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.
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.
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.
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