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

Corporate policyholders, directors and officers should monitor these matters because AIG is seeking coverage under the directors’ and officers’ insurance policies that it purchased to protect its directors against claims of liability. According to Business Insurance, “AIG purchased about $125 million of limits, with Great American Insurance Co. of Cincinnati, Ohio, writing the first $25 million layer . . . . Great American often offers primary D&O limits to financial institutions, but the insurer typically does not write primary coverage for other large risks, according to market executives. Warren, N.J.-based Chubb Corp. participates on a low excess layer of AIG’s program, according to sources.” See AIG Set to Test Own Cover, BUSINESS INSURANCE (May 16, 2005), at 1, available at http://www.businessinsurance.com/cgi-bin/article.pl? articleId=16843&a=a&bt=aig
Here’s the point: For AIG – or Messrs. Greenberg and Smith – to seek insurance coverage, they likely have to take the position that certain exclusions dealing with fraudulent misconduct (that we can assume appear) do not apply and that certain monetary relief being pursued against them represent covered ‘losses.’ But when AIG does this, it will be admitting that such a construction of the policy language supporting coverage is reasonable, setting the stage for the argument that relative to its own insureds similar constructions are reasonable, yielding the result that as AIG reaches for coverage it exposes itself on the policies it issued. (And
AIG’s own insurers should adopt the inverse tack of looking to AIG’s positions in service of denials of coverage to buttress their arguments that AIG now is making opportunistic arguments seeking recovery here. E.g., Serio v. National Union, 2005 NY Slip Op 03977 (May 17, 2005), available at http://www.courts.state.ny.us/reporter/3dseries/2005/2005_03977.htm. Oh what a tangled web.)
AIG may recognize this box and elect not to pursue the coverage it purchased so as to protect the coverage it sold. But it cannot control Messrs. Greenberg and Smith who no doubt as major shareholders of AIG have an interest in AIG’s not paying claims, but probably have an interest in not paying out of their own pockets for their attorneys (or any settlement or judgment) either. Given the nature of the conduct alleged, it may well be that AIG cannot indemnify these gentlemen pursuant to standard corporate indemnifications, which means that Greenberg and Smith will seek this coverage on their own. (Whether AIG can avoid indemnifying these alleged scoundrels is a tricky question. See Bergnozi v. Rite Aid Corp., http://courts.state.de.us/opinions/ (qnuzep45rti2tom1sweqc5r1)/download.aspx?ID=37080 (Del. Ch. Oct. 20, 2003); Globus v. Law Res. Serv. Inc., 418 F.2d 1276, 1288-89 (2d Cir. 1969). While the individual’s own pursuit of D&O coverage may not be quite the admission against interest that AIG’s seeking this coverage is, it still is probative, given who they were in the company and their knowledge of insurance.
Maybe AIG will commit hari kari on the coverage it purchased in the hope of obtaining the result that both the D&O coverage it purchased does not apply and that Messrs. Greenberg and Smith are not entitled to indemnification under the corporate indemnity. Compare http://www.sec.gov/news/press/2004-67.htm (indicating SEC’s ire at Lucent’s indemnifying its directors/officers). That seemingly would be the company’s best play.
At all events, in coverage disputes henceforth with AIG, Great American, and Chubb, policyholders should be pursuing discovery into the exchanges on coverage.
A final twist bears mention: Throughout Attorney General Spitzer’s complaint, he relies on the individual defendant’s invocation of his right to refuse to self-incriminate under the Fifth Amendment. Of course, in a criminal case, a prosecutor may not invite a jury to assume that the answer to a question that is not responded to on Fifth Amendment grounds supports an inference that the defendant is guilty; in a civil case, that limitation generally does not apply. (See generally Robert Johnston, Inferring Dishonesty: The Fifth Amendment and Fidelity Coverage, available at http://www.spriggs.com/news/pdfs/ACFB9AE.PDF .) But the New York action is a civil complaint, which presumably makes use of Greenberg’s invoking the Fifth fair game to support the inference that the answer would support the violation being alleged. (Query whether the State may sidestep the Fifth Amendment this way, which surely will be litigated in the case.)
But given the crucial use of the refusals-to-answer as an element of proof in the State’s case, one can assume that the D&O insurers will contend that the failure to answer somehow lays the foundation for a breach of the duty to cooperate. See Allstate Ins. Co. v. United Ins. Co., 2005 NY Slip Op. 02419 (March 28, 2005) http://www.courts.state.ny.us/reporter/3dseries/2005/2005_02419.htm. There ordinarily is not an “examination under oath” provision in D&O policies, and one can surely mount the argument that the D&O insurers’ (hypothesized) demand that Messrs. Greenberg and Smith waive their Fifth Amendment protections or sacrifice D&O coverage smacks of bad faith (see Gruenberg v Aetna Insurance Co., 9 Cal 3d 566 (1973); cf. Sakup v. State, 227 N.E.2d 822 (1967) (New York first-party bad faith). This is especially true in the context of an insurance policy with (we suppose) exclusions for fraud and one that lacks an examination-under-oath provision; in other words, it would be incongruous to permit the D&O insurers to deny coverage for refusing to answer questions/breach of cooperation when a crucial purpose of the policy is to protect against claims alleging fraud. Compare Federal Ins. Co. v. Kozlowski, 2005 NY Slip Op 02287 (March 22, 2005) http://www.courts.state.ny.us/reporter/3dseries/2005/2005_02287.htm (requiring insurer to defend and precluding litigation of its rescission claim while liability action against directors and officers were pending).
The ebbs and flow of the related liability and coverage matters here bears monitoring by policyholders and, for the parties involved, careful consideration of the big picture. (For other comments and tracking of the AIG mess, see the White Collar Crime Prof Blog.) These same tensions will arise regarding the application of ERISA fudiciary-liability insurance coverage, since (at least one) ERISA-based class action has been filed against Mr. Greenberg and others.