I have written before about the American Rule – which requires parties to a lawsuit, in the absence of a fee shifting statute or contractual agreement, to pay their own legal fees – and the exception under Massachusetts law that runs in favor of insureds who prevail in coverage cases against their insurers. The Supreme Judicial Court has now established that this exception runs only to disputes over an insurer’s duty to defend, and not to disputes over the duty to indemnify. Thus, while an insured who proves that its insurer breached a duty to defend can recover from the insurer its legal fees in proving this point, the same is not true for an insured who proves that its insurer breached the duty to indemnify. Here’s the story, with a link to the case.

This resolves an unsettled point of Massachusetts law, as to whether the right to recover attorneys fees runs along with a claim over the duty to indemnify, or instead only along with a claim for breach of the duty to defend. It turns out to be the latter only.

In the long run, it’s a better decision than the opposite holding would have been. A decision to deny indemnity without a reasonable basis for doing so is already punishable in Massachusetts under the state’s consumer protection act. When, in contrast, a denial of indemnity is reasonable, an insurer should be able to try to prove that its coverage determination was correct without having to factor in the risk of having to pay the insured’s legal fees if a court finds that the insurer’s interpretation of its coverage obligations, while reasonable, was wrong.

Two things to chew on over the holiday, other than the turducken (I have always wanted to use that word in a sentence), one to know about before it occurs, the other to note before it disappears. I guess I could take that dichotomy a little further, and note that one concerns the first half of the blog’s title, and the other, the other half.

The first: Susan Mangiero, who writes the excellent blog Pension Risk Matters, is hosting a webinar on November 28 covering issues related to investment fees, the management of 401(k) plans, and fiduciary obligations. The webinar, covering “401(k) plan fees – what they are, how they can affect reported performance and the fiduciary practices that address investment management fees” is driven by the fact that:

In the aftermath of the Pension Protection Act of 2006, 401(k) plan sponsors are required to carefully select "fiduciary advisors", identify appropriate default investment choices for participants and comply with more rigorous federal reporting procedures. All of this could spell trouble for retirement plan fiduciaries who fail to realize that regulation, public awareness and employee angst put them in the spotlight as never before. This is especially apropos with respect to plan fees.

You can find more information on the webinar here.

The second: Insurance coverage lawyers, almost by definition, have to be contracts geeks. At the end of the day, what they are really doing is fighting over the language in contracts, a particular type of contract certainly, but contracts nonetheless. And here, before it vanishes from the internet, is the story of how much money there is in not being a contracts geek.

 

Massachusetts, like most and I would assume all states, has a number of legislatively created entities that participate in or affect the insurance market in one way or another, including an insolvency fund intended to cover losses underwritten by,  yes, insolvent insurers.

The soon to be outgoing governor of the Commonwealth has now signed legislation exempting high net worth individuals – i.e., what normal people call rich people – from the fund’s protection.  Under the change in the legislation:

A high net worth policyholder is defined as one with a net worth exceeding $25 million on Dec. 31 of the year before the year in which the insurer became insolvent. The Massachusetts Insurers Insolvency Fund (MIIF) will not be obligated to pay first party claims to a high net worth insured. Government entities are not included in the definition.

Now, personally, I don’t have a problem with this, not the least of which is because it certainly doesn’t affect me or anyone I know, and I doubt I’ll ever manage to fall within the new exemption.  But it also  doesn’t bother me, and is unlikely to ever affect me, because I investigate the insurers that I buy coverage from, and am pretty sure they are all financially sound.  I don’t just chase the cheapest deal, which may make me a sucker, or it may make a sound consumer.  But what I do know it tells me is that anyone who is a shrewd enough businessperson or investor to have enough money to fall within the exemption is certainly shrewd enough to pick an insurer that is unlikely to end up under the umbrella of the insolvency fund, and ought to be expected to invest the time and money needed to pick such a carrier.  I don’t know if this was the reasoning behind making this change, but this reason alone justifies it.

Information, and the ability to manage it in ever more clever and analytical ways, is fundamentally changing industry after industry. This article details the impact that ever more sophisticated management of ever more extensive information is currently having, and will in the future have, on the insurance industry. The conclusion? Those insurers that can best collect and break down massive amounts of historical data in ways that will allow them to exploit the industry’s most profitable nooks and crannies will come to dominate the market, and those that can’t, well, those companies are dinosaurs but just don’t know it yet.

I’m not a stock picker, and I don’t even play one on a plasma TV, but want my guess as to where to make a lot of money? Figure out what insurance companies are going to be able to master the new data focused world and can finance the type of sophisticated quantitative analysis this brave new world requires, and then buy and hold their stocks for the next decade or so.

Here is a neat post about the latest skirmish over state or local attempts to mandate health benefits and whether doing so is preempted by ERISA, this time in San Francisco, where an organization representing restaurant owners is challenging a city ordinance mandating the provision of health benefits. This is echoes of the Maryland Fair Share Act and its attempt to make Wal-Mart provide health care for its employees, something I talked about here and here and here, an attempt that was deemed preempted by ERISA. I have talked in the past about how that ruling set the stage for fighting out the same battles elsewhere, as states and municipalities try to address the problem of uninsured workers in the face of ERISA preemption.

One thing that is interesting to me about these types of stories is the manner in which these attempts to mandate the provision of health care benefits run up against what has long been a central tenet and long held understanding of ERISA, which is that it was enacted by Congress not to mandate the provision of benefits but instead to encourage employers to do so, in part by creating a self-contained universe governing the issue. But it may be that we have now reached a point where the bigger societal issue and the one that many elected bodies are struggling mightily with is whether to require health care benefits, something entirely different than the issues of import when ERISA was enacted. In some ways, one can think of the preemption conflict over these types of state and local mandates as reflecting a clash of two eras, the earlier one in which ERISA, including the preemption requirement that is preventing these types of mandates, was created and the current era, in which the need to address gaps in the employer based health care system has come to the forefront as a significant issue. While there may be a lot to be said about this point, at a minimum we can safely say that the past right now is trumping (or perhaps preempting?) the present.

Here’s a very interesting decision, Northcutt v. General Motors Hourly-Rate Employees Pension Plan, out of the 7th Circuit, upholding the right of administrators to rely on recoupment language in a plan to set off a lump sum social security payment received by a beneficiary against on-going payment obligations to that beneficiary that would otherwise exist under the plan. The problem is one that arises with extraordinary frequency, namely a beneficiary is awarded benefits under a plan, and then later collects a lump sum retroactive award of benefits from social security covering a period of time during which the individual had been receiving benefits from the plan. What happens when the plan contains language declaring that if the lump sum payment is not paid over to the plan, the plan will reduce the benefits being paid until such time as the withheld amount of the benefits adds up to the amount of the lump sum payment in question?
Well, generally the answer is that what the plan says is exactly what is going to happen. Now as you can imagine, beneficiaries are often none too happy when this occurs. They go from thinking a windfall has landed in their laps, in the form of a large retroactive benefit award from social security, to being dunned for the whole amount. Even worse from the point of view of any sort of amicable resolution of the problem as between the plan and the beneficiary, the scenario is often complicated, as it was in Northcutt, by the fact that beneficiaries have often spent the lump sum award before being notified that they actually owe it back to the plan. (I like, by the way, how the Northcutt court described the problem, as being that the sum was “dissipated by the time [the plan administrator ] made its demand” for reimbursement; I might have chosen the term “spent it like a drunken sailor on shore leave without bothering to find out first if they owed any of the money to someone else” if I were the court.)
The plaintiffs in Northcutt were two beneficiaries confronted by this problem and who tried to get around it by creative lawyering, insisting that the recoupment provisions in the plan were an attempt to create some sort of quasi-judicial right of recovery to which the plan was not entitled because it was contrary to, or at least not expressly part of, the rights to relief and causes of action granted by the express language of ERISA to plan fiduciaries. The court caught an obvious problem in this argument, namely that the recoupment was a right established under the plan and was simply part of the express terms of administration of the plan set forth in the controlling plan documents. The recoupment was simply an administrative act, and was not judicial relief or a court action.
The court rejected the plaintiffs’ theory, finding that the sponsor clearly had the right to impose such terms as part of the plan, and that the plan was within its rights to simply apply those terms of the plan.
There is, beyond the holding and the interesting presentation of the reasoning behind it, some interesting language in the decision. One part that I like in particular speaks of the general acceptance in the case law of this type of recoupment mechanism, and of the fact that, although the Northcutt plaintiffs tried a novel theory of argument not already rejected by other courts, they were still subject to this same general acceptance of recoupment provisions. To quote the court:

Although Mr. Northcutt and Mr. Smith advance a novel theory in support of their argument, challenges to the enforceability of similar reimbursement provisions are not new. Before other courts, these challenges generally have focused on whether such reimbursement structures might violate particular provisions of ERISA. In these other suits, the plaintiffs have contended that contractually based recoupment amounts to a breach of fiduciary duty by the plan or to a violation of ERISA’s anti-assignment provisions. The district courts appear to have rejected each theory and approved, either explicitly or implicitly, of contractually based recoupment.

Like all of you, I am sure, I receive almost daily pitches in my in-box for seminars, podcasts, books and publications that promise to educate me on various topics that the pitchers have decided I must be interested in. Of course, these may be the same marketing wizards who send me twenty pitches a day for on-line pharmacies, so I may be giving them too much credit when I assume they are actually targeting their offerings to my professional interests in such topics as patent litigation, ERISA and insurance coverage. Nonetheless, sort of like playing horseshoes, they do sometimes come close to the mark with the offerings they email me.
This one caught my eye the other day, for a teleconference on the attorney-client privilege, with the hook that the privilege is supposedly under assault in the context of insurance coverage litigation. The short version pitch that was sent to me goes like this:

The sanctity of attorney-client privilege has been shaken by court decisions allowing discovery of attorney-client communication in the context of certain insurance lawsuits. Attorneys and clients must always be conscious of preserving the privilege, but insurance disputes gives rise to unique areas of concern.
In insurance cases, counsel often become involved prior to litigation, during the claims process – for coverage advice or to assist with investigations. These pre-litigation communications often end up subject to discovery.
Some courts have found the privilege waived in bad-faith suits where the insurer relies on an advice-of-counsel defense – sometimes even without that defense being raised. Insured’s counsel also argue that attorneys who participate in insurance investigations are not providing legal advice but are acting as adjusters whose communications with the insurer are not privileged.

Now, I have litigated these issues a number of times. While I have sometimes won these disputes outright, more often than not, the court finds a way to split the baby and give some limited and controlled discovery while at the same time imposing some restrictions intended to protect the primary communications at the heart of the attorney-client relationship, namely those in which actual legal advice itself is transmitted.
There are a couple of points that jump out at me about this whole issue that I wanted to mention. The first is that there is some truth to the argument that it is hard to investigate the facts at issue in both insurance coverage and bad faith litigation because of the attorney-client privilege and work product doctrine, and it is often necessary to carve out some exceptions to those protections against discovery to allow discovery in those kinds of cases to proceed. This often holds true for both insurers trying to learn the underlying facts of the claim over which coverage is being disputed and for insureds trying to learn the facts of what the insurer did with regard to coverage, or the denial of coverage, for such claims. The simple fact is that lawyers for the insured, in defending and settling the underlying claim, and lawyers for the insurer, in providing coverage analysis and recommendations, are participating in activities that are at the heart of insurance coverage and bad faith litigation, but do so while engaging in what would normally be privileged communications. Effective prosecution and defense of these types of lawsuits therefore often raises the question of the extent to which discovery is proper in light of, or instead precluded by, the attorney-client privilege.
The second point that jumped out at me is that this is another one of those issues that is, much like what I talked about in my post yesterday, deja vu all over again. It seems like every several years – maybe it works out to be once every generation of seminar presenters – the books and the articles and the seminars appear declaring the attorney-client privilege to be under assault as a result of discovery rulings issued in the context of insurance coverage and bad faith litigation. I don’t know for sure, but it sure seems to me that, despite these periodic “the sky is falling” pronouncements, the attorney-client privilege is still alive and well, and being raised in response to all sorts of discovery requests.

I am fascinated by this new exclusion that is being drafted and for which approval is being sought, which seeks to exclude claims arising from viruses – not the computer kind, but things like avian flu. I understand the intent, but for any of you who, like I, have been at the insurance coverage business long enough, it ought to ring a bell in your memory about the “asbestosis’ exclusions that were at play in the asbestos coverage litigation boom. For those of you who aren’t old enough to remember it, the central theme was whether exclusions written to exclude asbestosis were meant to – and did – exclude other asbestos caused diseases, or instead only excluded claims where the victims actually developed the particular disease of asbestosis. For those of you who would like more than just this thumbnail history of the issue, try this case, Carey Canada, Inc. v. Columbia Casualty Co., 291 U.S. App. D.C. 284 (D.C. Cir. 1991).
If we are at all lucky, this new virus exclusion will never come into play on a large enough scale for it to matter, but if it does, one can predict deja vu all over again, to quote Yogi Berra – you can foresee plenty of coverage disputes over whether a particular virus or bacteria or ailment falls within the description of virus included in the exclusion’s language, and over which ones do not. Experience suggests to me that the limits of the written word, and the outside limits on the skill set of even the best drafter of policy language, makes it awfully hard to draw a clear line on viruses within, and viruses without, the exclusion.

I don’t think I can recommend a better read for a Friday afternoon than this article on the apparently questionable rise and apparently imminent fall of the securities litigation powerhouse Milberg Weiss. You couldn’t make this stuff up, and I don’t think John Grisham or anyone else could have invented the panoply of players, and the complex web of relationships, detailed in this article.
One interesting thing about the article is the description of one of the key players as having made a living off of insurance fraud, an abusive insurance bad faith claim, and questionable disability claims before finding, at least according to the article, a more profitable line of work in serving as lead plaintiff in securities class actions. Is insurance fraud the gateway drug to bigger crimes?

Preemption is a tough defense to get around, particularly in the First Circuit, where it is taken quite seriously and numerous decisions expressly declare particular state law causes of action to be preempted by ERISA. One clever response to this problem, at least when the facts will allow the argument, is to try to sidestep any fight over preemption itself by arguing that the benefit at issue was not even provided by an employee welfare benefit plan and that as a result, ERISA does not apply and state law claims over the denial of the benefits are actionable. There is more room to maneuver on such an argument than in a battle over preemption, because the test recognized in the First Circuit for determining whether a benefit was in fact provided by an employee welfare benefit plan is mutlipronged, fact based, and, on at least some elements of the test, rather amorphous. At the same time, however, it doesn’t take much for an employee benefit to qualify as an ERISA governed employee welfare benefit plan, at least in this circuit.
The test is laid out and then explored in great detail in a recent decision, James O’Leary v. Provident Life and Accident Insurance Co., by Judge Saylor of the United States District Court here in Massachusetts. The court explained that “an employee welfare benefit plan has five elements: (1) a plan, fund, or program (2) established or maintained (3) by an employer or by an employee organization, or by both, (4) for the purpose of providing. . . disability. . . benefits (5) to participants or their beneficiaries,” and that these are factual inquiries. In many instances involving larger employers, the application of these factors and the conclusion that should be reached are transparent from the outset; even without looking closely at the factors, there is little room to doubt that, for example, a large company’s disability benefits plan for its employees satisfies these elements and is an ERISA governed plan.
What made the application of these factors interesting in the case before the court was the particular dynamic generated by the fact that it was a small employer and many of the facts at issue with regard to the employment benefit in question were unique to that one employee who was denied the benefits in question and was filing suit. This fact pattern took the case out of the realm of if it “looks like a duck and walks like a duck, its an employee welfare benefit plan,” and placed it instead in the realm of coverages that might just be personal to the employee rather than part of an ERISA governed plan. It wasn’t, the court eventually concluded, but the analysis in reaching that point is informative.