In his seminal book published more than 75 years ago entitled Business Interruption Insurance (Philadelphia 1930), C.M. Kahler wrote that “[u]nfortunately the development of an adequate system of business interruption insurance has been hampered by the fact that it has always been considered as a part of the direct damage insurance of the particular hazard.” Had United Airlines heeded Kahler’s insights into the nature of business-interruption coverage it could have structured its policy coverage to position itself better for recovery from its 9/11 losses; instead, United Airlines litigated a case that it lost at the trial court level and lost again on appeal to the Second Circuit. United Air Lines, Inc. v. Insurance Co. of the State of PA (2d Cir. Feb. 22, 2006).
Insurance contracts typically are creatures of state law. As a result, unlike other kinds of complex litigation, insurance-coverage disputes often are litigated in state, not federal, court. There are exceptions to this where there is diversity jurisdiction, though in complex, multiparty coverage cases it is often unusual for there to be complete diversity between and among all the parties.
Insurance disputes can end up in federal court under admiralty jurisdiction, which provides a jurisdictional hook to get into federal court where the insurance is maritime in character – or what is sometimes referred to as “salty.” There are traditional forms of maritime insurance that are subject to federal jurisdiction, such as hull, protection and indemnity, and cargo. Other forms of coverage may have a relationship to maritime risks, and parties may fight over getting into federal court and having federal admiralty law apply.
Claim frequency and claim values are going up for directors and officers of corporations, but insurance premiums are going down, coverage terms are getting broader, limits are increasing, and retentions are constant or decreasing. This is one of the findings in the most recent report from Tillinghast/Towers Perrin. As the report states, it “seems counterintuitive that there is a decrease in the excess premium given the increase in excess limits and increasing claim severity.” Premiums decreased by 8 percent in Tillinghast’s survey (downward pressures confirmed by others) compared to last year’s survey of some 2000 survey participants, with average limits being $14.3 million. And 25 percent of US participants reported increased enhancements to their coverage terms and another 10 percent reported narrowing of exclusions. The principal markets for this insurance in the US are provided by Chubb and AIG, with other players trying to gain market share in different segments, such as Beazley.
Following the recent uptick in corporate liability and corresponding coverage disputes — and the reported instances where directors have been required to dig into their own pockets as part of a settlement, directors and officers increasingly are asking about the precise terms of the coverage (roughly one-half of all companies in the Tillinghast survey). Increasingly, corporate directors and officers are scrutinizing (or should be scrutizing) the terms of the corporate-provided indemnities provided by their companies, in addition to evaluating the other form of protection for them, private insurance, and in both instances raising questions of credit-risk for each. What follows is a guide for in-house counsel, risk managers, and the directors and officers themselves to understand the coverage afforded by D&O policies and the specific changes that one might look for, and one needs to understand that issues may change depending on the particular industry in which the company operates. Sweating the small stuff here is important, because whether or not an insurance company affords indemnification may turn on the presence of one word or phrase – or its absence.
AIG has settled New York state charges related to accounting, bid rigging, premium overcharges, and other improprieties. There are many components of this settlement, including admissions of wrongdoing by AIG. One component of interest to corporate policyholders is the $375 million fund being established for the benefit of policyholders that purchased or renewed AIG excess casualty policies between January 1, 2000, and September 30, 2004. Each policyholder within this class will receive a proportionate share of the settlement fund based on the ratio of the premiums it paid to the amount paid by all policyholders in the class.
For more than fifty years, policyholders and their insurers have been struggling over the insurer’s promise to defend and the insurer’s control the defense. Policyholders properly have been concerned that an insurance company that controls the defense of an action potentially covered by the carrier’s duty to indemnify will use that control to avoid that very same indemnity obligation. While in egregious cases where a lawyer hired by the carrier has abused his or her relationship with the insured, the client, so as to favor the lawyer’s source of income – the insurance company – the courts have responded to protect the insured’s interests. But most courts have ruled that such after-the-fact remedies are insufficient: they do not adequately compensate for the injury; meritorious claims are not pursued (in part because insureds may not discover the abuse); and the potential for this abuse alone undermines the dominant purpose of the insurance relationship to afford protection and peace of mind for the insured.