Equitas Financial Reports – 2005 Version

As part of the Reconstruction and Renewal of Lloyd’s in 1996, several Equitas entities were created to serve as the final reinsurer-to-close and to manage the run-off of underwriter liabilities for non-life 1992 and earlier business.
On June 7, 2005, Equitas issued a press release on its annual results and more recently made available its Report & Accounts for the year ended 31 March 2005.

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It’s a Crime: Efforts to Constrict the Broad Scope of Fidelity Insurance Coverage

Companies purchase fidelity-insurance policies to cover them against the risk of loss from employee dishonesty. Fidelity coverage generally is divided into two types: financial fidelity, which covers banks and other financial institutions, and commercial fidelity (or commercial crime coverage), which covers other types of businesses. On the financial-fidelity side, there is significant standardization of policy forms; on commercial fidelity, though the policy language often springs from the Surety Association of America or the Insurance Services Office, there is less standardization in the wordings.
Generally speaking, two key issues are presented in any commercial fidelity claim: is the misconduct covered and, if so, how much does the policy pay for. The first question typically involves whether the employee acted with “manifest intent” to benefit himself (or someone else) and to harm its employer. The manifest-intent concept was introduced in 1976 and has spawned 30 years of litigation (and increasingly the manifest-intent concept is being abandoned by policy drafters). Less attention has been paid to the scope of the indemnification provided insureds for the “Loss of Money, Securities or other property.” The case, Building One Services Solutions, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, Civil No. 02-311-A (E.D. Va. Nov. 26, 2002), available at 7-24 Mealey’s Emerg. Ins. Disp. § C (Dec. 17, 2002) (on LEXIS), addresses both issues (I note that I was lead counsel in this case).

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Notice this Case

New York has been one of the last jurisdictions to hold onto the view that a policyholder’s promise to provide notice to its insurer of occurrence, claim or suit must be performed punctiliously at the risk of complete forfeiture of coverage. Following a relaxing of this rule when insurers themselves are the policyholder – that is, when they are in their capacity as cedents seeking reinsurance recovery – and given the lack of analytic foundation for New York’s formalism (addressed further below), many thought that New York would eventually adopt some form of what is usually called the “notice/prejudice” rule (probably akin to that in neighboring Connecticut, cited infra).

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D&O Implications of the AIG Mess

New York’s Attorney General and Insurance Commissioner have filed a civil complaint against AIG, Maurice Greenberg, and Howard Smith. (A copy of the complaint is available at http://www.oag.state.ny.us/press/2005/may/Summons%20and%20Complaint.pdf .) Further insight into the nature of the transactions comes from the SEC’s complaint against a former executive of General Re, who allegedly aided and abetted some of the allegedly fraudulent conduct engaged in by AIG to improve its balance sheet, which made a $144 million decrease in reserves in fourth quarter 2000 look like a $106 million reserve strengthening, and a $187 million decrease the following quarter appear as a $63 million increase in reserves, measures that improved AIG’s appearance to Wall Street and positively affecting its share price. (The SEC’s June 6 complaint is available at http://www.sec.gov/litigation/complaints/comp19248.pdf ) While an increase in reserves decreases an insurance company’s surplus, a positive one-dollar movement in AIG stock price supposedly increases Greenberg’s personal worth by $65 million, according to the NY complaint. Other actions have been filed against Mr. Greenberg relating to AIG, including one filed the same day by Ohio seeking to block his now well-known effort to give several million AIG shares of stock to his wife as the turbulence was increasing. See http://www.kpmginsiders.com/display_reuters.asp?cs_id=133552

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Denominators and Punitive Damages in Bad-Faith Cases

In State Farm v. Campbell, which limns the constitutional parameters of awarding punitive damages, the United States Supreme Court in a third-party insurance bad-faith case ruled that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” 538 U.S. 408, 425 (2003). The State Farm Court went on to hold that the “precise award . . . must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff[, and] courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.” Id. at 425-426. See generally Simon v. San Paolo U.S. Holding Co. Inc., (Cal. June 16, 2005), available at http://www.courtinfo.ca.gov/opinions/documents/S121933.PDF.

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Just the Fax: Coverage for Unsolicited Faxes under the TCPA

It wasn’t long ago when junk faxes were the spam about which legislators were concerned. Congress responded in part by passing the Telephone Consumer Protection Act, 47 U.S.C. § 227 (“TCPA”), a statute that has spawned its own cottage industry of lawsuits because of the mandatory liquidated damages provision of $500 per violation and the marketing technique of “blast” faxing, where a vendor sends advertisements by fax to thousands. Lawyers have brought class actions seeking $500 a pop for each unsolicited fax sent by companies, typically local businesses who have contracted with blast-fax advertising companies. E.g., http://www.law.com/jsp/printerfriendly.jsp?c=LawArticle&t =PrinterFriendlyArticle&cid=1076428446748

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Recoupment of Defense Costs

The question whether an insurance company that defends its policyholder may recoup the defense-cost payments it made continues to be litigated with divergent results. Most recently, the Illinois Supreme Court and Montana Supreme Court reached opposite conclusions in opinions issued a few weeks apart. See General Agents Insurance Company Of America, Inc. v. Midwest Sporting Goods Company, http://www.state.il.us/court/Opinions/SupremeCourt/2005/ March/Opinions/Html/98814.htm (Ill. March 24, 2005); Travelers Cas. & Sur. Co. v. RIBI Immunochem Research Inc., http://www.lawlibrary.state.mt.us/dscgi/ds.py/Get/File-39479/04-228.pdf (Mont. March 1, 2005).

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