Insurers frequently contend that their amounts paid as disgorgement are uninsurable as a matter of law. Whether or not this principle is true as a general matter still begs the question of whether or not the amounts for which coverage is sought represent “disgorgement.” In an interesting October 20, 2016 opinion (here), Delaware Superior Court Judge Jan R. Jurden, applying New York law to the issue, held that amounts TIAA-CREF paid in settlement of three underlying class action lawsuits did not represent uninsurable disgorgement. Judge Jurden expressly distinguished a series of decisions in which New York courts had ruled that settlement amounts paid in settlement of regulatory enforcement actions represented uninsurable disgorgement.
TIAA-CREF provides retirement accounts and other financial services to employees of schools and colleges. The organization was sued in three separate class action lawsuits which alleged that it had improperly failed to credit the accounts of customers with investment gains that accrued while transfer or withdrawal requests were being processed. The class action lawsuits ultimately were settled with amounts to be paid to the members of the class according to formulas in the settlement documents. The settlement documents expressly recited that in entering the settlement, TIAA-CREF was resolving disputed claims, denied all allegations of wrongdoing, and was not admitting any liability.
TIAA-CREF sought coverage for the settlement amounts from the various carriers in its professional liability insurance program. The carriers denied coverage for the amounts on various grounds, including their contention that the amounts the organization agreed to pay in settlement of the underlying claims represented uninsurable disgorgement. TIAA-CREF filed a coverage action against the insurers in Delaware Superior Court. The parties filed cross-motions for summary judgment.
The October 20 Decision
In an October 20 decision, Judge Jurden granted TIAA-CREF’s motion for summary judgment on the disgorgement issue, holding that the settlements do not represent uninsurable disgorgement.
In trying to argue that the settlement amounts represented uninsurable disgorgement, the insurers relied on three New York court decisions in which the courts had found that amounts the insureds in those cases had paid in regulatory enforcement settlements represented uninsurable disgorgement. Judge Jurden held that the facts in the TIAA-CREF differed from the facts involved in the three New York cases.
Among other things, she noted that, by contrast to the three New York lawsuits, neither the SEC nor any other governmental authority was involved in the underlying class action lawsuits against TIAA-CREF. She also noted the three cases “all involve conclusive links between the insured’s misconduct and the payment of monies. Not so here. TIAA-CREF settled and expressly denied any liability.” She found “no conclusive link between the settlements in the Underlying Actions and wrongdoing by TIAA-CREF that would render the settlement agreements uninsurable disgorgement.”
Judge Jurden also ruled that the later filed class action lawsuits were interrelated with the first filed lawsuit, and so the later lawsuits related back to the first lawsuit and therefore were deemed under the policy to have been first made during the policy period of the insurance program in place at the time the first class action lawsuit was filed. In reaching this conclusion, Judge Jurden noted that though TIAA-CREF was sued in different jurisdictions by different plaintiffs, and in cases asserting differing legal claims, “the allegations in the Underlying Actions arise out of, are attributable to, the same type of conduct – TIAA-CREF’s business practice that resulted in failure to pay customers their gains during delays in processing.”
Finally, Judge Jurden rejected the contention of several of the insurers that coverage for the settlements was precluded by the Commingling Exclusion, which precludes coverage for claims arising out of “the commingling of fund or accounts.” In reaching this conclusion, the noted that TIAA-CREF did not mix clients’ funds with its own funds, “the hallmark of commingling,” nor did it use those funds for its own private benefit.
Judge Jurden denied the summary judgment motions on two remaining issues: two insurers’ claims that TIAA-CREF failed to obtain their consent to the settlements and one insurer’s claims that TIAA-CREF’s defense fees were unreasonable.
As I noted at the outset, insurers contend that amounts for which coverage is sought represent uninsurable disgorgement. The battleground when this coverage defense is raised is usually whether or not the amounts at issue, in fact, represent uninsurable “disgorgement.”
For example, in one of the New York cases Judge Jerden addressed in her opinion, the New York Court of Appeals held Bear Stearns is not barred from seeking insurance coverage for a $160 million portion of an SEC enforcement action settlement labeled as “disgorgement,” where Bear Stearns’ customers rather than Bear Stearns itself profited from alleged misconduct. The Court of Appeals opinion reversed the ruling of an intermediate appellate court which had held that Bear Stearns could not seek insurance coverage for the settlement amount labeled as “disgorgement.” (The insurers in the TIAA-CREF case relied language from the intermediate appellate court decision, which Judge Jerden said in a footnote that the N.Y. Court of Appeals had not disavowed.)
It should be noted that in neither the TIAA-CREF nor the Bear Stearns cases did the courts hold that the policies covered disgorgement amounts. In the TIAA-CREF case, Judge Jerden simply concluded that the amounts paid in settlement of the underlying class actions did not represent disgorgement. In the Bear Stearns case, the Court of Appeals simply held that Bear Stearns was not precluded from seeking coverage in light of all of the facts and circumstances, and remanded the case to the trial court for further proceedings on the coverage issues.
While Judge Jurden did not hold that the insurance policies involved in the TIAA-CREF case provided coverage for disgorgement, her reasoning may nevertheless provide substantial help to other policyholders who are attempting to counter their insurers’ argument that amounts for which coverage is sought represents uninsurable disgorgement.
Among other things, in concluding that the settlement amounts at issue in the case did not represent disgorgement, Judge Jurden relied heavily on the fact that in reaching the settlement TIAA-CREF had admitted no liability and expressly denied any wrongdoing, by contrast to the cases on which the insurers relied where there was, she said, a direct link between the amounts paid and the alleged wrongdoing.
It is frequently the case when litigants settle disputes that their settlement documents recite that the defendant is admitting no liability and expressly denies any wrongdoing. In the event that the defendant’s insurer seeks to disclaim coverage for the settlement amount on the grounds that it represents uninsurable disgorgement, the insured can argue in reliance on Judge Jurden’s analysis and the terms of the settlement — including in particular the liability denial – that the settlement amounts do not represent disgorgement.
I will say that if the insurers are going to argue that disgorgement amounts are uninsurable, then the meaning of the term disgorgement should be construed and applied as narrowly as possible, and the preclusive effect of the uninsurability principle should only be applied when the amounts involved clearly and unequivocally involve the return of ill-gotten gains.
The nature of the amounts paid and for which coverage is sought frequently arises when the insurer seeks to disclaim coverage on the grounds that the amounts represent uninsurable disgorgement. For discussion of a case in which a court concluded that amounts paid in settlement do represent uninsurable disgorgement because of the nature of the underlying claims, refer here.
The D&O Claims Environment in Germany: Germany is already among the more litigious D&O claims environments and “current developments could fuel litigation activity further,” increasing D&O insurers’ exposure to a continuing soft market, according to a recent law firm memo. The October 26, 2016 memo from the Clyde & Co law firm can be found here.
The level of claims activity is a reflection of certain aspects of the framework for director liability. While corporate board members have protections from the liability for breaches of their duties under the business judgment rule, the burden of establishing that there was no breach or no negligence is on the board members. The applicable statutory law does not provide a damages cap and the inclusion of exculpatory clauses in corporate by-laws is “uncommon and only permissible under narrow circumstances.” In addition, under the German dual board structure, supervisory boards are, in principle, obligated to investigate and pursue damage claims against management board members if the supervisory board members are to avoid liability themselves.
More recently, there has been a surge of so-called “recourse claims,” brought by companies against their board members for fines imposed on companies by regulators, particularly the cartel authorities (either at the EU or national level). A key issue in these kinds of cases is whether and to what extent companies are permitted to seek recourse from their board members for fines imposed on the companies by regulators. As least one court has held that companies cannot, but “this ruling is not easily reconciled with other judgments by the Federal Court of Justice.”
Another key issue has to do with an insured person under a D&O policy may assign his or her coverage claim to the company pursuing the claim for damages against that person. An April 2016 Federal Court of Justice decision held that such assignments are permissible irrespective of the moral hazards that can arise in a market dominated by insured vs. insured claims (owing to the dual board structure). D&O insurers, the law firm memo suggests, need to be prepare “for an increased number of direct claims for payment made by policyholders and their insured subsidiaries against the insurer.”