Over the last few days, I have published several posts looking back at 2017. In addition to looking back, this is also the time of year for looking forward as well. Among other things to watch out for this year is a series of D&O insurance coverage cases that are now pending in the appellate courts. In a January 9, 2018 article (here, subscription required), Law 360 author Jeff Sistrunk identifies three of these cases to watch this year. As discussed below, these cases not only are worth watching but could have important ramifications as well.


Patriarch Partners LLC v Axis Insurance Co.

The first of the three cases that the Law 360 article identified is the Patriarch Partners case, which is on appeal to the Second Circuit. I discussed the September 2017 district court decision in the case here. The Patriarch Partners ruling is also one of the court decisions that were identified as a key 2017 D&O insurance coverage decision in a guest blog post earlier this week.


The Patriarch Partners case involves the question of when the claim was first made in connection an SEC investigation against the investment firm. The excess insurer involved in the coverage dispute contended that the claim was first made at the time of the SEC’s first order of investigation against the investment firm in June 2011, and therefore that coverage for the claim was precluded by a prior and pending litigation exclusion in the excess policy. The investment firm contended that the claim was not first made until the firm was served with the first subpoena in the investigation in February 2012, and therefore that the prior and pending exclusion did not preclude coverage under the excess policy.


In her September 2017 order (here), Southern District of New York Judge Valerie Caprioni held that the probe began at the time of June 2011 order of investigation, and therefore that the prior and pending litigation exclusion precluded coverage.


On appeal, Patriarch Partners argues that the courts conclusion that the prior events constituted a prior and pending claim so as to preclude coverage was erroneous. The firm argues that neither the order of investigation nor the SEC’s other informal acts constituted a claim under the excess policy at issue. Specifically, the firm argues that the policy’s definition of claim was not satisfied, because the policy requires an allegation of a wrongful act against an insured.


As I noted in my blog post discussing the district court’s decision, questions about whether or not various SEC proceedings constitute a claim for purposes of D&O insurance arise frequently. This case is unusual in that the usual situation is that the policyholder is arguing that events earlier in the investigation satisfy the policy definition of claim in order for the policyholder to secure coverage for costs occurred earlier in the investigation. Here, the policyholder is arguing that earlier events do not satisfy the policy’s definition of claim, in order to avoid the application of a policy exclusion that would operate to preclude coverage.


This case will indeed be interesting to watch, but because policy wordings so often control the availability of coverage in these circumstances, the appellate court’s decision in this case may or may not have widespread applicability. In addition, the district court’s opinion in the Patriarch Partners case stands in interesting contrast the Tenth Circuit’s recent opinion in the Musclepharm case (discussed here), in which the appellate court held that policy coverage did not extend to the costs MusclePharm incurred in responding to SEC subpoenas issued pursuant to a formal order of investigation because the subpoenas did not satisfy the applicable policy’s definition of the term “Claim.”


Apollo Education Group v. National Union

This case involves the interesting question of when a D&O insurer may properly withhold its consent to settlement. The settlement at issue in the case is somewhat unusual, in that the defendant company had succeeded in having the underlying claim dismissed at the district court level, and then the company agreed to settle the underlying case for $13.125 million while the underlying case was on appeal. The company’s D&O insurer withheld its consent and the policyholder sued.


As discussed here, in October 2017, Arizona District Court Judge Steven Logan concluded that the insurer reasonably withheld its consent because based on what Judge Logan described as “extensive analysis” the insurer had concluded that continued litigation was the better approach.


As I noted in my discussion of the district court decision, while Judge Logan validated the insurer’s decision here, this outcome is unlikely to embolden many insurers to more aggressively try to withhold consent to settlement, as it could be a risky approach for many carriers. Courts generally tend to take a narrow view of anything that could impede the negotiated resolution of cases. The district court’s decision was very much tied to the specific facts of this situation, including in particularly the specific steps the insurer took before withholding its consent. Nevertheless, this decision could provide important guidance on the scope of the insurer’s right to settlement consent and could fill out the prerequisites in order for an insurer to withhold its consent to settlement.


HotChalk v. Scottsdale Insurance Co.

The third of the three cases to watch that the Law 360 identified involves a question that readers know is something of a hobby horse issue of mine, which is the extent of the applicability of the professional services exclusion in a D&O insurance policy. As I have previously argued, these exclusions are often written very broadly with the “based upon, arising out of” preamble. All too often in my view, insurers apply these exclusions in a way that the exclusion threatens to swallow up coverage under the policy. This concern is particularly applicable with respect to professional services companies, because, as applied by the carriers, there is almost nothing the professional services company could do that would not come within the scope of the exclusion.


The Hot Chalk insurance coverage dispute arose out of an underlying False Claims Act claim against the insured company. The plaintiffs in the False Claims Act suit alleged that the HotChalk provided forms of incentive payments to its employees responsible for recruiting students, in violation of Department of Education regulations prohibiting companies involved in federal student grant and loan programs from paying commissions or incentive compensation. The insurer denied coverage for the claim in reliance on the applicable policy’s professional services exclusion.


In a November 15, 2016 order (here), Northern District of California Judge Claudia Wilken entered an order granting the D&O insurer’s motion for judgment on the pleadings. In granting the motion, Judge Wilken rejected HotChalk’s argument that the underlying lawsuit arose out of its alleged employee compensation practices, which, the company argued, strictly involved an internal aspect of the way it ran its business and therefore was unrelated to its delivery of professional services. Judge Wilken concluded that HotChalk’s incentive compensation scheme “could only have been improper because of the professional services that HotChalk provided.”


On appeal, HotChalk argues that the district court failed to distinguish between the company’s services to its clients and its own internal employment compensation practices. The company argues that under the district court’s interpretation, just about anything the company does would fall within the exclusion, precluding coverage for every claim, rendering the policy “virtually worthless.”


As discussed here, the policyholder advocacy group United Policyholders has filed an amicus brief in connection with HotChalk’s appeal. In its brief, United Policyholders stated that the D&O insurer’s “interpretation of the subject exclusion renders paid-for coverage illusory.” UP elaborated that the interpretation of the exclusion “is so broad as to effectively eliminate D&O coverage for allegedly wrongful management decisions made by entities in the business of providing services, and is inconsistent with California law.”


As I noted in my discussion of the amicus brief, the policyholder group’s intervention in the case is welcome because it emphasizes the importance of the issues involved in the case. The issues involved are important not just for policyholders but for all participants in the D&O insurance process. Insurers in particular have a stake in the issues. If the professional services exclusion has the preclusive effect that the insurer urged here, there not only would be no coverage left under the policy for any claim against a professional services company, there would be little reason for anyone to buy the insurance.


Cyber Liability Forum: On January 30, 2018, the ABA Tort Trial and Insurance Practices Section will be presenting a “D&O Insurance Cyber Liability Forum.” The program will be held at the St. John’s University School of Risk Management and Insurance, Manhattan campus, located at 101 Astor Place, NYC. Registration will be from 12:00 Noon – 12:30, followed by a brief welcome introduction.  Panel discussions, including a panel focusing on dispute resolution will then proceed in 3 parts during the afternoon, followed by a Wine/Cheese Reception, sponsored by The Chartered Institute of Arbitrators and Lewis Brisbois.  The education sessions will conclude at 4:30 p.m.


Speakers will include Jay Kramer, partner in the New York office of Lewis Brisbois; Christopher Liu, AIG, Head of Cyber Risk for the Financial Institutions Group; Adeola Adele, Willis Towers Watson, Director of Integrated Cyber Solutions and Thought Leadership; Richard Sheridan, Berkley Cyber Risk Solutions, Senior Vice President, Chief Claims Officer; Sasha Romanosky, RAND Corporation, policy researcher and former cyber policy advisor at the Pentagon. Information about the program including costs and registration information can be found here .