D&O

Ninth Circuit Correctly Recognizes that Insured-Versus-Insured Exclusion Does Not Bar FDIC From Pursuing Coverage Under Failed Bank’s D&O Policy

The Ninth Circuit recently held in St. Paul Mercury Insurance Co. v. Federal Deposit Insurance Corp. that a D&O policy’s insured-versus-insured exclusion does not prevent the Federal Deposit Insurance Corporation (“FDIC”), as receiver of an insured failed bank, from obtaining coverage under such policy. In so doing, the Court of Appeals follows the Eleventh Circuit and other courts that have addressed this issue and sided with the policyholder. This decision, while unpublished, is a timely one for policyholders, as regulators including the FDIC litigate these claims arising out of the financial crisis. Just this week, a Georgia jury returned a verdict in favor of the FDIC that awarded almost $5 million in damages for claims relating to a bank’s negligent management by its former officers and directors.

The FDIC brought claims against the former directors and officers of Pacific Coast National Bank for negligence, gross negligence, and breaches of fiduciary duty. The FDIC alleged that the former directors’ pursued an aggressive lending strategy, failed to ensure that loan practices complied with the bank’s policies, and inadequately supervised subordinate officers, which led the bank to suffer millions of dollars in losses. The insurer, The Travelers Companies, Inc., which comprises appellant Saint Paul Mercury Insurance Company, filed a declaratory judgment action to establish that the policy does not cover the FDIC’s claims. Considering the parties’ cross-motions for summary judgment on the action, the district court rejected Travelers’ contention that the exclusion barred coverage, holding that the exclusion did not expressly bar claims by the FDIC.

On appeal, the key issue was whether the language of the exclusion, which barred coverage for claims brought “by or on behalf of any Insured or Company,” was ambiguous. The FDIC argued that the phrase “on behalf of,” as applied to its action against the directors, was ambiguous, relying on the facts that it initiated the underlying case almost three years after the bank’s failure and that no person from the bank had any involvement in bringing its claims.

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Federal Court Rejects D&O Insurer’s Interpretation of “Loss” and Extends Coverage to Non-Recourse Judgment Against Individual Insureds

A federal district court in the Eastern District of New York recently held that a D&O policy’s definition of “Loss” that includes amounts an insured is “legally obligated to pay” extends to consent judgments that forebear collection by the underlying plaintiffs. In Intelligent Digital Systems, LLC, v. Beazley Insurance Co., Inc., the court joined a majority of courts in other jurisdictions that have addressed the issue and rejected the insurer’s argument that because individual directors and officers had entered consent judgments in which the plaintiffs agreed not to collect against them, they had not suffered any “Loss” as defined by the policy. This ruling arose out of a series of stipulated agreements made in an underlying lawsuit by plaintiff Intelligent Systems, LLC against some former directors of the surveillance technology company, Visual Management Systems, Inc. In exchange for the directors’ assigning their coverage rights under their policy to Intelligent Systems, LLC, the underlying plaintiff agreed to “unconditionally forebear” its collection of the judgments against the insured directors. The agreement, however, expressly provided that the insured directors did not waive the right to assert a claim against the D&O insurer.

To reach this ruling, the Court considered a legal question of first impression under New York law: Does a consent judgment, with conditions effectively exculpating an insured from satisfying a judgment for which he might otherwise be personally liable, constitute an amount that the insured had become “legally obligated” to pay?

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FIFA Official Beats the Offside Trap: Court Orders Insurers to Advance Defense Costs

Last week, in a coverage match hosted by the Eastern District of New York, the referee ordered insurers to advance defense costs to Eduardo Li, a former president of the Costa Rican soccer federation and a former official of the Federation Internationale de Football Association (FIFA), the governing body of international soccer. In 2015, the United States red-carded Li along with twenty-nine other figures in international soccer, charging them with participation in an international racketeering conspiracy. The prosecutors alleged more than twenty years of rampant corruption at the highest levels of FIFA, smearing the beautiful game with tales of bribery and money laundering as marketing and broadcast contracts were illicitly awarded for briefcases of cash passed under the table or financed through murky transactions.

Li tendered his request for advancement of defense costs under FIFA’s $50 million D&O policy while he was detained in Switzerland pending extradition to the United States. The insurers quickly denied coverage based on a so-called “RICO exclusion” in the policy—an argument they later dropped—and their position that Li’s indictment did not constitute an “investigative proceeding.” They also disputed whether Li was an insured under the policy.

In his coverage action against the insurers Li kept a clean sheet before Judge Raymond J. Dearie, the same judge presiding over the criminal racketeering case, who denied the insurers’ motion to dismiss and granted Li’s request for a preliminary injunction requiring the insurers to advance his criminal defense costs. In granting the preliminary injunction, Judge Dearie explained that a policyholder’s inability to timely receive defense costs under a professional liability policy constitutes irreparable harm. The Court also determined that Li made a sufficient showing that he would be entitled to advancement of costs under the policy’s broad, world-wide coverage for defense, investigation, and extradition costs. The Court inferred the duty to contemporaneously advance costs from a policy provision stating that “[s]hould the question of any wrongful intent be at issue, cover shall be granted for the defence costs” but an insured person “found guilty of wrongful intent . . . will be obliged to reimburse the Insurer for all payments made on his or her behalf.”

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Tipoff for the Question of Whether D&O Policies Cover TCPA Related Claims

shutterstock_175328363In 1991 Congress passed the Telephone Consumer Protection Act (“TCPA”) to protect customers from unsolicited telemarketing. It has since become an attractive avenue for consumer class action litigation. In the past, defendant-policyholders sought coverage under their Commercial General Liability (CGL) policies for costs incurred as a result of TCPA claims. When CGL policies began to include exclusions for TCPA claims, insureds began to seek coverage elsewhere, including under D&O policies. When presented with a TCPA claim, many D&O carriers have argued that coverage is precluded under the personal injury claim exclusion—particularly the “invasion of privacy” provision of the personal injury claim exclusion—found in the majority of private company D&O policies. While some courts have relied on this exclusion to bar coverage for TCPA claims, its application is questionable. Now the Ninth Circuit is about to weigh in.

In 2012, Los Angeles Laker fan David Emanuel sent a text message to a number posted on the scoreboard at the Staples Center during a game. He was responding to an invitation to attendees to text personal messages for the purpose of having them featured on the scoreboard. After sending his text, Mr. Emanuel received a promotional text back from the Los Angeles Lakers and incurred a charge from his phone company for the incoming text.

The Lakers’ response text message became the basis of a class action lawsuit brought by Mr. Emanuel on behalf of himself and others similarly situated. The lawsuit alleged that the Lakers violated the TCPA when the promotional response to Mr. Emanuel was sent. The California district court ultimately dismissed the case with prejudice, and the parties settled the case while an appeal was pending.

The Lakers turned to their insurer, Federal Insurance Co., for coverage related to the class action. Federal denied coverage and refused to defend the Lakers against the claims alleged in the lawsuit. Federal’s basis for denial was an exclusion for claims “based on, arising from, or in consequence of . . . invasion of privacy.”

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There’s a New Sheriff In Town: Coverage for World Bank Investigations and Sanctions

shutterstock_235340206Led primarily by the U.S. DOJ and SEC, global anti-corruption efforts have escalated markedly over the past decade. The increased number of investigations and high-dollar penalties associated with FCPA have caught the attention of the both insurers and insureds, even leading some companies to purchase standalone liability policies that cover FCPA-like violations. But while a number of significant international treaties promoting the fight against corruption were enacted beginning in the mid-1990s, member states beyond the U.S. have been somewhat slow to join the enforcement brigade. UK prosecutors have shown some desire to bring cases under the UK Bribery Act, but thus far their efforts have not nearly approached those of prosecutors in the U.S. But in the past few years, a completely new player has emerged: the World Bank.

The World Bank (and other multi-lateral development banks) has its own anti-corruption enforcement authority and framework through which it investigates, prosecutes, tries, and sanctions private-sector companies for misconduct (i.e., fraud, corruption, collusion, coercion, and/or obstruction) in relation to Bank-financed projects. Whenever a company signs a Bank-financed contract, such as a government contract to perform work on a development project financed by World Bank funds, it submits to this jurisdiction.

The World Bank is now showing that it’s not shy about exercising this authority. In fiscal year 2015 alone, the Integrity Vice Presidency (“INT”), the World Bank’s investigatory arm, opened 323 preliminary inquiries pertaining to 86 countries; selected 99 of those inquiries for full investigation; and found sufficient evidence to conclude in 60 of those investigations that it was more likely than not that sanctionable misconduct had occurred. (Unlike in criminal proceedings in U.S. courts, the World Bank can impose sanctions merely upon a finding that it is “more likely than not” that sanctionable misconduct occurred.)

The World Bank’s aggressive enforcement efforts will have serious implications for many companies engaged in development work and other work in the developing world. First, sanctions can include restitution and, more critically, temporary or permanent “debarment”. Debarment not only makes a company ineligible to participate in future Bank-funded projects, it can extend to affiliates, successors and assigns, can result in either formal or informal “cross-debarment” by other development banks, and results in publication of the company’s name on a list of debarred entities. Moreover, as when facing a DOJ investigation into possible FCPA infractions, the cost of investigation and response to a World Bank inquiry itself can be very expensive. Given the relative novelty of World Bank anti-corruption enforcement, targets of investigation may not always consider whether their insurance covers these large expenses. But they should.

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Tenth Circuit Employs “Animal Farm” Rule of Insurance Policy Interpretation, Finding Some Words are More Equal Than Others

In George Orwell’s Animal Farm, the governing principle that “All animals are equal” was revised by the pigs, who had ascended into power, to “All animals are equal, but some animals are more equal than others.” A recent decision by the Tenth Circuit (applying Kansas law), BancInsure v. FDIC, appears to apply a similar principle of insurance policy interpretation, finding that the plain meaning of one policy provision may trump the equally plain meaning of another conflicting provision. This is a departure from well settled rules governing how courts interpret insurance policies. Among those rules are that where there is no ambiguity, courts are to apply a provision’s plain and ordinary meaning. However, courts are to read the policy as a whole and cannot interpret one policy provision (even if it is clear) in a way that would render another provision meaningless (because all words in a policy are equal). Where the plain meaning of two or more policy provisions conflict, the policy is ambiguous and the court must adopt a reasonable reading that favors coverage. Instead of employing these rules to resolve an ambiguity in the D&O policy at issue, the court in BancInsure gave effect to one provision that excluded coverage, even though doing so required it to disregard another clear provision that would have allowed coverage—effectively deciding that “all words are equal, but some words are more equal than others.” READ MORE

Blurred Lines: The Professional Services Exclusion in D&O Policies for Services Companies

shutterstock_39539488Professional services companies need to be extra-careful when placing Directors and Officers liability (“D&O”) coverage to ensure that their policies don’t take away with one hand what they appear to give with the other. A new district court ruling suggests that a professional services exclusion found in most D&O policies may erase most of the coverage such companies believe they’re purchasing.

Banks and other financial institutions, like most companies, usually carry D&O insurance to protect themselves and their decision-makers from claims of alleged ”Wrongful Acts,” including alleged negligence or misleading statements. They may also have Errors and Omissions or Professional Liability (“E&O”) coverage to respond to claims arising from the performance of services requiring special training or expertise. To avoid overlapping coverage for claims that may be covered under an E&O policy, D&O policies typically include a so-called “professional services” exclusion that draws a line between these two lines of coverage. When applied to a professional services company, however, this line becomes blurred. As demonstrated by a recent decision from the U.S. District Court for the Southern District of Florida, broadly applying this exclusion to services companies like financial institutions threatens to eviscerate the companies’ D&O coverage.

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Closing the Courthouse Door to Insurance Disputes: Mandatory Arbitration Clauses in Insurance Policies Gain Traction

shutterstock_174841607Your insurer wrongfully denies coverage—so you file a complaint in court, right? Not so fast! Many new insurance policies now include mandatory arbitration provisions. While at one time arbitration clauses were common only in policies issued by foreign insurers, they are now finding their way into policies issued by domestic insurers and in all types of coverages, including commercial liability insurance policies, D&O, E&O, employment liability, and cyber insurance. While the terms of these clauses vary, to the extent they are enforceable or cannot be negotiated out of the coverage, arbitration provisions close the courthouse doors to insurance disputes and force policyholders and their insurers to resolve disputed issues in private and free from judicial scrutiny.

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Oh-FAC! There’s Coverage for That?

shutterstock_219213349Policyholders can include violations of economic sanctions among the laundry list of risks their companies face. Economic and trade sanctions are administered by the Office of Foreign Assets Control (“OFAC”), a little known agency within the U.S. Department of the Treasury. The sanctions that OFAC administers and enforces include broad embargoes of Crimea, Cuba, Iran, North Korea, Sudan and Syria, as well as restrictions against doing business with designated individuals and certain of their affiliates. As recent events show, failing to abide by these sanctions can result in significant liability. And where there is liability, policyholders should consider whether there may be insurance coverage.

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How to Respond to Insurance Companies’ Questions While Preserving Your Coverage and Your Sanity

shutterstock_237243613When you, as a policyholder, give an insurance company notice of a claim, the insurance company often will send a “reservation of rights” letter—especially where there are complex liability claims—preserving its right to give you a coverage decision after it investigates the claim (that is, if it doesn’t accept or deny the claim outright). These letters usually include lengthy lists of coverage defenses the insurance company reserves the right to assert and questions that it wants you to answer. Many policyholders are naturally overwhelmed by the questions and have no idea how to respond. But respond you must. And how you respond has the potential to make or break your claim. Luckily, common sense and some simple rules are usually enough to make sure your claim survives this early hurdle.

The insurance company’s questions often pose three problems. First, they may seek information solely to enable the insurance company to deny coverage, often on grounds that the notice was late. Questions such as “When did you know that there was a problem” seek to gain information to enable the insurance company to deny coverage on the basis that you failed to notify them timely of the problem. But you must remember that you are under no obligation to give the insurance company information that it can use to defeat coverage. You should provide information adequate to describe the nature of the claim, but it is the insurance company’s obligation to figure out how to defeat coverage.

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