One byproducts of the turmoil that has swept over insurance giant AIG has been a cascade of litigation. But even before the company’s latest woes, it was locked in a series of hotly contested legal battles with its former Chairman and CEO, Maurice Greenberg. The latest front in this ongoing war apparently is a fight over the proceeds of the company’s primary D&O insurance policy, as a result of which the D&O insurer has now initiated an interpleader action to sort out whose claims to the policy proceeds should prevail.
As reflected in the complaint (here) that the insurer filed on May 8, 2009 in the Southern District of New York, the insurer issued a $15 million primary D&O insurance policy over a $10 million self-insured retention for the policy period May 24, 2004 through May 25, 2005. As the D&O insurer’s complaint notes, "AIG is at the center of a firestorm," as a result of which the company and its present and former directors and officers are the targets of numerous lawsuits. (The lawsuits themselves are not specified in the D&O insurer’s complaint.)
But as the insurer’s complaint observes, "even before the current issues at AIG became front page news, a very public split" occurred between AIG and Greenberg, as a result of which the company and Greenberg have "taken strongly adversarial positions" in the various lawsuits that have accumulated against AIG. Both AIG and Greenberg and his related entities have expended significant sums in their defense of the underlying litigation, and both AIG, on the one hand, and Greenberg and his related entities, on the other hand, have demanded that the D&O insurer advance to them the proceeds of the D&O policy, presenting the insurer with "competing adverse demands to the proceeds of the Policy."
According to the complaint, AIG was advancing Greenberg’s defense expenses until mid-2007, after which Greenberg’s defense expenses were advance by his various related entities. The D&O insurer’s complaint alleges that the defense expenses that AIG has incurred on Greenberg’s behalf and on behalf of other individual defendants in the underlying litigation exceed both the D&O policy’s $10 million self-insured retention and its $15 million limit of liability.
The D&O insurer’s complaint is filed in the form of an interpleader action under Rule 22 of the Federal Rules of Civil Procedure. Using this procedure, the insurer is basically disclaiming any right or interest in the policy proceeds, and tendering them to the court, for the court to sort out the competing interests to the policy proceeds.
The precipitating event that triggered the initiation of the interpleader action was the attempt by Greenberg to pursue arbitration, in reliance on the arbitration clause in the D&O insurance policy. While the policy does provide for arbitration, Greenberg did not join AIG as a party to the arbitration, while at the same time purporting on his own to select an arbitrator. The D&O insurer is concerned both that AIG must be a party to the arbitration, and that the Policy reserves to AIG rather than to individual insureds the right to select the arbitrator.
In light of this separate arbitration proceeding, the D&O insurer’s recently filed complaint seeks, in addition to interpleader, a judicial declaration whether or not Greenberg is entitled to use the arbitration procedure under the policy, and if so whether AIG is a necessary party to the arbitration, as well as whether or not AIG has the right under the policy to select the arbitrator. The D&O insurer also seeks a judicial declaration of the appropriate disposition of the policy proceeds pending the outcome of the arbitration.
Obviously one of the things that makes this new action interesting is the high profile of the litigants involved. But the case is also interesting as an illustration of the kinds of problems that can arise between current and former directors and officers – clearly, the disputes can even include vehement disagreement over the proper allocation and distribution of D&O insurance proceeds.
The arbitration dispute also demonstrates some the shortcomings that can arise in the application of arbitration provisions in a D&O insurance policy. The sequence of events here not only raises questions about who can initiate arbitration, but also who has what rights in the event of an arbitration. Individual insureds might well be concerned to learn that their company could reserve the exclusive right to select arbitrators in any dispute in which the individuals might become involved with the D&O insurer. (These issues illustrate one reason why I have always thought that the preferred approach to alternative dispute resolution clauses in an insurance policy is for the specified procedures to be at the option of the aggrieved insured, rather than mandatory.)
Another interesting note in this dispute is that it relates to a D&O insurance policy that incepted in 2004. Obviously, the hottest parts of the "firestorm" in which AIG is now engulfed arose well after the policy period for the policy that is in dispute in this case, raising the question of how many (if any) other policy years’ of coverage have been triggered by the various lawsuits in which AIG is involved. How many of the various lawsuits "relate back" to this policy year, and how many triggered policies that were in force in subsequent policy periods? The total amount of insurance potentially in play depends on the outcome of this question.
It is also worth noting that the interpleader complaint described above involves only the primary policy in AIG’s D&O insurance program for the policy period 2004-05. AIG undoubtedly carried significant additional amounts of insurance (i.e., excess insurance) during that same policy period. While the excess insurers in the program may be indifferent whether the primary policy is exhausted in payment of AIG’s or Greenberg’s defense expenses, once the primary policy is exhausted, the dispute between AIG and Greenberg will just move up to the first level excess carrier, and so on up the ladder.
So it is obviously important to the excess insurers to know how the present dispute is resolved, because the outcome potentially could dictate the excess carriers’ rights, obligations and interests.
One final point that the many claimants in the various lawsuits pending against AIG and its present and former directors and officers may well want to note is that the deluge of litigation in which AIG is involved is rapidly depleting whatever amounts of insurance may remain. At some point, the insurance could well be exhausted even just by defense expense alone, leaving only the assets of the now nationalized entity as the primary source of funds out of which to try to extract a settlement or judgment – putting the claimants’ interests in direct conflict with those of U.S. taxpayers.
The theoretical possibility that these claimants might be able to recover from the individual defendants out of the individuals’ own assets must be tempered by the awareness that these individuals, although once wealthy, had most of their net worth tied up in AIG stock. My point here is that well-advised claimants might want to focus on trying to figure out how to maneuver cases toward settlement as soon as possible with the least possible additional defense expense. Not that I have a dog in this particular fight, I’m just saying …
Bloomberg reporter Thom Weidlich has a May 11, 2009 article about the interpleader action, here.
Mayday, Mayday!: Readers may be interested to know that Hank Greenberg just celebrated his 85th birthday on May 4. Everyone here at The D&O Diary wishes Hank a belated Happy Birthday.
And speaking of May anniversaries, with a May 24 inception and expiration date for the insurance policy at issue in this dispute, is it possible that the AIG D&O insurance program is up for renewal once again in just a few days?
Pertinent to the possibility of an impending AIG D&O insurance renewal during the month of May, I note that, according to Wikipedia (here), the universal distress signal "mayday" is a derivation of the French expression "m’aider," short for "venez m’aider," meaning "(you) come help me."