nystateOne of the key current concerns in the global D&O insurance marketplace involves questions of cross-border implementation of insurance policy responsibilities and requirements. This concern is usually presented as a problem for policyholders, as they must determine how their insurance might respond to claims arising outside their home jurisdictions. However, a recent decision in the Eastern District of New York and involving one of the individuals caught up in the FIFA improper payments scandal show that the problems involved with cross-border policy implementation represent a challenge for insurers, as well.


In an April 27, 2016 ruling (here), Eastern District of New York Judge Raymond J. Dearie determined that, notwithstanding a provision in FIFA’s D&O insurance policy requiring insurance disputes to be litigated in a Swiss forum, he had the authority to enter a preliminary injunction against FIFA’s insurers requiring them to advance the defense fees of Eduardo Li, one of the defendants in the FIFA criminal proceedings.   



Eduardo Li is a citizen of Costa Rica. He held a number of positions within FIFA and its member associations. Among other things, he was a member of FIFA’s executive committee. He was also president of the Costa Rican soccer federation and an executive member of the Confederation of North, Central American and Caribbean Association Football. Li was among the fourteen individuals named as defendants in a May 20, 2015 grand jury indictment charging the individuals with participating in an international racketeering conspiracy and related crimes. Specifically, Li himself was charged with racketeering conspiracy, wire fraud conspiracy, wire fraud, money laundering conspiracy, and money laundering.


Li was arrested in Switzerland in late May 2015. The U.S. government sought his extradition to the U.S., to which the Swiss government agreed. Following Li’s appeals of his extradition, Li was extradited to the U.S. In November 2015, the grand jury returned a sealed superseding indictment adding new charges against Li and adding new defendants. Li is currently in the U.S., where he has been released on bail.


In July 2015, Li send letters to FIFA’s insurers notifying them of his indictment and the efforts to extradite him, and requesting payment of his costs of defense. The insurers denied coverage for Li’s costs of defense in reliance on the primary policy’s “Further USA exclusions,” which, among other things precludes coverage for claims that are based in whole or in part on actual or alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). Also, the carriers contended that the defense fees that Li was incurring were covered by the criminal costs coverage for “investigative proceedings.”


Li filed a lawsuit against the insurers in New York state court to enforce the Policy. The insurers removed the case to federal court and then moved to have the case dismissed on forum non conveniens grounds and under the primary policy’s forum selection clause, which provides “For any disputes arising under this insurance relationship, a Swiss place of Jurisdiction and the application of Swiss Law shall be deemed to be agreed.”


Li subsequently filed a motion for a preliminary injunction directing the insurers to reimburse and advance his defense costs. After Li filed his motion for preliminary injunction, the insurers advised the federal court that subject matter jurisdiction for the case may not exist and that the action’s removal to federal court may have been a “mistake.”


The primary policy provides an insured with “world-wide” coverage for “defense costs incurred to defend any actual or alleged wrongful acts.” The policy further provides that “Should the question of any wrongful intent be at issue, cover shall be granted for the defense costs.” The policy provides for payment of “investigative costs” which is triggered when an “insured person is identified in writing by an investigating official body as a target of the hearing, examination or inquiry.”


The April 27 Opinion

In his April 27, 2016 opinion, Judge Dearie denied the insurers’ motion to dismiss and granted Li’s motion for a preliminary injunction.


In his introduction to his rulings, Judge Dearie said “In an almost haphazard fashion, the Insurers have launched a host of arguments to justify their refusal to pay. The Court is obligated to consider these arguments carefully and completely, and having done so, denies the Insurer’s motion to dismiss.”
The Court first considered the insurers argument that the court lacked subject matter jurisdiction and therefore was not properly in federal court (even though the insurers themselves had removed the case from state to federal court.). The Court rejected this argument and agreed with Li that the coverage dispute properly came within the Court’s ancillary jurisdiction, which recognizes the court’s jurisdiction over matters incidental to cases properly before the court. Judge Dearie concluded that the criminal charges pending in the court and the insurance coverage dispute were factually interdependent. He said that an ancillary coverage dispute proceeding is needed to foreclose undue delay in the resolution of the criminal proceedings and to ensure that this insurance dispute does not interfere with a fair and efficient criminal trial for Li, which the insurers face no prejudice from having the issues heard in federal court.


Judge Dearie then turned to the question of whether the case should be dismissed based on the primary policy’s forum selection clause, which specified that policy disputes should be heard in “a Swiss place of Jurisdiction.” Judge Dearie determined that Swiss law governed the question whether or not the forum selection clause applies. Li had argued that he is not bound by the forum selection clause. Judge Li, looking at provisions of the Lugano Convention as well as a decision by the Court of Justice of the European Union, agreed with Li that the forum selection clause does not apply to him because he did not subscribe specifically to it.


Judge Dearie also rejected the insurer’s motion to dismiss the case based on forum non conveniens ground. Judge Dearie concluded that Li’s choice of forum was entitled to substantial deference, because he faced criminal trial in the forum and because he will be restricted to the forum while he awaits trial in the criminal action. He also said that the balance of private and public factors weighed against dismissal, noting that “compelling practical considerations” counsel against dismissal. Li, the court noted, faces serious charges which threaten “grave” consequences for him. Judge Dearie added that “the strong local interest in seeing that litigants before this Court are appropriately represented, officers are properly compensated, and that criminal matters are not unnecessarily hindered cannot be ignored.”


Finally, Judge Dearie granted Li’s motion for a preliminary injunction requiring the insurers to advance his defense expenses. He noted that because the insurers have refused to advance the costs of his criminal defense, Li faces “an actual and imminent injury and has established irreparable harm.” He also concluded that Li has “established a clear and substantial likelihood of success on the merits [of the coverage dispute]” noting that the policy provides broad coverage to an insured for defense, investigation, and extradition costs; that the policy mandates contemporaneous payment of defense expenses; and that the insurers had abandoned their “initial, and meritless” ground for their coverage denial, the RICO exclusion.


Judge Dearie concluded his opinion by noting that the balance of hardships weigh heavily in Li’s favor:


If no injunction is issued, Li will never receive the benefit of the bargain, likely be deprived of his chosen counsel at this critical time, and sustain a conviction he might otherwise have avoided, while the Insurers are, in any event, relieved of their obligation to advance funds pending a final resolution. If, on the other hand, an injunction is issued, the Insurers face only monetary loss which may be recouped as provided in the Policy.



I want to emphasize at the outset that I am not finding fault with anyone or with the positions that any of the parties in this case took. I think this case presented a set of circumstances that no one had anticipated. The insurers certainly can be forgiven for their apparent surprise and unhappiness at finding themselves having to litigate a coverage dispute in New York under a policy that has a forum selection clause designating “a Swiss place of Jurisdiction” as the preferred venue. I don’t know whether or not it is because of the unexpected surprise of finding themselves litigating in New York, but the insurers seemed uncertain about their position and even about why they claimed Li’s claim was not covered.


For starters, the insurers removed Li’s lawsuit from New York state court, and then decided the federal court lacked subject matter jurisdiction and that the case’s removal had been a mistake. In addition, the insurers first argued that the Lugano Convention applied, but that it affected the case differently than Li contended; then the insurers submitted an additional expert affidavit arguing that the Lugano Convention didn’t apply after all, and was superseded by Swiss law. The insurers, who had initially argued that coverage was precluded by the primary policy’s RICO exclusion, also later abandoned that argument.


Against the public policy arguments Li had assembled and that Judge Dearie clearly found compelling, the insurers’ presentation of their position, which Judge Dearie called “almost haphazard,” clearly did not aid their cause.


I am sure the insurers are still trying to figure out how a dispute under a policy issued in Switzerland with a provision designating Swiss courts as the preferred forum wound up in a court in New York. I think it is fair to say that this is a development that was neither desired or intended on the insurers’ part, although perhaps their assumption that any disputes would wind up in a Swiss court apparently did not take into account the relevant principles in the Lugano Convention and under the applicable case law of the European court. The variety of positions the insurers took on what Swiss law required suggests that this is an issue the insurers had not previously addressed or even considered.


Among the many lessons from this interesting case is one that is quite topical in the current D&O insurance marketplace: that is, in a global business environment and in light of the cross-border nature of the business of most organizations these days, D&O insurance policies may be called upon to respond to unexpected claims in unexpected jurisdictions. These layers of unexpectedness are exacerbated by the fact that the way the policy is interpreted to operate may be decided by an unexpected court applying legal principles that the parties to the insurance contract did not anticipate would control.


The uncertainty arising from all of these layers of unexpectedness is usually portrayed as a problem for the policyholder, one that must be anticipated in the design of the policyholder’s insurance program, through, for example, the purchase of so-called “locally admitted” policies that would operate in the various jurisdictions where the policyholder does business. (The questions surrounding the need for locally admitted policies represent a larger topic, worthy of a separate discussion on its own, that will have to wait for another day.)


However, this case clearly showed that the problems arising from the cross-border operation of insurance policies represent a challenge not only for policyholders, but for insurers as well. The insurers here, clearly aware that a policy issued to a global organization like FIFA might be called upon to respond to claims in jurisdictions other than Switzerland, tried to plan for and control this concern with the choice of law provision and forum selection provision. As this case shows, the extent to which possible uncertainties from cross-border policy operation can be controlled may be limited; the policies may still be interpreted and applied by courts in other jurisdictions in ways that the insurer may well believe were unintended and not contemplated.


These kinds of issues are likely to arise even more frequently in the future, as claimants and regulators in a variety of jurisdictions become increasingly active and as the possibility of claims arising outside the insured organization’s home country become more likely.


The problems these cases present are hard for insurers – and they are new. I suspect strongly that the insurers involved in this case had not previously faced an argument that the Swiss forum selection clause did not control or determine the forum determination. I do not mean to suggest any the insurers here in any way should or even can be faulted for failing to anticipate the issues that arose here. My only point is that now that this issue has been presented, the question is what to do about it.


It may be hard news for insurers to learn that a forum selection clause may not operate as they assumed. The solution to this problem may entail a better understanding of the basis of their assumption about how the forum selection clause will operate. That is, it is not enough just to have put a forum selection clause in a policy. Before an insurer can be sure how the clause will operate, the insurer should understand the legal principles that will control its operation. The insurers’ changing position here on how the Lugano Convention applied, and then whether it applied, suggests that this case represented the first occasion when the insurer had considered these issues. Insurers interested in trying to control cross-border issues, such as forum selection and choice of law, will want to be sure to understand the legal principles that will determine how these provisions will be interpreted.


That said, I think the one thing that is clear that everyone in the D&O insurance marketplace is going to have to be prepared for a new era of unexpected outcomes, where policies are interpreted and applied in unexpected forums based on unexpected principles. This uncertainty represents a challenge for both policyholders and insurers.


My earlier post discussing the FIFA scandal in detail and discussing possible D&O insurance issues can be found here.


Upcoming D&O Insurance Conference: On July 26-27, 2016, the American Conference Institute will be sponsoring its 20th Annual Forum on Directors and Officers and Management Liability. The conference will feature an outstanding array of speakers and will be chaired by my good friends Diane Parker of Allied World; Kara Altenbaumer-Price of USI; and Robert Stern of Orrick. For information about the conference, please refer here. D&O Diary readers can obtain a discount for the conference by contacting Lisa Loratro at ACI, at 212-352-3220 x5522.