Earlier in the week, I promised to pass along over the course of the week some interesting articles on insurance coverage issues that I had been reading, and here we are, the end of the week already, and I haven’t done so, having been waylaid along the way by breaking news like the Ninth Circuit’s stay of the ruling that San Francisco’s health insurance ordinance was preempted. So in this post, I will pass along two more of the articles, both having to do with directors and officers insurance, a topic that I have mentioned in the past often raises problems for practitioners and clients, particularly in terms of understanding the scope of the coverage it grants and the nature of its exclusions. The first is this outstanding article here, laying out a road map for in-house counsel at publicly traded corporations over how to protect themselves from the various liability traps that have appeared for such corporate lawyers by navigating them through the ins and outs of the insurance coverage that may be available to them in that role. The article explains that many corporate counsel faced with problems from backdating inquiries and similar exposures will not in fact be protected by the directors and officers insurance purchased by their employers, and instead need to have their companies purchase a stand alone policy directed at covering the unique risks faced by in-house counsel to protect them against all of the investigations and lawsuits written up on the front pages of the business pages.

The second is this terrific interview here, in the Metropolitan Corporate Counsel, that really breaks down the structure of directors and officers insurance and the variables at play in obtaining it. One of the things I liked best about the article is that it reinforces the same point I often make when discussing directors and officers coverage and protection for people serving in that role, as I did here in this post, which is that directors and officers need to protect themselves by creating two separate lines of protection: first, they need to be guaranteed indemnification under the company’s by-laws against claims filed against them in their role as directors and officers, and then second they need to be protected as well by directors and officers insurance purchased by the company. In that way, the indemnification agreement can protect them against claims that might fall into exclusions or other gaps in the directors and officers coverage, thus keeping them free from personal exposure, and the insurance can protect them should the company go belly up or otherwise fall down on its obligation to indemnify them.

And this last point leads me to another topic that has crossed my path recently, namely the need to make sure that former directors and officers of public companies can rest their heads comfortably at night, without tossing and turning worrying about the possibility that their prior service as corporate officers might come back to haunt them, in the form of being named as a defendant in suits based on events that took place while they served on a board. Given the headlines in the papers and the increased risks of such service, one can understand how former board members may be concerned about personal liability after leaving a board. One answer to their concern is policies targeted directly at the risks and exposures of retired or former directors and officers, written for the express purpose of insuring them against claims instituted after they stop serving in that role. In much the same way that, as noted above, directors and officers insurance for current board members provides an additional level of shielding from potential personal liability, this product does the same thing for board members after they stop serving; one company providing the product, and more information on this type of insurance product, is here.

Workplace Prof has the story here of a three judge panel out of the Ninth Circuit staying the district court ruling that the San Francisco ordinance mandating the provision of health insurance by employers was preempted, and provides a link to the ruling. I second the surprise he describes in his post over the conclusion that the ordinance could legally be found to not be preempted, but in light of the media coverage of the appeal over the last week or so that I have been seeing indicating that the particular three judge panel hearing the action for a stay appeared critical of the lower court ruling, the fact that the stay itself was imposed doesn’t stun me.

The panel’s ruling consists primarily of drawing distinctions among the facts of leading Supreme Court preemption decisions and the details of the San Francisco ordinance, rather than of any sweeping view of preemption that would place mandates and fair share acts outside the scope of preemption, something which would set up a direct conflict with the Fourth Circuit’s ruling in Fielder, which found the Maryland Fair Share Act to be preempted. The distinctions that the panel relies upon are in many ways in the eye of the beholder, and it would be just as easy to argue the opposite, that the similarities of the San Francisco ordinance to the facts of the leading preemption cases mean that the ordinance should be understood to be preempted. The ruling also reflects, although obviously the panel is controlled by Ninth Circuit law in areas not yet passed on by the Supreme Court, a heavy reliance on Ninth Circuit decisions that do not necessarily reflect where this issue will end up if and when the Supreme Court finally weighs in on the preemptive effect of ERISA on state health care mandates and fair share acts, something which one can bet will happen sooner rather than later if the eventual ruling out of the Ninth Circuit on the San Francisco ordinance sets up a direct conflict with the Fourth Circuit’s ruling in Fielder.

Practicing lawyers like things that condense a lot of information accurately into relatively compact but still useful formats. I suspect – or at least hope – that is why many people read this blog, for instance. Along those lines, tucked in among the piles of junk email in my in box for mail order pharmacies and new books the publishers think I should buy, was an excellent little nugget from a company whose email newsletters on electronic discovery I do make a point to open and read. The company is CyberControls, and in the latest newsletter they passed along a Federal Judicial Center publication, “Managing Discovery of Electronic Information: A Pocket Guide for Judges.” I gave it a quick read this morning, and I cannot recommend it more highly. It’s a great starting point for the neophyte first facing electronic discovery issues in the federal courts, and a great standard reference point for the experienced electronic discovery practitioner.

Kevin LaCroix, at his D&O Diary blog, has a tremendous history of the recent filing of subprime litigation, including class actions, many filed under ERISA. While I don’t necessarily agree with each of his interpretations of that history, it’s as good an overview of the subject as a whole that I have seen in any media. Perhaps my primary point of departure from his presentation would concern his view that these cases are very different from other types of class action litigation, such as the stock drop cases, that are often criticized as lawyer-driven suits warranting reform, because these are cases instead being brought by “very large institutions [who are] suing other very large institutions.” Perhaps, and certainly to some extent, but there is also an aspect to at least some of these cases that reflect that the class action bar has, for reasons of legal developments, public sentiment, and the winds of politics, moved towards using ERISA in circumstances where they would have previously used the securities laws, as well as towards the representation of large retirement plans, rather than individuals, as plaintiffs.

We’ve been a little ERISA heavy here for awhile now, somewhat to the detriment of the insurance litigation half of the blog’s title, simply because of the range of interesting events that have taken place under the ERISA rubric lately. While all that was going on, though, a particularly good collection of articles on different insurance coverage topics have crossed my (electronic) desktop, and I want to pass them along as well; I will try to scatter them in with other posts over the next week or so, until I exhaust them.

One I wanted to pass along is this article here, by two prominent policyholder attorneys, on the tripartite relationship, which concerns the potentially conflicting loyalties of defense counsel appointed by an insurer to defend an insured against a lawsuit that may or may not be covered. This problem stems from the fact that insurers are often obligated to provide insureds with a defense against cases that may turn out, upon further development of the facts of the case, to not actually be covered, in which event the insurer will not have to cover any judgment or settlement, and might even be entitled to recoup from the insured the amount paid to defend the case in certain circumstances and jurisdictions.

Although there is much written and said about the tripartite relationship, the whole topic comes close to falling into the much sound and fury signifying nothing realm, although not completely because there is some substance to the issue, only not as much as lawyers like to make it out to be. The whole issue can really be boiled down to three handy rules of thumb. First, the defense counsel appointed by the insurer must focus only on defending the case as though the insured were his or her only client, and cannot muddle about between the insurer and the insured over any coverage issues that remain outstanding. Second, the insurer needs to retain separate lawyers, in the role of so-called coverage counsel, to take the factual information developed by defense counsel in defending the case and evaluate how it affects coverage. And third, an insured must remember that the defense counsel is solely going to defend the case, without regard to coverage disputes and is not looking out for the insured’s interests with regard to whether any recovery in the case will actually be covered; the insured has to instead hire independent coverage counsel of its own to take steps to parlay the evidence developed by the defense counsel into a commitment of coverage by the insurer.

This is a law oriented blog, obviously, and one of the things that is always worth remembering is that the complicated legal issues played out in the cases discussed here have real world implications for plan participants and for businesses trying to provide benefits to their employees. A nice reminder of that is here, in this article on SmartMoney.com, in which I and others are quoted on the question of how business owners should operate 401(k) plans in light of the potential for fiduciary liability being imposed under ERISA.

A couple of notes on cases today. Before the holidays, I posted about the First Circuit’s decision in Gillis, concerning an administrator’s discretion in calculating possible pension payments and how the discretionary authority granted to the administrator drove the conclusion that a challenge to the pension calculations would not be upheld in the courts. Suzanne Wynn, who writes on pension plan issues at her Pension Protection Act blog, has this very detailed analysis now of the issues concerning cash balance conversions that were at play in Gillis, for those of you looking for more information on that aspect of the case.

In addition, in the little window of time between the first holiday weekend of Christmas and the second holiday weekend of the New Year, Judge Woodlock of the United States District Court for the District of Massachusetts issued a very comprehensive and detailed opinion in the case of Island View Residential Treatment Center, Inc. v. Blue Cross Blue Shield of Massachusetts, which basically reads as a mini-treatise on a number of interesting issues arising in ERISA litigation. In the opinion, the judge covers, among other topics: standing to bring an ERISA claim; the application of federal common law to ERISA disputes; the statute of limitations applicable to ERISA disputes; exhaustion of administrative remedies; and the standard of review. Of particular note with regard to the standard of review, the judge presents the current status of the law in the First Circuit concerning so-called structural conflict of interests, which I have discussed many times on this blog, most recently in my post yesterday, and identifies the internal debate in the circuit over whether the law on that issue should be revised, a bone of contention in the circuit that I also noted before, in my post yesterday. Judge Woodlock comments that it appears the First Circuit may be waiting for possible guidance from the Supreme Court in the case of MetLife v. Gillis, discussed in yesterday’s post, before venturing into that issue. And finally with regard to the Island View case, I think, in a blogger’s version of professional courtesy, I would be remiss if I did not mention that one of the parties to the case was represented by fellow law blogger Brian King out of Utah, who blogs on ERISA issues – from what is probably a decidedly more participant oriented perspective than my own – at his excellent ERISA Law Blog.

Unlike me, Appellate Law and Practice, the scrivener who covers all things appellate, didn’t take New Year’s Eve off, and noted that day that the federal government had recommended that the Supreme Court accept cert in a case addressing the question of how a structural conflict of interest – that is, where the administrator who is deciding benefits under an ERISA governed plan is also the party responsible for paying such benefits if they are awarded – should affect the standard of review applied by a court to a challenge to a benefit determination. SCOTUSBlog sums up the issue here, noting that the government recommended granting cert in the case of “MetLife v. Glenn, limited to the question presented of whether an ERISA plan administrator that both evaluates and pays claims operates under a conflict of interest that must be weighed on judicial review of benefit determinations.”

The question of how this type of situation should affect the standard of review has been subject to a variety of answers in a variety of different circuits, as surveyed here, and the current rules concerning this issue have been subject to extensive academic and judicial criticism, to the point that in the First Circuit, appellate panels have criticized the rules governing the issue even as they have applied them. Personally, I am not convinced that the dispute over the issue isn’t really academic to a certain extent, in that, in the realpolitik world of litigation, it has been my experience that the underlying facts point towards the right outcome regardless of the standard of review applied in cases involving such alleged structural conflicts; I won’t reiterate that entire argument here, but you can find some of it here in this post.

Anyway, there is obviously enough background noise in the system over this particular issue of so-called structural conflicts of interest that it would make sense for it to be on the Supreme Court’s radar, and probably eventually its docket. I have noted before that I think the Supreme Court is looking for vehicles to weigh in on some of the more problematic areas of ERISA jurisprudence, and I think you see another instance of that here.

Well, I have talked before about dog bites man stories, and here’s another one. The United States District Court for the District of Northern California has now ruled that San Francisco’s ordinance requiring certain health care expenditures by employers was preempted by ERISA. The Workplace Prof sums up the ruling here, although he is wrong that there is any disjunct between the court’s recognition that ERISA protects plan participants and the court’s finding that the ordinance is preempted; ERISA does impose certain statutorily created protections for plan participants, as the court recognized in finding the ordinance preempted, but simultaneously imposes certain corresponding protections for those who sponsor plans, such as employers, including that the federal statute alone is to govern their obligations, which is the whole point of the statute’s express and broad preemption provision.

Anyway, the ruling is here, and don’t say I didn’t warn you, as I did here, that this statute was doomed to be preempted. These first generation attempts to impose health insurance mandates on the business communities, such as this San Francisco ordinance, and the New York local ordinance discussed here, and the Maryland statute struck down by the Fourth Circuit, simply universally run afoul of the preemption provisions of ERISA. Maybe states will do better when they move onto some sort of health insurance 2.0 approach that accomplishes the same goals in a framework that does not impose administrative and fee obligations on employers – which are the consistent failings of all of the statutes and ordinances to date that have been struck down or eventually will be on grounds of ERISA preemption – but I will believe that when I see it.

One thing of particular note that caught my attention in the court’s ruling in this case, by the way, was its discussion of how the statute ran afoul of ERISA preemption in light of the Fourth Circuit’s ruling in Fielder, which struck down Maryland’s Fair Share act as preempted. As I have discussed before, I believe that the Maryland legislature enacted in that instance about as bad a statute for purposes of trying to avoid ERISA preemption as any advocate of state fair share and health insurance acts could have envisioned, and thereby created a leading ruling that could not help but lead to the preemption of many subsequent state and local health insurance ordinances. This case out of the Northern District of California is a perfect example proving my thesis; while the San Francisco ordinance would likely have been struck down as preempted on its own accord in any event, having the Fielder ruling in play made doing so easy for the court.

You know, much of the progressive legal developments of the last forty years, from civil rights to the environment, was driven by pressing test cases that were carefully selected to move the ball forward; allowing the Maryland statute to have become the bellwether on this topic was, for those clamoring for state regulation of employer provided health insurance, the exact opposite of those historical examples.

Take a few days off, and news just keeps on piling up. In the next few posts, I am going to try to pass along some of the more interesting events, articles, court decisions and stories that crossed my desk over the past several days, starting with this one, a story out of the New York Times today that does an admirable job of explaining a new regulation out of the EEOC allowing employers to provide different health benefits to retirees under 65 than to retirees over that age. The idea behind the regulation is that employers ought to be able to move retirees eligible for Medicare into that program and off of their books, and at the same time, be encouraged to maintain benefits for younger retirees -who are not eligible for Medicare – by knowing that they don’t have to pay for medical benefits to the same extent for the class of older retirees. This is still more of the playing at the margins of the health insurance crisis that we also see, as I discussed here for instance, with state fair share acts; the real problem is the cost to employers of providing health insurance benefits, and steps like this regulation are directed only at making a bad situation a little better, without addressing the fundamental economic problem that creates the need for these half-steps, namely the extraordinary cost to employers of providing health insurance to employees and retirees.