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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.