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Donna Ferrara

In the following guest post, Donna Ferrara, Esq., Senior Vice-President, Managing Director, Management Liability Practice, Arthur J. Gallagher, takes a look at a recent federal appellate court decision highlighting the problems that can arise when anyone – including outside counsel – makes assumptions about insurance without actually looking at the relevant policies. Donna also examines the lessons that can be learned from this unfortunate case. My thanks to Donna for her willingness to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Donna’s guest post.

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For those of us who specialize in management liability, there are two recurring annoyances: First, the “instant experts” – those who claim expertise in our field after reading a single article on D&O.  The other are the assumers, practitioners with some experience who presume all D&O policies are identical, despite the fact that forms are negotiated, endorsed and amended until unrecognizable from the originals.

In a recent case, Sun River Energy, Inc. v. Nelson,[1] the Tenth Circuit of the United States exposed another kind: lawyers who opine on insurance policies without looking at them, or even for them.  This proved to be an expensive mistake.

By way of background: in 2011, Sun River Energy (“Sun River”) sued several of its shareholders.  The defendants removed the case to federal court and counterclaimed.  The federal rules of civil procedure require litigants to produce all relevant insurance policies[2], and the defendants demanded that Sun River do so.

Sun River’s counsel said there were no such insurance policies.  A few months later, the defendants asked again.  Sun River’s counsel retorted that there was no insurance and that if the defendants continued to ask for “non-existent policies” he was going to demand sanctions.  He made this threat despite the fact that, according to his own testimony, he had “unfettered access” to the policies, but neither he nor the in-house counsel pulled the policy to look at it.[3]

In October 2012, the defendants moved to compel production of the policies, attaching a detailed paper trail pointing to the existence of both general liability and directors and officers insurance. This included a spreadsheet memorializing payment for the policies.  Not surprisingly, the policies were produced.

In November 2012, apparently for the first time, Sun River sent a notice of the counterclaim to their D&O insurer.  Unsurprisingly, the insurer who had been on the risk when the counterclaim had been filed, denied coverage on the basis that the policy required notice to be given during the policy period –not more than a year after expiration.  There could have been other reasons to deny coverage, but this was an easy one.

The policy language was plain: coverage was triggered by claims made and reported during the policy period.  No extended reporting or discovery period had been purchased.

Why had counsel failed to produce the policy when asked?  In fact, why had counsel failed to produce the policies when the federal rules required insurance polices to be produced before demands are made?

Because neither lawyer had looked at the policies, assuming that the other had done so, even though they had never asked.

Further, outside counsel stated that he assumed that the directors and officers policy would not provide coverage because:

  1. No director or officer was named and
  2. D&O policies don’t usually cover securities suits.[4]

As the Tenth Circuit pointed out, counsel would not have even had to read the entire policy to know he was misinformed in his assumption.  The declarations page of the policy stated: “Directors and Officers Liability Insurance Policy including Employment Practices and Securities Claims Coverage”[5].

At the time of coverage, Sun River Energy made regular filings with the Securities and Exchange Commission and traded over the counter, making it a public company.  Its counsel should have known both these facts. At the risk of falling into generalities, public company D&O forms “usually” cover securities suits.

The district court was irritated enough by the attorneys’ carelessness to impose sanctions and order them to pay the other sides’ attorneys’ fees for the motion to compel the production of the insurance policy.  Due to the circuit court’s reading of the federal rules, the outside counsel was held liable for the attorneys’ fees, while the in-house counsel was not.

What are the lessons here?

As with most litigation, the court’s opinion doesn’t tell the whole story.  The docket for the underlying case has 362 entries, and runs for 51 pages.  It is replete with the kind of scorched earth motion practice that gives litigation a bad name

Although I know nothing about the background of this matter beyond what is publicly available, I can tell that this was a needlessly vitriolic matter.  Whatever the business aspect of the dispute, there is no justification for discovery fights like this one, especially when it may have cost Sun River the benefit of insurance coverage.

As for the litigants: there is a lot more lost than the $22,000 in attorneys’ fees.  Both attorneys had to pay for their defense at the district court through the appeal.  Sun River was delisted[6], and was placed into bankruptcy by its creditors.  Not least, both attorneys, when googling their names, will have their mistake in this case inevitably show up.

The lesson, therefore, is simple, but bears repeating: Don’t Assume.  More specifically:

  • Read the actual policy, all the way through.
  • You can’t hide important documents – there is always a trail.
  • Lawyers – and all insurance professionals – are not just hired guns: Our clients are owed calm judgment, not blind advocacy.

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[1] 800 F.3d 1219 (10th Cir. 2015).

[2] Fed. R. Civ. P. 26(a)(1)(A)(iv).

[3] 800 F.3d at 1223, 1225.

[4] 800 F.3d, at 1228.

5 Id at 1222.

[6] https://www.sec.gov/litigation/suspensions/2014/34-72400-o.pdf