CATASTROPHIC INSURANCE COVERAGE BLOG

Mediating An Insurance Coverage Dispute

2009-12-28T16:20:00.000-08:00

I read a very interesting article today about a hypothetical insurance coverage mediation in a publication that you need to subscribe to in order to have access - so I cannot link to it here. But for those of you who have access, you can read the article in LexisNexis® Mealey's™ Litigation Report, Insurance Bad Faith Volume 23, Issue #16 · December 24, 2009. It is titled, "The Mediation", and was written by John J. Pappas of the law firm of Butler Pappas Weihmuller Katz Craig LLP.

My wife, Vickie Pynchon, is a full time mediator and arbitrator who writes a blog devoted to the practical and academic issues raised by commercial mediations and arbitrations called Commercial ADR. I passed the article along to her. She posted an interesting commentary on the mediation that John had described, with her thoughts about what the hypothetical parties might have done to better achieve their goals and how they perhaps in fact did.

As Vickie says, there is no right or wrong that you can point to with any certainty. My own take on these issues, based not on the academic training that Vickie has had, is that she is correct that the early offers and counter-offers in the stratosphere or the basement are a total waste of time and do nothing to define the ball-park that the players want to play ball in. I also agree with John's last comment in the endnote to his article: both fact and truth are difficult to pin-down in such a process, but are not necessary for resolution. That perhaps is the greatest lesson for those involved in mediations who want to resolve the conflict, as most any mediator will likely tell you at some point during the course of a long day.

Common Sense Sometimes Wins the Day

2009-12-22T10:29:00.000-08:00

I thought that perhaps I ought to simply refer you all to an article that I found in one of my networking groups that has such clarity and wisdom that I thought I ought to just pass it on and give the author, John DeGroote, the credit he deserves. John's article is called "Insurance Coverage: 4 Rules and 10 Tips for Policyholders". It appears in his blog called, approrpriately enough, "Settlement Perspectives" (December 15). As long as I am giving him full credit, he acknowledges in his blog post that the concepts for the article came from a longer article that he co-authored called "Bet the Company Litigation from a Policyholder's Perspective" that appearred in the ACC Docket put out by the Association of Corporate Counsel.

Now that I have complied with all of my fair use copyright and attribution obligations, let me just say that the article sounds so much like common sense that you might ask yourself how could anyone think otherwise? But it happens all of the time. Just look at John's tip #3: I can't tell you how often it is that companies fail to give notice often enough: either of "circumstances" (as some policies require), let alone of an actual claim. His practical tips are truly worthy of deep consideration.

I think you will find John's post, and the article from which it comes, worthwhile reading.

Chinese Drywall - Another Comment

2009-12-15T11:00:00.000-08:00

So I just finished my posting yesterday about Chinese Drywall insurance coverage issues and the presentation by United Policyholders to the National Association of Insurance Commissioners (see my post immediately below). As if by telepathy, I shortly thereafter received the presentation notes from an attorney, Charles Miller, who has been long involved with the insurance industry and now consults with policy holders. Charles spoke to the Commissioners as well on the same subject as did Amy Bach of United Policyholders (that I mentioned yesterday) and explained why coverage should and does exist in reality for homeowners facing Chinese Drywall losses.

I thought that his presentation notes might be helpful for anyone thinking through or dealing with these issues.

So pleasse treat this as a belated supplement to yesterday's post.

Chinese Drywall Redux - United Policyholders Nudges the Insurance Regulators

2009-12-14T13:22:00.001-08:00

I posted back in August about the insurance coverage issues raised by the use of Chinese Drywall. Those issues not only won't go away but the severity of the problem seems only to increase.

Fortunately for policyholders, a group exists that perhaps you may not know about called United Policyholders. United Policyholders was founded in 1991 as non-profit tax-exempt organization dedicated to educating the public on insurance issues and consumer rights.

The Executive Director of United Policyholders, Amy Bach, recently was invited to make a presentation on the consumer perspective concerning Chinese Drywall insurance problems to the National Association of Insurance Commissioners at its Winter Meeting in San Francisco on December 7. Amy was able to tell the Commissioners about the problems with drywall and, more importantly, about the problems with the insurance companies the Commissioners regulate who are trying to bluff their way out of covering their policyholders. You might want to review Amy's Powerpoint presentation that was shown and distributed to the Commissioners.

Good going Amy! Policyholders are lucky to have you and United Policyholders on their side. For those of you who are reading this post and do not know of this organization, you might enjoy perusing its website.

If You Thought E-Discovery Was Bad, Hang on For Cloud Computing

2009-12-04T10:14:00.000-08:00

All litigators who handle disputes for business entities and any business that has already gone through a major piece of litigation understand how expensive, time consuming, to be honest, down-right awful, is the experience of trying to ascertain where all potentially relevant information resides within a company's many computer systems, networks, and individual PCs.

But the world of technology is slowly moving towards data storage somewhere outside the physical locations of many companies and out into the "cloud" (i.e., onto servers maintained by internet service providers or other large companies). Having to search for data, however difficult within your own company (or that of a client), raises yet further difficulties when you need to coordinate with outside vendors and raises all types of questions about control and access to information that your company (or client) may not have thought about.

The articles on e-discovery are legion and many companies have developed consulting services regarding e-discovery. Many lawfirms, including my own, have developed this expertise as well in conjunction with the cases that we litigate for our clients. But the issues with cloud computing are just developing and virtually no law yet exists on the obligations and duties of a litigant to get documents and e-data from sources outside its company that stores the data that you (or your client) only has access to. That may raise all kind of questions, starting with the pre-existing contractual obligations of the cloud provider or the lack thereof.

I have found an excellent series of articles on cloud computing. Rather, than trying to summarize them, let me direct you to the 4th article on the subject of the intersection of e-discovery and cloud-computing. The article is titled Legal Implications of Cloud Computing -- Part Four (E-Discovery and Digital Evidence) by Tanya Forsheit of Informationlawgroup. Also, if you are a lawyer or have an interest in one judge's views on e-discovery in general, you might also want to read the decision Tanya discusses, Lorraine v. Markel Am. Ins. Co., 241 F.R.D. 534 (D. Md. 2007)

The bottom line is that as a company moves to cloud computing and data storage, yet more thinking is required in advance of litigation and once litigation commences or is likely to commence. These are not easy issues nor ones that can be inexpensively dealt with.

California Supreme Court Speaks Yet Again on Punitive Damage Limitations

2009-12-02T16:52:00.000-08:00

The California Supreme Court has just spoken again on the issue of punitive damages. On Monday, November 30, 2009, the California high court handed down in its decision in Roby vs. McKesson Corporation. (The preceding link is to the official web site of the California Supreme Court and will only be current for 120 days.)

In Roby, the Supreme Court ruled that the maximum punitive damages award allowed under the federal constitution in the context of the facts of this case were no higher than a 1 to 1 ratio of punitive damages to compensatory damages. Purporting to apply the tests of State Farm Mut. Auto Ins. Co. v. Campbell (2003) 538 U.S. 408, 416-418 (State Farm) and BMW of North America v. Gore (1996) 517 U.S. 559, 568 (BMW), the Court ruled that the facts of this case fell within what it characterized as a low level of reprensibility and was coupled with what it characterized as a substantial award for non-economic damages (i.e., emotional distress). The conclusion that the wrongdoing was only "sort-of" reprehensible seemed to be driven by the stated and unstated evaluation of the fact that only a mid-level manager of a large and wealthy corporation was involved in the wrong-doing, even though his acts were repeated (frequency being the supposed test for evaluating wrongdoing). The opinion reads as if the Court were almost siding with the company because it was being stuck with liability by one of its supposedly rogue mid-level managers.

The concurring and dissenting opinion, however, felt that the maximum cap for a punitive award could be larger than a 1 to 1 ratio. However, even that opinion would allow no more than a 2 to 1 ratio.

If you work for or are the risk manager of a company, you might be very pleased with this decision as it shows a court's hostility towards charachterizing conduct as "really" bad (read the concurring/dissenting opinion to see why those justices would call the conduct "moderately" reprehensible). The decision also demonstrates the importance of the litigation strategy of characterizing the conduct.

If, however, you or your company are involved in litigation with an insurance company over their bad faith treatment of your company, you might find this decision certainly troubling. At no point does the Court deal in any meaningful way with the wealth of the corporation, although it does pay lip service to the fact that wealth has survived as an evaluative criterion even after the hostile U.S. Supreme Court decisions in State Farm and BMW. Yet, without assessing that impact, the California Supreme Court lets stand a reduced award that may (as far as one can tell from reading this decision) be a mere pin-prick in the operations and revenues of the defendant.

Applied to insurance bad faith litigation, this decision shows the need for the policyholder to perservere in demonstrating that the conduct complained of was sanctioned on high within the insurance company, was part of or a component of (if true) a general course of dealing or set of practices, and was more than the conduct of a mere rogue actor. Proving these fact, however, ought often to be fairly easy, given that many insurance company decisions -- at least with respect to sizeable claims -- are made by several people at varying levels of authority and reviewed by lawyers who are often involved to try to cloak the decision making process with privilege protection.

This decision makes highly relevant the practices of the defendant even when the acts complained were undertaken by a single individual so the plaintiff (policyholder in an insurance suit or plaintiff in the liability suit) can demonstrate facts pertaining to "who knew" and "how common". I believe that we will see this decision cited in numerous discovery battles over the scope of potentially relevant discovery.

Collateral Source Rule Protects Tort Plaintiff's Recovery for Health Insurance Discounts

2009-11-25T11:13:00.001-08:00

Here is an interesting case. The plaintiff in an auto accident sued for her full damages resulting from the accident. The defendant was found liable but sought to reduce the award by the amount of the difference between what her medical insurance actually paid and the total for which she was liable to the providers. Thus, the case focused upon whether the collateral source rule protected not only the amounts paid by the medical insurer, but also the huge discounts which often reach into the stratosphere that the insurers squeeze out of the providers.

In Howell v. Hamilton Means and Provisions, 2009 DJDAR 16748 (11/23/2009), the California Fourth District Court of Appeal ruled that the plaintiff was indeed entitled to her full medical expenses and the defendant was not entitled to any reduction reflecting the negotiated price reduction obtained by the insurer. The insurance company lobby filed an amicus brief in support of the defendant. The court disagreed with the analysis of other appellate court decisions and concluded that any abrogation of the collateral source rule should be undertaken by the Legislature, not by the courts.

This case is an unusual example of a conservative leaning court (we do not legislate) ultimately filing a decision that clearly supports the plaintiff's bar.

The decision has been published. Given the conflict amoungst several appellate courts in Califonria on this subject, it will be interesting to see whether or not the California Supreme Court takes this decision for review (which effectively removes it from the books) or depublishes it. For those of you not from California, seeking depublication is a tactic that insurance companies often seek to use to remove the precedential value of adverse decisions because a depublished decision cannot be cited by others as precedent, even though it remains the law of the case. The Supreme Court could also let the decision stand. I suspect that the insurance company lobby (openly or through the defendant) will move the appellate court to de-publish the decision and, if that maneuver fails, have the defendant seek review by the state Supreme Court.

Stay tuned.

Some Relief for Homeowners With Chinese Drywall

2009-10-23T12:59:00.000-07:00

I blogged in August on the Chinese Drywall problems and the response of the insurance industry. According to a number of articles circulating today, one insurance company in Florida -- not surprisingly a public one backed by the state -- has said it will renew at least one couple's policy on its home. It apparently is partially backing off of its earlier argument that Chinese Drywall in a home is a "pre-existing condition" (remind you of the health care debate) and/or that the damages caused by it is excluded because of a pollution exclusion. See, for example, the article in today's Insurance Journal.

This may be a small victory for policyholders in the larger fight -- particularly because the insurer said that it won't pay to fix the problem but at least will renew, a requirement that most banks impose upon their borrowers to avoid default on their mortgages. And a lobbying group for the insurance industry took the position that policies were never meant to cover defective materials. His overzealous statement seems to overlook that homeowner's policies have always been purchased to cover property damage and that is what the Chinese Drywall is causing.

While I have not read them all, the Associated Press has run a series of articles on drywall claims and the tactics of insurance companies. I invite all of you who are interested to google the AP and chinese drywall to pursue what it had to say on this subject.

Breaking News: Kartrina Losses Covered If Caused By Wind Damage

2009-10-12T10:23:00.000-07:00

In last week's decision in Corban vs. CSAA, the Mississippi Supreme Court rejected the anti-policy-holder view that the Fifth Circuit had earlier adopted. It ruled that, under Mississippi law, even though storm surge might be excluded by a flood exclusion, it was up to a jury to decide how much covered damage was caused by hurricane winds notwitstanding an anti-concurrent causation clause in the policyholders' homeowners policy.

The Mississippi Supreme Court's reasoning was that the causes of loss (wind and storm surge) did not occur simultaneously but sequentially and that even if the covered and uncovered causes lead to damages, it was for the jury to determine the quantum of damage caused by the hurricane. In so ruling 9-0, the Mississippi high court rejected the contrary and hostile interpretation that had been adopted by the Fifth Circuit.

Not surprisingly, even though the insurer has the burden of proving how much of the damage was caused by the excluded peril, CSAA has issued a press release praising the decision as confirming how well-taken its actions have been. However, the real story about this decision can be seen in one comment that sneaks through the praise for the decision from the insurance industry. As acknowledged in P&C National Underwriter,

Insurance Information President Robert P. Hartwig told National Underwriter in an e-mail that the decision “introduces uncertainty into an issue that virtually all had believed had been settled once and for all by the federal courts.” He added that “if insurers are now going to be held responsible for damage they believed--and the 5th Circuit believed--was excluded, there are obvious cost consequences. The inconsistency in the decisions between the state and federal courts will at some point need to be resolved.”

The person being quoted by the P&C National Underwriter seemingly cannot accept that the inconsistency has in fact now been resolved, at least insofar as Mississippi law is concerned and the Fifth Circuit's narrow view has been rejected by a unanimous Supreme Court. His last comment is the key as to why the decision is so important. Whenever the insurance industry starts talking about "cost consequences", you know that they know two things: that they will need to be making payments that they were trying to avoid by claiming that they never intended to cover them, no matter what the policies they sold actually say; and that they have suffered a major loss.

Can Your Mediator Be Your Enemy?

2009-10-07T20:40:00.000-07:00

You had better believe it and take precautions to see that it does not happen to you.

Though unpublished, this decision from California's Third District Court of Appeal, Palmer v. State Farm, made me pause. (If you are really interested, you can print this decision by clicking on the print icon in the window below.)

Mediator Testifies

In this case, a mediator who helped broker -- or so he thought -- a settlement between a policyholder and his carrier drafted an informal agreement for the parties to sign at the mediation - perhaps an OK practice but perhaps not. More about that later.

When the carrier drafted the formal agreement and presented it to the insured, the insured refused to sign, claiming that the mediator's handwritten agreement referred to two policy limits while the formal post-mediation carrier-drafted agreement referred only to a single policy limit.

The carrier moved to enforce the settlement, filing a declaration executed by the mediator affirming that the formal contract did indeed reflect the handwritten one and that both memorialized the parties' alleged mutual understanding that there was only one policy limit that could be applied to the claim.

From the appellate opinion, it does not appear that either party objected to the mediator testifying or to the partiality the mediator showed to the carrier in siding with it against its insured. If that is true, the policyholder's counsel missed an important argument that should have ended the issue and prevented the adverse ruling. The trial court weighed the evidence and concluded that the formal contract was not a new agreement -- it was simply a formal memorialization of the handwritten agreement. The appeals court affirmed the judgment - but fortunately chose not to have it published, a rule in California that keeps decisions from being cited to other courts.

What is the take away for the policyholder and its counsel?

First, avoid the problem entirely by bringing a template of your favorite formal agreement to the mediation on a jump drive or on your own laptop if you can connect it to a printer at the mediator's office so that no skeletal term sheet subject to post-mediation "nibbling" can become the subject of further litigation. You can negotiate the formal agreement while in the mediation.

If it is 3 a.m. and no one has the form or the endurance to draft up the final agreement for signature, draft the term sheet yourself. Don't leave it to your opponent or the mediator to get it right. (And ask yourself whether the mediator might not have more of an interest in the enforcement of an agreement he or she drafted which he or she may swear is clear as a bell -- whether it is or is not -- than in one a party drafted).

If your opponent moves to compel the enforcement of an agreement that does not reflect the terms settled upon and supports it with a declaration from the mediator, immediately object, move to strike the Declaration, and call the mediator demanding that he withdraw his or her sworn testimony not only on confidentiality and incompetence grounds; but also on ethical grounds.

California, like many states, has specific rules that preclude the mediator from testifying or taking sides about what the parties "really" meant, an intuition that he or she likely gained during private caucuses with the parties. See California Code of Civil Procedure Section 1775.10 and Evidence Code Sections 703.5 (competence) and 1119 and 1121 (inadmissibility). Moreover, the model rules from virtually every professional organization require that a mediator remain neutral as part of his or her ethical responsibilities. See the Model Standards of Conduct for Mediators from the AAA, the ABA, and the Society of Professionals in Dispute Resolution. Bear in mind, however, that the procedural and evidentiary rules may or may not be the same from state to state or or between state and federal courts and may or may not be same if the proceeding is deemed to be a settlement conference versus a mediation. For example, Rule 408 of the Federal Rules of Evidence is not as strict as the California rules for a mediation, a complicating factor given that most parties do not agree in advance as to whether state or federal law will be applied should any dispute arise. In any event, the non-binding ethical rules of neutrality should be applicable across the board no matter what jurisdiction you may be in or what law will be applied.

In sum, the key is try to avoid this problem of the failed agreement in the first instance by being proactive and getting the settlement transaction completed in detail and the written agreement executed by all parties at the mediation. Some, and perhaps many, mediators seem not to know of the evidentiary and ethical rules except in the vaguest sense and have a strong desire to get their concepts of the outline of the settlement that they thought had been achieved before a court if it looks like the agreement will unravel over the details. Moreover, there is the concern that cannot be quantified, and likely does not apply in many instances, that meditors, like arbitrators, often get repeat business again and again from insurance companies and want to undertake the type of support for their repeat customer, the insurer, as did the mediator in the case being discussed here.

This is not a condemnation of mediators in general or of the mediation process. It is just a warning to the risk manager or the lawyer handling a mediation to think of these issues in advance to reduce the risk that the mediator may end up being your own worst enemy.

For another perspective on this decision but with not dissimilar conclusions, see Victoria Pynchon's Negotiation Law Blog that discusses this same case. Fair disclosure though, Vickie is my wife.

Insurers Too Often Want to Weasel Out of the D&O Insurance They Sold.

2009-10-05T10:58:00.000-07:00

Fortunately, they don't always succeed, as evidenced by the recent decision discussed below.

I have returned from vacation and a lot of work that has kept me away from posting. But I am hopefully back in the swing of things now.

One of the many ways that some insurance companies try to avoid honoring their obligations under D&O insurance policies is to claim that one of the many insureds included within the coverage of the policy took some action that assisted the plaintiffs in the lawsuit against the company and its directors and officers. In doing so, they rely upon the insured vs. insured exclusion. That exclusion is frequently called by way of shorthand the IVI exclusion.

It is a good thing that so many people are insureds under the policy because of the need for a company to protect as many officers and directors as possible. But it is a bad thing when one of the numerous insureds claims to have been hurt by the others or even cooperates with the plaintiffs, thus arguably triggering the IVI exclusion. I litigated one such suit several years ago when the only thing two former officers of an indirect subsidiary of the company being sued -- who were insureds under the breadth of the policy's coverage -- did was to talk by phone for about 15 minutes to the plaintiff's attorney. (More about that below). When one insured participates or assists the plaintiffs, many carriers will seek to deny coverage to the entire group of insureds (the company and its directors and officers) based upon the IVI exclusion.

Fortunately, not all courts are willing to buy into the insurer party line. In the recently issued decision of Chartrand v. Illinois Union Insurance Co. et al., No. 08-5805, 2009 WL 2776484 (N.D. Cal. Aug. 28, 2009), the federal district court in California ruled that the carrier, Illinois Union, was not entitled to summary judgment in its favor and instead granted summary judgment in favor of the insureds. In this case, one of the plaintiffs was a new investor in the insured company being sued who claimed that he (and the other investor poaintiffs) had paid too much for the company because of alleged wrongdoings and mis-statements by the former owners. The problem was that he had recently been appointed chairman of the company and thus was now an insured under the policy and was suing other insureds, the former officers. The other investor-plaintiffs were not directors or officers and thus were not insureds under the policy.

The court gave short shrift to Illinois Union's argument that its entire coverage obligation was voided because one of many plaintiffs was an insured. The court held that only the costs allocable to the defense of the claims by that single plaintiff insured were not covered under the policy and that the duty to defend and pay defense costs for the remainder existed. Given that most defense costs in these types of lawsuits go to the defense of the entire action and not to the claim of a single claimant, the practical reality is that the insured defendants will likely be entitled to virtually all of their defense costs.

The case that I litigated, mentioned above, was Harris v. Gulf Insurance Co., 297 F.Supp 2d 1220 (ND Cal) 2003). The facts upon which the carrier predicated its denial of coverage were even slimmer than those in the Illinois Union case. In Harris v. Gulf, two former officers of indirect subsidiaries of the insured, who were not parties to the litigation against other former directors, agreed to spoke with and did briefly speak with an investigator for the suing plaintiffs. That was all they did. Not much assistance but it was enough for Gulf to try to defeat all coverage for all of the defendant officers and directors who were sued. No evidence existed that the two former officers who spoke with the investigator intended to help or aid the prosecution of the litigation or were going to benefit in any way. The district court held that the critical fact that was missing that was required to sustain Illinois Union's denial of coverage was any intent by the two former officer-insureds to obtain any benefit whatever from their cooperation. The court accordingly granted summary judgment for the policyholders and ordered Gulf to pay the defense costs of the litigation against the directors and officers. The court also held that allowing the draconian interpretation asserted by Gulf was dangerously close to inviting a violation of public policy.

For reasons that were never clear, Gulf took this case to the Ninth Circuit, apparently assuming the pro-insured decison would be reversed and taken off of the books. Gulf erred in its assessment. The Ninth Circuit, rather, affirmed the district court in an unpublished slip opinion, the case settled shortly thereafter, and the decision by the district court remains good law today.

The moral of these two cases is simple: when the stakes are high, as they most always are in these types of D&O coverage disputes, an insured needs to be ever vigilant and perhaps aggressive when dealing with its carriers as the carriers will often themselves be quite aggressive in seeking to deny coverage.

Los Angeles Program on Arbitration Advocacy in Commercial Litigation, Sept. 9.

2009-08-31T15:26:00.000-07:00

So what if you view this as self-promotion? Nevertheless, the topic of this program in Beverly Hills is worth thinking about if you are in the area on September 9 and want to have a wonderful lunch at the world-famous Lawry's the Prime Rib at the same time.

The program is "Using Case Managemement Conference Orders to Streamline Arbitration and Save $$$" and is sponsored by the Beverly Hills Bar Association. Click here for a program description and registration form.

As the program teaser states so well:

As advocacy in commercial arbitration becomes increasingly sophisticated, costs can skyrocket and the process can drag on unless counsel and the arbitrator(s) utilize these cutting-edge tips in the case management process. Topics will include motion practice, limiting discovery (including electronic discovery), and the use of stipulations and time limits to manage the proceedings.

The panelists are Justice Victoria Chaney, Associate Justice of the Second Appellate District of the California Court of Appeal, and formely a renowned trial judge who was able as much as anyone and more than most to streamline a proceeding while taking into account the needs of all parties; Deborah Rothman, a full time arbitrator and mediator; and yours truly. The program will be moderated by Jonathan Stein.

I hope that any of you out in this neck of the woods will think of joining for lunch at this program. There ought to be a lot of food for thought (in addition to the regular kind of food) -- and possibly some suggested answers -- discussed during the program. I hope to see you there.

Take Care of Your Director's and Officer's Insurance Needs

2009-08-28T08:08:00.000-07:00

I know I am on vacation. But in checking my email deliveries this morning, I saw yet another article that made me think about the need of corporate risk managers (or whoever is tasked with purchasing D & O insurance)to think of all possibilities and permutations of those seemingly never-ending lawsuits against Ds& Os.

I saw this morning that the Ds & Os of Lyondell Corporation, now in bankruptcy,are facing problems getting the coverage that the company purchased to protect them. The creditors committee, in large part one of the instigators of the suits against them, has asked the bankruptcy court for some protection against the use of the insurance on behalf of the directors because, the argument runs, that insurance is the asset of the estate. Of course, we know that the company, like almost all companies, primarily acquired the insurance to protect its Ds and Os, and not itself, except to the extent it was legally obligated to indemnify them. With bankruptcy,that is now impossible without much effort.

So along come the creditors and try to pressure the Ds & Os with the threat of limiting their coverage. This may be perfectly proper in love and war and I am not castigating them for pursuing whatever rights they may have under those policies. But this effort demonstrates that it is not only the insurers that can cause a company's directors and officers to forego the coverage they thought they had to protect themselves.

There is an important lesson here. When the company is acquiring its D&O coverage (or when a potential director is reviewing the coverage that has been obtained for her protection), it needs to evaluate exactly what happens in the event of bankruptcy. It needs to negotiate, if at all possible, for contractual clauses that provide coverage for the Ds and Os separately and independantly and that cannot be interfered with by the Company in the event of its bankruptcy, and thus not by the creditors who now control the fate of the company.

Remember, that D&O coverage, unlike general liability policies, are not very uniform and diffent companies offer different terms either by endorsement or even within the basic form itself.

There are many issues with D&O coverage that need to be thought about and negotiated. This is just one twist to keep in mind.

On Vacation

2009-08-25T09:41:00.000-07:00

I will be away all this week on vacation at the beach in San Diego with only funky internet access. Stay tuned for more posts starting in early September.

Have fun everyone! I sure plan on it.

Endorsements to Avoid and to Get

2009-08-20T14:44:00.000-07:00

I am constantly scouring the web looking for tips and tricks that I think will be helpful to policyholders and to lawyers representing them. Certain articles deal with the "stuff" that people out in the market-place know about and some are more aimed at the lawyers who have to deal with policies as they are written.

I ran across this really interesting article of the former type written by Chris Boggs (cboggs@insurancejournal.com) in The Insurance Journal. He gave it a great title Three CGL Endorsements That Every Insured Should Avoid. The three exclusions Chris discusses in this article are the: 1) Total Pollution Exclusion Endorsement (CG 21 49); 2) Contractual Liability Limitation (CG 21 39); and 3) Limitation of Coverage to Designated Premises or Project (CG 21 44).

He has written other articles on well that might interest anyone looking to obtain insurance. In particular, you might want to read his article, Three Commerical Property Endorsements That Every Client Should Have, that appeared in MyNewMarkets.com.

Excellent tips for risk managers and and their brokers looking to avoid problems down the road.

Chinese Drywall and Insurance Coverage

2009-08-17T11:45:00.001-07:00

I ran across an interesting post about the need for contractors to evaluate their liability risk resulting from the installation of Chinese made drywall, the subject now of an intense amount of litigation. The article was written by John M.Sadler (john@sadlerco.com) of Sadler and Company. The article also has appeared in Claimsjournal.com.

John points out, what many of us policyholder insurance coverage lawyers already know. When many serious liability risks arise, many insurers, as one famous court decision once stated in a products liability context, run for cover rather than coverage. Insurers like this have sought to insulate themselves from the liabilities that contractors often assumed they had coverage for by use of pollution and other exclusions with respect to work performed by sub-contractors on behalf of the contractor. As John suggests in his article,

"Builders can protect themselves from future construction defect and pollution claims by implementing the following practices:

* Implement mandatory subcontractor agreements with all subs including insurance requirements for General Liability, hold harmless/indemnification provision, and a requirement for all subs to participate in arbitration proceedings.

* If the builder’s General Liability policy includes the Exclusion-Damage To Your Work Performed By Subcontractors On Your Behalf (CG2294) or a similar exclusion, find out if the insurance carrier provides a buyback for an additional premium
charge.

* Ask the insurance agent if any insurance carriers are available that don’t use exclusion CG2294 or have a less severe version that covers resulting property damage to the builder’s non faulty work.

* Purchase a Pollution Liability policy."

Read John's full article here.

One of my partners, Leon Kellner, wrote an article on the same subject published in the Florida Homebuilders Association Magazine. As he stated:

"Insurance coverage [for drywall liabilities] may not be the sexiest of topics, but the intracies of insurance policies may prove to be paramount in deciding who winds up footing the bill for the tainted drywall."

Read Leon's full article here.

As the liabilities and problems relating to drywall mount and increase, particularly in the southeastern part of the U.S., Leon's words may prove to be very prescient indeed.

Madoff, Madoff, Madoff

2009-08-12T11:31:00.000-07:00

So much has been written about Bernie Madoff and the implications of the massive losses he caused that another Madoff post seems redundant. Unless, of course, you're worried about liability.

Not only Madoff, but also the accounting firms that touched Madoff's company (and the funds and advisers that were touched by him) are being swept up into the morass of litigation. In a corporate word association game, the word litigation should automatically elicit the word insurance.

How then do accountants seek a defense and indemnity for alleged liabilities arising from the Madoff Affair?

An interesting perspective on these issues was recently discussed at an industry symposium hosted by The CPA Journal. The symposium was called "Are CPA's the Next Madoff Victims? The Accountant's Liability." An edited transcript of the participants' comments was published by insurancenewnet.com.

Dan L. Goldwasser, shareholder and member of the accounting law practice group at Vedder Price, spoke at length about dealing with insurers and the need to disclose potential liabilities to them and the possibilities for finding coverage.

The area of damage control in the Madoff situation really boils down to two or three things that you can do. The most important thing you can do is to protect your insurance coverage. That is going to be your main line of defense - and hopefully you all have insurance coverage.Insurance companies are obviously very mindful of their potential exposure from the Madoff scandal. You've got to protect your coverage, and in that regard, you have to think about some of the things that iasur- ance companies do to try to get out from covering your claim.

Probably the first thing that they do is they look to see when you may have discovered your potential loss and whether it was under their watch. You've got to report your claim as soon as you feel you have circumstances which may give rise to a claim. That's what the language of your policy will say. You've got to immediately consider: "Should we be notifying our insurance company right now? What should we be telling the insurance company?" Obviously, there is a dilemma here, because if you say, 'I had 10 clients with total investments of $50 million with Madoff' and you send that notice to your insurance company, there's a good chance that your insurance company may say, 'I don't want to do business will you anymore,' and terminate you as a policy holder. That's a consideration - but I don't think it's a major consideration."

Goldwasser then goes on to discuss many other steps an accounting firm should be thinkng about and how to protect its very important assets represented by its insurance coverage. Goldwasser was followed by Ric Rosario, CEO and director of Cantico Mutual Insurance Company, who also provided a perspective to consider. This is an interesting symposium that any accounting firm concerned about its potential liability with respect to Madoff, or any actual or alleged, "crooked" investment scheme, ought to consider reviewing.

Click here to read the full article.

Back-Up Protection for Your D&O Coverage Needs

2009-08-10T16:42:00.000-07:00

If you are in charge of purchasing insurance for your comany's directors and officers and you want to keep them happy, you might be very interested in this idea developed by Peter Taffae, Managing Director of ExecutivePerils, Inc.

As reported by Dan Reynolds in the August 2009 edition of Risk & Insurance,

To hear Peter Taffae tell it, he started to get a hunch a little over a year ago that big changes were coming to companies in the insurance sector. Red flags were beginning to go up around American International Group Inc. and some of the sharper people in finance felt that an economic crisis was coming to some of the nation's most important underwriters.
That's when it hit Taffae, a former underwriter himself and current managing director for the Los Angeles-based wholesale broker ExecutivePerils, Inc. Why not give insureds a little more assurance in the realm of their liability coverage?

What Taffae came up with was what he calls the "supercontinuity option." For the price of pennies on the overall D&O premium for the relevant layer, the insured gets the option of switching D&O coverage to a backup carrier if the primary carrier on the insured's first D&O layer suffers a crippling ratings downgrade.

Click here to read complete article.

What a great idea. I bet that not a lot of companies or their brokers are thinking in this manner. I have no idea of what the true costs may be for this protection but I bet that the people who your company wants to get and retain as directors and officers will surely sleep a lot better at night knowing that this double protection is in place.

Two Often Overlooked Considerations In Choosing Counsel To Oversee Your Insurance Coverage Litigation

2009-08-10T13:16:00.000-07:00

One of the hallmarks of complex insurance coverage litigation between a corporate policyholder and its insurers is the substantial commitment to – and cost of – pre-trial discovery that is required. And one very large sub-set of that effort and expense is the massive amount of work usually required to locate, identify, and review “arguably relevant” electronic records from a company’s computer systems, networks, voice-mail systems, and computers of individual employees. If you work in the legal department of a company involved with this prospect or are a risk manager or an attorney who litigates cases on behalf of corporations, you have likely been swamped with legions of articles and solicitations about how to deal with discovery of electronic files in civil or criminal litigation or inquiries. It seems that the fairly new rules of e-discovery have created whole new industries virtually overnight..

I will not add to the overload about e-discovery as a simple internet search of that term will yield dozens of articles and links from law firms, accounting firms, and other “e-discovery” consultants that can get you started.

Notwithstanding the deluge of articles and solicitations and offers of “free” training programs, I have found that many companies that do not litigate all that often have yet to learn the ropes. And now, many judges and courts believe themselves to be experts in this field (some are!) and look askance (I am being polite here) when lawyers and their clients either miss obviously pertinent information in their document productions or request or give the adversary so much information that finding the obviously pertinent “stuff” is like looking for the proverbial needle in a haystack.

For those of you who have not yet been initiated and perhaps for others as well, let me provide you with two key pointers to consider before you start down this road. I have not found either of these points mentioned elsewhere.

1. Make sure that the partner who will be leading the litigation on your behalf is experienced with e-discovery. The rules of procedure in the federal courts now require a keen understanding by outside counsel of the entirety of your electronic systems. Although all major lawfirms surely have experience with e-discovery, you may find that many seasoned, intelligent, and highly skilled litigators who are likely to head your litigation are not really computer-savvy and perhaps even have a fear of entering this arena. Yet the strategic choices that will be made with regard to finding the electronic records that need to be located and reviewed will likely cost you tens of thousands or perhaps hundreds of thousands of dollars and need to be made at the top. So do your homework early on.

2. Find out – before you start – whether the lawfirms you are considering retaining have internal rules or practices for handling the e-discovery. The rules of many courts now place a heavy burden on the lawyers and some courts have become very hostile to perceived e-discovery omissions. As a result, some lawfirms require a company to use outside consultants to look for and identify e-documents. Outside consultants generally provide excellent work-product, are trained in tracking everything they do down to the most minute decision, and create a protective buffer against sanctions for the company and its lawyers if something goes wrong (“we told them to find everything”). But outside consultants often can be expensive beyond one’s worst budgetary nightmare. On the other hand, undertaking this effort in-house strains a company’s IT department (if there is one), requires the purchase of now-available off the shelf or, in some instances, custom search software, and places the risk of omission right where it may hurt the most of things go awry. But with proper training and record keeping, undertaking this effort in-house can provide the same quality of service as provided by outside consultants and usually at a fraction (often a small fraction) of the cost. Of course, as you will or at least should be told, the substantially reduced expenditure comes with risk and intrusion on the time of employees that already are fully occupied. No right or wrong answers exists. But you need to evaluate this question before choosing counsel, not after you are in the thick of discovery and told something that you wish you had known before you made your preliminary decisions.

Many more issues arise with respect to e-discovery and perhaps I shall return to them in later posts. But these two points are ones about which your advisors may perhaps be strangely silent.

Make Sure You've Got the D&O Coverage You Need

2009-08-08T16:06:00.000-07:00

Thanks to Mark E. Miller of Greenberg Traurig for this slightly dated but still excellent article: What You Need to Know About D&O Insurance: the Top Ten List.

Although properly negotiated traditional D&O coverage is the building block of any D&O insurance program, such coverage presents certain unavoidable risks, even when properly negotiated. First, coverage for the corporation can exhaust available limits, leaving directors and officers without coverage. Second, a bankruptcy court could determine that policy proceeds are assets of the estate, and prohibit payment to the directors and officers under the policies. And third, innocent directors could lose coverage because of misrepresentations, illegality, or deliberate fraudulent conduct of corporate insiders.
New D&O insurance products address some of these issues. Side A-only excess coverage cannot be exhausted by payments to the corporation and is beyond the grasp of bankruptcy courts, since none of its proceeds are paid to the corporation. Independent Director Liability (IDL) coverage is designed to cover independent directors in situations where other coverage is unavailable due to the adverse conduct of corporate insiders.
Unfortunately, unlike other types of business insurance, there is no standard D&O insurance policy form for any of these D&O insurance products, and there is significant variability in language contained in various D&O insurance products. The immense impact that this variability can have on the personal wealth of directors and officers is illustrated in the following “top ten” list of D&O insurance issues

For the 10 tips, click here.

Introducing the Catastrophic Insurance Coverage Blog

2009-08-08T12:44:00.000-07:00

Though I have spoken and written for many years about the rights of corporate insureds to recover policy proceeds for catastrophic (and other) losses, this is my first entry into the blawgosphere (about which my wife, the complex commercial arbitrator and mediator Victoria Pynchon, has been hectoring me for no small amount of time).

My blogger wife recommended that I introduce myself to the law blogging and blawg reading community. I do so here.

I have been representing policy holders in insurance coverage matters for more than two decades. I have sought coverage for my clients for asbestos liabilities, product liability claims, first party property damage and business interruption losses, alleged environmental damage, errors and omissions, and directors and officers liabilities. I have also brought suit against insurance carriers for bad faith. At issue in many of the cases I have handled are hundreds of thousands to billions of dollars.

My clients have included officers and directors; lenders; oil, chemical, and mining companies; casinos; hotel owners and operators; and consumer electronics manufacturers.

I have represented clients in a wide range of insurance recovery matters, including: claims involving directors and officers alleged liabilities; business interruption and first party property damage losses; professional errors and omissions; asbestos; and environmental and product liabilities.

Most recently, I represented the senior lender to the lessee of the World Trade Center in the property damage, business interruption, and liability coverage lawsuits filed in the Southern District of New York arising out of the events of September 11, 2001.

Prior to joining Dickstein Shapiro, I had been a member of Heller Ehrman LLP’s insurance recovery and complex commercial litigation practice groups since 1973.

Since 2003, I have annually been recognized by Chambers USA: America’s Leading Lawyers for Business as a leading attorney in the area of Insurance Coverage: California. According to the 2009 guide, I was "identified as a great attorney who provides excellent counsel on coverage issues involving products liability claims, alleged environmental damage, asbestos liabilities, E&O, D&O and first-party property damage and business interruption losses.” I have also regularly been recognized in The Best Lawyers in America and Southern California Super Lawyers.

I am admitted to practice in California and before the U.S. District Courts for the Central, Southern, Eastern, and Northern Districts of California and the Northern District of Illinois; the U.S. Court of Appeals for the Ninth Circuit; and the U.S. Supreme Court. I am a member of the American Bar Association’s Litigation Section, Torts and Insurance Practice Section, and Litigation Section’s Committee on Insurance Coverage Litigation; the State Bar of California; and, formerly, the Bar Association of San Francisco’s Insurance Practice Section Executive Committee.

I have spoken and prepared articles on many insurance coverage issues at a variety of conferences presented by Mealey’s Insurance Publications, the Practising Law Institute, and the Risk and Insurance Management Society.

I am also an Attorney Settlement Officer for the U.S. District Court for the Central District of California.

I am looking forward to engaging in the existing online conversation about the rights of insureds to coverage for their losses and to adding my own experience and insight to those discussions.

Insurance Deadlines Subject of Kirk Pasich's "On the Clock"

2009-08-08T12:34:00.000-07:00

Dickstein Shapiro attorney Kirk Pasich writes often and well for the Los Angeles Daily Journal. Here, from the DJ's "Focus" column is his most recent article, On the Clock.

by Kirk Pasich

Insurance policies typically contain various provisions that specify deadlines by which insureds "must" do certain things in order to obtain coverage. For example, commercial general liability policies and other third-party liability policies typically obligate an insured to provide notice of a claim or suit "as soon as practicable." Some variants of these policies also specify that in order to obtain coverage, a claim must be both made against the insured within the policy period and reported to the insurer with the policy period or a specified period of time thereafter.

Property insurance policies and other first-party insurance policies also contain deadlines. For example, these policies typically require that an insured provide notice of a loss or events that may give rise to a loss "as soon as practicable," that insureds provide a proof of loss within a specified period of time (typically 30 or 60 days), and that an insured file a suit against the insurer within one or two years after inception of the loss. California's standard contractual limitations provision states:

"No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within 12 months next after inception of the loss." California Insurance Code Section 2071(a).

Read full article - On the Clock - here.

Sorting Out a Liability Mess

2009-08-08T11:20:00.000-07:00

By Stephen N. Goldberg

In State of California v. Allstate Insurance Company, 2009 DJDAR 3425 (March 9, 2009), the California Supreme Court reversed a trial court's grant of summary judgment for a handful of insurance carriers who refused to defend the state against and indemnify it for liabilities arising from an infamous toxic waste site - the Stringfellow Acid Pits. Neither this opinion, nor another in the same matter handed down by the 4th Appellate District in January, finally resolves the state's claims. Instead, both courts sent two groups of insurance carriers back to the trial court for further proceedings. In both, the insurers lost significant battles but will no doubt continue the fight on yet another day.

The Stringfellow Acid Pits began operations in 1956, six years before Rachel Carson's "Silent Spring" presaged the modern environmental movement. More than 30 million gallons of industrial waste were deposited there between its first day of operation and its closure by state authorities in 1972. Eight years later, the federal government enacted the Comprehensive Environmental Response, Compensation and Liability Act to clean up industrial pollution and require potentially responsible parties to reimburse the government for its efforts.

To read full article, click here.