Well now . . . The news that State Farm is going to stop writing new homeowners business in California didn’t surprise me at all, but it did ring a powerful bell. All the way back in 2007 I was writing that climate change would be taken seriously and action would be taken once the economic impact of doing nothing showed up through the intermediary – perhaps it should be called the canary in the coal mine – of the insurance industry. I discussed it here, here and here, among other places. If anything, way back then, I was too sanguine on the issue. In my defense, I was a lot younger then.

Hamilton Nolan, in his article “Insurance Politics at the End of the World,” isn’t sanguine at all, but then things are much more serious- and the impact of climate change much more damaging – now. You will note that in this post on the subject in 2010, I mentioned how concerning it was to me that “I look[ed] out my window here in Boston at temperatures in the mid-forties and sunshine” in March. This past winter, I probably saw that weather in the beginning of February.

What I do like about Nolan’s article is that it drives home the point, which gave rise to my own posts on this subject a decade ago and longer, that the underwriting discipline of the insurance industry is what is at play here. This is not some sort of wishy washy ESG thing. Instead, the industry prices all risks – not just climate exposures – based on hard numbers and data, and that is why climate change losses are now getting priced into insuring against risks in ways that no longer allow rational economic actors – or even just everyday homeowners, whether rational or instead irrational – to ignore the impacts of climate change.

This is an interesting story on Mintz Levin trying to bring more lawyers back into the office by figuring out the best way to get people, starting with the partners, to find it valuable to be there, rather than by threatening associates’ compensation or mandating certain work hours, as other firms have done. My own experience managing people remotely (I am in the office most of the time, because it is better for my work, but not everyone who works with me is) is that top down dictates are pointless, but giving people a reason to be in the office – to see it as in their best interest for doing their work and being successful – is the best way to encourage a return to the office.

Frankly, in the short run, the “order lawyers (and others) back to the office” approach might work, but it won’t work in the long run. As this article points out, with the end of the bulge in the labor market created by the baby boom generation, we are moving quite clearly into an age of labor shortage. Law firms and other employers who want to hire and retain the best and the brightest are going to have to enact policies and take approaches – as Mintz is doing with regard to the question of remote versus office work – that encourage employees to act in ways that benefit the employer, rather than – as employers could easily do throughout the now bygone era of overpopulated labor markets – telling them what to do.

And what exactly does this have to do with the subjects of this blog? Well, the place to start is by improving employee benefit programs so that employees feel the requisite type of a stake in the employer, such as through matching 401(k) contributions, policing returns and fees in retirement plans so as to avoid imposing an unwarranted and hidden tax on employee retirement investments, establishing ESOPs, offering deferred compensation plans and an endless series of other approaches to improving the nature of ERISA governed employee benefits in this country. Heck, one might even consider offering pensions, like they did in the old days when people not only showed up for work at the office but stuck around at the job long enough to collect it.

I didn’t intend to write a second post (here’s the first) on the ever rising tide of excessive fee litigation, but the LinkedIn algorithm, responding to my posting of my first blog post on this issue, hand delivered me another great graphic, this one by Sompo International, on the same topic. What I like about this one is that it quickly presents a longer term view of the historical growth in excessive fee litigation, showing the growth in filings since 2010 and illustrating that filings became elevated around six years ago and, despite some variation, have remained so. It also doesn’t underplay the amount paid out in damages over the years on these types of claims, documenting it as in excess of one billion dollars. This number is kind of the lede, which should never be buried in these types of presentations, and this graphic definitely doesn’t do that.

When you see these numbers, you further understand the point I made in my last post – that the amount of potential recovery for plaintiffs and their lawyers is driving much of this growth and the most realistic way to bring down the numbers of filings and reduce, long term, the exposure to plan sponsors and their insurers is to consistently take these cases to trial.

This is a great and well-illustrated presentation by Chubb on the history of excessive fee litigation against sponsors of defined contribution retirement plans, on the pace of filings, on the types and sizes of plans that are being sued and on settlements of those claims. What you can see in the data is something that those of us writing on this topic years ago predicted – that the number of filings would only increase over time and that, perhaps most importantly, the size of plans targeted by plaintiffs’ lawyers would decrease, making being sued on a fee claim a potential risk for many employers who might have otherwise thought, a few years ago, that they were too small to be at risk. In a way, what has happened is sort of the opposite of the “too big to fail” mentality in financial industry regulation. For many years, plan sponsors without billion dollar plans assumed they were “too small to sue,” but as the Chubb presentation makes clear, that turned out to be wishful thinking.

The graphic presents the idea that litigation costs, defense costs, settlements and the like for these types of claims are simply going up, up and away, with no obvious end in sight, nor with any obvious rhyme or reason that would bring some certainty to this area of litigation or to predicting the potential exposures of plan sponsors. This is in many ways the point made by Dan Aronowitz in, among other blog posts, his piece on jury trials in excessive fee cases, when he points out the vagaries of rulings in this area of the law, and the lack of consistency in case outcomes.

To me, the underlying dynamic is that more and more plaintiffs’ firms have moved into this area as settlement values have gone up, and more and more cases, against smaller and smaller plans, have been filed as a result. In a way, from the perspective of an insurer, it’s a form of a death spiral, as more and more plaintiffs’ lawyers entering the area lead to more and more suits being filed, and more suits being filed leads to more and more defense costs being incurred, leading to more and more settlements being paid so as to avoid large defense bills, which in turn leads to yet more suits being filed as plaintiffs’ lawyers see those settlement numbers and decide to chase those types of settlements, thus bringing you right back to the first step in the cycle.

This is not, by the way, to suggest that all such claims are meritless, as thirty years of experience has taught me that, in fact, there are excessive expenses and fees buried in at least some plans, a point I made in my post about the inherent tax imposed on retirement savings in this country. However, years of litigation and corresponding improvements in practices by plan sponsors has substantially reduced this problem. Moreover, the fact that some claims have merit doesn’t mean that all do, or that some of them shouldn’t be filed at all and are effectively attempts to trigger settlements and legal fees to plaintiffs’ lawyers.

Is there a solution to this dynamic? Yes, there is, but it will cost insurers and plan sponsors defense dollars in the short term, and I am stealing it from the approach taken for many years by a major medical malpractice carrier in Massachusetts: don’t settle and instead try all cases to conclusion (assuming no resolution at the motion stage). Once it has been clearly established that plan sponsors and their insurers will try every one of these cases to a conclusion, you will quickly see the number of plaintiffs’ lawyers in this area shrink, the number of suits filed likewise shrink, the targeting of smaller plans end, and the merits of the claims that are brought dramatically increase. It will take awhile and, during that time period, require accepting a substantial increase in defense costs across the industry, but in the long run, it will reduce the number of suits, the amount of defense costs incurred and the amounts paid out in settlement, once the dynamic driving the increase in litigation in this area has been disrupted.

On the Fid Guru Blog, Euclid Fiduciary’s Daniel Aronowitz has an excellent deep dive on the question of jury trials in breach of fiduciary duty litigation under ERISA, asking the questions of, first, whether they are really coming and, two, if so, is that a good or a bad thing (his take clearly appears to be that it is a bad thing).

We will start here with the eat your vegetables part of this post, or the part where we discuss doctrine and not opinions. Dan does a terrific job with the history of the long-standing barrier to jury trials in ERISA cases, including with the jurisprudential underpinnings. From there, he explains the cracks in the wall, whereby courts are beginning to consider allowing jury trials, specifically addressing the potential liabilities of fiduciaries for excessive fee and similar alleged problems with large benefit plans. Dan’s post is built around the upcoming scheduled trial in the Yale University breach of fiduciary duty class action; as explained at the outset of the post, “barring a last-minute settlement and inevitable scheduling delays, a jury of ordinary citizens from Hartford, Connecticut is going to decide if the Yale University plan fiduciaries committed fiduciary malpractice in choosing the investments and monitoring the fees of its retirement plan.”

But is this a good or a bad thing? Dan clearly comes down on the side that adding jury trials to the ERISA litigation world is not a wise development, an entirely defensible position that should be held by any self-respecting insurance industry executive. And why is that? Well, first, because adding jury trials into the mix will prove expensive for fiduciary liability insurers, and not only for the obvious reasons. Speaking broadly and based solely on my own experience, jury trials are certainly at least marginally more expensive for insurers to fund than are bench trials for a variety of reasons. But the increase in defense costs linked to the rise of jury trials in this context isn’t just a question of the relative cost of conducting a jury trial relative to the cost of bench trials.

Instead, it is driven by the fact that the possibility of jury trials is likely to increase the number of trials and the amount sought in settlement of these types of cases. Throughout all areas of the law, plaintiffs’ lawyers operate on the belief that the availability of a jury is favorable to them, that they have a chance to win regardless of the strength of a particular case so long as they can just get to a jury (in other words, manage not to lose at the motion stage or be forced into a bench trial or an arbitration) and that the settlement value is higher if the defendant or its insurer has to contend with the vagaries of a jury. And frankly, based on thirty years of experience on both sides of the “v,” they are not wrong to think this way.

However, from a merits perspective, it is not entirely clear that jury trials in this context are by definition a bad thing. Juries in this context are not deciding the doctrinal questions that are primarily driving the vagaries in court decisions, but are instead applying those doctrinal decisions to the facts of a given case. That’s the general purpose of a jury, obviously. I don’t tend to accept the premise that juries are too easily driven by passion or misled by clever lawyers, or similar criticisms of their role in deciding cases. Instead, I find that, more often than not, they are roughly comparable to judges in executing the fact finding role. The real question is the need for control on those occasions when jury findings or verdicts are off base because of misapplication by a jury of the law or excessive sympathy for a plaintiff or an underlying dislike of a corporate defendant – but in that instance, the court possesses the necessary tools to address any such distortion driven by the jury system.

As an ERISA litigator, I have long been an advocate of the idea that the best defense against litigation is good compliance – in other words, that the best way to prevent lawsuits and, if sued, to come out whole on the other end is to operate a well-run benefit program and to consistently do so long before the process server shows up. In this regard, one of the central elements of running a compliant 401(k) plan that maximizes the opportunity to prevent or win lawsuits is to establish the prerequisites for compliance with ERISA section 404(c); 404(c) provides some protection against claims for breach of fiduciary duty where the employees have control over how their salary deferrals are invested.

For years, one of the more hotly contested topics in ERISA litigation has been the scope of protection against liability that plan sponsors and fiduciaries can claim for themselves by running 404(c) compliant 401(k) plans. There is certainly some protection earned by doing so, but the scope of that protection is likely less than many plan sponsors would like to have obtained or, possibly, believe they acquired by engaging in that particular act of compliance.

Financial advisor Doug Lutkus, who like me believes that providing more information about investment options to plan participants is often the best course of action for plan sponsors, and I will be discussing these topics in a webinar today. If you would care to join us, you can find the sign up information here.

There is an interesting article in the Guardian on the subject of structural and policy barriers in the United States to the elimination of poverty, which is addressed in a new book by a MacArthur award winning sociologist. I think the New Yorker has a new article out on the same topic, probably based on the same book, but I have been unwilling to use my one free, non-subscriber article access per month on it to find out.

It caught my eye because of something similar I have been thinking more and more about with regard to retirement and other benefits in American work life. A significant part of my practice is freeing up retirement, pension, 401(k), deferred compensation, employer provided group life and other benefits that are due to, but aren’t being paid to, American workers. It’s very gratifying work and, at the risk of sounding like one of those plaintiff-side personal injury lawyer ads that always trumpet the amount of money recovered for the injured over the years, I have recovered multiple millions of dollars for employees and retired employees through this work. What has really jumped out at me about this part of my practice over the years, and become very apparent recently, is the constant undercutting and underdelivering of promised retirement and other benefits to employees. It holds true across all socio-economic classes of employees – there was a day recently where I spent the entire workday on such issues on behalf of everyone from retired senior executives to upper middle managers to a group of rank and file employees. There is, in essence, a structural barrier to the payout of benefits across the board to the American workforce, and it doesn’t matter how high up the employment ladder you look.

Some of this is, consistent with the argument made in the Guardian article, structural and baked into the system. What is deferential review in the context of an ERISA case but a structural barrier against paying out benefits to employees? There are in many cases no reason for an ERISA benefits case to be analyzed as anything other than what it often is at heart, a breach of contract dispute, and yet because it involves employee benefits, a unique standard, unfavorable to employees but favorable to the plan sponsor, applies. Similarly, the use of equitable relief under ERISA to remedy gaps between what a retirement plan actually owes and what was promised, often many years before, to employees, has long been handcuffed by similar barriers to recovery, although recent developments in the case law are moving the standards on this issue in directions that substantially erode this systemic barrier to recovery of benefits.

And still yet more of it arises simply from the complexity of the system and the disjunct between the needs of employers – particularly smaller employers – to locate good outside administrators and the relative paucity of them. This dynamic leads to endless numbers of errors in the system that, barring intervention by a lawyer, often deprive employees of some substantial part of their retirement or other benefits, for a whole host of reasons. I could offer up many examples, but that would requiring turning this short blog post into a treatise.

And some of it, of course, is deliberate. Any lawyer working in this area can bore you to tears with war stories of cases where the withholding of benefits was deliberate and intended to reduce the benefit cost to the employer, or increase the fees of a vendor, or otherwise benefit someone other than the employee.

To me, I tend to think of all of this as a sort of tax on the retirement system, reducing the benefits owed to American employees across the board, for some more than others. My gut feeling is that all of this, combined, represents a 10% to 20% tax across the entire retirement universe, with employees underpaid by that much through some combination of administrative error, doctrinal barrier, and unnecessary cost.

Don’t get me wrong on this – I think, and my experience has been, that most employers and vendors in the retirement and benefit field have good intentions, but the few bad apples, when combined with the inherent barriers to full payment of employees that are baked into the system, complicates and reduces retirement and benefit payouts to the American workforce as a whole, once you look at the question with a really broad lens rather than focusing on a specific case. When you focus on specific cases, you are as (or perhaps more) likely to find a generous and well-run plan as to find one that shortchanges a group of employees – but if you look at the entire, enormous retirement benefit market as a whole in this country, I feel confident you will find that the amount of benefits that gets to employees is significantly reduced by this dynamic.

I spoke earlier in the week at ALM’s Complex Claims and Litigation Forum in Las Vegas, where I was on a panel on “Tackling Market Disruptors – How to Manage Industry Shifts.” I spoke on a subject near and dear to my heart, which is the impact on claims handling of the rise of the nuclear verdict and the problems that ever increasing liability exposures pose for the insurance industry in general. I was joined on the panel by Jacqueline Schafer, a practicing attorney in Washington state and the founder and CEO of the artificial intelligence company, Clearbrief, who addressed the very newsworthy and timely subject of the impact of AI on litigation and insurance trends, as well as Daphine Willingham of State Farm Insurance, who gave a very interesting take on the view, from the claims side, of these trends. (I am also now stealing forevermore her metaphor for the rationale behind resolving problem claims early rather than later, which was that rotten fruit doesn’t get better while sitting on the countertop and instead just gets worse).

I also greatly enjoyed the conference as a whole. I don’t know whether it is the relief of being freed from virtual conferences after all this time, but the past two conferences I have attended – this one and DRI’s Insurance Coverage and Practice Symposium in December (which I wrote about here) – have been a great deal of fun. In fact, the ALM conference is the first conference I have ever attended in Las Vegas where I didn’t lose a small but princely sum in the casino, not because I won but because the conference and the attendees were so interesting I never even sat down at a table in the casino.

It was also the first conference I have attended that entirely avoided the age old problem of manels. There is no question in my mind that, as an attendee sitting in the audience, the range of perspectives and experiences of the members of the panels, which were universally diversified, made for far more interesting presentations than what we typically used to see at these types of conferences, where the same five men from the same five insurance companies said the same five things only in slightly different words. These panels were far more interesting, and my kudos to the organizers for pulling that off so well.

Overall, though, my biggest takeaway was the extent to which the three days of discussions reinforced two beliefs I hold dear about the insurance industry – that it is at the same time both the most static and the most dynamic of industries. Static in that, despite new policy forms and new coverage risks, the issues remain very much the same. For instance, there was an excellent keynote address on insuring the marijuana industry and the issues doing so raises. Although a new area of underwriting, the issues remain very much the same – what type of policy wording needs to be used, what type of data is needed for underwriting, and so on – as has always been the case in insurance. Dynamic, though, in that the range and types of risks keep shifting in ways that force the industry as a whole – from brokers to underwriters to claim departments to litigators – to constantly shift and often play catch up to developments in the greater world; nowhere was this more evident than in the discussion of cyber risks and insurance, presented by a terrific panel.

I was pleased to read this article in Massachusetts Lawyers Weekly, as well as the recent Supreme Judicial Court decision it references. For several years, I have been arguing that in insurance coverage disputes involving sophisticated insureds, Massachusetts courts are moving away from their historic reliance on pro-insured maxims in deciding coverage disputes in favor of a more traditional contract law approach to deciding such disputes. For many lawyers who, like me, have been practicing insurance law in Massachusetts for decades, our experience for many years was that Massachusetts courts considering disputes between insureds and their insurers would frequently fall back on what I call “tie goes to the runner” maxims, such as the rule that ambiguous policy language must be interpreted in favor of the insured, to find in favor of insureds in such disputes. Over the past handful of years, though, it has been clear to me that state appellate decisions were cutting against that approach, in favor of rubrics that favored identifying and then enforcing the apparent contractual intent of the parties, at least when the insured was a sophisticated entity. Unfortunately over the years, there has not been an appellate decision that could serve as a ready and easy touchstone for making that argument, but that now seems to have changed.

As Massachusetts Lawyers Weekly points out in the article, with affirmation from a number of prominent coverage lawyers, a recent state supreme court decision decided a complex coverage action by determining and then enforcing the contracting intent of all the parties – both the insured and the insurer – to decide the scope of coverage, rather than invoking other maxims or rules to reach its decision. The Court declined to find coverage for a risk not addressed in the policy language itself, stating that “[g]iven the express allocation of risk and the sophisticated parties that contracted to allocate this risk, we decline to imply a common-law duty to fill in the gap in coverage.” The Court held that the parties – both the insured and the insurer – were sophisticated entities who negotiated the extent of the risk transfer between them and that there was no basis for the Court to make a reallocation of their decision by reading benefits into the policy that the parties did not expressly include within it. One leading coverage lawyer called the decision “a refreshing recognition of the sanctity of contract.”

To me, the decision is another marker on the journey of Massachusetts insurance coverage law from a regime in which extracontractual rules of policy interpretation (which inevitably favor insureds) control the outcome of disputes to one more in line with traditional rules of contractual interpretation, in which the guiding principle is to try to identify as precisely as possible what the contracting parties actually intended to accomplish by their written agreement.

I enjoyed this article from Middle Market Growth on the intersection of private equity investing and ESOPs. As the article points out, most people think of ESOPs as fully employee owned enterprises, but in fact there are partially employee owned companies where there is room for private equity investments elsewhere in the ownership structure and outside of the part of the company owned by the employees. The article speaks very favorably of these types of scenarios and notes that these types of transactions can greatly benefit the investment itself and the investment target, as well as the employees. I find this proposition wildly noncontroversial. As I have written elsewhere with regard to employee ownership, turning employees into stakeholders is beneficial to the particular company’s employees, to (as the article also points out) the company’s prospects and performance, and, in my view, to society as a whole.

However, one point not noted in the article is the need to ensure that these types of transactions treat the employees fairly and bring matching – and depending on the transaction identical – benefit to the employees as it does to the non-employee owners. I have litigated cases where that was not the case, and this is a quick route to expensive litigation involving the ESOP. For instance, in one of my cases, private equity bought the company through a structure in which both the employee stock holdings and the shares of the company’s other owners were acquired. Although the discrepancy, and the impropriety of it, was not obvious as it was buried within the nature of the transaction and obscured by the timing of different steps of the transaction, the buy out resulted in a higher purchase price being paid to the majority, non-employee owners than was paid to the employees for their share of ownership. This eventually led to litigation intended to rebalance the funds paid to purchase the company so as to eliminate the discrepancy.

It is important to pay attention to these types of details when private equity becomes involved in investing in an ESOP. Unlike a classic private company transaction, complete freedom of movement in designing the terms of a deal doesn’t exist with an ESOP, due to the obligations running to the ESOP itself and the employee owners.