The pictures readers have taken with their D&O Diary mugs have continued to arrive. The range of settings and locations continues to impress and entertain.

 

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 previous posts (here, here, here,  here, and here), I published prior  rounds of readers’ pictures. The pictures have continued to arrive and I have published the latest round below.

 

The first shot in the latest gallery comes from north of the border. Shelley Lloyd of AON in Toronto sent in this photo taken at the Hockey Hall of Fame (La Temple de la Renommée du Hockey). The photo includes a D&O Diary mug, which Shelley described as “the cup that may be rarer and almost as coveted as Lord Stanley’s.”

 

 

 

 

 

 

 

 

 

 

 

 

Today’s second mug shot also comes to us from north of the Border. Damian Brew of Marsh sent in several nice pictures from his family’s vacation trip to Montreal, including this picture of the Montreal Botanical Garden, where the mug took in the Mosaicultures Intertionales 2013, an exhibit consisting of 50 horticultural works of exhibitors from 25 different countries.  The exhibit is described here and the mug is prominently featured below (I am thinking of doing D&O Diary-themed watering cans next time around).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It wouldn’t be a D&O Diary mug shot gallery without at least one picture from Asia. This time, our Asia photo comes to us from Jopet Santos of Asia Capital Reinsurance Group in Hong Kong. Jopet reported that this picture was taken from his firm’s conference room overlooking Victoria Harbour. He noted that “you can probably make out two of the taller buildings in HK, IFC2 (left) and ICC (right), in the background on this dreary day in the aftermath of typhoon Utor.” For those readers interested in seeing the same buildings appearing in Jopet’s mugshot in a photo taken outside and from Victoria Peak on a much sunnier day, please refer to my Hong Kong travelogue from last April, here.

 

 

 

 

 

 

 

 

 

 

 

 

And next, a shot from the Parthenon. No, not that Parthenon, that one is all in pieces. No, this is a photo of full-size replica of the Parthenon located in Centennial Park in Nashville, submitted to us by loyal reader Hailey Aldren of Nashviile. Hailey reports that unlike the original in Athens (at least in its current state), the replica has a full-sized statute of Athena inside the building.

 

 

 

 

 

 

 

 

 

 

 

 

Harry Bryans of AON also sent in a picture featuring a prominent landmark in his home town, one that captures the spirit of the entire D&O Diary mug project. The Free Library of Philadelphia, like the D&O Diary mug that Harry received, and indeed like The D&O Diary itself, is free, as are all of the best things in life.

 

 

 

 

 

 

 

 

 

 

 

 

Finally, our good friends the husband and wife team of David Murray of AIG and Suzanne Mast Murray of Alliant Insurance Services send in this picture of their two D&O Diary mugs relaxing by the pool. Yes those are the mugs behind those shades and under the towels.

 

 

 

 

 

 

 

 

 

 

 

 

I can’t tell you how much fun it is receiving the pictures and seeing the interesting places readers have taken their mugs and the striking pictures that have resulted. 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 order a mug, please be patient, it may take a few days to mail the mug to you.

 

Thanks to everyone for their pictures. Cheers!

Back in 2009, when the current bank failure litigation wave was in its very earliest stages, I noted that in its preliminary efforts to lay the groundwork to pursue failed bank litigation, the FDIC had resurrected FIRREA, a statutory vestige from the S&L crisis in the late 80s and early 90s that had in the intervening time largely gone dormant. Though the FDIC’s reliance on Financial Institutions Reform, Recovery and Enforcement Act of 1989 in connection with the failed bank litigation is hardly surprising, what has been surprising has been the use that other regulators and prosecutors are now making of the statute.

 

As detailed in an August 21, 2013 memo from the King & Spalding law firm entitled “FIRREA – Aging but Agile, the Government’s Newest Formidable Weapon of Enforcement” (here), prosecutors have “added FIRREA to their arsenal by using its provisions to bring claims of financial fraud against major financial institutions.”

 

Since its passage over nearly 25 years ago, the statute was rarely used for civil fraud enforcement actions. Perhaps the statute’s first significant recent attempted use as a civil enforcement tool was the action that the DoJ filed in February 2013 against the three McGraw-Hill and its rating agency affiliate Standard & Poor’s. As discussed here, in reliance on claims asserted under FIRREA, the government is seeking $5 billion in penalties and alleging mail fraud. The government has filed other actions relying on FIRREA against several other major financial institutions.

 

There are a number of reasons that FIRREA has proved to be an attractive option for prosecutors and regulators. As the law firm memo notes, FIRREA has a lengthy statute of limitations, an “arguably low burden of proof, and the also provides the government with the ability to issue administrative subpoenas to conduct a civil investigation in advance of filing a civil complaint.

 

As the peak of the credit crisis recedes further into the past, the statute’s lengthy statute of limitations could prove to be particularly important. As the law firm memo notes, the statute of limitations period applicable to most anti-fraud suits is five years, which could put conduct in 2007 or 2008 beyond reach. However, FIRREA “offers a ten-year statute of limitations, which enables prosecutors to bring new lawsuits that extend back through the entirety of the crisis period.”

 

FIRREA also affords the opportunity for substantial financial recoveries. The statue provides for fines of various amounts, including in particular the right to recover the “actual loss incurred,” which could “aggregate to tens of millions.”

 

The prosecutors’ reliance on FIRREA received boost recently in two decisions out of the Southern District of New York. The government had filed actions directly against several major financial institutions in reliance on FIRREA’s provisions allowing recoveries for violations “affecting a federally insured financial institution.” The defendants in these suits questioned whether the statute authorized prosecutors to rely on this provision to bring actions against federally insured institutions for allegedly engaging in financial fraud that “affects” itself.

 

In an earlier decision by Judge Lewis Kaplan and in an August 19, 2013 decision by Judge Jed Rakoff (here), the courts held with respect to these so-called “self-affecting” claims that prosecutors may indeed pursue a bank for its own misdeeds. As the law firm memo notes, “without a ‘victim’ in play, this interpretation could greatly expand the class of defendants sued under FIRREA for financial fraud.” The memo’s authors add that these rulings, which endorse the expanded use of FIRREA, “likely will embolden the Justice Department to pursue financial institutions for fraud against third parties where the ultimate financial impact on the bank and its shareholders is substantial. “

 

As a result of these developments, the memo concludes that “the government’s actions appear to promise a host of suits targeting many financial institutions.” The government’s “renewed use of an creative theories regarding [FIRREA]…should be closely watched given the potential risks for financial institutions.”

 

Special thanks to a loyal reader for providing me with a copy of Judge Rakoff’s decision.

 

On August 19, 2013, in connection with its entry into a settlement with New York-based hedge fund adviser Phillip Falcone and his advisory firm Harbinger Capital Partners, the SEC for the first time implemented its new policy requiring defendants seeking to settle civil enforcement actions to provide admissions of wrongdoing, in contrast to the long-standing practice of allowing defendants to resolve the enforcement actions with a “neither-admit-nor-deny” settlement.

 

The SEC’s new policy requiring – in “egregious” cases — admissions wrongdoing in order to settle an enforcement action not only has important implications for the enforcement action itself, but potentially also has important implications for other related civil or criminal proceedings. Another issue that inevitably will also arise is the question of the impact of factual admissions on the availability of D&O insurance for related defense expenses and indemnity.

 

In June 2012, the SEC filed an enforcement action against Falcone and various Harbinger entities alleging that in October 2009, Falcone had used $113 million in fund assets to pay his personal taxes; that he had favored certain fund customers’ redemption requests at the expense of other investors; and that he had conducted an improper “short squeeze” in the bonds of financially troubled Canadian manufacturing firm.

 

The SEC and the Harbinger defendants, including Falcone, had actually reached an earlier agreement to settle the enforcement action. In May 2013, the agency and the defendants reached a settlement in principle to resolve the case. That earlier settlement agreement reflected the traditional “neither admit nor deny” approach. However, in July 2013, the SEC advised Harbinger that the SEC Commissioner has voted to reject the deal. The vote apparently reflected the SEC’s new policy, announced in June by new SEC Chair Mary Jo White, that going forward the SEC would require defendants settling enforcement actions to admit wrongdoing, at least in “egregious” cases.  

 

In connection with the revised settlement announced on August 19, Falcone and the Harbinger entities agreed to extensive admissions of wrongdoing. The factual admissions are set out at length in detailed Annex to a Consent that Falcone signed on August 16 on his own behalf and on behalf of the Harbinger entities. The admissions are also set out verbatim in the proposed Final Consent Judgment that was filed with the Court. Pursuant to the settlement, the Harbinger entities agreed to pay a total of over $18 million in disgorgement, civil penalties and interest. As part of these payments, Falcone himself must pay over $11.5 million. Falcone also agreed to a five-year ban from the securities industry.

 

The factual admissions detailed in the Annex and incorporated into the Final Consent Judgment make for some interesting reading. Among other things, the factual recitations detail that Falcone did not just walk down the hall and pull $113 million out of one of the Harbinger funds to pay his taxes, as if he were taking money out of a piggy bank; the transaction was actually suggested to Falcone by a prestigious outside law firm that counseled Falcone and Harbinger. The law firm prepared an extensive power point presentation proposing the transaction and also prepared a written loan agreement documenting the loan.

 

The admissions also detail the “short squeeze” Falcone orchestrated in connection with the bonds of MAAX Holdings, a Canadian manufacturing company. In a series of moves that seemingly defy the laws of physics, Falcone and the funds “purchased more than the available supply of bonds” (accomplishing this seemingly impossible feat by taking the long side of short sales in the open market). By capturing the supply of the MAAX bonds, Falcone and the Harbinger funds prevented Goldman Sachs from covering a short position that the investment bank held in the MAAX bonds.

 

The Consent also contains another of other provisions to which Falcone and the Harbinger defendants also agreed. Among other things, the defendants agreed that they “shall not seek or accept, directly or indirectly, reimbursement or indemnification from any source, including, but not limited to, payment made pursuant to any insurance policy, with regard to any civil penalty amounts” paid pursuant to the Final Consent Judgment.

 

The Harbinger Defendants also “acknowledge” in the Consent that “no promise or representation has been made by the Commission … with regard to any criminal liability that may have arisen or may arise from the facts underlying this action.”

 

The defendants also agreed that they “will not make or permit to be made any public statement to the effect that the Harbinger Defendants do not admit the allegations of the complaints, or that this Consent contains no admissions of the allegations.” However, the Consent also goes on to state that nothing in this agreement affects the defendants “right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.”

 

The admissions in the Consent are comprehensive – the defendants basically admitted all of the SEC’s allegations. Moreover, it appears that in pursuing its new settlement approach, the SEC will be requiring other defendants to provide similar admissions in order to settle SEC actions against them. For example, there are reports that the agency is seeking to require J.P Morgan to provide admissions of wrongdoing in connection with the agency’s actions against the firm in connection with the “London Whale” cases.

 

The SEC’s apparent requirement for admissions of wrongdoing in at least some cases has a number of significant implications. First and foremost, it means that, at least in the SEC enforcement actions where the agency will require admissions in order to settle that the cases will be much harder to settle. The defendants, wary of the possible impact the admissions could have in other proceedings, will be reluctant to provide admissions. One consequence of the new policy could be that the SEC will be compelled to try more cases, which could strain the agency’s resources.

 

The provision of the admissions potentially could have enormous consequences for related proceedings. The recitation in the Consent that the Harbinger defendants have been provided no assurances about the possibility of criminal proceedings has to be particularly chilling, especially for Falcone. The admissions in the Consent may or may not suffice to draw criminal charges, but at least some commentators have suggested that criminal charges could follow.

 

Another question that follows from the Harbinger defendants’ admissions is the collateral effect the admissions could have in related civil proceedings. As it happens, there is a pending civil action that Harbinger investors had filed against Falcone and the funds that could provide an early test of the civil litigation collateral estoppel consequences of admissions in an SEC enforcement action. In an interesting and detailed August 20, 2013 post in her On the Case blog (here), Alison Frankel examines the possible impact that the admissions could have on the fund investors’ pending civil action. As her post explains, the pending action may not be the perfect test of the admissions’ preclusive consequences, as the civil action is not filed under the federal securities laws and also largely relates to matters other than those involved in the SEC enforcement action. Nevertheless, the admissions could have an important impact on the case and bolster the plaintiffs’ allegations.

 

An issue that occurs to me is the question of the impact of the admissions on the availability of D&O insurance. The specific question is whether or not admissions of the type that the Harbinger defendants provided in the SEC settlement are sufficient to trigger the fraud and criminal misconduct exclusion in the D&O policy. The wording of these exclusions varies, but they typically preclude coverage for loss arising from fraudulent or criminal misconduct, but only after a final adjudication determines that the preclusive conduct has taken place. If the admissions were found to be sufficient to trigger this exclusion, coverage would no longer be available for the wrongdoer, and the insurer could even have the right to try to recover amounts that had already been paid (for example, the attorneys’ fees the wrongdoer incurred in defending himself or herself in the SEC proceeding).

 

On the one hand, there would seem to be some reason to be concerned that a settlement of the type that the Harbinger defendants entered into represents a “final adjudication.” The specific factual admission to which the defendants agreed were not only stated in the public court record, but they are incorporated verbatim into the Final Consent Judgment filed with the court. Upon the Court’s entry of the Judgment, there would seem to be grounds upon which it could be argued that there had been a final adjudication.

 

On the other hand, there would appear to be a substantial question whether the specific admissions to which the Harbinger defendants agreed rise to the level to satisfy the exclusion’s misconduct requirement. While the admissions represent an extensive concession that the defendants engaged in wrongdoing – and while the admissions expressly recite that the defendants acted “improperly” and “recklessly” — at no point to the defendants admit to “fraud” or to any other level of conduct that would expressly trigger the typical D&O policy’s conduct exclusion.

 

A related issue that could arise is the question of exactly how bound the admitting parties are by their admissions. The Harbinger defendants’ Consent specifically recites that nothing in the agreement affects the defendants “right to take legal or factual positions in litigation or other proceedings or other legal proceedings in which the Commission is not a party.” In effect, the Harbinger defendants seemed to have tried to preserve the right to argue that while they made certain admissions for purposes of the SEC enforcement action, they did not make those admissions for all purposes and for the benefit of all other parties who might seek to rely on them. The Harbinger defendants might well argue that notwithstanding their admissions in the Consent, they have the right to contest the factual matters in other proceedings, including for example, in the context of an insurance coverage dispute. 

 

The Harbinger settlement represents a significant development with important potential implications for other defendants in SEC proceedings. The admissions that these defendants may be required to provide in order to settle the enforcement action pending against them could have important collateral consequences, many of which at this point remain uncertain. The impact of these kinds of admissions in related civil cases remains to be seen. Among other questions that likely will also have to be addressed is whether admissions of this type have any impact on the continued availability of insurance coverage for the defendants that provide these kinds of admissions. 

 

D&O Diary Readers Get Discount for ACI D&O Conference: On October 21 and 22, 2013, I will be co-Chairing the American Conference Institute’s D&O Liability Conference in New York. The event has a comprehensive agenda covering the current state of the D&O insurance marketplace as well as important developments in the world of directors’ and officers’ liability. The conference will feature an impressive line-up of knowledgeable speakers discussing topics that will be of particular interest to this blog’s readers. Background information regarding the conference, including the program agenda and registration details, can be found here.

 

Readers of The D&O Diary are eligible for a $200 discount when registering for the conference. In order to obtain The D&O Diary discount, readers should reference “DOD200” when registering by calling 888-224-2480 or online at www.AmericanConference.com/DandO

 

On July 24, 2013, in a case the court said was one of “first impression,” the First Circuit held that, due to the nature of its involvement in the management of its portfolio company’s operations, a private equity firm was potentially liable for the portfolio company’s pension obligations. The decision has significant implications for the way private equity funds structure their relationship with the portfolio companies. The decision may have important insurance implications as well. A copy of the First Circuit’s opinion can be found here.

 

In 2007, two Sun Capital Investments funds invested in Scott Brass, Inc., which went bankrupt in 2008. The New England Teamsters and Tracking Industry Pension Fund asserted that the funds were liable for the unfunded vested benefits in the bankrupt company’s pension fund. The union argued that the funds acted as a part of controlled group and therefore were jointly and severally liable for the pension liability. The funds argued that because they were merely investors in the bankrupt company, they were not participating in a “trade or business” that could be a “controlled group” or under “common control” with Scott Brass sufficient to make them liable under ERISA for the pension fund. The district court agreed with the funds and the union appealed.

 

In a July 24, 2013 opinion written by Chief Judge Sandra Lynch for a unanimous three-judge panel, the First Circuit held that the funds were sufficiently involved in the management and operation of the portfolio company for their activities to qualify as being involved in a “trade or business” but remanded the case to the district court for further proceedings to determine if the funds and Scott Brass were under common control.

 

As noted in an August 14 2013 memo about the decision (here), the Sherman & Sterling law firm notes that private equity funds have traditionally taken the view that, as passive investors, the funds are not a “trade or business.” The Court applied an “investment plus” test to determine whether the private equity firm’s activities met the legal standard.

 

In concluding that the test had been met, the Court cited such factors as the fact that the funds’ limited partnership agreements and private placement memoranda explicitly described the funds as actively involved in their portfolio companies’ management; and that the partnership agreement also gave the general partner the authority to make decisions about hiring, firing and compensation agents and employees of portfolio companies. The funds’ controlling stake gave the funds the right to place two of their employees on the portfolio company’s board, giving the funds effective control of the board.

 

As the law firm memo notes, the First Circuit’s decision “creates potential ERISA liability risk for private equity funds that engage in active management.” If the fund is involved in the management and operation of its portfolio companies – as many funds are – “there is potential for the fund to be held responsible for the portfolio company’s ERISA liabilities.” The memo notes the potential liabilities include the “joint and several liability for withdrawal from a multiemployer pension fund” (which is what was at issue in the First Circuit case) and “joint and several liability for missed contributions to and underfunding upon the termination of a pension plan.”

 

As many commentators have noted, this decision has important implications for the way private equity funds structure there relationships with their portfolio companies. It also has implications for the way fund documents describe the private equity firm’s role. The Sherman & Sterling memo that many of these same implications could also extend to venture capital firms as well, where venture capital firms taking an active role in management could also risk incurring ERISA liability for the portfolio companies.

 

This case also has interesting insurance implications. Many organizations carry fiduciary liability coverage to protect the firm and its officials from liability under ERISA. However, these policies typically apply to loss from claims alleging wrongful acts in connection with the operation of Sponsored Plans. The Sponsored Plans to which the policy coverage applies typically are those operated by the insured organization itself (or jointly by the insured organization and a labor organization). The liability protection under the policy typically would not extend to liability arising from the operation of a third party organization’s plans, such as, for example, those of a private equity firm’s portfolio company.

 

To be sure, even if there otherwise were coverage under the policy for this type of liability, the policy would likely exclude coverage for “benefits due” (such as pension benefits that were due but not paid into the plan fund). Many of the potential  ERISA liabilities described in the law firm memo might well be excluded from coverage, even if a portfolio company’s pension plan were otherwise within the scope of the private equity firm’s fiduciary liability coverage, by operation of the “benefits due” exclusion

 

It may be that there is in fact no liability here that would not run afoul of the benefits due exclusion. However, if there is liability for which the exclusion would not otherwise preclude coverage, there appears a substantial likelihood that the liability would be uninsured.

 

These issues are at (or perhaps beyond) the very outer edges of my knowledge about the scope and reach of fiduciary liability insurance. Just the same, I think the First Circuit’s recognition of the potential for private equity firm’s to incur ERISA liability for the portfolio companies’ pension funds, and the seeming likelihood that that liability would be uninsured, raises interesting questions.

 

I know that many of readers know a great deal more about the intricacies of the scope of coverage under fiduciary liability insurance policies. I strongly encourage those who have greater insight into these issues and that have view on this topic to add their comments to this post using the blog’s comment feature.

 

A recurring question under the management liability insurance protection that banks typically acquire is the extent of the protection afforded under their policies’ professional liability provisions. One particular question that often arises is whether the policy affords coverage for customers’ excessive overdraft fees claims.. An August 7, 2013 decision by Northern District of Georgia Judge Richard W. Story, applying Georgia law, held that a bank’s policy did not cover the settlement of a customer overdraft fee class action. A copy of Judge Story’s opinion can be found here. An August 9, 2013 post on the Class Action Lawsuit Defense Blog about the decision can be found here.

 

Fidelity Bank was sued in Georgia state court in a customer class action alleging that the bank’s flat $29 overdraft fee, charged regardless of the size of the overdraft, amounted to a usurious interest charge in violation of Georgia law. The bank tendered the overdraft fee suit to its insurer, which had issued a Management and Professional Liability Insurance for Financial Institutions policy to the bank. The insurer accepted the defense of the claim, but denied coverage for any settlements or judgment amounts. The bank settled the underlying claim and filed an action seeking a judicial declaration that the  policy covered the settlement amount. The parties filed cross-motions for summary judgment.

 

The relevant portion of the policy provided coverage, among other things, for loss arising from a claim alleging a wrongful act of the insured “in the rendering of the failure to render professional services.” The policy defines professional services as services “rendered by an Insured pursuant to a written agreement with the customer or client as long as such service is rendered for or on behalf of a customer or client of the Company.”

 

Policy Exclusion (h) specifies that the insurer is not liable to make payment for loss “alleging, arising out of, attributable to, directly or indirectly, any dispute involving fees, commissions or other charges for ay Professional Service rendered or requiting to be rendered by the Insured, or that portion of any settlement or award representing an amount equal to such fees, commissions or other compensations; provided, however, that this exclusion shall not apply to Defense Costs incurred in connection with a Claim alleging a Wrongful Act.”

 

In his August 7, 2013 opinion, Judge Story granted the insurer’s motion for summary judgment, on two grounds: first, that the underlying settlement represents uninsurable restitution; and second, that Exclusion (h) excludes coverage for loss arising out of fee disputes, other than defense costs.

 

First, with respect to the restitution issue, Judge Story said that the money at issue in the underlying dispute did not represent amounts the bank had lost, for example by negligently negotiating a forged check. Rather, Judge Story noted, the allegation was that “Plaintiff was deducting to its own use funds from its customers’ accounts in a manner that was not legally authorized.” Because of the underlying lawsuit, the bank “was required to return to return its customers’ funds in the same manner that it would if Plaintiff has mistakenly deducted funds from a customer’s account because of, for example, a computer error.”

 

Judge Story added that to require the insurer to “pay restitution for amounts Plaintiff collected pursuant to illegal practices would result in a windfall to Plaintiff.” If the Court were to require the insurer to make a payment in these circumstances, “it would amount to a ruling that Plaintiff is free to collect fees and make profits from its customers through illegal conduct, and the insurer is on the hood when the customers sue while Plaintiff keeps the ill-gotten gains.”

 

Judge Story also held that Exclusion (h) “speaks exactly to this type of claim” because it “excludes from indemnification (but not defense) disputes involving fees and commissions or, in other words, amounts that Plaintiff was accused of wrongfully or excessively charging its customers.” Judge Story acknowledged that the plaintiffs in the underlying lawsuit had referred to the overdraft fees as “usurious interest,” but, he said, “the fact that Georgia law treats a fee as interest in a certain context does not mean that it cannot also be a fee.”

 

The outcome of this insurance coverage dispute is noteworthy not only in and of itself, but also because plaintiffs’ lawyers are filing a host of overdraft fee class actions these days, and so the question of insurance coverage is coming up with some frequency. Obviously coverage will depend in part on the nature of the fees charged and the facts alleged and claims asserted in the underlying lawsuit, as well as the wording of arguably applicable exclusions if any. Nevertheless, despite these case and circumstance specific factors, insurers’ are likely to rely on this case to try to argue that their policy does not cover the amount of any settlement of a customer overdraft fee class action.

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