Earlier this summer when the U.S. Supreme Court issued its opinion in Italian Colors v. American Express, in which the Court enforced a class action waiver in an arbitration agreement to compel the claimants to arbitrate their antitrust claims, the decision seemed likely to have widespread impact even outside the antitrust context. On August 9, 2013, in a decision demonstrating the wide-ranging impact of the Supreme Court’s American Express opinion, the Second Circuit enforced a class action waiver in an Ernst & Young employee’s written offer letter  to require her to individually arbitrate her Fair Labor Standards Act (FLSA) claims, even though the costs of pursuing her claims individually would far exceed the value of her potential recovery. A copy of the Second Circuit’s opinion can be found here.

 

Stephanie Sunderland worked as a staff employee at Ernst & Young. She was paid a flat salary, regardless of how many hours she worked. During the time she worked for E&Y, she sometimes worked overtime. She filed an action against E&Y claiming that she had improperly been classified as exempt and seeking to recover $1,867.02 in overtime pay. She sued on her own behalf as well as on behalf of similarly situated E&Y employees.

 

E&Y moved to dismiss or to stay the proceedings and to compel Sunderland to arbitrate her claims on an individual basis, in reliance on the provisions in the offer letter Sunderland had signed at the time she accepted the E&Y job. The parties agreed that the provisions in the offer letter required Sunderland to arbitrate her disputes with the company and also that the provisions included a class action waiver. Sunderland argued that the arbitration provisions were unenforceable because the requirement that she arbitrate her claims individually would prevent her from “effectively vindicating” her rights under the FLSA owing to the expense of pursuing the claims (she estimated that it would cost her approximately $200,000 to litigate a claim worth less than $2,000).

 

The District Court denied the defendants’ motion in reliance on an earlier opinion that the Second Circuit had entered in the American Express case prior to its Supreme Court review, holding that arbitration agreements would not be enforced where plaintiffs demonstrated that they would be unable to vindicate their statutory rights if a class action waiver was enforced. E&Y appealed. During the pendency of the appeal, the Supreme Court entered its opinion in the American Express case.

 

In a unanimous per curiam opinion, a three-judge panel of the Second Circuit reversed the district court and remanded the case for further proceedings.

 

As explained in an August 11, 2013 post on the Wage & Hour Litigation Blog (here), the Second Circuit’s opinion in the Sunderland case “dispenses with two of the arguments that lower courts had used to invalidate class action waivers in the wage-hour context: that the FLSA confers an unwaivable substantive right to pursue a collective action, and that a collective action is the only means by which plaintiffs can effectively vindicate their rights give the low potential recover in the individual action.”

 

In consideration of Sunderland’s argument that the FLSA gave claimants an unwaivable statutory right to pursue class claims, the Second Circuit referred to Supreme Court case principles holding that the Federal Arbitration Act establishes “a liberal federal policy favoring arbitration agreements” and requiring that an arbitration agreements must be enforced according to their terms unless “overridden by a contrary congressional command.” Noting the “consensus among our Sister Circuits” on the issue, the Second Circuit concluded that the FLSA “does not include a ‘contrary congressional mandate’ that prevents a class-action waive provision in an arbitration agreement from being enforced according to its terns.”

 

With respect to Sunderland’s argument that the class action waive prevented her from “effectively vindicating” her statutory claims, the Second Circuit noted that its earlier opinion, on which the District Court had relied in denying E&Y’s motion in the lower court, is no longer good law. The Second Circuit noted that “despite the obstacles facing the vindication of Sunderland’s claim,” the U.S. Supreme Court’s decision in the American Express case “compels the conclusion that Sunderland’s class-action waiver is not rendered invalid by virtue of the fact that her claim is not economically worth pursuing individually.” The Second Circuit quoted the Supreme Court’s language from Justice Scalia’s majority opinion in the American Express decision that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.

 

Although other courts have enforced arbitration agreements with class action waivers in connection with FLSA claims, there had still been some hold outs, including among district courts in the Second Circuit. As the Wage & Hour Litigation Blog post linked above notes, as a result of the Second Circuit’s decision in Sunderland – and absent further unforeseen procedural developments in the case at the Circuit Court – “the arguments against waivers should not be consigned to history.”

 

Even though the U.S. Supreme Court’s opinion in the American Express case was consistent with the court’s other recent case laws strongly enforcing arbitration agreements, the Court’s decision did raise the question of just how broadly the enforceability of class action waivers in arbitration agreements would be taken. As the Second Circuit’s opinion in the Sunderland opinion shows, the answer to the question seems to be quite far indeed. Even though the American Express decision involved the enforcement of a class action waive in an antitrust suit, the Second Circuit had no trouble applying the Supreme Court’s decision to enforce a class action waiver in an FLSA case. Clearly the Supreme Court’s line of cases broadly enforcing arbitration agreements – including class action waivers – will have a far-reaching effect.

 

The broad enforceability of class action waivers is clearly an important trend that could have an enormous impact on litigation generally. The most interesting question is whether courts will enforce an arbitration requirement with a class action waiver in a corporate by-law to require shareholders to arbitrate their claims individually. At least one court has done so already; it seems likely that the question of enforceability of class action waivers in this and many other contexts will be an important litigation question in the months ahead.

 

ICYMI: FDIC Updates Its Litigation Report: On August 8, 2013, the FDIC updated the page on its website on which it tracks the litigation against former directors and officers of failed banks that the agency has filed or approved. According to the latest update, the agency filed seven additional lawsuits since its prior update, bringing the total number of lawsuits the agency has filed since 2010 to 76, and bringing the number of lawsuits filed so far this year to 32. (By way of comparison, the agency filed 25 lawsuits during all of 2012.)

 

As of August 8, 2013, the FDIC has also authorized suits in connection with 122 failed institutions against 987 individuals for D&O liability. (As of the agency’s last update in July, the agency had authorized 120 lawsuits.) The number of suits authorized is inclusive of 76 lawsuits that the agency has already filed naming 574 former directors and officers.

 

Even though the peak of the financial crisis is now nearly five years in the past, banks are continuing to fail. The FDIC has closed two more banks during August 2013, bringing the number of failed banks this year to eighteen and bringing the total number of bank failures since January 1, 2007 to 486. The agency has authorized lawsuits in connection with 122 failed institutions, meaning that the agency has authorized lawsuits in connection with about 25% of bank failures (by comparison, during the S&L crisis, the agency filed D&O lawsuits in connection with about 24% of bank failures). With a total of 76 lawsuits actually filed, the agency has now filed suit in connection with about 15% of bank failures.

 

In recent years, the uptake for M&A representations and warranties insurance has increased. Just the same, even now, the participants in the M&A transaction often do not always fully understand what they need to know about the insurance. In particular, some transaction parties don’t always appreciate why they need reps and warranties insurance protection.

A July 31, 2013 article from the Kirkland & Ellis law firm entitled “Why You Need M&A Reps and Warranties Insurance” (here) details the reasons why the insurance product should be of interest to both buyers and sellers in the M&A context. As the article notes, the insurance can “increase deal value and may make the difference between whether or not a deal gets done.”

As the article explains, the insurance product is available either for the buyers (a buy-side policy) and the sellers (a sell-side policy) in an M&A transaction. Both kinds of policies “can preserve deal value by shifting potential liability for unintentional and unknown breaches of representations and warranties” in the transaction documentation. The insurance may also be available “to cover certain general indemnities beyond the actual representations and warranties.” In exchange for an upfront payment, the policy “may reduce or eliminate the need for seller accruals, reserves or collateral for contingent liabilities” – an arrangement that could be particularly attractive in the current low interest rate environment.

According to the authors, the majority of the reps and warranties policies sold are buy-side policies. The buy-side policies allows a buyer “to recover directly from the insurer without making a claim against the seller,” which has the potential to reduce, or even eliminate, a buyer’s reliance on the seller’s funding or indemnification payments” for reps and warranties breaches. The way that the insurance facilitates payments reduces “collection risk where there are numerous sellers, foreign sellers or sellers at risk of insolvency.”

From the seller’s perspective, the insurance policies may allow a “clean exit,” by eliminating or reducing the need to establish purchase price escrows or holdbacks. Lower escrow or holdback amounts in turn allow the seller to distribute greater portions of the purchase price to investors while reducing the risk of a clawback. The availability of insurance coverage may also reduce a seller’s dependence on contributions from jointly liable co-indemnitors.

As the article discusses, the cost of the insurance can vary widely depending on the circumstances of the transaction. For most deals, the premium will be between two to three percent of each dollar of coverage, with the costs slightly higher for buy-side policies than for sell-side policies. Added up-front costs will include underwriting and due diligence fees as well as governmental taxes and fees (for example, for state surplus lines taxes).

The applicable retention generally ranges from “1 percent to 3 percent of enterprise value,” although it is “not uncommon” for the policy to provide for step-downs that decrease the retention if unused. The policy may also require that the retention is exclusive of any indemnification deductible or threshold so that “the insured has actual dollars at risk before it can recover on a claim” against the reps and warranties insurance policy.

In conclusion, the article notes, reps and warranties insurance “may allow parties to efficiently allocate risk and increase deal value. “ It may also be implemented to “strategically change the dynamics in a competitive process,” and may even “be determinative in whether a deal gets done.”

The D&O Diary mug’s many travels have continued including visits to some of the most dramatic and revered locales in the world. At the same time, the D&O Diary mug is also at ease even when just at home or at the office.

 

Readers will recall that in a recent post, I offered to send out to anyone who requested one a D&O Diary coffee mug – for free – but only if the mug recipient agreed to send me back a picture of the mug and a description of the circumstances in which the picture was taken. In prior posts (here, here, here and here), I published the first four rounds of readers’ pictures. The pictures have continued to arrive and I have published the latest round below.

 

The first of the latest pictures was sent in by Charles Stotter of the Bressler, Amery & Ross law firm, who took this photo at the Grand Canyon during a recent cross-country trip. Charles notes about the picture that “one could say” it is “a symbol of the modern laws of man (and woman) met the timeless laws of nature. That image could not be more of a contrast.” Everyone here at The D&O Diary was pleased by Charles’s report that the mug made to back home safely from the cross-country travel

 

 

 

 

 

 

 

 

 

 

 

 

Long-time friend and former colleague David Allen of Gen Re forwarded a photo of a more domestic scene, taken at his Easton, Connecticut home. This is the rare shot of a D&O Diary mug being used for its most basic function – it is actually being used as vessel for holding coffee, during a review of the latest information about the D&O industry.

 

 

 

 

 

 

 

 

 

 

 

 

 

The D&O Diary mug is of course suitable for work, as shown in this picture from Susan Sun of Marsh (Beijing) Insurance Brokers Co. Ltd. Susan took this picture in the conference room of the Marsh office in Shanghai. The conference room overlooks Lujiazui, the new central business district in Shanghai. We were particularly pleased by Susan’s report that everyone in FINPRO China reads The D&O Diary.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finally, Nessim Mezrahi of Nathan Associates sent in these great pictures from Israel. Nessim’s explanation of the pictures appears in indented text below the photos.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I travelled to Israel to represent the USA cycling team at the 2013 Maccabiah Games.  (www.maccabiah.com)  The Maccabiah games are held every four years in Israel, and are sometimes referred to as the “Jewish Olympics” – now, the 3rd largest global sporting event.   I attended the games to represent the US cycling team, where I earned a Bronze medal in the Individual Time Trial and led the US team to a Bronze medal in the team competition.  I am a Category 2 cyclist and race road bikes at an Elite Amateur level for the Annapolis Bike Racing Team (ABRT) when I am out of the office or not attending to my newborn, Orly.  …

 

I had the opportunity to tour Israel through the Israel Connect program, an 8-day cultural immersion program sponsored by Maccabi USA for all US Open/Elite and Junior athletes, prior to the inauguration of the Maccabiah Games.  The picture attached shows the D&O Diary Mug at the Western Wall, also known as the Wailing Wall or Kotel, considered to be one of the holiest sites by all Jews around the world.  This was my first trip to Israel and visiting the Wailing Wall for the first time and competing in the Maccabiah Games was a once-in-a-lifetime experience. 

 

The pictures are all great. I love the relaxing comfort of the pictures of the mug at home and at the office. At the same time, I also enjoy the idea of loyal readers traveling all over the country and the world with their mugs and cameras at the ready looking for just the right opportunity to capture a classic mug shot. I look forward to receiving and publishing many more pictures.

 

I recently ordered another supply of mugs, so if there are more readers out there who would like to have a mug, please just let me drop me a note.  Just remember, if you get a mug, you have to send back a picture. If you request a mug, please be patient, it likely will be the end of August before we can ship out the next batch of mugs.

 

Thanks to everyone for their pictures. Cheers!

 

In yet another insurance coverage dispute in which a D&O insurer denied coverage for a claim based on the assertion that the claim was interrelated with a prior claim first made before its policy period, District of Massachusetts Judge Rya Zobel has ruled that BioChemics is not entitled to summary judgment on the issue of its D&O insurer’s duty to defend an SEC enforcement action against the company and its CEO. Judge Zobel ruled that the insurer is first entitled to discovery on the issue whether the wrongful acts alleged in the SEC enforcement action are interrelated with wrongful acts underlying SEC subpoenas served prior to the policy period of the insurer’s policy. A copy of Judge Zobel’s August 7, 2013 opinion can be found here.

 

Background

In May 2011 and September 2011, the SEC served document subpoenas on BioChemics requesting a broad range of documents and indicating that the SEC had issued a formal order authorizing the investigation. At the time the 2011 subpoenas were served, BioChemics had a D&O insurance policy in place with a predecessor insurer. In November 2011, when the predecessor insurer’s policy expired, Biochemics placed its insurance with a different insurer, the one whose policy is at issue in the insurance coverage dispute. The new insurer’s D&O insurance policy had a policy period between November 13, 2011 and November 13, 2012.

 

In January 2012, during the policy period of the successor D&O insurance policy, the SEC served deposition subpoenas against John Masiz, BioChemics’ CEO, and two other individuals. In March 2012, the SEC served document subpoenas on BioChemics and Masiz. The 2012 subpoenas referenced the same SEC investigation identification number as had the 2011 subpoenas. The March document subpoenas noted that Masiz was not required to produce any documents that had already been produced in response to the 2011 subpoenas.

 

BioChemics submitted the 2012 subpoenas to its D&O insurer (the one whose policy went into effect in November 2011). The insurer denied coverage for the subpoenas, asserting that the SEC investigation was a single claim that was first made at the time of the first document subpoena in May 2011, before its policy took effect.

 

In December 2012, the SEC filed an enforcement action alleging that from 2009 to mid-2012 BioChemics and Masiz had engaged in a fraudulent scheme to mislead BioChemics’ investors about the company’s financial condition. BioChemics submitted the SEC enforcement action to its D&O insurer, which took the same position with respect to the enforcement action that it had taken with respect to the 2012 subpoenas, namely that the enforcement action was part of a single claim first made in May 2011.

 

BioChemics and Masiz filed a lawsuit against the insurer in Massachusetts state court (a copy of the complaint can be found here). The insurer removed the coverage action to Massachusetts federal court. BioChemics and Masiz moved for partial summary judgment, arguing that the available record was sufficient to permit the court to determine that the insurer owed them a duty to defend. In response, the insurer contended that further discovery was required and in particular that it was entitled to discovery of the communications between the plaintiffs and the SEC to determine whether it had any duty to defend.

 

The D&O insurer’s policy defines “Interrelated Wrongful Acts” to mean “any and all Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of causally or logically connected facts, circumstances, situations, events transactions or causes.”

 

The August 7 Order

In her August 7 order, Judge Zobel denied the plaintiffs’ motion for summary judgment without prejudice and granted the insurer’s motion for discovery.

 

The plaintiffs had argued that the D&O insurer’s policy establishes on its face that the insurer owes them a duty to defend them against the 2012 SEC subpoenas and the SEC enforcement action because those were claims were made against them during the D&O insurer’s policy period. The insurer argued that the 2012 subpoenas and the enforcement action are part of a single ongoing claim first made before its policy period began. The insurer sought discovery of materials related to the plaintiffs’ dealings with the SEC to show that the entire investigation arises from a single set of interrelated wrongful acts.

 

The plaintiffs argued that in determining the insurer’s duty to defend, the insurer cannot rely on extrinsic evidence but instead the insurer’s duty must be decided solely by reference to the underlying complaint and the policy. The insurer argued that the rule against using extrinsic evidence to determine an insurer’s duty to defend applies only where the insurer seeks to challenge the allegations of the third party’s complaint, not where the insurer is challenging an extrinsic fact that will not be litigated in the underlying action. The insurer’s relied on Edwards v. Lexington Ins. Co., a 2007 First Circuit opinion applying Maine law, which said that the rule against extrinsic evidence “cannot be rigidly applied in the context of claims-made policies where the determinative event is the timing of the claim, a fact that likely will be …irrelevant to the merits of the underlying tort suit and therefore absent from the pleadings.”

 

Judge Zobel said that “though the question is close,” the D&O insurer “has the better of the argument.” She said that

 

An insurer may not use extrinsic evidence to avoid its duty to defend if the allegations in the complaint are reasonably susceptible to an interpretation that states a claim within the scope of the policy. But an insurer may use extrinsic evidence to deny a duty to defend based on facts irrelevant to the merits of the underlying litigation, such as whether the claim was first made during the policy period, whether the insured party reported the claim to the insurer as required by the policy, or whether the underlying wrongful acts were related to prior wrongful acts. (Citations omitted.)

 

Judge Zobel held that because the material the D&O insurer sought to discover might affect the outcome of the plaintiffs’ summary judgment motion, the D&O insurer was entitled to the discovery.

 

She rejected the plaintiffs’ argument that because the SEC enforcement action referenced alleged wrongful acts that allegedly took place after the 2011 subpoenas were served, the enforcement action could not be interrelated to the wrongful acts underlying the earlier subpoenas. She said that the question of whether there is a “common nexus” between the 2011 subpoenas and the SEC enforcement action could only be determined after the parties had completed discovery.

 

Finally, Judge Zobel determined that under Massachusetts law, the insurer did not have an obligation to defend the plaintiffs pending resolution of the coverage dispute.

 

Discussion

I have previously noted that questions of whether or not claims involve interrelated wrongful acts can be particularly troublesome and that the court decisions on the issue are all over the map. As this case illustrates, these questions can be particularly difficult for insured persons, because these vexing issues often arise, as they have here, at the outset of the underlying claim when the insured persons must defend themselves against the underlying allegations. The practical effect of Judge Zobel’s summary judgment denial is that now this company and the company’s CEO must defend themselves out of their own resources, rather than having the insurer fund the defense. In addition, they must now deal with the insurer’s discovery requests while also confronting the SEC’s action against them.

 

One question I had while first reading this opinion had to do with the predecessor D&O insurer – if, as the subsequent insurer asserted, the claim was first made before its policy period, why wasn’t the predecessor insurer also involved in this dispute (or even defending the SEC proceedings)? A quick reference to the insurance coverage action complaint suggests what might have happened. Though the predecessor insurer is not a party to the coverage dispute, BioChemics’ insurance broker is named as a defendant. The coverage action complaint alleges, among other things, that the broker recommended that BioChemics move its insurance from the predecessor D&O insurer to the successor insurer allegedly without discussing with BioChemics whether there were any circumstances that needed to be reported to the predecessor insurer and without calling attention to the option under the predecessor policy of purchasing extended reporting period coverage. The suggestion is that notice of the 2011 subpoenas was not given to the predecessor insurer during the predecessor insurer’s policy.

 

Another question I have has to do with the issue of whether or not the 2012 subpoenas and enforcement action involved actual or alleged wrongful acts that are interrelated with the wrongful acts underlying the 2011 subpoenas. The fact is that subpoenas in general typically do not allege wrongful acts or make allegations of any kind. Indeed, some D&O insurers have taken the position that their policies do not provide coverage defense costs associated with responding to subpoenas, because the subpoenas do not allege a wrongful act. There may well be a procedural thread that ties all of these various SEC proceedings together. Just the same, I wonder how it will be determined if there is a “common nexus” of alleged wrongful acts between the earlier subpoenas and the later proceedings and enforcement if the earlier subpoenas in fact allege no wrongful acts.

 

At least based on Judge Zobel’s opinion, this dispute does not appear to involve some of the issues that often arise when there are coverage questions about SEC subpoenas. At least based on the opinion, it does not appear that there is a dispute whether the subpoenas involve a claim within the meaning of the policy, a dispute that often arises with respect to SEC subpoenas (about which refer here). Also because the initial subpoena was issued and served pursuant to a formal investigative order, the parties’ dispute at least does not also involve the question that often arises about the extent of coverage under a D&O insurance policy for defense costs incurred in connection with an informal SEC investigations (about which refer here).

 

Though the dispute apparently does not involve these often recurring coverage issues, it still does present a cautionary tale about the need for attentive management of D&O insurance issues. The implication from the insurance coverage complaint is that at the time that BioChemics received the first subpoenas in May and September 2011, it did not provide notice of claim regarding these subpoenas to the insurer whose policy was in force at the time. Had the company done so, or had it done so at any time prior to the expiration of the predecessor insurer’s policy, many of the insurance problems confronting BioChemics as it deals with the SEC enforcement action likely would have been avoided, because the SEC investigative and enforcement proceedings would be being taken care of under the predecessor policy.

 

The allegations in the coverage complaint against the company’s broker provide another cautionary tale. It isn’t clear that moving coverage at renewal in and of itself created coverage issues, but the company is at least taking the position that the broker failed to provide sufficient counsel when moving coverage, particularly with respect to question of whether or not there were any circumstances that should have been noticed to the predecessor insurer prior to its policy expiration. For anyone involved in advising companies in the insurance placement process, there is a lot to contemplate in the allegations that company has made against the broker.

 

A D&O insurer’s denial of coverage for a claim against corporate officials can leave the individuals in a very difficult position, as illustrated by a recent high-profile case in the U.K. According to an August 4, 2013 Financial Times article entitled “Call to Reform Directors’ Insurance as iSoft Four Left With Bill” (here), four former directors of iSoft who were recently acquitted of criminal financial misrepresentation charges were financially devastated when they were forced to fund their criminal defense after the company’s D&O insurer denied coverage for the matter.  

 

The high profile nature of the case and the tone of the Financial Times article are sure to draw attention to the directors’ plight, at least in the U.K. However, though I discuss this situation below, I wish to emphasize that the article does not discuss the basis on which the insurer denied coverage and the only comment from the insurer in the article is its statement that it could not discuss the situation because it is an “ongoing matter.” Accordingly, there is no basis from which to assess the grounds on which the insurer denied coverage. The article seems to take it as a given that the coverage denial was unjustified; I wish to stress here that based solely on the article (which is my only source) I have no way of assessing the coverage denial.

 

According to the article, the four former iSoft officials were alleged to have engaged in a conspiracy to make misleading financial statements at iSoft. The individuals were acquitted at the Southwark Crown Court on July 22, 2013, following “procedural mistakes by the prosecution,” and after a seven year investigation and two trials.

 

The article reports that the company’s D&O insurer denied coverage for the claim in July 2011, before the first trial. The individuals were “left to fund their own legal costs or seek help from the taxpayer” after the coverage denial. The article quotes one of the four, iSoft’s former financial director, as saying when he learned of the coverage denial, it was “devastating, the low point of my life.” He says that he has lost his house as well his job and has not worked since. The former financial director went without legal representation for three months until his solicitor and barrister agreed to work for a reduced fee set by legal aid.

 

The article quotes the former financial director’s barrister as saying of the insurer’s coverage denial that “to arrive at a conclusion without hearing evidence is perverse given policy wording and the clear reasons for D&O insurance.” He added that “This action often completely undermines the whole point of taking out D&O insurance.”

 

The article also quotes a representative of the Institute of Directors as saying “There is a need to ensure that existing D&O policies being promoted by the insurance industry are genuinely fit for purpose and are not misrepresenting the cover that they can deliver to directors." The article also reports that the Law Commission is preparing to recommend that ministers tighten the regime to give policyholders more protection.

 

Another lawyer, who apparently was not involved in the iSoft criminal case, is quoted as saying “Directors need to take the trouble not only to look at the premium and the amount of cover … but to find out something about the historic performance of the provider standing by their policy and providing a proper level of support.”

 

The article concludes with a quote from a leading U.K. broker who notes that there are many examples where D&O insurers have paid large D&O claims.

 

Without knowing more about the basis on which the insurer has denied coverage, this entire situation is hard to assess. However, the article itself does underscore the enormous consequences that can ensue for involved individuals when a D&O insurer denies coverage. Even though these individuals have been acquitted, their lives are left in disarray because of the financial consequences of having to fund their own defense.

 

The article highlights a different issue as well – that is, even if its decision is entirely justified, a D&O insurer’s coverage denial can have enormous reputational consequences for the insurer, particularly in a high profile case like this. Whether justified or not, the carrier is exposed to public swipes like the comment above from the attorney about the need to need for policyholders to look unto whether the carrier will stand by their policy and provide the proper level of support.

 

The article also underscores the fact that a coverage denial in a high profile case can not only attract public criticism but it can also trigger calls for reform and regulatory scrutiny, which seems to be what has happened here. Indeed, at a time when some potential buyers remain unconvinced of the need for or value of the insurance product, high profile publicity about a coverage denial can threaten to undermine consumer confidence in the product. 

 

However, as I emphasized at the outset, there is no basis from the article to assess whether or not the carrier’s actions in connection with this claim were warranted. From that perspective, the adverse publicity may be unfair. Whether the publicity is fair or not, it is definitely the kind of thing that an insurer hazards when taking a tough coverage position in a high profile case. The possibility of this kind of adverse publicity is one factor carrier must take into account when deciding what actions to take when considering whether or not to deny coverage.

 

Special thanks to a loyal reader for providing me with a link to the Financial Times article.

 

A Kingdom Explained: While thinking about the article above, I remembered the classic video, embedded below, explaining, among many things, the difference between Britain, Great Britain and the United Kingdom. I highly recommend this entertaining video. You will be surprised and amused by the role that God plays in all of this. Watch for the shot of the Gibraltar monkeys. (Sorry about the advertisement at the beginning, it is short.)

 

//www.youtube.com/embed/rNu8XDBSn10

Over the last several years, plaintiffs’ lawyer have rushed to file “say on pay” lawsuits – either by filing an compensation-related lawsuit in the wake of a negative say on pay vote, or more recently by filing a lawsuit in advance of the vote, alleging that the compensation-related proxy disclosures were inadequate. As I previously noted, the post-vote cases have fared poorly. And a recent California state court decision in a case involving Symantec shows, the proxy disclosure cases continue to struggle as well.

 

A shareholder of Symantec had filed a putative class action on behalf of Symantec shareholders alleging that the compensation-related disclosures in the company’s proxy statement were inadequate to permit the shareholders to cast their advisory “say on pay” vote at the company’s 2012 shareholders’ meeting. The shareholder plaintiff had sought a preliminary injunction to require further disclosure. The court denied the motion for a preliminary injunction. The vote took place in October 2012.  

 

After further proceedings, the Court allowed the plaintiff leave to file her complaint. In her amended complaint, the plaintiff continued to seek supplemental disclosure and also sought to have the court require the company to have another say on pay vote following the supplemental disclosure, asserting that that would allow the “informed shareholders to voice their opinions on Symantec’s executive compensation.” 

 

The defendants filed a demurrer to the plaintiff’s amended complaint. The defendants argued that the plaintiffs amended allegations should be dismissed, among other reasons because the claims plaintiff asserted represented derivative claims, not direct claims.

 

In an August 2, 2013 ruling (here, refer to “Line 3”) California (Santa Clara County) Superior Court Judge James P. Kleinberg sustained the defendants’ demurrer with prejudice.

 

Judge Kleinberg found that the alleged harm that the plaintiff claimed had occurred or that would occur all represented an alleged injury to Symantec, not to the shareholders, and that any benefit that would be produced by the relief the plaintiff sought would inure to the benefits of Symantec. Judge Kleinberg noted that the plaintiff “does not allege how any of the purported omissions caused injury to the Symantec shareholders, and only alleges possible harm to Symantec.” He concluded that the plaintiff’s action therefore was a derivative suit, not a direct action.

 

However, Judge Kleinberg went on to say that even if the plaintiff has adequately alleged a direct disclosure claim, the plaintiff has failed to sufficiently allege the materiality of the allegedly omitted information. Both with respect to supposedly omitted performance metrics comparing the Symantec executives’ compensation scheme to the peer group and with respect to the summary of peer benchmarking analyses the board’s compensation committee used, Judge Kleinberg concluded, after a detailed review of the allegedly omitted information, that “none of the compensation related information [in the Proxy statement] is rendered misleading by omission of information.” He held that it is “not substantially likely” that the addition of the allegedly omitted information would have “altered the total mix of information available.”

 

It should be noted that Judge Kleinberg’s decision is in the form of a “tentative ruling.” Under the California procedural practice that I have always found a little puzzling, the parties have the option of contacting the court to “contest” the tentative ruling, which potentially could lead to further proceedings with respect to the demurrer, including among other things, oral argument or further briefing. I note the following assuming that the demurrer in the Symantec case will stand.

 

The Symantec case is not the first of the proxy disclosure say on pay cases to be dismissed. As discussed in a prior guest blog post on this site (here), in April 2013, Northern District of Illinois Judge Amy St. Eve dismissed with prejudice the plaintiffs’ proxy disclosure-related say on pay case involving AAR.

 

As the various say on pay cases continue to struggle in the courts, one obvious question is whether or not they will continue to be filed. As some readers may recall, a short time ago I published a post (here) citing a memorandum from the Haynes and Boone law firm that asked the question whether or not we had seen the last of new say on pay cases. In response to that post, I did receive communications from various readers suggesting that it might be a little premature to call the end of the wave of say on pay cases. Nevertheless, as the cases continue to struggle, there would seem to be significant questions why the plaintiffs would continue to file these cases. 

 

Just the Same, Not Every Ruling in Say on Pay Cases in Going Against the Plaintiffs: In a July 31, 2013 opinion (here), the Ninth Circuit ruled that a say on pay case involving Pico Holdings had been improperly removed to federal court; the appellate court returned the case to the district for the case to be remanded to state court.

 

The plaintiffs had filed a shareholder derivative suit against certain directors and officer of Pico Holdings following a negative say on pay vote. The plaintiffs’ complaint, which they filed in state court, alleged that the company’s compensation practices violated California state law. The defendants removed the case to federal court. The federal court dismissed portions of the case and remanded the remaining portions of the case to state court for lack of jurisdiction.

 

The Ninth Circuit held that the district court lacked jurisdiction to do anything other than remand the case back to state court. The court held that the plaintiffs’ complaint in that case asserted state law causes of action, and that their allegations regarding the say-on-pay vote were insufficient to establish federal-question jurisdiction. The panel vacated the decisions of the district court with instructions to remand the case to state court.

 

Of most significant interest, the Ninth Circuit rejected the suggestion that a complaint alleging only state court claims nevertheless raised a federal question to support federal court jurisdiction merely because the complaint involved a say on pay vote required by the Dodd Frank Act. The court also rejected any suggestion that a federal question sufficient to support federal court jurisdiction merely because the defendants express an intention to assert a federal law defense, as a federal defense “is inadequate to confer federal jurisdiction.”   The court also rejected the suggestion that the Dodd-Frank Act’s provisions represented a federal preemption so comprehensive as to supplant state law causes of action.

 

Though the plaintiffs are still a long way from winning the case, they have at least secured the right to go back to state court – where they had filed their lawsuit in the first place — and to live for another day.

 

My beat here at The D&O Diary requires me to read many insurance coverage decisions. I am well accustomed to the idea that the court opinions can be varied lot. But every now and then I run across a decision that is a real head-scratcher. A July 16, 2013 decision out of a Texas intermediate appellate court applying Texas law to interpret a D&O insurance policy falls in the latter category.

 

The court’s opinion is somewhat convoluted, but basically the court held that the policy’s interrelated claim provision conflict with the policy’s prior and pending litigation provision; that because of this conflict between the two sections, the interrelatedness provision must be construed against the insurer; and therefore that the policy covers seven lawsuits filed during the policy period even though the seven are interrelated with three lawsuits filed prior to the policy period. A copy of the court’s opinion can be found here.

 

Background       

Gastar Exploration Ltd. was named as a defendant in a series of ten lawsuits involving a mare lease investment program. The first of these lawsuits was filed in 2006. Three of the ten lawsuits were filed prior to the 2008-2009 policy period of the D&O insurance policy that was the subject of this dispute. Seven suits, referred to as “the Seven Gastar Suits,” were filed during the policy period.

 

Gastar submitted the Seven Gastar Suits to its D&O insurer. The D&O insurer denied coverage for the seven suits on the grounds they were interrelated with claims that had first been made prior to its policy period, and therefore by operation of the D&O insurance policy’s interrelatedness provision, were deemed made at the time the first of the suits was filed back in 2006.

 

Gastar filed a coverage lawsuit against the insurer. The parties filed cross-motions for summary judgment. The trial court granted the insurer’s motion for summary judgment on the grounds that the Seven Gastar Suits were interrelated with the three prior lawsuits and therefore deemed made prior to the policy period. Gasstar appealed.

 

Several policy provisions are relevant to the appellate court’s analysis. First, the policy contains an interrelatedness provision, Policy Condition C, stating that

 

All Claims alleging, arising out of, based upon or attributable to the same facts, circumstances, situations, transactions, or events or to a series of related facts, circumstances, situations, transactions or events will be considered a single Claim and will be considered to have been made at the time the earliest such Claim was made.

 

The policy also contains a prior and pending litigation exclusion, which as amended in Policy Endorsement No. 10, provides that the insurer will not be liable for payment of any Loss in connection with a Claim “arising out of, based upon or attributable any pending or prior litigation as of 5/31/2000, or alleging or derived from the same or essentially the same facts or circumstances as alleged in such pending or prior litigation.”

 

Finally, the policy contains another provision specifying that “the titles and headings to the various paragraphs, including endorsements attached, are included solely for ease of reference and do not in any way limit or expand or otherwise affect the provisions of such paragraphs and sections to which they relate.”

 

The Court’s July 16 Opinion       

In a July 16, 2013 opinion written by Justice J. Brett Busby for a unanimous three judge panel, the Texas intermediate appellate court reversed the trial court’s decision and remanded the case to the lower court.

 

The appellate court assumed for purposes of its decision that the Seven Gastar Suits were interrelated with the three pre-policy period lawsuits. In reaching its decision, the court first recited a series of rules of insurance policy interpretation, the most important of which is the principle under Texas law that when interpreting an exclusionary clause, a court must adopt the construction urged by the insured as long as that construction is not unreasonable.

 

The court then found that though the interrelatedness provision, Condition C, is found in the policy section headed “Conditions,” it operates as an exclusion because it narrow coverage, and therefore must be interpreted using the rules for interpreting policy exclusions. In reliance on the policy provision stating that section headings are for ease of reference only, the court disregarded the appearance of the interrelatedness provision under the “Conditions” heading.

 

The Court then went on to consider the relation back provisions in both the interrelatedness provision (Condition C) and in the prior and pending litigation provision (Endorsement 10). The prior and pending provision precludes from coverage any claim made during the policy period that arises out of, is based upon, or attributable to any lawsuit arising prior to May 31, 2000. The Court said that the interrelatedness provision in Condition C rendered Endorsement 10 “meaningless” because any Claims that would be excluded from coverage by Endorsement 10 would already be excluded by operation of Condition C (the interrelatedness provision). The court said “an interpretation that renders a part of the contract meaningless is not reasonable.”

 

The court summarized its reasoning this way:

 

Condition C would thus exclude coverage for the Seven Gastar Suits, while Endorsement 10 would place them in the covered window for Claims related to litigation filed after May 31, 2000 but before the effective date of the policy. Under these facts, we conclude that Condition C and Endorsement 10 conflict at best, when read together create an ambiguity. When provisions in an insurance contract conflict, a court must adopt the interpretation that most favors coverage for the insured…. To hold otherwise would not give full effect to the parties’ agreement.

 

The court rejected the insurer’s argument that the two provisions do not conflict because they serve different purposes and have no bearing on one another. The insurer pointed out that the prior and pending litigation provision sweeps much more broadly because its preclusive effect applies even if the prior or pending suit has been filed against a non-insured party, while the interrelatedness provision applies only to “Claims.” The court rejected that this contention, observing that the policy’s definition of Claim did not require that a claim be brought against an insured, and therefor that the one provision’s reference to “litigation” and the other’s reference to “Claims” made no difference.

 

Discussion

When I first saw a report of this case before reading the opinion, I assumed that there must have been a typo; how could a prior and pending litigation provision with a P&P lit date in May 2000 have anything to do with whether or not subsequent lawsuits related back to a prior lawsuit first filed in 2006, six years after the P&P lit date? Now that I have read the opinion, I see that there was no typo. But I still am a little befuddled about how the prior and pending litigation provision has anything to do with the issues involved in this case.

 

Readers of this blog know that these days I have a something of a bias in favor of the policyholder when I review coverage decisions. I have even been chided about it by old friends in the industry who know me from my many years as an insurer-side advocate. But even if I were to come at this case with a predisposition in favor of the policyholder, I would have to concede that internal logic of the appellate court’s decision is less than satisfying.

 

Let’s start with the reasoning the court uses to justify interpreting the interrelatedness provision as an exclusion rather than as a condition.  First, the court says that it is not bound by section titles and headings. However, the court overlooks the fact that the provision not only appears in a section of the policy captioned policy conditions, but it operates like a condition, and it is in a section of the policy where all the other provisions are also conditions.

 

The court makes a big deal elsewhere about how it must read the policy as a whole, but somehow in its strained effort to characterize the interrelatedness provision, it overlooks the fact that the policy has a structure to it that should matter to how it is reviewed, and that this provision not only is in a section of the policy that is titled Conditions but that all of the provisions in the same section are also conditions.

 

The court goes on and says that it doesn’t matter whether or not the provision is an exclusion or a condition, because either way, the provision narrows coverage, and therefore it must be interpreted based on principles applicable to the interpretation of exclusions. The problem with this line of analysis is that, again, it is made without considering the policy as a whole.

 

A liability insurance policy is a tightly drawn document. The policy is replete with provisions that are not exclusions but that narrow coverage.  For example, the limit of liability narrows coverage. The policy period dates narrow coverage. The definition of Insured person narrows coverage. Merely because a provision in some sense narrows coverage cannot transform a provision that is not an exclusion into an exclusion. Otherwise the principle that exclusionary provisions must be interpreted differently than the rest of the policy becomes meaningless – there is not a “rest of the policy,” there are only exclusions. Why have a rule of construction saying that exclusions, as distinct from the rest of the policy, must be interpreted narrowly, if the entire policy is to be interpreted narrowly in any event?

 

But where the court really gets into a muddle is the way it pulls the prior and pending litigation provision into the analysis. As a preliminary matter, I feel compelled to note here that insurance professionals know that a claims made liability insurance policy will contain both an interrelated claim provision and a prior and pending litigation provision. These insurance professionals understand that these separate provisions are there for separate purposes and operate in separate spheres. The idea that the mere fact that the  two provisions might operate to apply to different time periods somehow creates a conflict between the two provisions rendering one of them inoperable would strike most in the industry as a very odd proposition indeed.

 

The fact is that the two provisions are not only entirely separate and entirely different; they appear in the policy for entirely different reasons. First, they pertain to different matters. The prior and pending litigation provision relates to the period prior to the initial inception of the claims made coverage and provides rules of the road for the applicability of the policy to subsequent proceedings in lawsuits that arose before coverage first incepted. The interrelatedness provision provides rules of the road for determination of the claims made date, for purposes of the application of the claims made coverage.

 

Second, the two provisions operate differently and have different purposes. The prior and pending litigation provision does not have what is sometimes referred to as a “deemer” clause – that is, the interrelatedness provision deems the later related claim to have made on the date of the earlier claim. The purpose of the interrelatedness clause is to establish a claims made date for a series of claims, while the purpose of the prior and pending litigation clause is to exclude coverage for the pre-existing litigation. The prior and pending litigation provision has nothing to do with establishing a claims made date.

 

There is a third reason that insurers insist on the inclusion of a prior and pending litigation clause notwithstanding the presence of the interrelatedness clause. That is, the insurers want to be sure that, regardless of whether the interrelatedness provision is triggered, that the claims made policy is not stretched to apply to subsequent developments in litigation that existed before coverage incepted. The prior and pending litigation doesn’t require any determination that the prior matter was a claim or what the claims made date was or anything else.

 

Readers of this blog know that I am no fan of the interrelatedness provisions found in D&O insurance policies. Courts have struggled to interpret the interrelated claim provision and have produced results that are all over the map. But this court didn’t struggle with this policy’s interrelatedness provision or the often challenging question of whether or not subsequent claims are or are not related to prior claims. Indeed, the court was willing to assume for purposes of its decision that the seven later lawsuits were related to the three earlier lawsuits. However, for reasons of its own, the court chose a differnt path.

 

One of the contract interpretation principles the court recites at the outset is the principle under Texas law that the court must seek to “harmonize and give effect to all provisions of the policy so that none will be rendered meaningless, useless or inexplicable.” However, the effect of the court’s decision is to render the interrelatedness clause “meaningless, useless or inexplicable.” 

 

Here’s the problem – this is claims made coverage. The policy only applies to claims that are made during the policy period. Given the court’s analysis, what is the claims made date of the Seven Gastar Claims? Do we just say that they were made during the policy period of the D&O insurance policy even though they were interrelated with the three prior claims? But what about the “deemer” clause and the claims made date clause in the interrelatedness provision? The prior and pending litigation clause doesn’t have a deemer clause or a claims made date clause, and indeed it is not the purpose of the prior and pending litigation clause to determine a claims made date. The upshot of the court’s analysis is that it renders the deemer provisions and the claims made date provisions of the interrelatedness clause “meaningless, useless and inexplicable.”  

 

The insurers undoubtedly would want to appeal the intermediate appellate court’s decision, but the case has been remanded back to the trial court for further proceedings there. Any further consideration of the intermediate court’s analysis must await a much later date, if indeed it ever happens. (Unless of course the insurers are permitted to pursue an interlocutory appeal).

 

I suspect there are others out there how will take a very different view of this case than I have taken here. I encourage those with differing views to add their remarks to this post using the blog’s comment feature in the right hand column.

 

I would like add my thanks here to Arthur Washington of the Mendes and Mount law firm for sending me a copy of the opinion. I hasten to add that the views in the blog post are exclusively my own and should not be imputed to any other person.

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Outside corporate directors named as defendants in D&O litigation are rarely required to pay settlements or judgments out of their own personal assets, as prior research has shown. But the question of how frequently outside directors are held liable is a different question from the question of whether and to what extent directors are held accountable.

 

A June 2013 paper by Harvard Business School professors Francois Brochet and Suraj Srinivasan entitled “Accountability of Independent Directors – Evidence From Firms Subject to Securities Litigation” (here) takes a look at this question of independent director accountability. The authors report that while directors are rarely held liable, independent directors that are named as defendants in securities suits are more frequently held accountable. A July 26, 2013 post on the Harvard Business School website about the paper can be found here.

 

The authors start by noting that investors have two mechanisms for holding independent directors accountable. Investors can name independent directors as defendants in lawsuits and they can also express their displeasure with the ineffectiveness of the directors’ oversight of manager by voting against the directors’ reelection. In order to assess the extent to which directors are held accountable, the authors studied the incidence of independent directors being named as securities suit defendants and the record of shareholder votes against those directors.

 

The authors examined a database of 921 securities class action lawsuits filed between 1996 and 2010. The authors found that with respect to the companies that were named as defendants in these suits, 11% of their directors were named as defendants. The likelihood of an independent director being named as a defendant is much higher for directors serving on the audit committee (54% of named independent director defendants); for directors that sold shares (16% of named independent director defendants); or that have been on the board for the entire class period. The incidence is also higher when the lead plaintiff is an institutional investor and when the lawsuit is files under Section 11.

 

The authors then examined subsequent shareholder votes involving the directors named as defendants. The authors found that these independent director defendants have a great percentage of withheld votes (5.47%) than a controlled sample of independent directors whose companies had not been sued.

 

The authors also noted that accountability can also be reflected in a greater turnover among independent directors who have been named as defendants. The authors found that independent directors that are named as securities suits defendants are more likely to lave the board of the sued company within two years of the lawsuit than other directors in the same firm. The propensity of directors to leave the board is greater in lawsuits that are not dismissed and for audit committee members. The likelihood of leaving the board increased for both independent directors named as defendants and for other directors of companies that have been sued after 2002 (post-SOX), which the authors “use as a proxy for greater governance sensitivity.”

 

The authors also examined lawsuit outcomes when independent directors are named as defendants. They found that the more independent directors are named as defendants, the less likely the lawsuit is to be dismissed, settle faster, and settle for a larger amount. The authors noted that “some of our evidence points to the strategic naming of independent directors by plaintiffs to gain bigger settlements.”

 

The authors conclude that “overall, shareholders use litigation along with director elections and director retention to hold some independent directors more accountable than others when firms experience financial fraud.” In other words, though independent directors are only infrequently held liable, that does not mean that they are not held accountable.

 

Does a D&O insurance policy provide coverage for attorneys’ fees awarded in settlement of a breach of contract class action? That was the question before the court in an insurance coverage action brought by the Screen Actors Guild (SAG) against its D&O insurer. In a July 11, 2013 decision, Central District of California Judge Dolly M. Gee, applying California law, held that because there was no coverage under the policy for the underlying breach of contract claim, the policy did not cover the attorneys’ fee award either.

 

A copy of Judge Gee’s opinion can be found here. A July 19, 2013 memo from the Baker Hostetler law firm about the ruling can be found here.

 

Background

Prior to the events that gave rise to the coverage dispute, SAG had entered a collective bargaining agreement in which the actors’ organization had agreed to collect foreign royalty payments and to distribute them to its members. In September 2007, Ken Osmond (who played the part of Eddie Haskell in the TV show “Leave it to Beaver”) filed a class action alleging that SAG had collected over $8 million of the foreign levies but had failed to remit the funds to the SAG members. Osmond asserted claims for conversion, unjust enrichment, accounting and violation of the California Business Code. Osmond sought restitutionary relief, compensatory and punitive damages, a constructive trust, costs, reasonable attorneys’ fees, prejudgment interest and injunctive relief.

 

SAG tendered the claim to its D&O insurer, which agreed to pay defense cost but denied coverage for any indemnity amounts. The parties to the underlying dispute reached a settlement agreement whereby SAG agreed to a plan for the payment of the foreign levies. In approving the class settlement, the court in the underlying claim awarded Osmond an enhancement payment of $15,000 and awarded class counsel attorneys’ fees of $315,000. SAG requested reimbursement from its D&O insurer for the $330,000 award. The carrier responded that the fee award was not covered under the policy. SAG initiated coverage litigation against the carrier and the parties cross-moved for summary judgment.

 

The July 11, 2013 Order

In a July 11 Order, Judge Gee granted the carriers’ motion for summary judgment and denied SAG’s cross-motion for summary judgment.

 

Referring to the 2012 decision of the California Intermediate appellate court in Health Net, Inc. v. RLI Ins. Co., as well as other California cases, Judge Gee identified a principle under California law that the courts had articulated, which is that “if a contracting party fails to pay amounts due under a lawful contract and is sued for that failure to pay, it cannot then obtain a windfall by having its payments covered by an insurance policy covering only ‘wrongful act.’”

 

SAG attempted to circumvent these principles by contrasting the specific language in its policy with the policy language at issue in the earlier cases and arguing that its policy broadly provided coverage for “damages.” Judge Gee found said that this argument “is not persuasive.” She found that the definition of the term “Wrongful Act” in SAG’s policy was similar to the definition of the term in the policies at issue in the prior cases. Judge Gee expressly rejected the notion that there could be coverage for attorneys’ fees as “damages” if there was no underlying “Wrongful Act” alleged. She cited the Health Net decision for the principle that “if the entire action alleges no covered wrongful act under the policy, coverage cannot be bootstrapped based solely on a claim for attorney’s fees.”

 

Judge Gee found that the parties’ submissions and even from SAG’s own presentation in the insurance coverage dispute lead to “but one result,” which is that because SAG was “obligated to account for and distribute the foreign levy funds to the plaintiff class,” SAG “failed to establish that the $330,000 fee award arises from a ‘covered’ Claim under the Policy.” She concluded that the insurer has no duty to indemnify SAG for the fee award and she granted summary judgment in the insurer’s favor.

 

Discussion         

This dispute involved two frequently recurring D&O insurance coverage issues: first, whether a D&O policy covers breach of contract disputes; and second, whether or not a D&O insurance policy covers the amount of an award to the plaintiffs’ attorneys in an underlying claim.

 

Many D&O insurance policies (typically those issued to private companies) have express exclusions precluding coverage for breach of contract claims (as discussed here and  here). However, Judge Gee’s decision here that there was no coverage for the underlying claim here did not depend on her interpretation of a policy exclusion; instead, she found that there was no coverage for the underlying claims against the SAG – for collecting but failing to remit the foreign levies – because the underlying claim did not allege a “Wrongful Act.”

 

There have been many cases holding that insurers are not liable to indemnify their insureds for claims against the insureds for failing to remit amounts the insured was obligated to pay to others. However, these determinations are typically based on the argument that in remitting the amounts due, the insured had not incurred a “Loss” under the policy. These “no loss” principles are fairly well established, as recently discussed for example here. Typically these cases hold that amounts due as a result of a pre-existing duty are not covered Loss

 

 It is interesting that Judge Gee’s analysis here did not depend on, or even refer to, the “no loss” line of cases; the carrier, in reliance on existing California case law, made a different argument, obviously because it could (owing to the case law), but also perhaps because the existence of the $330,000 fee award might have made the “no loss” argument tougher to sustain. Indeed, the SAG did argue here that because fee award represented “damages” and therefore came within the policy’s definition of “Loss.” Judge Gee concluded, in reliance on the prior California cases, that it doesn’t matter whether or not there is “Loss” if there is no “Wrongful Act.”

 

The question whether or not a D&O insurance policy provides coverage for the amount of a plaintiffs’ fee award in an underlying claim is a recurring issue. As I discussed in a recent post, this question often comes up in the context of the settlement of shareholders’ derivative lawsuits, which often include a plaintiffs’ fee award as a part of the underlying settlement. The D&O insurers often argue that the amount of the fee award does not represent “damages” or otherwise is outside the policy definition of Loss. The insurer argue that the fee award represents an amount the company had to pay in order to secure the benefit that inured to the company in the derivative lawsuit settlement.

 

There are several obvious differences between the derivative lawsuit settlement context and the circumstances involved in this case. Among other thing, in connection with a derivative lawsuit, the carrier has usually acknowledged coverage of the underlying claim. In addition, in a derivative lawsuit settlement, the carrier has the argument that the derivative settlement represented a benefit secured for the insured company; the context in this dispute was far different. The present dispute does illustrate another example of the recurring question of coverage for the amount of an attorneys’ fee award in connection with the settlement of an underlying claim.

 

For Many Years, People Actually Watched a TV Show with a Main Character Named Beaver Cleaver: Here at The D&O Diary, we can’t pass up the chance to obvious opportunity to roll some video from a classic TIV show like Leave it to Beaver. Here’s a short clip that includes in the second half a brief yet archetypical dialog between Mrs. Cleaver and Eddie Haskell. It was a more innocent time then; now, I am not sure which is harder to believe – that somebody actually made this TV show or that people actually watched it.

 

//www.youtube.com/embed/MohwVOYzlPw

The many travels of readers’ D&O Diary mugs have continued, with stops in places both familiar and exotic. The results are a variety of mug shots taken on location in places both far and wide. As reflected in the pictures below, the mug is at ease with lobsters, gnomes and volcanoes, and is an appropriate ornament at temples, halls and castles.

 

Readers will recall that in a recent post, I offered to send out to anyone who requested one a D&O Diary coffee mug – for free – but only if the mug recipient agreed to send me back a picture of the mug and a description of the circumstances in which the picture was taken. In prior posts (here, here and here), I published the first three rounds of readers’ pictures. The pictures have continued to arrive and I have published the latest round below.

 

First up is the fascinating shot pictured at the top of the post, which was taken by Jill Dominguez of Energy Insurance Mutual. Jill sent in the picture taken in Key West, Florida. She took the picture on the first day of sportsmen’s lobster season, or “going bugging” as they say in Key West. Jill reports that “You have to get up pretty early to catch these guys and a nice mug of D&O Diary coffee helps to get the ‘bugs’ out!”

 

Loyal reader Jeff Ward of the Loss, Judge & Ward law firm traveled with his sons to Cooperstown, New York, and of course they took their D&O Diary mug with them. They sent in several great pictures of the Baseball Hall of Fame, including this shot of the site of the first Hall of Fame induction, as well as the Cleveland Indians exhibit at the Hall of Fame. (Go Tribe!)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The D&O Diary is partial to the Cleveland sports team (for better or worse), but we understand that readers have their own loyalties. You don’t have to guess at which teams loyal reader Sam Rudman of the Robbins Geller Rudman & Dowd law firm supports. (Sam reports that his Mets gnome was AWOL on the day of the mug shot photo shoot).

 

 

 

 

 

 

 

 

 

 

 

 

Our good friend and former colleague Diane Parker of Allied World Assurance Company traveled out west on her vacation, and apparently she took her D&O Diary mug with her travels. She sent in this really beautiful shot of “what is left” of Mount St. Helens in Washington State.

 

 

 

 

 

 

 

 

 

 

 

 

A very different kind of mountain is also being transformed in New York City. As reflected in this picture submitted by Peter Taub, a 40-ton mountain of sand on Water Street in New York City is being sculpted into a massive sand castle, as part of the Water Street Pops street festival.

 

 

 

 

 

 

 

 

 

 

 

Finally, Gil Jensen of the Musick Peeler law firm in Los Angeles sent in these pictures from Southeast Asia where he had traveled with his daughter. Gil says that “My youngest daughter is in grad school in Melbourne. She suggested in June: ‘Hey Dad, let’s go to Cambodia.’ My initial thought was – great, what a perfect opportunity for some D&O Diary Mug Shots.” From the collection of pictures Gil sent in. it really does appear that the purpose of his visit to Cambodia was to find just the right location for a mug shot. Gil explained that he even had a special carrying case (“ the Chubb Executive Protection bag from a PLUS International Conference from a few years ago”) to make sure that the mug remained undamaged during his travels.

 

The first picture below was taken in front of The Bayon within Angkor Thom just north of Siem Reap (part of the Angkor Wat area). 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 For the second picture below, Gil explains, he traveled “a little farther afield (my version of Heart of Darkness).”. The picture was taken in “the overgrown temple complex Beng Melea (about 70 km from Angkor Wat). Other than a small group of tourists from India and a few Khmer kids, this temple site was totally deserted.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I have to say I really enjoy the idea of loyal D&O Diary readers traveling all over the country and the world with their mugs and cameras at the ready looking for just the right opportunity to capture a classic mug shot. The pictures are great, and I look forward to receiving and publishing many more.

 

As I noted in my last mug shot gallery, I recently ordered another supply of mugs, so if there are more readers out there who would like to have a mug, please just let me know. Just remember, if you get a mug, you have to send back a picture. If you request a mug, please be patient, it will likely be the end of August before we are able to ship out the next batch.

 

Thanks to everyone for the great mug shots. Cheers!