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.

Chip, chip, chip. No, that’s not the sound of the polar ice caps shedding ice, although I suppose it could well be. It’s the sound of the Fortress Europa that some of the more optimistic lawyers for 401(k) plans thought was being enacted against excessive fee claims – in the wake of cases such as Hecker – slowly being whittled away. Cases such as this, in which the fiduciaries were found to have fallen down on the job by accepting retail class fees, are going to open the door to more of these cases, and to more settlements to resolve them, than seemed possible when the first wave of excessive fee type cases were being ruled on; indeed, as this client advisory points out, it is no longer possible for plan fiduciaries to simply ignore the question of the propriety of retail fees in their plans. I have long believed that it will take only a couple of district courts who are willing to allow excessive fee cases to proceed into discovery and to adjudication on their merits to turn excessive fee cases into a potentially significant risk for fiduciaries, and I feel comfortable predicting that this is the start of that trend. To add a Civil War metaphor to my earlier climate change and World War II metaphors, these types of cases are going to bear out my prior prediction that Hecker was likely to be the high water mark in the defense of excessive fee cases.

Anyone who writes anything for a long time, as I have this blog, cannot help but end up with certain recurring themes. When it comes to the management of 401(k) and similar plans, one of those themes has been the importance of compliance and a careful decision making process by fiduciaries, an idea borne out of this litigator’s belief that, in the courtroom, the best defense is a good offense. In the context of breach of fiduciary duty litigation, this old chestnut should be understood as meaning that the best way to defend fiduciaries against such claims is to present a long history of active oversight of investment and other decisions by the defendant fiduciaries. Not only is that good for plan returns themselves in the long run in most instances, but it goes far towards insulating the fiduciaries themselves against being liable on claims for excessive fees, too much stock, or other alleged problems. Many claims of this nature will never even reach the point of really examining the specific conduct of particular fiduciaries, and are instead often decided at an earlier stage, such as motions to dismiss, on the basis of broader defense theories, such as the existence of presumptions in favor of the retention of employer stock in a plan, or “law and economics” type theories, such as in Hecker, that the marketplace shows that the decision making was fine, or on the application of ERISA safe harbors. But one cannot be sure that this will always be the case, and some breach of fiduciary duty litigation against fiduciaries will always get past these types of early suit Maginot lines, and in those instances the next best line of defense is to be able to demonstrate specific conduct by the defendant fiduciary that shows strong efforts being made to get the challenged issues – whether the expenses or fees of a plan, or something else – correct. If the plaintiff or class gets to that point of the case, being able to show that will more often than not determine who wins.

I write of this today, and it is on my mind, because of a press release that crossed my desk this week concerning the decision of a major defined contribution plan to use an index BrightScope created from its data to benchmark the performance of its target date retirement funds. The release notes that:

The BrightScope On Target Index will help [the plan sponsor] measure the performance and risk attributes of their target date portfolios while giving participants the ability to see how accurately their target date portfolio lives up to its stated goals.

At the end of the day, anything and everything plan sponsors can do to put accurate, transparent information in front of fiduciaries as part of their decision making process makes it harder for liability for breach of fiduciary duty to be imposed on those fiduciaries, and this is a perfect example of a plan sponsor doing so.

This is an interesting small piece out of Reish and Reicher highlighting the fact that smaller plans, with relatively small asset pools, face many of the same risks and problems that are faced by the large plan sponsors involved in the bold face cases that show up on a daily basis in the media. To my mind, the key point is, as I have said often, one of compliance. For smaller companies in particular, an obsessive focus on compliance is needed to avoid getting sucked into these types of lawsuits. For the very largest plans, that alone won’t keep them out of the litigation cross hairs; they are simply too big of targets, and too subject – like BP – to external events that can put their fiduciaries on the wrong side of a complaint’s caption. For smaller companies, though, it is the internally controlled events, like compliance lapses, that are likely, in my experience, to trigger fiduciary or other ERISA litigation, and that is something those companies can control.

The article, incidentally, came to my attention through a Linked In group I participate in, and its only fair to note investment advisor Chris Tobe for bringing it to my attention. My comments on Linked In about the article expanded upon my thoughts above a little bit, and to the extent you are interested, were that:

The Reish article is right on point. I have represented smaller plans and their sponsors in similar cases, and relative to the size of the employer, they are every bit as disruptive, expensive and of concern as large cases against larger plans. For the smaller plans in particular, who really cannot afford the distraction from their business of these types of claims, an emphasis on compliance to avoid these types of suits is crucial. Of even more import is a willingness to work cooperatively with a participant who has a legitimate complaint to resolve the matter without litigation; I have done this, and it can save a small fortune in legal fees while ending up with a settlement similar to one that would be on the table at the end of litigation. Finally on this point, I would note one concern with regard to fiduciary liability insurance for these "small plan" claims. Many such policies have a high deductible, meaning that relatively small dollar claims in relatively small plans may not end up covered by the insurance at all or at least not to a significant extent. Small plans should keep in mind when acquiring the coverage that a low deductible is necessary to capture the typical size claim that a small plan will generate.

BP has a giant employee savings plan, making it a prime target for stock drop type ERISA breach of fiduciary duty claims in light of the Deepwater Horizon leak, as I mentioned here in this post, and the lawsuits and the investigations that will eventually result in lawsuits are coming out of the woodwork as fast as vampires in one of the Twilight movies. As I noted in this earlier post, I am beyond skeptical of any such claims that are premised on the simple thesis that the fiduciaries breached their duties by not anticipating and accounting for the risk of this type of a loss when deciding to include or emphasize company stock in the plan. However, less flippantly and more exactingly, the same is not necessarily true for the alternative thesis, which I assume to be what many of these claims will play out as, that the fiduciary breach doesn’t relate to this specific environmental loss and its impact on the stock holding, but rather is that, in light of the regulatory and environmental universe in which BP operates, it was imprudent to hold or allow employees to hold a disproportionate amount of company stock; in other words, that the risk profile of the accounts as a whole was too high because too much of the investment was in company stock in an industry subject to unique and potentially catastrophic risks. Just a quick, non-analytical glance at BrightScope indicates a large company stock exposure in the BP employee savings plan, incidentally. In this sense, these claims, and the BP fiduciaries’ exposure, is no different than other instances of companies whose stock fell at a time that employee retirement accounts held a disproportionately high share of that one stock. What makes the claim here a little different, however, is the argument that there is something unique to the industry that calls for less company stock being offered to employees and instead a greater fiduciary emphasis on diversification than would be the case in other industries. For instance, if a Gillette or a Grace is sued after a stock drop, the argument is essentially that prudent investing practice as a whole calls for greater diversification, and the claims against the fiduciaries, to dress them up, may also include the argument that the fiduciaries should have anticipated stock market risks based on their knowledge of the company and its industry that should have caused them to prevent the excessive accumulation of company stock. With the BP claims, though, what you would have, I suspect, is less the argument that greater diversification was needed as a general principle, in favor instead of the argument that the oil industry itself is so subject to unique, stock value demolishing risks – from tanker crashes, to oil well blow outs, to nationalization, to wars – that it was simply imprudent to allow an excess exposure to the industry and certainly to any one particular company in that industry. (Incidentally, there is no better overview of these topics and the peculiar risks of the oil industry than Daniel Yergin’s The Prize, which may perhaps be necessary background reading for the law clerk of any judge assigned one of these cases).

Its an alluring theory, but one that raises the question of whether it plays out against the backdrop of past case law and the development of fiduciary standards when it comes to employer stock holdings, which would suggest that the claims on their merits have weaknesses, or whether instead they play out against the political backdrop of the Deepwater Horizon event and the economic losses it is strewing across a range of actors, including but not limited to the employee shareholders. If it plays out against that later backdrop – as a, perhaps, unseen or unspoken influence – the question becomes whether this fact pattern could shift the nature of these types of claims in a direction that could give them far more traction than the past history of claims of this nature suggests would otherwise be the case.

Here is an excellent and very educational post that I wanted to pass along from the Florida Insurance Blog on the statute of limitations applicable to denied benefit claims under ERISA. It is an issue that is often not as straightforward as it either appears or should be, as the Ninth Circuit case addressed in the post illustrates.   If you are new to this issue, you could do worse than to start with a read of that post.
 

Funny that I referenced the Oscar Awards the other day in a post, as I just found out this blog has been nominated as a top insurance blog by LexisNexis. You know how all the Oscar nominees who don’t win always say its an honor just to be nominated? I never believe them – I am in this to win!

You can see the full list here, and thanks to my producer, the director, the guys at UTA, my agent, the academy . . .

Well, someone thinks so. You can count me, though, as monstrously skeptical that you could tag the fiduciaries of the BP 401(k) plan with breach of fiduciary duty for overexposure to company stock because they failed to expect the Deepwater Horizon explosion and account for it by greater diversification. On the other hand are two notes: (1) perhaps there is a circuit, somewhere out there, with fiduciary liability standards for company stock investment that are so loose that including BP stock ahead of such an event could be deemed an actionable breach; and (2) the decline in the value of the plan’s assets may be so large that, if a class gets certified, even a minor settlement to avoid a potential ruling against the fiduciaries could easily run into the tens of millions.

I really, really like this opinion, to paraphrase Sally Field’s perhaps most famous line (or perhaps not, since she never actually said it.)  I like it because it deals really well, and out of a highly respected court, with a question that often bedevils not just courts, but also lawyers trying to determine the scope of preemption, which is how close does a state law claim have to come to impacting an ERISA governed benefit plan for it to be preempted on the thesis that the state law claim “relates” to the benefit plan. The trend in the case law is to recognize that the word relate is overbroad in this context, and to note that, in light of current Supreme Court jurisprudence, state law claims do not become preempted simply because they relate, in the common English language sense, in some general manner to an ERISA governed benefit plan. Rather, they only relate for these purposes, and are preempted, if the state law claim “interferes with the relationships among core ERISA entities [or] tends to control or supersede their functions,” thereby threatening to undermine “the uniformity of the administration of benefits that is ERISA’s key concern.” When, in contrast, the state law claims, if recovered upon, would not be paid by the plan itself and do not seek to impose peculiar, state by state, obligations on the plan’s administrators and fiduciaries, the state law claims do not relate to the ERISA governed plan for purposes of preemption analysis, and there is no preemption.

I suspect that one of the reasons this issue – of the scope of ERISA preemption – is difficult to handle at times is that there is a language barrier of sorts; as this case shows, relate has a specific meaning in the context of ERISA and ERISA preemption, and an entirely different and broader one when used as part of regular speech, including by lawyers. As a result, analyzing the scope of preemption under ERISA can become one of those areas of the law in which ERISA lawyers and other lawyers become “two peoples separated by a common language,” in the famous formulation.

The case, incidentally, is Stevenson v. Bank of New York, decided this week by the Second Circuit. You can find a copy of it here.

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.