug of war over production and discovery in coverage and bad faith litigation.
But the other part of the problem is that what we may really need is some sort of federal rules of evidence, insurance coverage and bad faith subsection (hopefully then adopted by the states as well as part of their own evidence codes, in states like Massachusetts that don't automatically follow the federal rules of evidence), that synthesizes all the case law on these types of issues that arise repetitively in coverage or bad faith litigation, and sets down a rule once and for all on them. In this tidy little daydream for a Friday morning, we could then all stop relitigating the same discovery points over and over again, frequently with little more than a change of judge and forum from the last time we argued over them.
Insurance Policy Interpretation and ERISA Conflict of Interests
Insurance coverage could learn a bit from the law of ERISA, particularly from the concept of structural conflicts of interest that is so much in play in ERISA litigation at the moment. In the world of insurance coverage litigation, insurers almost invariably stand in exactly the position that ERISA decisions view as a structural conflict: they both decide the claims for coverage and pay the claims if there is coverage. And yet we don't talk in insurance coverage about such conflicts, and this issue is never the animating principle behind judicial decisions over whether or not a policy covers a particular loss. Instead, insurance coverage law borrows from contract law, and courts purport to be applying contract principles to decide these types of cases.
But the truth of the matter is that many rules of insurance policy interpretation and many rules governing the obligations of insurers and insureds simply don't fit comfortably within a contract law framework. Some of those rules and obligations, however, could be better understood if viewed through the prism of a structural conflict of interest analysis.
For instance, several decisions over the last few years have addressed whether an insurer has the right to be reimbursed by its insured for defense costs incurred on uncovered claims, as discussed here. Some courts allow it, with the thinking being that the insurer did not contract to provide a defense to uncovered claims, but instead only for potentially covered claims, and therefore the insurer should be paid back moneys spent on defending uncovered claims. Yet allowing reimbursement isn't logical if the question is examined from the point of view of traditional contract law. As David Rossmiller pointed out here, the policies don't include an actual contractual term to this effect. Moreover, it has long been, depending on the jurisdiction involved, either an accepted norm or an outright legal rule that the insurer must pay for the defense of the entire case even if only one of many claims in the lawsuit might be covered, and under any traditional approach to contract law, such a long held mutual understanding of the contracting parties would be understood to be part of the contract's terms. Thus, I am skeptical that reimbursement makes any sense under a contract regime, which insurance coverage decisions generally purport to be part of. At a minimum, the answer to whether reimbursement should be allowed under these circumstances certainly isn't clear from the point of view of pure contract interpretation, given that an almost equal number of courts don't allow reimbursement as allow it, as discussed in this article.
But it may be that contract law in its traditional form simply isn't the right framework for understanding this issue, and that instead what we want to do in this situation should instead depend on the outcome that is fairer to both parties to the contract, the insurer and the insured. And the way to figure that out may be to borrow from the law of ERISA the concept of the structural conflict of interest and apply it, and see what we end up with. If the powerful role that the insurer holds as both payor of the loss and initial decision maker on the claim affects this issue, than perhaps it is not fair to interpret the policy to allow such reimbursement, but if it does not have that effect, then perhaps it is appropriate to allow such reimbursement given that the contract terms themselves do not settle the question. Now, in most of these reimbursement cases, the insurer has agreed to pay for the defense of the insured against claims - often ones that are very expensive to defend against - that simply are not covered. An insurer that does so obviously has not made its decision due to any sort of conflict it might face as both the payor of the loss and the decision maker, because it has elected to do something in the insured's favor, and not in its own: namely, defend the insured against a claim that is not even covered. Why would an insurer acting out a conflict do that, one would have to ask, and the short answer is that it wouldn't. Since the insurer was not acting out of a conflict of interest, there is no reason not to simply limit the insured to what it paid for, namely the defense of covered claims, leading to a corresponding obligation to repay the insurer the money spent defending the insured against uncovered claims.
And thus a structural conflict of interest analysis sheds some light on the result that should be reached in a situation in which the terms of the policy itself, and the doctrines of contract law, can't tell us what the outcome should be.
Choice of Law in Insurance Coverage Litigation
Lawyers today are specialists, as evidenced by the long list of single issue law blogs listed on the bottom left of this blog (for an explanation of that list, see here). And with specialization comes what I call "without a second thought" tools, which are approaches to practice that are second nature to those in a particular specialty but of little interest and infrequent relevance to those practicing most other specialties. A "without a second thought" tool is often the unarticulated backdrop behind a specialist's decision to proceed on a case or represent a client in a specific way, one that influences the tactical decisions made on the more front and center issues in a case. At the same time, lawyers who practice in other areas may never even give that topic a second look.
For insurance coverage litigators, choice of law is exactly this type of "without a second thought" tool, subtly and consistently influencing other decisions on a coverage dispute, as this post here discusses, but one that, as a different post reminds us, is an issue that may seldom, if ever, be of relevance to lawyers litigating in other specialties.
Hurricane Katrina Insurance Coverage and the Insurance Industry
I tend to be a fan of facts, and of hard numbers, as they frequently paint a picture different than the one that would otherwise appear. This is no less true for the subject matter of this blog than for other subjects. Lawsuits and litigation, and the discussions about them, often focus on the spectacular or the rare. Insurance coverage is no different, as it is really the rare case that turns into a courtroom drama, a point I hinted at here, when I noted how relatively few coverage determinations are actually challenged in court and overturned. There has been much discussion in recent weeks about the Hurricane Katrina coverage litigation taking place in Mississippi, and in particular the hundreds of lawsuits still pending in the federal courts there. Yet in contrast, as this article reminds us, the vast majority of claims arising out of Hurricane Katrina have been settled amicably, with insurers paying out multiple billions of dollars in claims in Louisiana and Mississippi, and insureds reporting a high level of satisfaction with their insurers' responses to the claims. The Insurance Information Institute reports that a year after the storm, approximately 95% of the Hurricane Katrina related claims in those two states have been resolved. Now, of course, the caveat is that we all know the old saying, that there are three kinds of lies - lies, dang lies and statistics - and thus we would need to see the underlying data - in particular the survey questions - to know how much credence to give this report, but I suspect the results being reported here bear a pretty good resemblance to reality.
Voiding Policies for Misrepresentations
I like this case. Lobsters, boats, New England in the summer, insurance coverage - what's not to like? Beyond that, this decision this month from the First Circuit is a nice textbook example of when a misrepresentation in an insurance application will void a policy. We all know that obtaining insurance requires applying for insurance, and this means filling out an insurance policy application. Misrepresentations by an insured in such an application can justify an insurer's denial of coverage for a claim made after the policy was issued, but in many jurisdictions the fact that the insured made a misrepresentation isn't enough to bring this about; instead, the insured has to have made a material misrepresentation, meaning that the misstatement by the insured must have truly affected the insurer and its decision to sell the insurance to the insured or the pricing of that insurance.
In Commercial Union Insurance Company v. Pesante, the insured applied for coverage for a gill net fishing boat, warranting that it (the boat, not the guy who filled out the application) was instead used for lobstering. The very fact that this scenario ended up before the First Circuit telegraphs what is coming next, that the boat was used for gill net fishing, not lobstering, and was damaged during its use for that type of fishing. Reflecting a general sense against voiding policies that one can gather from much of the case law concerning whether a policy can be voided for these types of misrepresentations, the United States District Court found that there was an insufficient causal relationship between the accident that the boat was involved in and the type of fishing being done, and that the misrepresentation did not preclude coverage as a result. The trial court "based its decision on a finding that there was no causal relationship between [the insured's] breaches and the losses suffered. The court reasoned that, since [the insured boat] was steaming home when the accident occurred, [the insured] technically was not gill netting and therefore was not in breach of the warranty at the time of the loss."
Seems kind of silly, if the insured can misrepresent in an insurance application the very nature of the risk being insured yet avoid any consequences by the sheer good fortune - if you can call it that - of having the loss occur on the way home rather than while out to sea fishing. It appears that the First Circuit saw it the same way, finding that the misstatement of the character of the boat justified a loss of coverage for the accident. The First Circuit noted that under Rhode Island law, a material misrepresentation voids coverage regardless of whether or not the misrepresentation was deliberate, and that a misrepresentation is material if it affected the insurer's decision to insure the risk. The First Circuit found that under this standard the policy was void and the insured was not entitled to coverage for the accident because:
had the underwriter known that the Oceana was used for gill netting and not lobstering, [the insured] would have been charged a premium twenty-five percent higher than the $1,550 that was quoted. It is therefore clear that [the insurer] would not have insured [the boat] at the quoted price had it known the true nature of the vessel's use. We therefore find that the misrepresentation was material.
Perhaps the only unanswered question from this decision is why lobster costs more than fish at the market, given that the fixed costs of insurance are lower for the lobsterman than for the fisherman.
Health Insurance without the Insurance?
For those of you who find the health part of health insurance more interesting than the insurance part, David Harlow has a health care law blog out detailing health law issues in Massachusetts. David has been heavily involved in the state regulation of health care in Massachusetts for many years. Thanks to Robert Ambrogi for the link.
Reimbursement of Defense Costs
I doubt there is anything that has been the subject of more incessant chatter at seminars, with less to show for it, than the question of when, or if, an insurer can obtain reimbursement of defense costs incurred on uncovered claims. Ever since the California Supreme Court issued its ruling in Buss, the issue has been the focus of much excited talk - perhaps more than it has ever really been the subject of any action - and understandably so, given that insurers have been paying defense costs for what seems like an eternity on uncovered claims because of the long established rule that an insurer must provide a defense against the entire case if even only one claim in the action is covered. One can easily see how the possibility of putting an end to that would grab the imagination of an entire industry.
Finally, though, someone has really shed more light than heat on the issue. Thanks to David Rossmiller, here is insurance coverage litigator Randy Maniloff's detailed look at the question. One thing I liked in particular was Randy's conclusion, which hints at exactly why, as suggested above, the issue has generated more talk than actions by insurers to recover defense costs from their insureds: namely, that the sheer difficulty of allocating defense costs between covered and uncovered claims makes recovering defense costs difficult even in those jurisdictions where such recovery is allowed. On a perhaps more cynical note, it seems to me that courts can also be expected to rely on this fact to protect insureds from reimbursement claims, even in states that allow such claims, in cases where reimbursement strikes the court as inequitable.
Judge's Ruling In Hurricane Katrina Coverage Litigation
I don't have anything to say about this right now, and everybody will be weighing in tomorrow on what the decision itself means, but I thought I would note that the court has issued its opinion, favorable to the insurer and the insurance industry, in the Hurricane Katrina coverage case that went to trial recently. First word on the ruling is here. I do note with amusement that both sides claim to have won.
Interpreting ERISA Plans and Insurance Policies
ERISA on the web generally does a nice job of chronicling ERISA decisions out of the Eleventh Circuit, but one of its recent posts, about an August 8th decision by the United States Court of Appeals for the Eleventh Circuit, jumped out at me more than most. The post discusses the case of Billings v UNUM Life Insurance Company, a case involving whether a pediatrician was entitled to continued disability benefits after being disabled due to obsessive compulsive disorder, or whether, instead, the mental health limitation in the plan limited the length of time to which he was entitled to benefits. Although the case presents a somewhat unusual, and certainly curiosity invoking, fact pattern, that is not what drew my attention. Instead, what caught my eye when reading the post was that it discussed the decision and described the court's reasoning in a manner that made me think not of ERISA litigation, but instead of the other focus of this blog, insurance coverage litigation. As the post described and the court's opinion reflects, the Eleventh Circuit decided the question by applying rules of policy construction to the plan language at issue that we more often see in insurance coverage disputes, such as the doctrine of contra proferentem (a fancy way of saying construe ambiguities in the document against the drafter, which in the insurance context most often means against the insurer); the court then decided on that basis whether or not the plan language limited the physician's benefits.
The post left hanging the question of why such an approach was applied, rather than the more typical approach of the court yielding to the administrator's interpretation of the plan language and ultimate decision so long as both were reasonable and rationally supported by the evidence, but it was easy to guess the reason, and a quick jump over to the opinion itself confirmed it; the plan at issue did not grant discretion to the plan administrator, meaning that the court, and not the administrator, was the ultimate decision maker on the issues presented by the claim.
What interested me most about the case, and the post, was that it illustrated the extent to which if you remove the deferential standard of review usually required of courts deciding benefit cases under ERISA from the equation, they would become, essentially, insurance coverage cases, consisting of a dispute over the plan language and an eventual decision by a court over which interpretation - that favored by the plan or that favored by the claimant - should be selected, with the outcome of that determination essentially deciding who wins. That is insurance coverage litigation in a nutshell, but normally is not ERISA benefits litigation in a nutshell.
Some of you may have noted, given what I had to say here and again here, my view that the law of insurance coverage is not as well developed or at least not as consistent in the case law as it should be. At the end of the day, it is just policy language and facts, and it shouldn't be so difficult for the case law to reflect a consistent approach to insurance policy issues. Admittedly, such a project is complicated by the reality that the facts and the policy language differ from case to case, and the truth is that the slightest change in either variable can affect the outcome. I once spent years litigating a case that at the end of the day, turned on the distinction between the word damage and the word damages; I came to think of it as the Sesame Street case, with the case eventually focusing on the "letter of the day," and that one letter "s" becoming outcome determinative.
Additional insured clauses are a perfect example of this problem. Generally speaking, additional insured clauses simply serve the purpose of adding a third party, who would otherwise be a stranger to the relationship between the insured and its insurer, to a policy as an insured. Anyone who practices in, or anywhere near, the fields of insurance coverage, construction, architecture, professional liability or real estate, as well as a host of others, is familiar with these clauses, and has probably noted as well the variability in the policy language often used in such clauses. In truth, what should be the simple act of adding a party to a policy as an additional insured in this manner is often rife with unexpected difficulties if and when a claim against that additional party arises, due to even slight variations in the language used in those clauses and disputed questions of fact concerning the events that gave rise to the claim against the additional insured.
What brings this to mind today are several recent discussions of issues involving additional insured clauses, and which make clear that how they should apply to any given set of facts simply is not, and probably never will be, completely settled. InHouse Blog has the story of a new development in California law on this topic, Marc Mayerson has a similar story about a New York state decision addressing the additional insured problem, and the policyholder lawyers at Anderson Kill have this to say about the choice of law complications caused by such clauses.
Hurricane Katrina Insurance Claims
Readers of this prior post know that I had some questions as to whether the Maryland legislature engaged in the necessary amount of due diligence before enacting the Fair Share Act. There is certainly much to be said, though, for the very fact of state legislatures attempting to resolve difficult problems, such as the availability of health benefits.
McGlinchey Stafford, through its Hurricane Law Blog, provides another fine example of a state legislature trying to solve a difficult problem, one that is particularly interesting for those of us with an interest in the insurance industry and its role in the recovery of states affected by Hurricane Katrina. While much media coverage has centered in recent weeks on the Hurricane Katrina coverage litigation that has been ongoing in federal court in Mississippi, and which is now primed for a ruling by the court (thanks to David Rossmiller for the link), the Louisiana state legislature has continued with legislative activities directed at an orderly clean up and recovery, this time by extending the time for affected policyholders to file property damage claims. Recognizing that the dispersion of residents after the flooding may have made it difficult for residents to assess their losses and timely file insurance claims, the state legislature "extended the period within which Hurricane Katrina insurance claims must be filed by one year -- until August 30, 2007." The legislature also instructed the state to promptly file a declaratory judgment action to establish the constitutionality of this change. The complaint ("petition" in Louisiana legal lingo) is interesting reading, both for its description of the new change in the law and of the need for it. A hearing on the petition is set for August 21.
Coverage Lawyers, and How to Pay Them
It seems like everyone is weighing in on the question of billable hours and alternative fee arrangements these days. My colleague and occasional lunch companion - and forceful proselytizer for abandoning the billable hour - Chris Marston weighed in on his blog the other day on the evils of the billable hour and his belief that alternative fee arrangements are better for both the client and the law firm representing the client. Chris' post caused Arnie Herz to tag Chris' firm as "cutting edge" and provoked a thoughtful commentary from Carolyn Elefant on who should bear the risk of mistakes made in establishing a non-billable hour pricing arrangement.
Chris' comments lay a nice foundation for considering a particular question that has often puzzled me, namely whether a policyholder should ever pay coverage lawyers by the billable hour, given certain fee shifting rules available to policyholders - but not to insurers - and a particular structural aspect of coverage litigation. Under Massachusetts law, a policyholder who prevails on a coverage case against an insurer can generally recover his attorney fees from the insurer, in one of those remarkable and relatively rare exceptions to the American rule (under which all parties are generally responsible for their own legal fees and costs). In addition, Massachusetts' bad faith statute - Chapter 93A - under which claims for insurance bad faith are prosecuted, presents still another avenue for recovering fees from an insurer. Beyond that, when a policyholder sues its insurer after a loss, the amount that is being sought from the insurer is usually either already a sum certain (the amount of the loss already being known) or can be readily guesstimated. Still beyond this, an experienced insurance coverage litigator ought to be able to make a fair guess - known in other businesses, such as home remodeling, as an estimate - from past experience as to how much time will have to be put into such a case to prevail on behalf of the client.
Given these avenues for fee shifting to the insurer if the policyholder prevails, the ability to craft a contingency arrangement based on the known value of the loss and the resulting likely amount of recovery, and the knowledge base of the experienced practitioner, there seems little reason why someone suing an insurance company should ever have to pay by the hour. One would think that a policyholder could expect a fee arrangement calculated on the basis of the likely recovery, and structured around the likelihood of recovering fees at the end of the day from the insurer if the lawyer was right to recommend challenging the insurer's coverage determination in the first place.
If you take this little thought experiment a step further, such a paradigmatic shift in how policyholders compensate their coverage lawyers would likely benefit not only policyholders, but insurers and the court system as well. The simple fact of the matter is that insurers are not always wrong on their coverage determinations, no matter what many policyholder lawyers may think. In fact, given the amount of coverage decisions they make on a given day, the relatively few that are challenged in court, and the even fewer that are ever overturned by a court, it is fair to say that insurers are right far more often than they are wrong. You can almost prove this point by a faux mathematical equation: number of coverage decisions by the insurance industry in a year, minus the number reversed by a court in a year, leaves behind a whole lot of coverage determinations that are simply correct.
If insureds compensated their coverage lawyers not by the billable hour, but instead by the fee shifting and/or contingency bonus they would receive if successful, one could expect semi-frivolous lawsuits against insurers, and even those of at best debatable merit, to be brought far less often than they are currently. It would only make sense that if an insured's lawyer was paid to be right about whether to challenge a coverage determination in court, rather than being paid simply for challenging the coverage determination - rightly or wrongly - in court, policyholders would almost certainly receive from their attorneys the type of objective analysis of coverage that is needed to properly determine whether a coverage determination is right or wrong, before a decision to sue an insurer is made; it would now be in the best interest of both the insured and the insured's lawyer not to file lawsuits against insurers on which they are unlikely to prevail. This would be a nice change, both for the burdens on the courts and the costs to insurers of simply being in business, from the current environment in which it is fair to say that some, but certainly not all, lawyers sue insurance companies simply because, to borrow from the bank robber Willie Sutton, that is where the money is.
While I have been focused on the interior life, if you will, of the decision in Retail Industry Leaders Association v. Fielder - its reasoning, whether it was correctly decided - others have been focused more on the impact of the decision outside the state of Maryland. Jerry Kalish of the Retirement Plan Blog has been covering the question of whether it impacts a Chicago ordinance intended to raise benefit and wage levels, and the California Labor & Employment Law Blog points out the impact of the decision on "proposed California legislation [that is] very similar to Maryland's overturned law" and which requires a similar minimum amount of benefit expenditures. Meanwhile, Pensions & Benefits Weblog takes a still broader view, noting that "many other states [have] comparable legislation under consideration [and that] [t]his is but an early battle in a very very long war ahead."
Objectivity in Providing Coverage Advice
With too much on my plate at the beginning of the week, I told David Rossmiller that I was not going to borrow from his terrific post early this week on the thought process needed to provide advice on coverage issues. As the week has gone by, however, I find myself regularly returning to it. Moreover, I think some of my coverage obsessed readers, friends, clients and colleagues would appreciate it as much as I did, so I changed my mind. At the heart of the post, David talks about the thought process that one must apply when counseling clients on coverage:
This brings to mind something that separates the practice of insurance coverage law from some other kinds of legal practice. I mention this because last night I was reading a blog written by a so-called trial lawyer that frankly made my jaw drop, because it purported to analyze case law but was so lacking in objectivity and fairness as to be disgusting. (I'm not going to mention who this is because it was so evidently written in a bid for any kind of attention, negative or positive, that recognizing these efforts by name would merely reinforce the delusions at their root). Coverage lawyers can have their own views on the world, but when they start wading chest deep in serious analysis of cases and insurance policy language, in my view they have to strive for maximum objectivity and suppress emotion and bias in favor of an intellectual sorting process similar to playing chess. If they don't remain objective and allow bias to influence their thinking, it is too easy to make a mistake and then gain a new bias: defending your own previous substandard analysis.
I think David has captured perfectly one of the hardest things for those of us who move back and forth between litigating different types of cases and rendering coverage advice, namely the need for advocacy in the former role and strict objectivity in the latter.
Employment Law and Insurance Defense
I made a prediction some years ago - long before I had a blog on which to note such things - that the rise of employment practices liability insurance (commonly known as EPLI), which covers employment related claims, would eventually transform the market for employment law services, moving it further away from a traditional corporate law firm specialty and closer to an insurance defense type specialty. It was not much of a prediction, and barely required an educated guess, but this article seems to record that this has in fact come to pass.
A Fine Piece of Insurance Policy Analysis
I turn today from my recent obsession with ERISA preemption and the Wal-Mart case to other arguably unhealthy obsessions, including insurance coverage decisions, contract interpretation and the fine art of drawing a good judge. On Monday, the Massachusetts Appeals Court issued its opinion in American Commercial Finance Corp. v. Seneca Insurance Co.,in which the issue before the court was whether a fire insurance policy covered costs incurred after a fire to protect the premises against any possible subsequent damage (including another fire). As per the court's opinion, the policy did not contain any express language stating whether or not the policy covered such costs, and any experienced coverage lawyer will tell you that when a court starts off noting that fact or something similar, it is a pretty good bet that the ultimate finding will be that the loss was covered under the policy. Now the absence of policy language expressly precluding coverage of a certain event - of an exclusion actually stating that the policy does not cover a particular event or loss - should not lead inexorably to the conclusion that the event is therefore covered. Reasoning of this nature goes against the general proposition that an insurer cannot and should not be expected to anticipate every possible turn of events and account for them with express limitations on coverage written directly into the policy; if insurers were prophetic enough to be able to do so, as some courts and commentators have pointed out, you would end up with insurance policies that run into the hundreds of pages. That unremarkable idea, however, as anyone who has defended an insurance company against a claim that is not expressly excluded under a policy will tell you, is most often honored only in the breach.
But the Appeals Court judge here did not proceed in such a manner. Instead, as is more proper and far more defensible intellectually, he analyzed the actual language used in the policy related to the insured's obligation after a fire to use reasonable steps to protect the property from further damage, and concluded that it logically implied an obligation on the part of the insurer to pay for the costs of doing so. Although anytime you argue over words in a contract - any contract, not just an insurance policy - there is room to differ as to what the final conclusion should be as to how to interpret it, the judge's reasoning in this case is logical and hard to fault. As such, it is what many insurance coverage decisions are not: useful to future parties trying to guide their contracting and their conduct, understandable and defensible.
And this leads to the point about drawing a good judge. The opinion was authored by Judge Doerfer, who for several years before being appointed to the Appeals Court, served as a Superior Court judge, the Superior Court being Massachusetts' primary and highest level trial department. I can remember litigating complex coverage cases in state court back then, and being pleased to draw Judge Doerfer, who was known to have the intellectual curiosity and scholarly disposition needed to handle such cases. This is in contrast to a case - a true story - in which I appeared in a trial court (I won't identify it so as to protect both the guilty and the innocent) in a coverage case in which the insured and the insurer filed cross motions for summary judgment on the duty to defend. In that case, as in most cases, the determination of whether there was a duty to defend depended simply on a comparison of the policy to the complaint, with a duty to defend existing if the complaint described a claim that potentially might be covered. There generally either is or is not a duty to defend in that circumstance; it has to be one or the other, and all you have to do to decide is make that comparison, barring peculiarities of a nature absent from that case. Now, since one motion said there is a duty to defend and the other said there isn't, one of the parties had to be right given this standard, yet somehow this judge found both parties to be wrong, denying both parties' motions for summary judgment. It ended up being fixed on appeal, but it just goes to show that drawing the right judge right off the bat makes a world of difference, both in the outcome of the case and in the amount of litigation it will require to get to the right outcome.
Part D and Profits, a Prediction Rings True
Just a quick follow up note on an earlier post. It looks like Medicare Part D is having the effect on drug company profits, and on taxpayers' wallets, that was predicted and was discussed here. The New York Times has the confirmation here.
ERISA and the Defense of Marriage Act?
I could not let this go by without commenting on it, coming as it does on the heels of multiple posts on the question of whether to arbitrate coverage disputes. This story, arbitration award and federal lawsuit take the subject a full step - at least - further, into the realm of ERISA and its intersection, somehow, with the Defense of Marriage Act. Better still, it manages to do this while folding in as well a claim that an arbitrator overstepped his authority, requiring that his ruling be vacated.
As the plaintiff describes it on its website, "[t]he Massachusetts Nurses Association (MNA) filed a suit in federal court today seeking to reverse an arbitration award that denied health insurance benefits to the same-sex spouse of a registered nurse employed by Merrimack Valley Hospital in Haverhill, Mass, which is owned by Essent Healthcare of Nashville, Tenn."
The arbitrator was charged with determining whether this was appropriate under a collective bargaining agreement, but to do so, he felt compelled to determine how the intersection of ERISA and the Defense of Marriage Act impacted that question. Based at least in significant part on his analysis of the interplay of these two statutes, he found against the nurse seeking coverage.
While the interplay of those two statutes may present a somewhat unique circumstance, what followed isn't; the party aggrieved by the arbitration award filed an action in federal court to set aside the award, on the ground that the arbitrator overstepped his authority by ranging outside of his charge under the collective bargaining agreement. As readers of my prior post on this exact type of challenge know, courts are clearly responsible for analyzing whether or not an arbitrator engaged in such conduct and should set aside a ruling if that was the case. The complaint alleges that the arbitrator's decision making and the sources for it were expressly limited by the terms of the agreement requiring arbitration, but the arbitrator went outside of those sources to make his decision. If true, this is a textbook example of an arbitrator improperly exceeding his or her authority.
Business Risk Exclusions
Before it falls off the edge of my desk in the crush of next week's business, I wanted to pass along an excellent post from David Rossmiller at the insurance coverage law blog on business risk exclusions. I think anyone who has either litigated or counseled parties on claims involving business risk exclusions will recognize the frustration he references: the case law on these exclusions is generally a mess, judges often don't understand the exclusions, and the analysis presented by courts in opinions applying these exclusions often does little more than further muddy the waters.
David, however, has found a case that doesn't do that, and I agree. Unfortunately, it is out of the Eastern District of Wisconsin, and the court's website does not include recent opinions issued by the court, so I can't give you an easy, and free, link to the decision. It is out on Westlaw, however, and David has the cite.
Wal-Mart, Maryland and the Fair Share Act
The United States District Court for the District of Maryland issued its opinion yesterday on the legal challenge to the Fair Share Act, the Maryland statute recently enacted for the purpose of forcing Wal-Mart, and only Wal-Mart, to increase its health care spending for its employees. Major media accounts of the ruling are here, here and here. There is a tremendous amount of grist for the mill in this decision, which ranges logically and fluidly across issues of standing, ERISA preemption, the Tax Injunction Act and the Equal Protection Clause of the United States Constitution.
What jumps out at me today though, on a first reading, is its central ruling, the holding that ERISA preempts the Act. ERISA preemption is typically litigated in the context of a plan or a fiduciary defending itself against an action seeking to impose liability on it beyond that allowed by ERISA; it usually involves attempts by plaintiffs to add liability (and greater damages than could be recovered under ERISA) by means of state statutory and common law causes of action that, while generally available in actions against most types of defendants, are precluded by ERISA preemption from being brought against an ERISA governed entity.
Here, though, what we see is a much rarer creature, the affirmative use of preemption by an ERISA governed entity for the purpose of precluding the application to it of a state law enacted for the express purpose of modifying the operation of a benefit plan. The District Court concluded that because the Act strikes directly at an ERISA plan and its operations, it is preempted by ERISA. Both in the use of the preemption doctrine as a sword here by the plaintiff and in the court's analysis and application of the doctrine, we end up with something far removed from the tactical litigation use of preemption we find in most reported decisions on the issue, and with something that is instead closer to the pure core and heart of the doctrine and its purpose, which is, as the court framed it, protecting "ERISA's fundamental purpose of permitting multi-state employers to maintain nationwide health and welfare plans, providing uniform nationwide benefits and permitting uniform national administration."
More on Arbitration
Apparently I am not the only one with concerns about the arbitration process, which I discussed in a recent post. As this article notes, both the Eleventh Circuit and the Georgia state courts are displaying an overt hostility towards parties who challenge arbitration decisions in court, after the arbitration has concluded. What is unclear from the article, however, is whether the courts are displaying a justified anger against parties who bring meritless challenges to arbitration rulings into court, or are instead displaying a simple prejudice against such challenges. If the former, it is hard to quarrel with the attitude being displayed by the courts, but if it is the latter, it is unwarranted.
The Federal Arbitration Act, which as a general rule will govern arbitration contracts that impact interstate commerce in some manner and which controls most litigation over arbitration decisions in federal courts, provides express grounds on which an arbitration ruling can be challenged and overturned in court. Many states have similar arbitration acts that apply similar rules to arbitrations governed by state law. Judges often display a sort of knee jerk belief that arbitration is semi-sacred and is not to be tampered with, at least not lightly. These arbitration acts, however, require the courts to intervene when the standards for doing so under those acts are met, and in my experience, they are met more often than courts seem to be willing to recognize. For instance, many arbitration clauses impose express rules on the arbitration, and an arbitrator who decides in a manner inconsistent with such rules is, in reality, operating outside of his or her authority. An arbitration decision reached under such circumstances should be set aside. The Federal Arbitration Act and many state arbitration acts require courts to fairly entertain such arguments, and to set aside an arbitration if appropriate to do so. A judicial hostility towards challenges to arbitrations is certainly not consistent with this, but for that matter neither is the benign prejudice against overturning such decisions that judges sometimes appear to manifest.
For an example of a court properly understanding its role in overseeing arbitrations, see this post.
Part D, Medicare and Economic Distortions
The New York Times provides an excellent report today on the impact of Medicare Part D and the unintended - maybe(?) - result of moving millions of lower income patients from Medicaid to Medicare. The article points out that drug company profits will increase significantly because the patients are moved from Medicaid, which has certain price restrictions, to Part D, which lacks those same restrictions. In the article, A Windfall from Shifts to Medicare, the author sums up:
The windfall, which by some estimates could be $2 billion or more this year, is a result of the transfer of millions of low-income people into the new Medicare Part D drug program that went into effect in January. Under that program, as it turns out, the prices paid by insurers, and eventually the taxpayer, for the medications given to those transferred are likely to be higher than what was paid under the federal-state Medicaid programs for the poor.
About 6.5 million low-income elderly people or younger disabled poor people were automatically transferred into the Part D program for drug coverage. . . .
Drugs tend to be cheaper under the Medicaid programs because the states are the buyers and by law they receive the lowest available prices for drugs.
But in creating the federal Part D program, Congress - in what critics saw as a sop to the drug industry - barred the government from having a negotiating role. Instead, prices are worked out between drug makers and the dozens of large and small Part D drug plans run by commercial insurers.
The article provides a thorough summary of a complex problem. Beyond the problem, though, is a question. Is this an economic distortion flowing from the structure of the industry, of the type discussed in an earlier post on such distortions? Or was the original cheaper structure the distortion?
Coverage Arbitration Pros and Cons
As soon as I read the article Arbitration's Fall From Grace in GC South, I knew I needed to pass it along to others. Insurance policies are often written with arbitration clauses that require coverage disputes between the insured and the insurer to be arbitrated. In seminars I have given, I often discuss the pros and cons of arbitrating a coverage dispute, and I try to emphasize that arbitration is not necessarily preferable to litigation. It depends on what you want to accomplish in the dispute resolution process, and variables related to how you think you should get to the result you are pursuing. Do you need certain types of discovery to win, types that are more readily available in the court system than under the rules of the American Arbitration Association? If so, then you want to avoid arbitration.
Another key question is whether you are aiming to prevail on summary judgment - the arbitration rules do not explicitly provide for such motion practice, and I have arbitrated cases in which substantial briefing and expense has gone into simply trying to convince the arbitration panel to hear summary judgment type motions.
Another key consideration is the legal strength of your case. Is the body of law in the circuit that the case would be litigated in if the matter were not arbitrated favorable to you? If so, I often advise clients to avoid arbitration. Why? Because if the law is in your favor but an arbitration panel misapplies it, you have no right of appeal; if a trial court misapplies it and you lose at that level as a result, you can have it overturned on appeal. Thus, if you should win on the law, you shouldn't willingly go to arbitration, if you can avoid it.
I have won more commercial arbitrations than I have lost, but whichever end of the stick I have ended up on, one fact has remained consistent: for any even mildly complicated case, arbitration can be an unwieldy beast.
All these problems and more are discussed in wonderful detail in the article. In my own experience, the article is right on the money, both with regard to the pros, and the cons, of arbitrating disputes.
One of the problems that insurers, and insurance law, have to confront is the distortion in behavior, economic and otherwise, that insurance can create. Insurance coverage law deals with this problem in a number of ways, such as by means of the known loss doctrine, which - although the specifics of its application vary from jurisdiction to jurisdiction - essentially holds that a person cannot insure against an expected, existing or highly probable loss. As such, it prevents an insured company or individual from insuring against something the company or the person intends to do and knows is likely to cause harm. One can think of the known loss doctrine in this context as protecting against people undertaking harmful activities that they would not otherwise have done if they did not think they could insure themselves against the consequences.
We can also understand the various treatments given by the courts of different states to the question of whether a punitive damages award against an insured is insurable as being part of the same thought process. . . .
Hurricane Katrina Coverage Litigation
Call it professional jealousy that someone else has such an interesting case to try, call it the same urge to look that slows up traffic when there is an accident over by the side of a road, call it simply a professional interest in a fascinating insurance coverage dispute, but I am fascinated by the trial that began yesterday in federal court in Mississippi arising out of the wind and storm damage caused by Hurricane Katrina. In it, well known plaintiffs' attorney Richard Scruggs is claiming that Nationwide Mutual Insurance Company wrongly denied coverage of damage to the plaintiffs' home. In a nutshell, Nationwide argues that "while wind damage is covered by its homeowners' policies, damage from flooding is excluded, including Katrina's wind-driven storm surge." The plaintiffs counter that, one, the agent misled them into not purchasing a flood policy and, two, the damage was in any event predominately wind damage, with their lawyer arguing that:
weather data shows Katrina's 140 mph wind hit the Mississippi coast three hours before any storm surge flooding [and that] Nationwide's experts ignored that evidence and wrongly blamed water for the vast majority of the damage to the [plaintiffs'] house.
The case is expected to be a bellwether for thousands of other suits making similar claims:
The trial, being heard without a jury by U.S. District Judge L. T. Senter Jr., is the first among hundreds of lawsuits that have been filed by Gulf Coast homeowners challenging insurance companies over the wind-verses-water issue. Plaintiffs' attorneys hope a ruling in the homeowners' favor would pressure insurance companies to pay out hundreds of millions of dollars in settlements for homeowners whose claims have been rejected.
Insurance Coverage Counsel and the Repeat Player
I often mention in seminars and meetings a point that I call "the insurance company and the repeat player." In doing so, my intent is to emphasize to insureds and their usual counsel the importance of retaining experienced insurance coverage lawyers to represent them when issues arise involving insurance coverage and insurance policies, whether they arise in the context of negotiating a policy, seeking coverage for a loss, disputing a coverage determination, negotiating a resolution of a claim with an insurer, or litigating a coverage dispute with an insurer.
The allusion to a repeat player is meant to drive home the point that the insurer in such a scenario is always using an expert on insurance coverage to represent it and even more than that, is probably using an attorney who has thousands of hours of experience working with the exact insurance product at issue; the attorney is a repeat player. The insured, to have any chance of competing on an even playing field, needs a repeat player of its own - i.e., an experienced insurance coverage lawyer with expertise in the type of policy and coverage issues involved in the matter.
My thoughts on this go further, but I will not repeat them all here (or what else will I have left to post on in the future?). What brings the point to mind right now, however, is that Rees Morrison has a post on his Law Practice Management blog on the Horndal effect, the improvement in efficiency and effectiveness that flows to the repeat player, only he discusses it in the context of the benefits captured by in house law departments when lawyers in the department become specialists and "repeat players." His description of the economics that underlie the idea of the repeat player captures this point beautifully. To quote in part,
As in-house counsel handle matter after matter of a similar kind, they gain experience and they can do more, better, and in less time. The knowledge they accumulate can be thought of as a by-product -- a spillover from the repeated production of advice and counsel
What if Both the Insurer and the Insured Cause a Misrepresentation in an Insurance Application?
This is fun - what happens if insurance coverage is based on misrepresentations in an application, but the misrepresentations were due to both mistakes by the insurer and oversights by the insured? The general rule, with variations among jurisdictions as to certain specifics, is that coverage is void if obtained based on misrepresentations in an application for an insurance policy. The general rule though, can only be understood intellectually as being based on the assumption that the insured is accountable for the misrepresentations or other errors in the application. The Massachusetts Appeals Court has just found that the misrepresentations do not void coverage after a claim is made under the policy where it was an agent of the insurer who made the mistake, and the insured's only role was, in essence, justifiably relying on the agent. In Guerrier v. Commerce Insurance Company, No. 05-P-606. (May 25, 2006), the insured simply signed the application in blank, relying on the insurance agent, whom the court found was an agent of the insurer, thus making her actions those of the insurer, to fill out the actual application. The court placed the risk of errors in the application under that circumstance on the insurer, not on the insured. Obviously, the court could have imposed a rule that placed the burden on an insured to make certain that documents submitted in the insured's name are correct, and it may well turn out that a different set of facts presented to the court in the future might support and result in such a ruling. For instance, it appears that in the case before the court, the facts added up to justifiable reliance by the insured on the agent, thus arguably justifying the insured's acts of omission. The rule in a future case, might, however, be different if the facts allowed for the persuasive argument that the insured's reliance on the agent was not justifiable.
Beyond that, the key factual finding here in my view was that the insurance agent was an actual agent of the insurer; it seems to me the ruling would have to be different if the facts showed that the agent was acting on behalf of and as the actual agent of the insured in soliciting quotes from insurers and seeking policies from various carriers.
The case can be found at http://www.masslawyersweekly.com/signup/opinion.cfm?page=ma/opin/coa/1111106.htm.
Professional Liability Coverage for Medical Billing Errors
There is an interesting story out of Massachusetts concerning a $1.9 million settlement entered into by a physician related to allegedly fraudulent medical billing; the article is at http://www.masslawyersweekly.com/ (subscription required for the full article). In fairness and to be accurate, note that the physician denies the charges and has stated that the real problem was confusion on the part of federal officials over how certain unique services should actually be coded. I have no idea who is right, but what interests me is whether there is coverage for it under the doctor's professional liability policy. Massachusetts has well developed case law, in both the state and federal courts, concerning the limits of professional liability coverage. The case law establishes that such coverage encompasses only claims that require the expertise of the covered professional, and not those that, although part of that professional's business operations, would be common to both the professional's practice and any other business. You can review an article I published on this issue here, Download file.
In this, Massachusetts law is consistent with that of most jurisdictions. Where Massachusetts case law departs somewhat from other jurisdictions is in the specificity of its case law; both the state and federal courts have written extensively on this issue, including cases to the effect that billing and similar "back room" operations are not part of professional services for purposes of professional liability coverage (or for that matter, for purposes of professional liability exclusions).
What is interesting about this settlement, however, is the question of whether that would be different in this instance. Pure overbilling, or intentional fraud (I do not know what was the actual cause of the alleged overbilling in this case, and the physician's position is that this was not the case in this matter) presumably would fall within the province of prior decisions precluding coverage under professional liability insuring agreements for such "back office" operations. But it would seem to me the case may be different if the overbilling allegations stemmed, as the physician asserts, from judgment calls over how to code the procedure for billing purposes, because in that instance the physician's professional judgment may have been involved. A case can be made under the jurisprudence of this circuit that professional liability coverage should extend to the billing problems if they actually stem from decisions on coding that required the provider's expertise and professional judgment.
Again, I do not know what actually occurred in this case. Interesting grist for the mill, however, concerning a particular, and oft litigated, insurance coverage issue.
Pollution Exclusions and the Reasonable Expectations Doctrine
There is an interesting decision out of the Massachusetts Supreme Judicial Court concerning the application of a policy endorsement and its mirror image exclusion to coverage of an oil leak from an oil delivery truck. The spill occurred while the truck was parked overnight, in between two separate days of delivering oil. The Supreme Judicial Court found that the oil leak fell within the coverage granted by the endorsement for the release of pollutants while being transported by the insured, and not within the exclusion for pollutants released while being stored. Neither the facts themselves nor the finding is particularly noteworthy, other than as a classic example of the traditional approach of Massachusetts courts to the interpretation of insurance policies. The court interpreted the plain language of the endorsement, and found that, particularly in light of the strict construction normally given to exclusionary language in the Commonwealth, the events at issue fit within the coverage grant and not within the language of the exclusion.
What was of more interest to me was the court's reliance on the reasonable expectations doctrine to buttress its reasoning and conclusion. The court stated:
This interpretation of the indorsement is consistent with what an "objectively reasonable insured, reading the relevant policy language, would expect to be covered." Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 283 (1997), quoting Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 849 (1993). As noted above, City Fuel is in the business of delivering oil to residential customers. In purchasing an indorsement that covers the oil it delivers both while it is "[b]eing transported" and, more broadly, while it is "[o]therwise in the course of transit by" the insured, an objective purchaser in City Fuel's position would reasonably believe that a release of the oil would be covered from the time the oil is loaded onto its trucks until the time it is delivered to the customer, at least in the ordinary course.
For many years, Massachusetts courts assumed the existence and application of the reasonable insured doctrine in interpreting policies. Regardless of whether and how long it has been recognized in the Commonwealth, of interest to me is the intellectual rationale for this approach to interpretation. Is it legitimate? Is it intellectually defensible?
An insurance policy is a contract, so what warrants deviating from the actual language of it, and basing an interpretation instead on the supposedly reasonable expectations of only one of the parties to the contract? A while back, at a seminar for business and particularly real estate lawyers, I responded to an inquiry from a lawyer who represents real estate developers, and who objected to the idea that the policy was a contract that should be applied as written; his objection was premised on the assertion that what was written in the policy was not always consistent with the insured's purposes in acquiring the insurance. Now there are many ways to respond to such an argument, not the least of which is that, like any contract, it is the contracting party's responsibility to insure, pun intended, that the terms as reduced to writing are consistent with the actual agreement reached by the parties.
But the inquiry got me thinking about a more fundamental question. When I was in law school, more years ago than I care to admit to, Ronald Dworkin's writings on judicial reasoning and interpretation (generally of statutes) were a terrific starting point for much thought and consternation. His key point in one of his books, which one escapes me now, was the idea of the judge as just the next person in the course of reading and understanding the particular statute, or in this case contract, at issue. As extended to a contract, the idea was that the original contracting parties were the initial authors of the contract, but the words themselves in the agreement could not possibly encompass every possible scenario to which they might apply or account for every factual variable. As a result, strict constructionism, so to speak, of the contract is impossible; there is no original intent to the document that will cover all situations. The judge, however, becomes the next author, responsible for making a principled decision as to how to expand the understanding of the contract to make it properly fit the newest events to which the contract is being applied.
At the end of the day, isn't this how we should understand the reasonable expectations doctrine, as the court inserting itself into the role of being the latest author of the policy - rather than the policy and its meaning having been fixed in stone when the contracting parties entered into it? I am not convinced this is necessarily the right way to interpret policies, and I have some truck with the reasonable expectations doctrine itself (more on that some other time), but isn't that exactly what the Supreme Judicial Court was doing in this case, and isn't that exactly what courts are doing when they declare that the reasonable expectations of one party or another dictate that the policy be interpreted today in a particular manner?
The case, incidentally, is City Fuel Corp. Vs. National Fire Insurance Company of Hartford, SJC-09623 (May 10, 2006), available here, http://www.masslawyersweekly.com/signup/opinion.cfm?page=ma/opin/sup/1007806.htm
Coverage for Copyright Infringement and Why You Should Buy It
In a recent posting I discussed the value to insureds of purchasing an endorsement adding advertising injury coverage to their commercial liability policies when they acquire or renew them because it can grant coverage of at least defense costs in some intellectual property cases, at a minimum copyright infringement claims; this is discussed at http://www.bostonerisalaw.com/archives/cat-advertising-injury.html.
It is most valuable to smaller businesses who cannot carry the tens and hundreds of thousands of dollars that it can take to litigate even the most reasonably sized copyright infringement dispute. Bruce MacEwan, on his blog Adam Smith, Esq, http://www.adamsmithesq.com/blog/, wrote a series of postings recently concerning copyright infringement claims being threatened against him by a major media company for information posted on his website. Of interest to me is one in which he describes being advised that
One motivation for doing this is the remark of an IP practitioner and friend who, unsolicited, volunteered the opinion that "There are entire in-house law departments devoted to sending out legally unjustified cease and desist letters." And the truly bad news is not that dismaying commentary on the paucity of ethics, but his additional observation that far more than half the time, threats work.http://www.bmacewen.com/blog/archives/2006/05/copyright_law_fair_use_an_1.html#more
We can presume that most of the times that this threat works it is because the recipient cannot afford to defend itself against a copyright infringement lawsuit, or at least the calculus is that the profits from the allegedly - but possibly not - infringing activity is less than the cost of defending against that claim. Being insured against such a claim, and knowing that at a minimum the insurer will provide a defense against the copyright infringement lawsuit that will be filed if the cease and desist letter is not complied with, changes the calculus immeasurably. Suddenly, the only real issue for the recipient is whether it is, in fact, infringing on someone else's copyright, not whether it is too expensive to litigate the question and find out.
Once again, insurance to the rescue. More importantly, once again, companies and their counsel simply should not overlook the value of paying a little more for add ons, such as advertising injury coverage, that are typically available.
More on Who Should Pay for the Defense of Corporate Officers and Directors
Looks like I was not the only one intriqued by the article earlier in the week in the New York Times about companies who stop paying the legal bills of their officers, directors or employees, and the effect it has on the affected individuals. The wired gc talks about it here http://www.wiredgc.com/2006/04/17/corporate-legal-defense-fees-and-cooperation/.
This is one of those issues where your take on it seems to depend on where you sit. As my earlier posting on the subject showed, it illustrated to me the need for officers and directors to be proactive in ensuring that the company's bylaws and its directors and officers coverage work in tandem to protect them as much as possible from personally incurring substantial legal fees.
Insuring and Litigating Design Disputes
What does design, and more particularly the rise of design in modern industrial China, have to do with ERISA and insurance? Little, something and nothing.
A little, because business liability policies often contain advertising injury coverage, which can provide coverage for copyright infringement claims in certain circumstances. You can read my very out of date article on advertising injury coverage - from 1992 - here: Download file. Of note for present purposes, reflecting my lawyerly obsession with footnotes, is footnote one, which details the causes of action covered under advertising injury coverage endorsements.
Something, because one of the areas in which I practice extensively is defending insureds against intellectual property lawsuits in cases where the advertising injury coverage is triggered and the insurer will cover the claim. It is worth noting that this coverage can lead to insurers at least paying for the defense of many types of intellectual property claims, not just copyright infringement actions. I have handled cases in which everything from patent infringement to trade dress infringement actions have been defended by insurers. This comes about because the lawsuits also include a claim for copyright infringement, and the copyright infringement claim triggers the advertising injury coverage, resulting in the insurer having an obligation to defend the insured against the lawsuit. In most jurisdictions an insurer, if it must provide a defense against one count in a lawsuit must also provide a defense against the other counts in the lawsuit (with variations and exceptions not relevant to this discussion, but which can be very important to the particular insured defendant in a particular case). As a result, the other claims made in a copyright infringement lawsuit, such as claims for patent infringement or trademark infringement that are often "bundled" in a lawsuit with a copyright infringement claim, also end up being defended by the insurer. See the following link, which includes an example of a "bundled" case of this nature in which I defended a party charged with patent infringement, trade dress infringement and copyright infringement: http://www.mccormackfirm.com/new.html.
And finally nothing, because the relationship has as much as anything to do with my personal and professional interest in design, and how you protect it. I cannot read an article on architecture, industrial or other design in any setting without immediately thinking about how ownership of it can be protected. There is a fascinating article in today's New York Times on the rise of, for lack of a better term, a commercial design economy in China, that highlights several designers and architects, and their recent work. The article highlights the interplay between traditional Chinese forms and materials, and the country's newest designs and designers. http://www.nytimes.com/2006/04/20/garden/20china.html?_r=1&oref=slogin. In reading it, I immediately jump to the questions of what parts of it can be protected, which owners/designers can limit the rights of others to replicate it, and how that can be done. Issues ranging from claiming trade dress protection in the products, to an architect's copyright in a building design come immediately into play. It fit with a case I am handling, in which the question of the extent of an architect's ownership of and copyright in his design of a building was at issue. You can find a one paragraph discussion about that case here: http://www.mccormackfirm.com/new.html.
Funding the Defense of Corporate Directors and Officers
Directors and officers policies generally require an insurer to pay the defense costs incurred by a covered corporate officer when a claim is made against her or him. The insurer in that circumstance does not actually provide a defense, but instead, under the terms of the policies, normally must reimburse either the officer for his defense costs or the company itself, if the company is paying the defense bill. I have written and spoken on this point elsewhere, http://www.mccormackfirm.com/pubs/WhatEveryBusinessLawyer.pdf, and have mentioned that a corporate officer or director's best proactive plan is to both have such coverage and ensure that the company bylaws require indemnification; this provides directors and officers with two sources to pay the high legal bills that are often incurred in the types of cases brought against them. Although not directly on point, in the New York Times today is an interesting article about the impact of having to fund their own defense on corporate officers and employees who are charged with criminal wrongdoing, http://www.nytimes.com/2006/04/17/business/17legal.html?_r=1&oref=slogin.
If it walks like a duck, looks like a duck, and quacks like a duck, is it a claim?
When is a demand, or a threat, or another communication from a potential claimant a claim? The answer matters, particularly in corporate insurance programs built upon claims made policies. Normally, courts either apply the specific definition of the term claim contained in the policy at issue or else, in the case of a policy that does not contain such a definition, a general common law rule that the term claim means a demand for something as of right.
Not too long ago, I litigated a case in which an insured received a demand from an aggrieved party, but that demand did not qualify as a claim as defined in the claims made policy in effect at that time; as a result, it did not trigger coverage under that policy because claims made policies are generally only triggered by claims, as defined either by the policy or common law, that are made while they are in force.
The next year, when that demand evolved into the filing of a lawsuit, a different carrier insured the company, under a policy with a different definition of the term claim. The demand made the year before qualified as a claim under the definition of that term in the policy in force that year. The policy in force that year did not cover the lawsuit as a result, because for purposes of that policy, the claim was made before the policy took effect and claims made policies do not cover claims made before they take effect.
Both insurers correctly denied coverage, based on the definition of the term claim in their policies, and the insured, despite having purchased policies that were in effect both when the demand was made and when a subsequent lawsuit arising out of the same events was filed, lacked coverage for the lawsuit. In that particular instance, the insured eventually had to sue, and recover from, its own insurance broker, for having set up a program that would allow such a gap in coverage.
The United States District Court for the Northern District of West Virginia just released a memorandum opinion deftly applying these rules to claims made policies that contained a detailed definition of the term claim. The court, correctly, broke down the specific textual requirements of the definition of claim in the policies, such as the requirement that it be in writing and seek damages, and applied them to the notice that the insured received during the policy period about the events at issue, concluding that certain communications during the policy period did not constitute a claim that would trigger coverage because they did not satisfy those requirements. The case is Cornett Management Company v. Lexington Insurance Company, Fireman's Fund Insurance Company, Brady Risk Management, Inc. and Hartan Brokerage, Inc., a copy of which is available here: Download file