When I posted my interview with veteran insurance executive Robert Kingsley a couple weeks ago, on the subjects of insurance industry consolidation and what insurers think about the lawyers they hire, I failed to mention that, in addition to his years in the industry, Rob is also the founder of the Anne B. Kingsley Ovarian Cancer Foundation, something which I probably should have included when I profiled him in the post. I was reminded of this when I received the foundation’s recent mailing announcing that the foundation, though young, had already made its first significant research grant.

I am a big supporter of the foundation, not least because Rob’s long record of success suggests to me that the foundation is likely to be a success as well. I would encourage you to take a look at the foundation’s website, and to pitch in with a contribution. I can assure you, its not a foundation where the donations will go to waste.

And that, I suppose, should satisfy the FCC requirement that all bloggers publish the required amount of public service posts. That’s a joke – if it went right by you, go down the hall and ask the communications lawyers at your firm to explain it.

Kevin O’Keefe, the trial lawyer turned legal blogging evangelist who runs LexBlog, the company that provides the technical support – but not any of the copy – for this blog and for the many other blogs listed on the lower left hand corner of this page, has been running a series of posts on the question of the impact of legal blogs on law reviews. I have my own thoughts, based on years of practice and my own stint on a review’s editorial board, on the question of what the growth of legal blogging means for the future of these august but hide bound publications. Now I try to stay away from blogging about blogging – in fact I think I have managed to blog for many months now without ever discussing the subject in a post – because I think it’s essentially navel gazing and it has nothing to do with the reason why people come to this blog, which – I hope not naively – I assume to be to learn about ERISA, intellectual property litigation and the law of insurance coverage. But I couldn’t let the subject raised by Kevin (who, by the way, has no compulsion against blogging about the topic of blogging because, well, that is what his blog is about – blogging) pass without commenting on it from the standpoint of a practicing litigator who focuses on the areas discussed in this blog.

When I came across Kevin’s posts on this topic, the old song lyric that video killed the radio star immediately started sounding in my ears, and no, I wasn’t listening to my ipod at the time. Law blogging is in the early stages of making detailed legal analysis on specific subject areas available to the entire legal community in ways that are both searchable and far more practical and useful than anything that law reviews generally provide. There is little doubt in my mind that practicing lawyers can find far more useful information about specific issues in insurance coverage, for instance, from David Rossmiller’s blog, or on the law of ERISA from Roy Harmon’s blog, or on intellectual property issues from Patently O, and so on and on, then they will ever locate in the published law reviews.

And why is this? There are multiple reasons. First, at the risk of being too negative, law reviews have, over the years, essentially become echo chambers for law faculty to talk to one another or, worse yet, have simply become a place for law professors to publish esoteric work that is absent significance to practicing lawyers or the courts simply because they feel they need to do so if they are to pursue tenure. This is hardly a novel criticism, as I can remember a federal judge – I forget who it was, but he was out of the industrial mid-west – pointing out years ago that published legal scholarship had no merit or relevance to what he did every day. Law blogs are obviously different; the point is to publish useful legal information at a level of legal sophistication sufficient to be relevant to the practicing community, the courts and clients. That is an entirely different audience than the one that law reviews are targeted at, and an entirely different type of information that is intended to be transmitted.

In fact, when I was in law school, a particular near octogenarian law professor, rumored to have been during his earlier days at Harvard the model for Professor Kingsfield in the book and movie The Paper Chase, spoke once about how, many years ago, the writing of treatises that were of practical use to the profession was considered a worthy output for a law professor, but how that was no longer the case. Instead, esoteric topics, the more so the better, were what advanced a career in legal scholarship.

Second, blogs are searchable in a matter of moments. Run a search for ERISA, for instance, over at Google Blog Search, and see how quickly you can find information about the differing approaches to the standard of review in ERISA cases when the administrator is operating under a conflict of interest, a favorite topic of this blog. Then compare that to how quickly you can actually find law review articles on this subject, with the exception of those pieces commented on and linked to in blog posts. I know that those articles are out there, because I have read many of them, but you won’t find them quickly, or without doing traditional types of legal research to locate them.

Third, law reviews have divorced themselves from the practicing lawyer, in multiple ways, only one of which I will comment on here, so as to avoid turning this blog post into, well, the length of a law review article. They make publication too time consuming for many successful lawyers to consider pursuing, thereby limiting the pool of potential author/experts – perhaps intentionally? – to law faculty. I have on my own hard drive, for instance, a nearly finished law review article covering the law of trade dress infringement in the First Circuit that grew out of a summary judgment memorandum in a trade dress infringement case I was litigating. The substance is all there, but finding the time to fix the cites, and dress up some of the transitions, and dot each I and cross each T? Almost impossible, unless I am going to assign it to an associate, which somehow strikes me as cheating. But what I may well do is finish it up to a nearly finished draft status, and put it up on this blog, and just plain bypass the time consuming law review publication system, while still putting the information easily in the hands of those who may have use for it. Blogs make all of this type of information far more readily available to the community than law reviews do or, frankly ever will, unless and until they not only add accompanying blogs but also make all of their text freely available for on-line searching.

So yes, whether you practice in ERISA, insurance coverage, intellectual property, or any of an endless variety of other practice areas, legal blogs are far and away the best source of information, and they are turning law reviews into dinosaurs. The whole subject reminds me of some discussions in Seth Godin’s book small is the new big that can essentially be summed up as, in the age of the internet, businesses can either change or die. As far as I am concerned, that is where law reviews find themselves right now: they can either figure out how to transform themselves into an easily accessible on-line repository of valued information, or they can continue to be marginalized, only at ever increasing speed, into a place where law professors simply go to impress one another.

Here is a fascinating decision out of the federal district court for Rhode Island arising out of a dispute over plan contributions required of a contractor under collective bargaining agreements in the construction context. What I most liked about the case is its discussion of the challenge to the plaintiffs’ standing to bring an ERISA action, on the ground that the plaintiffs were not participants, beneficiaries or fiduciaries of the plans in question. The central issue concerned whether the plaintiffs qualified as fiduciaries for these purposes, and the court’s primary analysis was directed at whether one of the plaintiffs, who was the plan administrator, qualified as a fiduciary.

The district court concluded that it did, and in addressing this issue, provides a terrific synopsis of the law in the First Circuit concerning when an entity qualifies as a fiduciary for these purposes, and in particular when a plan administrator qualifies for that status. The court stated (I have omitted the voluminous citations to statute and case law, but it is here in the opinion itself for those of you who are interested):  

An ERISA fiduciary includes any person who "has any discretionary authority or discretionary responsibility in the administration of [an employee benefit] plan." ERISA also provides that a fiduciary "exercises any discretionary authority or discretionary control respecting management of [a] plan or exercises any authority or control respecting management or disposition of its assets." In addition: [r]egulations promulgated by the Department of Labor interpreting ERISA make clear that the administrator and trustees of a pension plan are fiduciaries within the meaning of the statue, for a plan administrator or a trustee of a plan must, b[y] the very nature of his position, have discretionary authority or discretionary responsibility in the administration of the plan within the meaning of section 3(21)(A)(iii) . . . . Thus, at least according to many courts that have addressed the issue, a plan administrator is per se a fiduciary. The Court of Appeals for the First Circuit appears to have expressed a similar tenet, although recently, the court has characterized this as an assumption, not a holding. Absent any clear authority in any circuit to the contrary, this court will also proceed on this assumption. Consequently, because the plan administrator is named as a plaintiff in this suit, and is acting in a fiduciary capacity, he therefore must be considered a fiduciary within the meaning of 29 U.S.C. § 1132(e)(1). Accordingly, because the plan administrator has standing this court has jurisdiction to hear the claims.

The case is Rhode Island Carpenters Annuity Fund v. Trevi Icos Corp.

Sometimes when I give seminars on directors and officers coverage, I like to pass along a story I once heard of a law professor who gives his students what he considers an impossible hypothetical, namely, how would you respond to a client who walks in the door saying that she has been asked to join a board of directors and needs to know whether the company’s directors and officers insurance is sufficient protection for her. The reason the hypothetical is impossible, the professor posits, is because no one can say whether the directors and officers policy is sufficient in the abstract, and the scope of its coverage can only be understood by waiting to see the latest theories of liability being asserted against directors, and then examining how insurers are responding to them under the language of the directors and officers policies that they issue.

Now I have always thought that story overstates the case a little bit, in that certainly most areas of directors and officers exposure are sufficiently well developed that one can look at a directors and officers policy and provide a present or future board member with at least some general sense of the scope of their insurance protection. This is, after all, why people and companies hire insurance coverage lawyers: because they have the experience and knowledge base to understand a policy and provide some guidance, even in the abstract, as to what it covers and what it does not.

That said though, the story I noted above rang clearly in my head – and rang true – the other day when I came across a New York Times piece (only available by subscription or to those of you who still have Friday’s paper lying about) on the expanding risk of personal liability for directors based on backdated option grants. Two things jumped out at me. The first is that if there was ever an object lesson as to the need for directors and officers coverage, and why no one should ever leave home for a board meeting without it, this is it. Counsel to board members must look in advance, preferably at each renewal, at the scope of coverage being acquired for directors and officers exposures and the potential exposures of the board members, and make sure that the best product available on the market, the one that is best suited for those board members and their exposure risks, is obtained.

The second thing that really drew my attention was that the story fit perfectly with the law professor’s hypothetical, although in a way that may reflect insurers being at risk as much as the directors. To what extent are lawsuits and liabilities arising out of this newest scandal, if that is in fact what we should call it, within the coverages provided by directors and officers policies, most of which were drafted before the expansion of this fast growing risk? Does it fit within standard coverages that were already in play, or within standard exclusions already contained in the policies? Or is it a risk of a nature no one anticipated, and insurers are sitting there with policies that don’t have language that controls this risk? The answers to these questions are going to make a big difference in who actually ends up paying if directors are personally liable for these type of stock option manipulations – the officers themselves (or the companies they serve if they are obligated to indemnify the directors) or the insurers who issued directors and officers policies to those companies.

Roy Harmon, over at his Health Plan Law blog, has his typically scholarly take on two recent rulings out of the United States District Court for the District of New Hampshire in the case of Hopper v. Standard Insurance Company. The rulings primarily revolve around the question of which claims in the lawsuit are preempted under ERISA, and the law, reasoning and rulings of the court on these issues is consistent with First Circuit law, which grants a pretty broad sweep to ERISA preemption. What caught my eye about the case, however, and was of particular interest to me, was the discussion of whether the claims against one of the defendant entities that was involved in the insurance program at issue, namely the insurance broker, were preempted. The court, in one of its two rulings, determined that the broker did not play the role of a fiduciary, was not subject to ERISA, and that the claims against it were not preempted as a result. The court explained:

Hopper’s misrepresentation claims against WGA [the insurance broker], however, are different. Unlike Standard, which functions as an ERISA entity, see Hampers, 202 F.3d at 53 (citing Stetson v. PFL Ins. Co., 16 F. Supp. 2d 28, 33 (D. Me. 1998))(explaining that the "primary ERISA entities are the employer, the plan, the plan fiduciaries, and the beneficiaries of the plan"), WGA is strictly an insurance broker, engaged in sales and marketing functions.

WGA had no direct control over Standard’s insurance policy or the benefits plan. WGA did not administer the plan, and did not determine participant eligibility for benefits or consider appeals of benefit denial. Put differently, Hopper’s claims against WGA are limited to WGA’s "role as a seller of insurance, not as an administrator of an employee benefits plan." Woodworker’s Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 991 (10th Cir. 1999).

This result is consistent with the underlying goal of ERISA "to protect the interests of employees and other beneficiaries of employee benefit plans." Morstein v. Nat’l Ins. Servs., Inc., 93 F.3d 715, 723 (11th Cir. 1996). "If ERISA preempts a beneficiary’s potential cause of action for misrepresentation, employees, beneficiaries, and employers choosing among various plans will no longer be able to rely on the representations of the insurance agent regarding the terms of the plan." Id. As a result "[t]hese employees, whom Congress sought to protect, will find themselves unable to make informed choices regarding available benefit plans where state law places the duty on agents to deal honestly with applicants." Id. at 723-24.

Accordingly, Hopper’s misrepresentation claims against WGA are not preempted by ERISA.

I think at least this part of the ruling, though arguable, is correct, so I don’t have any real quibble with it. What catches my eye, however, is the issue it raises, of whether an entity involved with an ERISA governed plan is better off staying out of the eye of the storm by avoiding a role that would grant it fiduciary status, or is instead better off playing a large enough role in the administration of the plan to end up being assigned that status. Falling outside of the ERISA framework leaves the entity exposed, as was the broker here, to a range of common law and state statutory claims; indeed, the potential exposure of such a defendant is limited only by the imagination of plaintiffs’ lawyers (and to a certain degree, the actual facts). On the other hand, coming within the realm of entities regulated by ERISA would preclude those types of claims from being asserted against the entity, while limiting recovery to that which is authorized by ERISA.

Granted, it is probably not something that the insurance broker in the Hopper case gave any thought to at the commencement of its involvement with the plan in question, but it might be something for any entity playing a role in an ERISA governed plan to consider at the outset of their retention: should they put themselves in a position to be a fiduciary subject to ERISA, or should they avoid that like the plague?

Well, health insurance really isn’t a major focus of this blog, although we do comment on it from time to time, and it certainly touches on both focuses of this blog, ERISA and insurance. Employer provided health insurance has always done well by me and mine, so I don’t really have a vested interest in this topic, but the always interesting Robert Frank has this to say today in pitching the merits of converting to a single payer health insurance system. Its well-written, persuasive and elegant, but I think he gives short shrift to two particular points in making his case, possibly because of limitations on the article’s length and the fact that one could obviously – and many have – address these two issues in great depth and across many pages. In the first instance, he is a little too glib in assuming that, given the economic benefits of the current system to many of those involved, the economic and political barriers to removing health insurers from the equation can be easily overcome. In the second instance, he is a little too quick to assure us that, since his son was happy with his medical care in Paris, we can all assume that the accessibility and availability of care enjoyed by those of us who are in fact currently insured will not suffer by a move to a government based single payer system. I have little doubt there is plenty more evidence out there on this last point one way or the other, and that it was the restrictions of newspaper writing that limited how much he could put in on that issue and caused him to instead rely on the shorthand of a personal anecdote. At the end of the day, however, these two points that he simply assumes are not barriers to a single payer system are, in fact, the real political and economic issues that confront any attempt to move to such a system.

I was going to write about something else today – about a particular technical, tactical issue in litigating insurance coverage and ERISA, particularly breach of fiduciary duty, cases – but I came across something else that was too intriguing to me to pass up, and I will return later this week to the issue I meant to discuss today. What caught my eye was this article on cyberinsurance, which I liked for a number of reasons: one, it is a good article on the topic; two, it sounds cool, what with the word cyber in it; and three, it mingles my interest – reflected by the existence of this blog – in technology with my professional interest in insurance coverage.

And just what is cyberinsurance? It is a specialty insurance product covering the risks inherent in reliance on computer data and computer generated, stored and manipulated information. As the article points out, most traditional insurance products relied on by businesses do not provide much, if any, coverage for the risks related to a business’ reliance on this type on technology, so a few insurers have created specific policies targeting this risk. The policies cover:

First-party business interruption covers revenue lost during system downtime caused by accidents and security breaches. Losses during catastrophic regional power outages are typically excluded, but that’s little different from standard exclusions for floods or other "acts of God."
First-party electronic data damage covers recovery costs associated with compromised data, such as virus infections.
First-party extortion covers ransom demands of hackers who claim to control systems or data and threaten to do serious harm.
Third-party network security liability covers losses associated with the compromise and misuse of data for such purposes as identity theft and credit card fraud.
Third-party (downstream) network liability covers judgments from lawsuits initiated by those harmed by denial-of-service attacks and viruses sent out over your system.
Third-party media liability covers infringement and liability costs associated with Internet publishing, including Web sites, e-mail and other interactive online communication.

One of the more interesting things from an insurance coverage standpoint about the article, and about this product, is that, as the article points out, “[u]nlike traditional insurance policies, cyberinsurance has no standard scoring system or actuarial tables for pricing premiums,” and instead each company that offers the coverage must investigate the potential insured’s exposure and develop a price point for that particular insured that adequately captures the risk.

 

I came out on the wrong side of this order from one of my cases, but that’s alright; although John Barth’s fictional lawyer in the Floating Opera may have never lost a case, any real life lawyer who tells you the same thing is, well, speaking fiction.

But it is an interesting ruling nonetheless, on a relatively new and important issue, namely the scope of electronic discovery obligations imposed by the e-discovery amendment to the federal rules. This decision by a U.S. magistrate judge presents the factors that should be considered to determine whether electronic discovery should be ordered, or is instead too burdensome to be allowed.

There is also in the decision a little lesson for ERISA governed plans, namely, to make sure that electronic databases and electronic claim files are structured in a manner that allows for easy recall and searching of data, because as this order reflects, the courts will order such searching and production of electronic data if that data is in play in the case, even if the data is stored in a way that makes it very expensive to uncover.

Recently, waiting for a pretrial conference in federal court on one of my cases, I listened as a judge explained to the lawyers in a different case, based on only knowing the causes of action, what the actual facts of the case before him must be, even though he had never heard from the parties before. He did, in fact, actually nail the general outline of the case off the top of his head, and the lawyers for the parties simply had to fill in a few of the more specific facts for him. The judge explained that he had seen that type of case a thousand times before, and the fact patterns were always basically the same.

I was reminded of this when I read this recent decision by Judge Tauro in the Massachusetts federal district court, which concerns competing claims to life insurance proceeds provided under an ERISA governed plan. It seems as though the facts of this case are likewise always the facts in these types of claims: a divorce proceeding, followed by a standard state probate court order forbidding the husband from removing his soon to be ex-wife as the beneficiary, followed in short order of course, by the husband changing the beneficiary to his girlfriend (usually followed not long afterward by the husband’s demise, although no one has proven – to my satisfaction anyway – a causal linkage between that and either the girlfriend or the change in beneficiary).

Now of course what happens in that case is you end up with two competing claimants to the life insurance proceeds, one of whom – the ex-wife – asserts that she could not have legally been removed as the beneficiary, and the other of whom – the girlfriend – claims that she is the beneficiary pursuant to the plan’s terms and therefore must be paid the proceeds, at least if the plan’s terms are going to be enforced. And then what happens next of course, is that the plan administrator, quite rightly, files an interpleader action asking the court to figure out which one of the two should get the proceeds. A plan administrator would err if it did anything else, as ERISA preemption and the plan’s terms would suggest that the girlfriend should get the proceeds, but this would be in direct contradiction of a probate court order; there is no reason for the plan and its administrator to be stuck between the rock of the plan and the hard place of the probate court order. And avoiding being stuck in this type of position is exactly why federal law allows interpleader in this situation.

Judge Tauro, in his opinion at the end of January in Unicare Life & Health v Chantal Phanor et al, presents in a very logical manner exactly how this issue should be considered and resolved, finding that the proceeds should be paid out to the former wife under this scenario, so long as the probate court order qualifies as a qualified domestic relations order (“QDRO”) for purposes of ERISA. As the court explained, Congress expressly exempted QDROs from preemption, so as to allow probate courts to properly divvy up marital assets. The key issue with QDROs, and whether the beneficiary designation mandated by them should govern instead of the beneficiary designation that would govern if the terms of the plan controlled the issue, is that there are specific characteristics of the order that must exist for it to qualify as a QDRO. An issue of controversy, and which was at the center of the dispute in Unicare, is how strictly those requirements should be applied, and whether a probate court order that only loosely fits the requirements can qualify as a QDRO for these purposes. Judge Tauro came down squarely on the side of not taking those requirements literally, instead requiring only that the probate court order fit generally within the requirements and fall within the purpose intended to be served by QDROs.

For some reason, the Unicare decision is not currently available on the Massachusetts District Court’s website, but I will keep an eye out and post a link to it when it becomes available.  For now, it can be found on Lexis, at 2007 U.S.Dist. LEXIS 6136.

This blog serves many purposes, at least in my mind. Among them is to bring to the reader information he or she may otherwise not have access to, and another is for me to investigate things in the insurance and ERISA fields that I am interested in. I think both of these purposes are well served by a recent discussion between the blog and Robert Kingsley, who until last year was the President and CEO of Financial Pacific Insurance Company, a California based insurer; Rob left the company after closing its sale to the Mercer Insurance Group. Rob spoke with the blog recently to provide some insight from inside the insurance industry:

Blog: You have certainly had a close up view of the trend towards consolidation in the insurance industry, having just overseen the sale of one insurer to another. Any thoughts on whether this trend will continue, accelerate, or instead slow down?
Rob: In a declining rate environment with the pressure to grow and companies flush with capital there is little doubt the pace of consolidation will accelerate.

Blog: Is the trend towards consolidation a positive or instead a negative for the industry?
Rob: I think consolidation is a good thing for any industry so long as the markets remain competitive and the barriers to new capital and new ideas remain relatively low. The fact of the matter is that smaller, entrepreneurial organizations innovate in ways the larger companies, due to their sheer size, are incapable of.

Blog: What about for the consuming public?
Rob: So long as the market remains competitive the trend toward consolidation will help consumers. For one thing, as companies grow through consolidation they achieve greater economies of scale in their expenses and a portion of the savings will be passed on to consumers in the form of lower rates.

Blog: What is driving the urge to merge in the industry?
Rob: The industry is over capitalized and companies have made certain growth and profit growth ‘promises’ to investors, which are simply not achievable through organic growth.

Blog: Big insurers, smaller insurers? Who’s got the bigger upside at this point?
Rob: I may be biased (having a small company background) but I am a believer in the small insurer. I think they generally know their markets better and react and respond to opportunity more effectively than their larger counterparts. It’s not a universal rule, but on average, smaller niche companies have outperformed their larger peers. Conning has performed a couple studies on this subject.

Blog: There is probably no bigger consumer of legal services than the insurance industry. From your point of view of having led a company that consumes those services, what is your biggest complaint about lawyers and the services they provide to clients?
Rob: The big disconnect is that the lawyers are selling time and the insurance companies are buying results. That’s all I say about that subject (note my wife is an attorney).

Blog: What’s the single biggest thing lawyers could do to better serve clients like the company you headed?
Rob: Financial Pacific had (has) an in-house law firm that handled 80% or more of our litigated cases. The reason we formed that firm was to change the economics of the loss adjustment process. When a carrier is paying an hourly fee to an attorney it can affect the carrier’s settlement appetite and price point. Turning that variable cost into a fixed cost allows the carrier to cleanly evaluate the merits of the litigated case without being affected by the ‘meter is running’ mentality. Law firms that are sensitive to that dynamic and/or are willing to be evaluated and compensated based on their results (their outputs) as opposed to their inputs (hours) would be valuable and highly coveted.

Blog: Rob, thanks for your time.