The Supreme Court today hears argument in a case concerning many politicians’ and lawyers’ favorite pinata, the Chevron doctrine. It would likely be naïve to believe that the case won’t at least further restrain agency authority and discretion, although whether the case will be the vehicle for complete abrogation of the doctrine is beyond my tarot card reading powers. Robert Steyer addresses what this development likely means for the retirement industry and ERISA governed entities in an excellent article in Pensions & Investments, titled “Industry Eyes High Court on Chevron Deference.”

As I discussed in my comments in the article, my own view is that, for the most part, the retirement industry is best served – as are most of its participants – by the maintenance of a reasonable status quo from a regulatory perspective. For a whole host of reasons, big regulatory swings in either direction aren’t generally in the best interest of any member of the ecosystem, whether that is in the form of new initiatives or the presumptive eventual elimination, as a result of the demise of Chevron, of existing ones. To be fair, of course, there are circumstances in which regulatory initiative or change is valuable – for example, it is hard to have a new asset class offered in retirement plans if you don’t create a regulatory regime for doing so. But overall, consistency counts and an undercutting of agency power, if it were to lead to churn in the regulatory environment for retirement plans, isn’t likely in anyone’s best interest.

But time will tell. And unlike some of the other commentators quoted in the article, I would not be sanguine that, if the Supreme Court eliminates Chevron deference or even just significantly cuts back on agency authority, it won’t, at least over time, have the effect of altering the regulatory and investigatory environment in which ERISA lawyers and their clients operate.

This is a great story from over the holidays that I wanted to pass along, which touches on many issues in the current insurance environment. It’s a story of how insurance industry insiders in the Florida homeowners coverage market have been able to get rich by “cherry picking” policies to underwrite, while leaving the riskiest properties to be protected by taxpayers. It’s also a story about moral hazard and the extent to which proactive action in the face of the economic risks posed by climate change in areas vulnerable to sea rise and weather pattern changes is undercut by the assumption that the rest of the country, through the avenue of a federal bailment, will assume the losses from major climate change events in places like Florida.

That is all a lot to pack into one article, but the story is a good one and does a good job with it. Long time readers of this blog know that I am fond – among other writerly quirks – of two things. The first is the comment that someone once said Marx was wrong about a lot of things but he was right that everything is economics. For someone who, like me, writes extensively about insurance, climate change, and retirement assets and their regulation, this old saying (which did not originate with me) has become an everlasting gobstopper of a witticism. Here, we once again see its utility, as it is pure economics – and not a sober evaluation of proper insurance underwriting practices or the risks of climate change – that are driving the events covered by the article.

The other constant in my writing for years has been the idea that insurance is the canary in the coal mine on many fronts, something that is particularly true with regard to climate change. Long before recent high profile decisions by major insurers to reduce their exposure to significant property risks impacted by climate change, insurers, including Lloyds, had begun revising their underwriting approaches and risk appetite to account for climate change, which is a development I have been writing about for years. That development underlies the “cherry picking” and the moral hazard at the heart of the article I have linked to today, as those decisions by long standing carriers is what has created the environment for those events to occur.

Anyway, on those sobering notes, Happy New Year to you.

As usual, I had a terrific experience at DRI’s annual Insurance Coverage and Practice Symposium in midtown Manhattan, which was held last week. I had gone in many ways simply for two particular presentations, one on generative AI and the other on the impact of nuclear verdicts on insurance coverage and bad faith issues, although other presentations were informative and had value as well.

The AI presentation, ably presented by Lewis Wagner’s Meghan Ruesch and Melissa Fernandez of Travelers, was oriented towards the question of how AI would impact insurance, with discussion of new claims against insureds it may give rise to, how and whether such claims will be covered by standard industry policy language and how generative AI may be employed in, or otherwise affect, claims handling by insurers. On the first issue, the presenters emphasized the range of claims that can be expected to arise, running from the obvious – copyright infringement claims against insureds using generative AI apps or other tools to create media – to the less obvious, such as invasion of privacy by the creation of so-called deep fakes or through other AI driven activity. Your mileage may vary, but I think that any imaginative lawyer with a basic knowledge of how AI works can likely envision a nearly limitless range of potential claims against users of generative AI tools and distributors of AI crafted output.

What jumped out at me about this particular topic, however, wasn’t the range of potential claims but the extent to which the law itself – both statutory and common law – has a long ways to go before doctrines, evidentiary approaches, or the recognized elements of claims are in sync with the coming of claims based upon generative AI. We simply don’t know at this point what the elements of various causes of action should look like with regard to harms caused by generative AI, nor what new causes of action will have to be recognized to account for them. In effect, we are about to try to handle generative AI based claims with legal doctrines designed for, and resulting from, a much different age. It’s akin to the courts trying to handle claims arising from locomotives, cross-country railroads and automobiles, with a body of law still based on an agrarian society and the horse and buggy. The law eventually caught up, but it took a while. So too the law will eventually catch up here – but again, it will take time, and many judicial decisions, before the parameters of claims arising from the use of generative AI will be clear and widely agreed upon.

With regard to the presenters’ second issue, namely the extent to which such claims will be covered by standard policy language, of course the final answer to that question won’t be known until after the exact nature and elements of such claims have been at least substantially developed in future judicial decisions. However, the nature of insurance, obviously, is protection against the unknown, and thus both insureds and insurers will have to muddle through on the question of the scope of coverage even while the nature and elements of the claims themselves are still being developed.

For now, though, what caught my attention in this regard was the focus on the extent to which claims arising from generative AI may end up being shoehorned into the coverage granted by advertising injury insuring grants in policies. I believe it was all the way back in 1992 when I wrote an article for an insurance industry publication that I titled “The Expanding Scope of Advertising Injury Coverage,” addressing the extent to which, way back then, this coverage grant was being broadly read by courts to provide coverage beyond what the industry believed was its intended scope. The more things change, the more things stay the same I guess – back then, we didn’t even have iPhones but were discussing the propriety of a broad reading of the scope of this coverage, and today we are doing the same only with artificial intelligence, something that when I wrote the article in 1992 was the stuff of science fiction (shout out to Hal goes here).

At this point, one has to ask why the industry hasn’t revised the language of advertising injury coverage or removed it entirely from policies, rather than deal with the uncertainty of constant questions as to whether it provides coverage for the latest trend, this time of claims generated by generative AI. The only answer I can really come up with at this point is that, one, insureds expect such coverage to exist in their policies (or maybe their brokers do, as I have to think that only insureds with particularly sophisticated risk management departments give this particular coverage much thought at all when acquiring coverage), and, two, underwriters have long since figured out how to price this uncertainty into providing this coverage (of course, the underwriters who signed off on policies with sudden and accidental pollution exclusions in them a generation ago probably thought the same thing, and look how well that worked out for the industry).

As for the presenters’ third point – the extent to which the use of generative AI will affect claims handling – there can be little doubt that, at some point, a generative AI tool will be marketed that effectively does much of the basic factual work of claims handling and removes it from the province of adjusters themselves. I have to say, though, that in light of so-called hallucinations and the like, that day is not yet here. One of the presenters gave an example of having asked ChatGPT to summarize the My Pillow litigation, and it returned a summary with causes of action that were clearly and wildly inaccurate. Now imagine a claims adjuster handling a claim based on a similarly erroneous characterization of the underlying case against the insured generated by a generative AI product used by an insurer and you see the problem. Take for instance the adjuster’s job of deciding whether the company should provide a defense or not – the law in most jurisdictions requires that a determination of the duty to defend be based on the claims pled in the complaint, not on what ChatGPT might hallucinate those claims to have been.

But what about when there is eventually an effective, in the sense of being accurate, generative AI tool available to the industry, one that assumes much of the routine fact gathering and even potentially the evaluation of a claim? Bad faith lawyers will have a field day testing the analyses of such tools against the legal obligation of fair and reasonable claims handling imposed on insurers, and arguing over whether implicit biases, or overweighting of one factor or another in the software or underlying algorithm, or prejudice in the triggering prompt renders conduct by an insurer based on that tool unreasonable and in bad faith. The only saving grace I can think of right now in this regard is that this may be too subtle a task for many of the bad faith lawyers we see, who currently typically apply a much more formulaic approach to building out bad faith cases against insurers but give them time – they’re smart people and they will figure it out.

Bad faith claims, of course, are a common theme that make up part of almost every issue confronted by the insurance industry, and the discussion of bad faith in the context of generative AI flowed naturally into the discussion of nuclear verdicts by Wendy Stein Fulton of Kiernan Trebach and Sonia Valdes of Medmarc. I have written extensively about this issue in the past and handled the bad faith and intra-insurer disputes within a coverage tower that arose from a substantial nuclear verdict in Massachusetts, so I have my own particular interest in these issues and my views don’t necessarily align with those of other authors and speakers on the subject. That said, however, both speakers did a terrific job with the topic, demonstrating – statistically and convincingly – the rise in nuclear verdicts over the past decade. More interestingly, they recognized that most lawyers have never seen a nuclear verdict, or how one comes into existence. This is an important point because nuclear verdicts do not happen in a vacuum, nor are they the result of traditional approaches to calculating damages as most lawyers understand them (in the nuclear verdict in Massachusetts in which I handled the subsequent coverage and bad faith disputes, for instance, the approach to damages taken by the jury certainly did not correspond to the way I was taught as a young lawyer to calculate out the range of reasonably likely damages under the elements of Massachusetts’ wrongful death statute, nor with how most Massachusetts lawyers have done it since time immemorial). To account for that, the presenters gave a very detailed demonstration of exactly how the jury in a recent nuclear verdict calculated such a large number.

Their presentation was excellent, but I wanted to comment on one particular point where my thinking on nuclear verdicts departs from that of the presenters. No matter how many statistical data points are presented showing that nuclear verdicts are increasingly not outlier events, and no matter how many other factors are also present (I put a lot more stock on certain social inflation factors and the cultural impacts of ostentatious displays of wealth in this country as substantial contributing factors in this phenomenon than do most commentators), what I find in the cases in my own bad faith docket where either nuclear verdicts have occurred or the risk of one occurring has led to settlement is the existence of very unique, sui generis fact patterns that placed the insured (and thus the insurer) at great risk. This was true in particular of the example used in the speakers’ presentation to demonstrate the making, so to speak, of the sausage of a nuclear verdict – you wouldn’t find a repeat of that fact pattern in a court in this country in a thousand years.

My point in beating this particular drum, which is one I have been beating for years, is that understanding the unique confluence of factors that give rise to nuclear verdicts is crucial to accurate, thoughtful and proper claims handling during the time that a potentially explosive claim is pending, when the eventuality of a nuclear verdict can still be avoided. Trying to put Humpty Dumpty back together again after a jury has returned a nuclear verdict is a lot harder than evaluating and, if need be, settling a claim before that can happen. Avoiding a nuclear verdict, though, requires paying close attention to the details of the claim while it is progressing and being aware of whether it presents the type of scenario that might give rise, at trial, to a nuclear verdict. If you miss the warning signs, you also miss the opportunity to avoid the myriad problems for insurers that are triggered by a nuclear verdict, problems that only begin with paying off the judgment and spiral from there into bad faith and coverage problems.

This is a terrific article by Crowell and Moring’s Paul Haskel on the use of alternative fee arrangements, particularly contingency fee arrangements, by large law firms to supplement the revenue generated by traditional billable hour defense work. The author makes three points: first, that large firms have been doing this for years but it is now growing (and in my view, larger firms are now more open about it than they used to be); second, the tactic can significantly boost firm revenue in years where a case returns a recovery, but creates inconsistent revenue streams because in other years, no revenue is generated from the cases; and third, some firms are using litigation finance to smooth out the impact on revenue of that volatility.

Most of my work has always been based on the billable hour, and much of it has always been in the capacity of a defense lawyer. However, I have always been open to, and in many ways preferred, alternative fee arrangements, whenever they are feasible and the client is interested, including flat fee arrangements. I like the extent to which they align client and attorney interests, result in both having “skin in the game,” and allow me the freedom to closely investigate or study strategies or theories that might not pan out without concern that I am impacting the client’s finances by doing so since the flat fee or other alternative fee arrangement has already capped the client’s financial responsibilities.

Much like the scenario presented in Paul Haskel’s article, I have often used contingency arrangements when representing plaintiffs in ERISA litigation, and have found that, as Paul notes, they can significantly boost firm revenue in years where there is a recovery. As Paul also hints at, however, the key is being very good at evaluating and selecting the cases to bring, so that the odds of eventual recovery are sufficient to justify the time invested in the action and the carrying cost of that investment.

In ERISA actions, though, there is one additional variable that comes into play, which is the availability of a fee award to a prevailing plaintiff. If properly factored in by counsel at the outset, the possibility of such an award can allow for different ways of structuring alternative fee approaches to representing plaintiffs, beyond simply traditional contingency fee awards of the type addressed in the article.

A significant fee award can also reduce the impact on the plaintiff or plaintiffs of a contingency agreement. In at least one case I handled on contingency, the attorney fee award, combined with pre- and post-judgment interest, resulted in the plaintiffs recovering over one hundred cents on the dollar of their losses, even after paying counsel. Granted, that’s a “perfect storm” type scenario, but it can happen, although only thanks to the fee shifting provision of ERISA.

This is a very interesting tale about an unusual outcome that shouldn’t actually be all that unusual. I know – with that lead in, now you may be expecting some sort of Edgar Allan Poe tale, like “The Tell-Tale Blog,” or something similar.

But that’s not the type of tale I have for you today. Instead, I have an excellent article from Massachusetts Lawyers Weekly (subscription likely required, but you can find the case discussed in the article here) about a Massachusetts Appeals Court decision holding that an insurer did not engage in low ball settlement tactics, or violate Massachusetts’ consumer protection act or its unfair insurance claim practices act, when it only offered $15,000 in settlement on a case where a jury later returned a much larger verdict – $225,000 – against the insured. As the article makes clear, the Court reached that finding despite the disproportionate relationship between the offer and the eventual judgement because the insurer’s process in reaching that settlement offer was fair, reasonable and objectively appropriate.

The ruling is correct on that evidence, and this is exactly how the insurance settlement bad faith system, governed by Massachusetts’ Chapter 93A and Chapter 176D, is supposed to work. But here in the real world, the simple fact that an insurer’s offer turned out to be only a small percentage of an eventual jury verdict is often, for all intents and purposes, outcome determinative in bad faith settlement cases against insurers or, if not outcome determinative, is at least the most important fact in finding against an insurer on such a claim. As a result, there is an incentive in Massachusetts for insurers to not try the underlying case, or else to overvalue the settlement offer itself, simply to avoid the risk of that scenario occurring. We are all much better off, and insurance costs to all of us over time will be much lower, if insurers do not approach decisions about settlement, or about whether to try a case, from this perspective, and instead objectively make these determinations. But unless and until there are more rulings of this type at the appellate level reinforcing that insurers are safe from exposure under these statutes – regardless of the size of a particular jury verdict – so long as the original decision to try the action or the original settlement valuation was based on sound investigation and evaluation, insurers will likely not consider that the safest approach.

This is because, when a case against an insured is tried to verdict, the amount of that verdict can be doubled or trebled as bad faith damages if the Court believes there was a low ball settlement offer before trial. This makes it extremely risky for an insurer to try a case to verdict or to make a settlement offer that might later be seen, in hindsight and by comparison to an eventual jury verdict, as too low. If you take the example of the case I am discussing here, if the Court had concluded that the $15,000 settlement offer was too low to be reasonable or to satisfy the insurer’s obligations, the Court could have awarded double or treble the $225,000 jury verdict as damages against the insurer for bad faith settlement efforts by it. That’s a big hit simply for arguably getting a settlement valuation wrong, remembering, as most tort lawyers and claims people will tell you, that settlement valuation is an art, not a science.

It’s interesting. I spoke in my last post about the possibility of using ERISA and employee benefits to alter the course of economic inequality, referencing that pensions might be a better choice to accomplish that but they aren’t coming back. If they are, even in just isolated circumstances, it will be as a result of unionization or other job action to get them. Shortly after publishing my last post, this excellent article from Maryland attorney Barry Gogel showed up in my feed, explaining Brooks Robinson’s role in a 1972 job action by major league baseball players to force team owners to use a pension plan surplus to increase future pensions. It is always interesting to note the central role pensions played in the labor/ownership relationship in the years before defined contribution plans replaced them, and Barry’s article is a nice window into that dynamic.

It’s also interesting, though, to notice something else in this story, which is that the labor dispute is over the use of a funding surplus. It remains fascinating to me how often, even today, surplus capital in retirement plans play a role in business decisions, as well as in the ongoing relationship between employees and their employers. In my own practice, it often seems to me that access to and control of funding surpluses plays a bigger role in questionable or disputed decisions than funding shortfalls themselves ever do.

How are these two stories related? The first concerns a Nobel Prize winning economist’s proposition that the taxation and political structure of the United States plays a central role in the downward mobility of the American middle class, while the second concerns an investment fund that intends to purchase companies from their founders and eventually turn them over to their employees (in other words, presumably take the profits out of them for years while slowly transforming the companies into ESOPs). The relationship is that the second, if successful, is an example of using employee benefits in a manner that addresses the problem identified in the former.

ERISA and the employee benefit structure it governs are rife with opportunities to address the limitations on wealth accumulation among those born without it and who instead rely on the workplace to make their way in the world. Better employers already use it that way, and have long done so by such mechanisms as matching contributions and ESOP participation. But simple revisions could greatly expand the efficacy of ERISA plans as a means to address economic inequality and the problems it engenders by making simple changes that would increase the wealth of plan participants and beneficiaries.

ERISA plans and the benefits provided to workers under them are an open invitation to counter the long standing trend by which wealth has moved away from workers, as they can be used to move money and wealth in the opposition direction, in other words towards employees. All it would take is some thought about tax treatment, both of the benefit provided by the employer and of the benefit received by the employee, to provoke it. For instance, and here is a simple one, what if you changed the tax status of employee 401(k) contributions (and the earnings on them) from tax deferred to tax free? Short of reverting back to the long lost world where employees received pensions, it is hard to imagine anything that would more quickly increase the retirement wealth of workers.

If you like that one, I have a million more such ideas. Every time I run into something in my practice that increases the taxes, reduces the earnings or complicates the administration of benefit plans, I think of another thing you could change that would put more money into the bank accounts of employees by use of ERISA governed plans.

I like to call my shots when I can. So for instance, I am on record as saying Gunnar Henderson will win an MVP award within five years, the Orioles will win the World Series this year and that neither Bill Belichick nor anyone on his coaching tree will ever win a playoff game now that Tom Brady is retired (okay, I admit it, this last one is a “hot take” included simply in the hope of generating “clicks,” although in my defense I do note that I am the only ERISA lawyer ever quoted by Peter King in MMQB). Today I want to call a different shot, which has to do with social inflation, the increasing risk to employers of being held liable on individual employee claims of varying types and the growing dollar value of such claims.

I have written and spoken in the past on the question of social inflation and the – at least anecdotally or impressionistically – astronomical increase in jury awards in the tort context. Others have argued for a number of underlying factors, but I believe one overrides them all, namely a broad shift in social norms around wealth and, in particular, the increasing prevalence of its ostentatious display. As I have written before, I have become convinced, from my work on the insurance and bad faith aftershocks of large jury awards, that jurors have begun rejecting traditional, more conservative measurements of economic and related injury that both kept awards down and were heavily relied on by defense lawyers, in response to the increasing wealth they see paraded all around them. Years ago, a friend who moved to Massachusetts from upstate New York commented – with some but not complete exaggeration – that every third car on the Mass Pike on his morning commute was a Porsche SUV. Members of future jury pools see that dynamic too, and many more displays of wealth just like it. Given that social environment, it is not surprising that traditional formulations of damages, pitched for generations by defense lawyers in closing arguments, that placed a high six figure or low seven figure number on damages in wrongful death or significant personal injury cases are not being accepted anymore by jurors.

A similar dynamic is beginning (and this is where I am calling my shot) to display itself in the context of individual, one-off type disputes in the employment context. Section 510 of ERISA bars retaliation or similar employment actions against employees who exercise their rights under ERISA. For years, such claims –speaking impressionistically with regard to the universe of such disputes – lacked legs. As both a lawyer for plan sponsors and administrators, as well as for executives and other employees, it was always clear to me that such claims were the red headed stepchildren of ERISA and related cases. Indeed, in the First Circuit’s leading decision on deferred compensation, the Court effectively downgraded one part of the dispute from a deferred comp argument to the separate realm of a Section 510 claim. Recent decisions, such as this one, suggest that this dynamic is well on its way to changing, and that recovery under Section 510 is a risk that plan sponsors and their lawyers now have to take seriously at all times.

Two similar jury verdicts relating to executives and professionals returned by Massachusetts juries in recent weeks suggest the same, both brought in by very good plaintiffs’ lawyers who happen to be friends of mine. In one, Chuck Rodman of Rodman Employment Law and his team obtained a multimillion dollar jury verdict on behalf of a doctor who was retaliated against for whistleblowing and in the other, Matt Fogelman of Fogelman Law obtained a multimillion dollar jury verdict for a university administrator who was discriminated and retaliated against.

I don’t think these are isolated incidents but instead reflect a shift, similar to the impact of social inflation on tort verdicts, in the way juries are coming to view the power dynamic between employers and employees. The media coverage of executives who think that employees, in a full employment environment, have become either “arrogant” or “lazy” or both, and similar stories are the social inflation in this context, and I believe are leading juries to no longer give employers the benefit of the doubt in these types of cases.

My point today isn’t just to call my shot in this regard or to either praise or criticize this development, but instead to point out that employers and plan sponsors need to be aware that this is happening and temper their approaches, both in and out of court, accordingly. Any lawyer who doesn’t take this risk seriously when counseling employers and plan sponsors isn’t paying attention. Likewise, any lawyer for executives or other employees with ERISA claims who doesn’t look closely at these possible avenues to recovery also isn’t paying close enough attention.

I started writing years ago on the litigation and insurance questions posed by climate change, focusing on two particular issues, namely: (1) the role of litigation in response to climate change issues; and (2) the response of insurers to increased risk exposure as a result of climate change. When I started writing on these topics, they were outliers (kind of like the every 100 year floods that now happen three times a year in many places) but two themes were already apparent. First, that the litigation theories to be pursued were an open question but the odds were that such suits would eventually find a footing. Second, that the insurance industry’s response to those same climate change risks was more fundamental as well as predictable in the long run (and I don’t mean predictable in a bad way, only in the sense of it being predictable to anyone who understands that insurance decisions are driven by underlying underwriting concerns and, at the end of the day, hard numbers).

The news today makes two things clear. The first is that the insurance industry pullback from the increased risks attributable to climate change is not going away and is accelerating, as discussed in this excellent summary. For those of us who have always thought that responses to climate change will become more serious only once the economic impacts become clear, this clearly appears to be a tipping point in that regard. I have often written that the insurance industry is often the canary in the coal mine with regard to many aspects of American economic life, and that is clearly the case here. The second is that the courtroom, as a forum for tackling these issues beyond simply disputes between regulators and industry, is having its day in, well, court, and we will be seeing the development in the near future of a robust body of law governing this type of suit.

It is one of my favorite words – spoliation. It just slides right off of a litigator’s tongue. I have been litigating, either as direct claims over destruction of evidence or as an evidentiary inference, the concepts of spoliation for decades. If memory serves, the first time I handled it was defending a direct claim against an insurer over the insurer’s destruction, through testing, of a significant piece of evidence it had taken hold of from its insured after an accident, thereby (allegedly) interfering with the injured party’s ability to prove his tort suit against the insured. Later, I would litigate it in various forms as an evidentiary issue, including whether spoliation inferences were warranted, in a variety of types of cases. In my view, spoliation of evidence claims have been taken more and more seriously over the years, at least in Massachusetts state and federal courts, with the trend moving from great skepticism on the part of judges to such arguments, to grudging acceptance, to taking the issue quite seriously. Personally, I think both the increasing acceptance by courts of spoliation arguments and their increasing prevalence are due to the same thing, namely technology – texting, emails, Facebook, tweeting (or Xing, if that’s the new word for it) and the like have made evidence both more ephemeral than ever and also more likely to vanish (whether accidentally or deliberately).

I think this story on the subject in Massachusetts Lawyers Weekly fits this history and development to a T. You see in it the seriousness of judicial response to the issue at this point, after more than a decade of substantial judicial evolution concerning the issue, as well as the essential role technology plays in the issue.