The Cavalcade of Risk: 1st Anniversary Edition, is now up at Insure Blog. Noting that “it was a year ago this week that we published the first Cav,” Insure Blog explains that the Cav is intended as a round up “of interesting/unusual risk-related posts from around the blogosphere.” One of my posts is up on the Cavalcade, but perhaps of more interest to those of you who already read my posts, so are a number of other, interesting posts on insurance, employee benefit, and pension issues from some of my favorite bloggers. I recommend you take a quick gander, and hope you enjoy it.

Does copyright matter in the real world, or is it just about billion dollar disputes between media companies and Google? In my own practice I see that it does, trickling right down to employee/employer relations in knowledge based industries. This article here is a perfect, and highly entertaining, example, discussing the improper use of a dead celebrity’s image in an advertisement, a brouhaha that grew, apparently, out of a misunderstanding as to the scope of copyright clearance actually obtained by the ad agency. And not only do you see in this article how a problem of this type can arise, but you also see the costs of not recognizing and avoiding the problem in advance – in this instance, the loss of a large account by the ad agency.

Interesting case out of the Massachusetts Appeals Court at the end of last month on one of the more difficult questions in insurance coverage law, which is when does an insured commit a misrepresentation in providing information to its insurer such that the policy should be deemed void. Lots of tricks and ins and outs on that one.

In the latest wrinkle, the insurer of a commercial auto policy sought to avoid coverage because the insured had never notified it, upon renewals of the policy, that the company for which the policy had originally been written had in fact been dissolved, and that, while the auto remained in use and listed under that policy, the company to whom the policy was issued was no longer in existence. The Appeals Court found that, absent actual inquiry from the insurer upon renewal into the question and a misrepresentation by the insured in response, the policy could not be voided for misrepresentation; the insured’s silence alone, without more, did not rise to actionable misrepresentation.

The court summed up the law in Massachusetts on misrepresentations and insurance policies, and extended it to the scenario presented by the case, as follows:  

Peter [the insured] does not dispute that he was required to provide accurate information in the original application for insurance and inform Quincy [the insurer] of any material changes that occurred between the time of the application and the inception of the policy. See Chicago Ins. Co. v. Lappin, 58 Mass. App. Ct. 769, 780 (2003) (applicant has duty to inform insurer of changes prior to inception of policy that render initial representations untrue). He also does not dispute that Quincy could have insisted on updated information at each yearly renewal of the policy, and that upon inquiry as to changes, he would have been obliged to answer honestly and accurately. However, he contends that where the policy did not impose such an obligation, and where neither Quincy nor Fair & Yeager [the insurance agent] requested such information nor conditioned renewal upon completion of an application or questionnaire, he was under no obligation to identify the matters that the insurer might deem material and notify it of such changes. Contrast Hanover Ins. Co. v. Leeds, 42 Mass. App. Ct. 54, 60 (1995) (insured’s failure to disclose in renewal application that location of insured vehicle had changed concerned the calculation of risk at the time the renewal application was submitted).

Whether Peter’s silence amounts to a misrepresentation turns on whether the obligation is one of inquiry by the insurer or sua sponte disclosure by the insured when neither a policy provision nor a renewal application or questionnaire requires such information of an insured. Does an insurer have a duty to identify and ask its insured for information that it deems material (relevant to the risks being underwritten during the period of insurance or renewal)? Or does the insured have a duty to identify what is material and notify the insurer of such changes from prior policy periods?

We conclude that, when neither a policy provision nor a renewal application requires the insured to provide updated information to the insurer, the insured’s failure to do so is not a misrepresentation within the meaning of G. L. c. 175, § 186. In such circumstances, the onus is on the insurer to identify the information that it considers material and request from the insured updated information concerning any changes. Absent such obligation or request, the insured’s silence is not a misrepresentation within the meaning of the statute.  

I am not sure I disagree with the court at all; it seems easy enough for an insurer to always ask at renewal even a broadly phrased question such as whether any facts at all stated on the initial application for coverage have changed, which should thereby place the onus instead on the insured to fess up facts such as those at issue in this case and allow the policy to be voided if the insured doesn’t do so. On the other hand, if the insured actually had any reason to know that the information in question would be relevant to the insurance company, but didn’t disclose it, I am hard pressed to understand why that type of active and knowing decision not to disclose should not void the policy. Perhaps the tipping point on this issue is in the fact that this case involved an auto policy, and not some other form of coverage. There is an extent to which auto policies really exist for the benefit of the public at large placed at risk by the automobile, rather than for the benefit of the insured himself, who can protect his assets through umbrella policies and other avenues; the mandatory nature of auto coverage is there to make sure that those injured have recourse to insurance benefits of the tortfeasor, and perhaps making it easier, rather than harder, to void such policies would run opposite of that public interest.

In any event, the case is Quincy Mutual Fire Insurance Co. Vs. Quisset.

The current issue of the National Law Journal has an article providing an excellent overview of litigation over allegedly excessive fees charged on investments in 401(k) plans. The article notes the variations in the theories, and discusses what are likely to be large, class wide actions in the near future. There are those who think these types of claims are going away but, as this article suggests, that doesn’t actually look to be the case.

Now connect the dots between that story and the LaRue case, which I discussed here and about which more can be learned here, in which the Supreme Court is being asked to determine whether a single participant in a 401(k) plan can bring a breach of fiduciary duty claim for breaches that harmed only his account. Right now, with regard to the excessive fee issue, we are seeing, as the National Law Journal article reflects, the development of essentially plan wide suits. But if developments in the LaRue case establish that any individual plan participant can sue for breaches of fiduciary duty affecting that participant’s account, that will change. We will instead have a universe of individual participants, all with the capacity to sue over their own account balance and over any complaints they have that excessive fees drove down the balance of their own accounts over the course of years, and I suspect we will see plenty of lawyers appear who are ready and willing to represent individual account holders in such lawsuits. This will create a different litigation world for fiduciaries, plan sponsors, plan administrators and the like, then the current one in which the real risk is large plan wide actions by specialist plaintiff firms. In its place will be more of a death by a thousand cuts type of litigation regime that will confront plan fiduciaries and their allies.

I am not saying this is necessarily a bad thing, or a good thing. It is what it is. But in at least one way it may well be a good thing. We are all bombarded with the mantra that, in this defined contribution plan world we now inhabit, individuals are now responsible for their own retirement, as opposed to when companies provided it by means of guaranteed pensions. Well, I suppose if we are going to make individual plan participants the risk bearers and care takers of their own retirement funding, the least we can do is provide them with the legal tools to protect their investments.

Very few things can still reduce me to an adolescent rumble of uttering very, very, very cool, and it is particularly remarkable when something in the practice of law has that effect. These three posts, from Workplace Prof, Adjunct Law Prof Blog, and SCOTUSBLOG had that effect on me when I came in to them on my desktop this morning. They all discuss the fact that the Supreme Court has accepted a case presenting the question of whether parties to arbitration agreements can contract around the Federal Arbitration Act and change the extent of judicial review of an arbitrator’s ruling. As I have discussed in a number of posts in the past, I am one of many people who have a healthy skepticism about commercial arbitration, and one of my many concerns with the format has to do with the extremely limited judicial review of arbitration decisions, even ones that are obviously and fundamentally flawed. I discussed this point in some detail here. For those clients who are interested in arbitrating, I often counsel close analysis of the pluses and minuses of doing so, and in particular I recommend attention to the arbitration agreement itself with the idea of adding into it particular protections or litigation tools that would otherwise be missing from the process. Now, it looks like the Supreme Court will be addressing the question of to what extent parties can actually do this. As I said, very, very cool, at least to those of us with a long standing interest in the pros and cons of arbitration, and how to improve it by private agreement.

This article on an upcoming law review study on the role, effect and potential liability exposure of the insurance industry with regard to climate change provides the perfect opportunity for me to branch out into a new line of discussion on this blog on another issue that is of professional and intellectual interest to me, alternative energy and the climate change debate. To be more precise, what has long interested me about this subject isn’t the doom and gloom sci-fi stuff, but the more prosaic question of the economic and marketplace realities and the myriad ways in which they interact with the need to reduce both oil dependency and greenhouse gas emissions. It seems to me that the profit motive is the real stick that will drive the changes needed to solve this problem and that the marketplace will pick what companies will win and what ones will lose as a result of this environmental issue. A simple example: as gas prices continue to move up, and as Toyota expands availability and lowers the cost of its hybrid engines, competitors who fall too far behind in the race to put oil efficient engines in their cars – anyone in Detroit listening? – will inevitably lose ever more market share to Toyota. It is a safe bet that oil usage per car in first world economies will inevitably decline, simply driven by gasoline pricing and the decisions of millions of individual consumers to avoid overpaying at the pump, and the companies who can cater to that dynamic will win in the marketplace, to their benefit as well as to that of the environment.

But this dynamic doesn’t have to be driven by pure marketplace forces alone. Instead, government tax and regulatory policies can goose those marketplace incentives significantly, prodding automobile companies to win the race against their competitors to produce the most gas efficient autos possible while simultaneously encouraging consumers to punish companies that fail to do so out of their own self-interest in avoiding high gasoline prices. That, in essence, is the point of this recent op-ed piece by the good folks at MIT.

And this article on the role of the insurance industry in climate change can be understood as making the same macro point – that climate change is an economic issue, and how the problem plays out depends on how those economic actors most affected by it respond to it. And for those of you who might be inclined to downplay the extent to which climate change will impact this industry, British insurance blogger ReRisk had this terrific post some time back, illustrating the property damage in the London market should sea levels rise over time. As he points out, will insurers actually continue to provide property coverage long term in such threatened areas? And if so, should forecasts of rising sea levels bear out, just imagine the loss payouts by the insurance industry.

SCOTUSBLOG is the NY Times, or maybe – given its focus on one particular field – the Wall Street Journal, of the legal blog world. With the backing of a major international law firm, it brings tremendous resources to its in-depth coverage of all things goings on at the Supreme Court. Cripes, the blog even has its own reporter, to supplement the work of the actual bloggers.

And of course that’s also why I read it, because you know you are not going to miss anything of importance to your own practice area that happens at the Supreme Court. And here, of interest, is their post on the United States Solicitor General’s brief recommending that the Supreme Court hear an appeal from the Fourth Circuit’s decision in LaRue v. DeWolff, Boberg & Associates, which presents the question of whether an individual participant in a 401(k) plan can sue to recover losses from errors by fiduciaries that affected only his or her account in the plan, rather than the accounts of all or most participants in the plan. In dispute is the question of whether it qualifies, first, as a loss to the plan, such that the participant can sue for breach of fiduciary duty, and/or second as equitable relief as the Supreme Court has interpreted that phrase for purposes of ERISA, such that the participant can recover on a separate equitable relief theory.

One thing’s for sure. If the Supreme Court puts its imprimatur on this theory, and makes clear that individual plan participants can sue for their own individual losses in their defined contribution accounts, there will be a whole range of new potential plaintiffs out there, and I am sure plenty of lawyers ready and willing to represent them. At the same time, to be fair, in a world of Enrons and the like, maybe there should be.

The Workplace Prof reads SCOTUSBLOG too, and here’s the prof’s take on these events.

I wanted to pass on to you a case out of the United States District Court for the Northern District of Ohio that was issued about the time I was trying a patent infringement case last month, and which I wasn’t able to comment on then as a result. With a little more time now, however, I wanted to go back to it and mention it here, because, despite being out of Ohio, it applies Massachusetts law on the duty to defend under insurance policies and on the rules for interpreting insurance policies. The court provides a terrific, and easily quoted, summation of the rules in this state on those issues: 

Under Massachusetts law, as in most jurisdictions, "the question of the initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions . . ." Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct. 316, 318, 458 N.E.2d 338 (1984). The duty to defend arises if, in comparing the policy terms with the third-party complaint, "the allegations of the complaint are ‘reasonably susceptible’ of an interpretation that they state or adumbrate a claim covered by the policy terms . . . Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of the allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy." Id. (quoting Vappi & Co., Inc. v. Aetna Cas. & Sur. Co., 348 Mass. 427, 431, 204 N.E.2d 273 (1965)) (citations omitted); see also Simplex Techs., Inc. v. Liberty Mut. Ins. Co., 429 Mass. 196, 197-98, 706 N.E.2d 1135 (1999) (quoting same). The insured bears the initial burden of proving that a claim falls within the grant of coverage. See Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 321, 568 N.E.2d 631 (1991).

"It is well settled in [Massachusetts] that a liability insurer owes a broad duty to defend its insured against any claims that create a potential for liability." Simplex, 429 Mass. at 199 (quoting Doe v. Liberty Mut. Ins. Co., 423 Mass. 366, 368, 667 N.E.2d 1149 (1996)) (emphasis supplied by Simplex court). The cause of action stated in the complaint need only give rise to a possibility of recovery, "there need not be a probability of recovery." Id. (citation omitted) (emphasis added). Indeed, a duty to defend may arise "even if the claim is baseless." Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir. 1997) (applying Massachusetts law); see also Sterilite, 17 Mass. App. Ct. at 324 ("the insurer stands in breach of its duty even if the third party fails in the end to support any such claim of liability by adequate proof."). In addition, "[t]hat some, or even many, of the underlying claims may fall outside the coverage does not excuse [the insurer] from its duty to defend the actions." Simplex, 429 Mass. at 199 (quoting Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 322, 568 N.E.2d 631 (1991)).

Massachusetts courts have explained that, "when construing the language of an insurance policy, it is appropriate ‘to consider [whether] an objectively reasonable insured, reading the relevant policy language, would expect to be covered." Nashua Corp. v. First State Ins. Co., 420 Mass. 196, 200, 648 N.E.2d 1272 (1995) (quoting Hazen Paper Co. v. U.S. Fidelity & Guar. Co., 407 Mass. 689, 700, 555 N.E.2d 576 (1990). Further, "an insured is entitled to the most favorable interpretation of the policy language when there is more than one rational interpretation of the policy language, or where the policy language is ambiguous." Id.; see also Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 12, 545 N.E.2d 1156 (1989) ("Where the language permits more than one rational interpretation, that most favorable to the insured is to be taken.").

The case is Royal Insurance Company v. Boston Beer Company, 2007 U.S. Dist. LEXIS 25513 (D. Ohio 2007). The decision comes out of a court that, unfortunately, does not make all of its opinions available for free on line, something that all courts frankly should do, and so I cannot provide a link to the opinion.

Third party administrators and claims adjustment companies play a significant role in my practice because they often administer ERISA governed plans and adjust claims under insurance policies on behalf of insurers.  As a result, I have long been interested in how they are run, staffed, marketed and the like.  For those of you who may share an interest in this subject, this interview with the general counsel of Crawford and Company provides some insight into the operations of these types of companies.