Volume 7 | issue 1
EThe Insurancenf Policyo Enforcementrce Journal
In this Issue
Gene COVER STORY Celebrating the incredible journey Anderson of Gene Anderson, from humble The Dean of beginnings on a farm to slaying Policyholders’ corporate giants. (And spinning Attorneys some great stories along the way.) Looks Back
ADDICTED TO AIG? The impacts of the troubles for AIG are profound for business and policyholders. Special report begins on Page 9.
A MERGER OF COASTS AND CULTURE Meet the key people at Anderson Kill Wood & Bender, LLP.
Enforce: The Insurance Policy Enforcement Journal is the industry’s premiere source for information and analysis of the enforcement of insurance policy provisions.
Settle for Everything.® Enforce Contents
9 Special Report: The AIG Addiction The impact of the crippled giant on the insurance marketplace. What happens to policyholders if AIG enters bankruptcy? Page 10 A respected broker describes how brokers can help during a time of turmoil in the insurance industry. Page 15 Would Americans be better served if the federal government regulated the insurance industry? Page 17
22 When East Meets West The merger of Anderson Kill & Olick, P.C. and Wood & Bender, LLP is about more than two firms in the same practice area. They share a culture of community service. Meet the key attorneys at Anderson Kill Wood & Bender, LLP.
25 Keeping an Eye on the Ball By John G. Nevius, P.E., Edward J. Stein, and David E. Wood Hot button issues to watch: Environmental Liability; General vs. Professional Services Liability; Directors’ and Officers’ Liability.
30 Attorney Conflicts of Interest By William G. Passannante and David P. Bender, Jr. It is critical for law firms to steer clear of the conflicts inherent in representing both policyholders and insurance companies.
2 Enforce: The Insurance Policy Enforcement Journal Volume 7 | issue 1
Shorter Takes From the Publishers Page 4 A milestone edition for a milestone event. Risk Radar Back Cover Hot topics to watch in the coming months.
Enforce: The Insurance Policy There’s more online Enforcement Journal is published semi-annually by Anderson Kill Wood www.andersonkill.com & Bender LLP, a California-based law firm with a national practice in insurance policy enforcement. The firms of Wood & Bender LLP and Anderson Kill & Olick, P.C. had each built a national Publishers reputation in insurance policy enforcement cases. David E. Wood Their merger in January creates the strongest firm David P. Bender, Jr. in the nation in this area. Enforce will continue to Editor in chief be published on a regular basis. In the meantime, Tim Gallagher the firm’s website will continue to keep you up to Contributors date on the latest developments in the field. David E. Wood, David P. Bender, Jr., David A. Shaneyfelt, John G. Nevius, P.E., Visit the firm’s website to find past articles on Edward J. Stein, William G. Passannante important topics. Design Our website is a great place to learn about: Publishing Resources, Inc.
Editorial inquiries and story ideas are ... Details and history of the firm and our attorneys; welcomed. Contact Tim Gallagher at ... Our successes in previous cases; [email protected]. ... Expert opinions in matters of insurance policy Subscriptions are complimentary for clients, enforcement; friends of the firm and those interested in the development of insurance policy enforcement law. ... Contact information for reaching our lawyers. Copyright 2009 by Anderson Kill Wood & Bender LLP. All rights reserved. This magazine informs clients, friends, and fellow professionals of developments in insurance coverage law. The articles appearing in Enforce do not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. The firm has offices in New York, NY; Newark, NJ; Philadelphia, PA; Greenwich, CT; Ventura, CA; and Washington, D.C.
Volume 7 | issue 1 3 From The Publishers
Dear Readers: been interviewed by regional and national insurance and mass media publications like The National Law The first of this year marks an exciting milestone in Journal, Forbes, USA Today and the Los Angeles Daily the life of Wood & Bender, publisher of Enforce. On Journal, and speaks regularly on insurance policy January 1, 2009, we announced our merger with New enforcement topics to professional and lay audiences. York-based Anderson Kill & Olick, P.C., to create the The firm founded the award-winning magazine preeminent insurance policy enforcement firm in the Enforce, considered the go-to journal of business country. We could not be more pleased and excited. insurance policy enforcement. This issue of Enforce celebrates this marriage and the expanded scope of service the combined firms now The merger, which became effective January 1, 2009, offer nationwide. It is dedicated to Anderson Kill’s adds Wood & Bender’s 14 attorneys to Anderson Kill’s founding partner, the legendary Eugene Anderson. 79 attorneys. Through this merger, Anderson Kill adds a California presence to its complement of offices Gene Anderson literally wrote the book on corporate in New York, NY; Newark, NJ; Philadelphia, PA; insurance recovery. The first nationally-recognized Greenwich, CT and Washington, D.C. expert in the field, Gene launched the law firm that bears his name in 1969. Today Anderson Kill is Anderson Kill has long been the most substantial widely respected for an encyclopedic command of national insurance firm in the country, with no ties to insurance and its dedication solely to the interests of insurance companies, no conflicts of interest, and no the policyholder adverse to insurers. The firm recently compromises in their devotion to policyholder interests received a No. 1 ranking for Insurance: Dispute alone. Wood & Bender shares this commonality of Resolution in New York; Litigation: Insurance in New purpose. Its unique tag line, “Settle For Everything®,” Jersey and Insurance nationwide by Chambers USA will now be adopted by the combined firms as the 2008: America’s Leading Lawyers for Business. ultimate expression of the combined firms’ policy enforcement practice philosophy: to demand and recover from insurance companies nothing less than the full extent of the obligations they owe. In these times of tightened corporate belts, American business simply cannot afford to leave money on the table.
Anyone familiar with insurance knows Anderson Kill. Enforce and Anderson Kill Wood & Bender salute Gene Anderson and his partners who carry on the tradition of excellence he pioneered. There simply is no one more respected in the field. Together we form the nation’s largest practice devoted exclusively to corporate insurance recovery. Our thanks to the clients and david e. wood and david P. bender, JR. friends of both firms for their support of this and the The fusion of Wood & Bender’s policy enforcement many other publications generated by Anderson Kill practice with Anderson Kill’s has been seamless. and Wood & Bender lawyers in the past. Wood & Bender has represented corporate policyholders in insurance recovery matters since Please enjoy this tribute to Gene Anderson. 1995, and has a strong presence in the West. The firm has extensive experience representing public and Sincerely, private companies and municipalities in complex David E. Wood David P. Bender, Jr. insurance coverage litigation. It has written for and [email protected] [email protected]
As a national leader in insurance policy enforcement, Anderson Kill Wood & Bender is a dedicated advocate for the cor- porate policyholder’s right to full value from its insurance programs. Enforce is the flagship of our suite of print and online publications, our clearinghouse for new ideas on gaining the broadest insurance coverage allowable.
4 Enforce: The Insurance Policy Enforcement Journal The Dean of Policyholders’ Attorneys Looks Back
any attorneys dream of a breakthrough court win that will open doors for Mthemselves and their law firms. Gene Anderson’s breakthrough victory against three insurance companies in Keene vs. Insurance Co. of North America reshaped the landscape not only for his firm but for corporate policyholders everywhere. At a time when corporations across the country were facing huge liabilities for pollution and asbestos claims that alleged damage over the course of many decades, Keene helped companies tap insurance policies that extended over the full period in which their liabilities developed.
As Mr. Anderson moved from that signature victory to other major insurance coverage battles, a new practice area, now known as insurance recovery or insurance enforcement, took shape. Over the ensuing 27 years, Mr. Anderson has mentored a generation of zealous advocates for policyholder’s rights. GENE ANDERSON The year was 1981, and client Keene Corporation faced millions of dollars in liabilities stemming from personal injury claims from plaintiffs alleging Faced with these “three bears,” Mr. Anderson came that they had been exposed to asbestos over the up with a reverse-Goldilocks solution. All three were course of many years. The company tendered the “just right” — that is, right about the others. If a suit to three insurance companies that had insured carrier insured the company at any time during the it at different times — each of which pointed the exposure, injury or claim, it was liable for the loss. finger at the others. The Court of Appeals accepted that argument, One carrier claimed that the insurer on the risk which established the doctrine of the “triple when the plaintiffs were first exposed to the trigger” for insurance coverage: a claim can be asbestos was on the hook. The second carrier triggered at the time damage occurs, at the time asserted that the claim’s responsibility was with it manifests itself, or at the time when a plaintiff the insurance carrier of record when the plaintiff seeks redress. realized he was ill. And the third alleged that the carrier on the risk when the first plaintiff The victory was also especially sweet for Mr. demanded relief from the insured company was Anderson because, he recalls, an opposing responsible. attorney went out of his way to belittle Continued next page
Volume 7 | issue 1 5 him — only to find that ever sat down at a PC, Mr. of Appeals judge ruled that the Mr. Anderson ultimately Anderson said, “I don’t know common clause “sudden and outworked him. “I spent four how I got this vision. I just accidental” in the pollution days holed up in a hotel room thought, put all this stuff in exclusion was ambiguous, getting ready for a 15-minute what we called ‘in the can,’ and upholding the win. argument,” Mr. Anderson figure out ways to access it so recalls. “And my client said, that when the next case comes With the landmark wins ‘Never underestimate a up you’ve got it. Everybody came widespread recognition. dedicated workaholic.’ I guess does it now. I did it to make it American Lawyer described he was right, but I also was easier for me.” Mr. Anderson as “a furious at that case because brand name specialist for the lawyer for Hartford said Armed with his “can,” Mr. policyholders.” Business at one point ‘Mr. Anderson Anderson kept winning Insurance designated him one has more enthusiasm than business, to the point where of the 20 people who have had experience.’ And I thought, he was billing $35 million per the greatest impact on property ‘God I love that. I hope it’s year. He found like-minded and casualty insurance over going to remain true the rest peers who devoted themselves the past 20 years. Business of my life.’” to coverage litigation on Week described Mr. Anderson
“I was furious at that case because the lawyer for Hartford said at one point, ‘Mr. Anderson has more enthusiasm than experience,’ And I thought, ‘God, I love that. I hope it’s going to remain true the rest of my life.’”
Inventing a Practice Area behalf of policyholders only, as the “dean of policyholders’ In the years that followed, and mentored a generation attorneys.” Best’s Review called an enthusiasm that kept him of attorneys who exploited Anderson Kill & Olick, P.C. working 12 hours per day, and built on precedents he “a national giant in insurance seven days per week drove established. coverage law.” Mr. Anderson to delve deeper into insurance industry “lore” Among those principles: that than anyone had before — that “pollution exclusions” to For All Policyholders: is, to unearth and contrast liability policies written in what insurance industry the 1970s did not bar coverage Pro Bono and Amicus Work executives had told regulators for accidental pollution that For Gene Anderson, enforcing and policyholders about policy occurred over an extended insurance policy provisions language while getting it period of time. One signature was never primarily about approved and selling policies, victory on this front was on money. He has made it his life’s with what they told courts behalf of Central Illinois crusade to battle on all fronts when denying coverage years Public Service Co., in a $12 what he sees as the insurance later. He pioneered building million lawsuit against Allianz industry’s structural propensity databases of such information Underwriters Insurance Co., to take in policy dollars and — before personal computers and other companies. After deny claims. He has taken this were ubiquitous. a jury found in October 1991 crusade into a long string of that the utility’s pollution was pro bono cases on behalf of Asked how he came to develop neither expected nor intended, individuals wronged by their firm databases before he’d a Seventh U.S. Circuit Court insurance companies, many of
6 Enforce: The Insurance Policy Enforcement Journal
them women denied coverage are frequently cited in judges’ lawyers. Anderson identifies with for breast cancer treatments decisions, including the U.S. the plaintiff’s attorney in the deemed “experimental” by Supreme Court decision in book because, he said, insurance insurance companies. Humana v. Forsyth (1999), lawyers always have treated him which limited the insurance the same way. One even likened Of that all-too-frequent defense industry’s McCarran-Ferguson his courtroom tactics to “the against medical coverage, Mr. defense, subjecting the magician’s sleight of hand.” Anderson says, “I think that insurance industry to liability this is a matter of corruption under the federal Racketeer because of money — though Influenced and Corrupt Meeting of Like Minds: it is very hard to get judges to Organizations Act (RICO). buy that. There is no principled Anderson Kill Ties Up With reason that a treatment “Gene uses insurance Wood & Bender recommended by reputable enforcement as a mechanism In recent years, after a period doctors shouldn’t be covered. of social reform,” observes of diversifying practices, An- It’s experimental only in Robert M. Horkovich, co-chair derson Kill has refocused on the sense that every medical of the insurance recovery its core competence: insurance procedure is experimental. practice at Anderson Kill. “He recovery. That focus was rein-
“I was furious at that case because the lawyer for Hartford said at one point, ‘Mr. Anderson has more enthusiasm than experience,’ And I thought, ‘God, I love that. I hope it’s going to remain true the rest of my life.’”
“The breast cancer litigation was has always recognized that forced this January by the firm’s important and satisfying,” he while insurance is essential, merger with Wood & Bender, continues. “We did not make the industry will not fulfill its a firm equally committed to any headline in The New York obligations without compulsion insurance enforcement. Mr. Times or anywhere else but I and constant vigilance. He’s Anderson notes, “The affiliation have a little plaque from those taken it upon himself almost with Wood & Bender is a reflec- breast cancer victims.” singlehandedly to supply the tion of Bob Horkovich’s firm necessary vigilance.” conviction that there is going Beyond his individual pro to be more business for cover- bono work, Mr. Anderson There is a work of fiction age lawyers than ever. Bob has found a truly unique way to that helped to crystallize Mr. steadfastly objected to any affili- extend his firm’s influence Anderson’s sense of mission. ation on the West Coast until and social impact. Working A 1998 profile in Best’s Review now. But Wood & Bender does closely with a nonprofit noted: good work.” advocacy group called United
Policyholders, he created a Visitors to his midtown culture, an infrastructure, and Manhattan office are likely to A Hitchhiker’s Guide to a conceptual framework that leave with a paperback copy of has led Anderson Kill to file John Grisham’s The Rainmaker Success in Law 250 amicus briefs in insurance and an exhortation from While the origins of a work coverage disputes across the Anderson to read the novel for drive as strong as Mr. Ander- nation — more than half of the depiction of a fraudulent, son’s are always mysterious, he which Mr. Anderson himself no-claims-paying insurance began life in humble and diffi- co-authored. The firm’s amici company and its unscrupulous Continued next page
Volume 7 | issue 1 7 cult circumstances, a child of the firm Chadbourne & Parke, of the Fresh Air Fund, sought Great Depression. Son of a single where he worked his way to his help in an alleged insurance mother who suffered bouts of partnership. While he always fraud case, which he handled disability, he recalls that for chafed at the firm’s hierarchical pro bono. “She’s the best thing extended periods, “I was an or- structure — and eventually that ever happened to me,” Mr. phan. I lived in foster homes and created a far more egalitarian Anderson told Best’s Review. an orphanage in Oregon. There culture at Anderson Kill — he “She really civilized me.” were a lot of farms involved. I was fortunate to find an unusual didn’t have the faintest idea of mentor at the white-shoe firm. “I Being “civilized” never what I wanted to do when I grew went to work for one of the few diminished Mr. Anderson’s up. But I knew I did not want to women lawyers, Janet Brown,” sense of connection to those spend the rest of my life shovel- he recalls. “Female partners less fortunate. Asked why he ing cow manure.” were as rare as hen’s teeth back does so much charity work, Mr. then. I found out later that I was Anderson reflects, “I don’t think ridiculed behind my back for there is any answer to that. I working with Janet — but she kind of pick up mutts, I guess. had an enormous influence on I like teddy bears too. I used to my career. A great, great woman. have a drawer full of teddy bears
Asked why he does so much charity work, Anderson says, “I kind of pick up mutts.”
She taught me, ‘Know more than that I gave to children who came anybody else knows.’ She was to the office. I was thinking the always very, very well prepared.” other day I need to replenish that drawer. I am out of teddy Starting work early, he put That lesson was massively bears. I can remember losing my himself first through high reinforced by Mr. Anderson’s teddy bear in an orphanage I school and then UCLA, where next boss — and future lived in outside Portland. I went he took a notion to go to law father-in-law — Manhattan back to that same place many, school but had little idea District Attorney Robert many years later and looked in how to go about it. While Morgenthau. Anderson worked the rooms to see if I could find hitchhiking, he met a lawyer for Morgenthau in the U.S. that teddy bear. I couldn’t.” who saw promise in him and Attorney’s office. “That’s going eventually helped him get to go down in my mind as the Perhaps that’s why Mr. admitted to Harvard Law high spot in my whole life,” Mr. Anderson has been a source of School. “Part of the key to my Anderson reflects. “Working aid and comfort to so many for life is hitchhiking,” he recalls. “I with Robert Morgenthau. He so long. s graduated from UCLA and put was amazingly sharp.” my thumb out. And hitchhiked on Wilshire Boulevard all the Another high spot in his life way to Harvard. I did that seven was marrying Mr. Morgenthau’s times.” daughter, Jenny, 25 years ago. Their relationship was kicked off, After law school, Mr. Anderson fittingly enough, by an insurance landed a job with the New York matter. Ms. Morgenthau, head
8 Enforce: The Insurance Policy Enforcement Journal Is American Business Addicted to AIG?
n September 2008, the United States Federal As the crippled giant lumbers ahead, what impact is Reserve provided AIG with $152 billion in it having in the insurance marketplace? How is that Icredit through four separate programs to help marketplace adjusting to a world no longer dominated it restructure and sell assets, staving off what the by AIG? Would the complete collapse of the company financial services giant claimed was imminent cause a paradigm shift in the availability of corporate insolvency when credit default swaps and other insurance? And if AIG did become insolvent, would derivatives came due for settlement. As of early the policyholders of its insurance company subsidiaries March, AIG was requesting $30 billion more be fully protected from its creditors? from the federal government in an exchange for preferred stock with no dividend. Whether The fact that these questions are being asked — and nearly $200 billion in government help will be that answering them is so urgent — speaks to how enough to save AIG remains very much an open deeply bound up in the U.S. economy, and in global question. insurance markets, AIG has become. Like it or not, corporate America has become addicted to AIG Taxpayer advocates ask why one of the largest capacity. As companies evaluate whether buying corporations in the world should be rescued coverage from AIG carriers means assuming the at taxpayers’ expense, through financing that risk of an AIG insolvency, they sometimes find it seemed risky at first and looks riskier by the difficult to avoid including an AIG insurer layer in week. The response has been that failure of AIG a program or an AIG insurer product in a portfolio. would trigger a domino effect throughout the financial world, exacerbating contraction of In the following pieces, highly-respected insurance the credit markets and depriving companies of professionals weigh in on the bottom-line issue: How (among other things) the short-term financing does the deterioration of AIG change the rules for they need to smooth the short-term gaps between American companies looking for capacity adequate to accounts payable and receivable. So far, objectors their needs, and for prompt and fair claim payments? largely have been overruled, and funds have been And what can these companies do to protect the released as requested. scope of coverage during this game-changing chapter in the modern history of insurance? s Whether and in what form AIG will survive in the long term remains an open question. Yet the Fed’s repeated infusions of cash underscores the More on the AIG Addiction primacy of AIG on the insurance and financial services landscape. So accustomed has the • A weakened AIG’s effects on the insurance-buying corporate public become to insurance marketplace. Page 10 AIG dominance of market capacity in key lines like D&O that even in a severely weakened state, • Expert insurance broker says the company may be able to stay in the game insurance companies are still paying of competing for underwriting income. If, that claims. Page 15 is, AIG can continue to muster the resources to • A debate over federal regulation of the remain competitive, through cash on hand or creative financing structures. Such is AIG’s day- insurance industry? Page 17 to-day struggle.
Volume 7 | issue 1 9 • RISK REPORT • If AIG Enters Bankruptcy Would Insurer Subsidiaries — and Their Policyholders — Be at Risk?
David E. Wood, Partner anderson kill wood & bender, LLP
was born in Shanghai, China, in 1919 as a modest insurance agency selling AIG policies to Chinese individuals. In the years that followed, it shifted its business to high- margin corporate policyholders, branding all of its financial and insurance services by its corporate acronym AIG (short for American International Group). Yet it is not an insurance company. AIG sells non-insurance products and services in its own name, and sells insurance via its insurance company subsidiaries (including National Union Fire Insurance Company of Pittsburgh, American General Life Insurance Company, Lexington Insurance Company and American International Surplus Lines Insurance Company, to name only a few) of which it is the sole owner.
To what extent are these wholly-owned insurance companies vulnerable if AIG enters Chapter 11 or Chapter 7 bankruptcy?
The Standard Rule Conventional wisdom and well-established law indicates that the insurer subsidiaries’ assets are ” beyond the direct reach of AIG creditors. Long- standing federal law (the 1945 McCarran-Ferguson Act, amendments to the bankruptcy code and a spate of cases from throughout the country) the subsidiaries are domiciled would institute provides that insurers are to be rehabilitated or rehabilitation or liquidation proceedings to protect liquidated, as the case may be, in state courts under policyholders. statutory schemes roughly analogous to — but materially different from — federal bankruptcy Further, the AIG insurer subsidiaries are separate law. If the financial health of the insurer entities that — under the auspices of state subsidiaries was viewed as being in jeopardy, regulators — remain solvent and financially the regulators of the various states in which healthy, giving creditors of AIG or the subsidiaries
10 Enforce: The Insurance Policy Enforcement Journal little legal basis to cherry-pick subsidiary assets. Creditors May Well Have Access to AIG’s Supporting the notion that AIG’s healthy insurance Interests in the Subsidiaries subsidiaries would not be directly impacted by a parent company bankruptcy is the recent case of AIG’s creditors (or the trustee, acting on behalf of Conseco, Inc. Like AIG, Conseco was a non-insurer the creditors) undoubtedly would claim an indirect holding company that owned insurance company right to subsidiary assets in the bankruptcy subsidiaries. Although the parent company filed for proceedings. That is, those pre-petition assets of Chapter 11 bankruptcy protection, the insurance AIG including, most notably, its equity interests company subsidiaries were not brought into the in the insurance subsidiaries. This would not per bankruptcy and their assets were not directly se run afoul of state insurance law or infringe on drawn upon to satisfy Conseco’s creditors. state regulators’ turf. That seems simple enough in theory, but the exact interests AIG and related The foregoing is what we would regard as the entities own are not clear and — based on the most-likely result — an orderly winding-down of size, complexity and opacity of the AIG corporate AIG with minimal direct impact on the insurance family — almost certain to be multifaceted.
As mentioned, the principal insurance-related asset held by AIG is its equity interests in its subsidiaries. We assume ‘an But AIG might also occupy numerous other places in the subsidiaries’ capital structures, such as a orderly winding-down holder of preferred, convertible or unsecured debt securities. AIG or a related financial services entity of“ AIG … if we have might have acted as a secured lender, lending money to and taking security interests in the assets learned anything from of the subsidiaries. The parent might also have the recent events in issued guarantees to third-party lenders which the financial world, it loaned money to the subsidiaries. And these are just the simple theoretical should be to pay relationships. Given the degree to which AIG attention to the most was active in complex capital market products (including credit default swaps, collateralized debt remote risks — the obligations, leveraged loans, synthetic products, etc.), it seems likely that AIG has numerous other so-called Black Swan interests in the insurers’ subsidiaries assets to which creditors would claim a right. Off-balance sheet events.’ arrangements between the insurance subsidiaries and entities as a practical matter controlled by or at least destined to the same fate as AIG would subsidiaries and their policyholders. However, add a further dimension of risk and complexity. there are many” variables which could lead to Although related transactions between AIG and a less probable, but far more dangerous result. its insurance subsidiaries are subject to approval And, if we have learned anything from the recent from insurance regulators, off-balance sheet events in the financial world, it should be to pay entities might have escaped regulatory scrutiny attention to the remote risks — the so-called and regulators had — until very recently — little Black Swan events. Most prominently, the size of basis for objection to transparent transactions with potential losses and complexity of the proceedings AIG: on what grounds could a regulator object to would almost guarantee that the creditors or a counterparty that was or had the backing of AIG trustee would be extremely well-funded, creative and its Triple-A credit rating? and aggressive. This, alone, might be the factor that pushes the proceedings from the expected to Potentially incestuous relationships within the AIG the unexpected. family should be scrutinized, but it should be kept in Continued next page
Volume 7 | issue 1 11 mind that the rights of the AIG creditors vis-à-vis the at valuations greater than the sum of individual underlying subsidiaries’ assets would be largely limited subsidiary assets? Or, for example, what if subsidiaries to those possessed by AIG pre-petition, i.e., rights given default on obligations triggering creditors’ or other a controlling equity holder, unsecured creditor, secured stakeholders’ (including those standing in the shoes creditor, guarantor, etc. These positions, in aggregate, of the parent) rights to access specific assets of the would give AIG creditors, collectively, a seat at the insurer subsidiaries? table in discussions concerning the subsidiaries’ fates, but would not give the creditors an unfettered right to A creative creditor committee or trustee might cherry-pick subsidiary assets. argue that an insurance company subsidiary should be treated like any other asset of an insolvent For example, the trustee or creditors presumably parent: it should be sold to raise money to pay the could monetize the subsidiaries — as AIG recently parent’s debt. As a general matter, the sale price of did with its sale of Hartford Steam Boiler Group an insurance company is determined by the value — by spinning them off in whole pieces under the of its investment portfolio and its pure surplus. A auspices of the bankruptcy court and with the sale converts these assets to cash paid to the parent blessings of state regulators. Such an approach is for the benefit of creditors. The buyer receives the not unprecedented, as PennCorp Financial Group, investment portfolio and the claim and IBNR a non-insurance holding company, voluntarily reserves (incurred-but-not-reported losses), assumes entered Chapter 11 for the express purpose of the duty to pay claims. Under this scenario, creditors facilitating the sale of its insurance subsidiary. of the parent company would receive all assets of the insurer subsidiaries, save reserves. More radically, creditors standing in the shoes of AIG could in theory require that the subsidiaries issue a Alternatively, and assuming some form of default large cash distribution as a dividend to the equity by one of the subsidiaries, a creditor could seek to holders. However, the trustee or creditors’ ability to foreclose on a security interest in insurer assets. In access specific subsidiary assets would be limited by this instance, assets of the subsidiary likely would state corporate and commercial law and, therefore, pass to the creditor free from the scrutiny of the somewhat muted, assuming the subsidiaries were able bankruptcy court and insurance regulators. to continue meeting all obligations (e.g., payments and collateral requirements under lending facilities) owed to their bankrupt parent. Might AIG Carrier Reserves Be Exposed? The reserves represent funds set aside for actual Further, to the extent a creditor was able to lay viable policyholder losses that have not yet ripened into claim to subsidiary assets under bankruptcy, corporate payable claims, and for losses the carrier knows based or commercial law, state insurance law enforced by on past experience have already occurred but which state regulators would step in to protect policyholders’ have not yet been reported. This money is considered, interests. This dynamic was seen, albeit in a slightly for accounting purposes, a pool of funds belonging to different context, during theReliance Insurance the policyholders, constituting the value they receive Group proceedings. In that matter, Pennsylvania for payment of premiums. The idea that creditors state regulators objected to the non-insurer holding of a parent company could seize these reserves is company’s plan to restructure debt in a Chapter 11 anathema to any insurance professional. proceeding on grounds that, in the regulators’ view, the restructuring would jeopardize policyholders’ interests But what if the creditors’ committee or trustee asserts being addressed in a parallel rehabilitation proceeding a right to the reserves as well? A creditor could involving the insurance subsidiary. contend that reserves are assets of the insurance carrier that should be available to all creditors But what happens if, for example, market conditions according to priority established by the Bankruptcy are insufficient to support a sale of whole subsidiaries Code, without giving policyholders priority.
12 Enforce: The Insurance Policy Enforcement Journal Under this line of reasoning, a statutory reserve where AIG companies had issued large number of an insurer must maintain to comply with state policies. The net effect of this would be regulatory insurance regulation is no different from a loan gridlock and high administrative expenses, both loss reserve a financial institution must maintain delaying payment and decreasing the amount of in order to satisfy federal bank regulators. In the funds available to pay claims. event of the insolvency of the insurer or the bank, the reserve is not applied against the claim or loan However, once the liquidators or rehabilitators balance — it is dumped into the pool of assets made marshaled the subsidiaries’ assets, those assets available for distribution to creditors according to would be distributed pursuant to a priority scheme applicable law. The reserve is not treated as cash established under the liquidation statute of the collateral available to a secured creditor. domiciliary state. In general, these statutes give policyholders class-three payment priority behind Similar disputes arose during the liquidation secured creditors and administrative expenses but proceedings of Amwest Surety Insurance Company, ahead of unsecured creditors. This enhanced priority during which obligees on collateralized surety bonds under state insurance law should give policyholders claimed a quasi-secured right to payment to the an added layer of protection vis-à-vis claims from extent of the collateral (as opposed to the collateral AIG creditors, assuming the delinquency proceedings being rolled into the general assets of the estate, and reflected purely preemptive action to protect then made available to those obligees on a pro-rata policyholders or to address temporary liquidity issues. basis with other class-three claimants). If, however, the subsidiary suffered from deeper- While this argument is thought-provoking, it raises seated solvency issues or the claims by secured many issues. claimants or administrative expenses eroded assets below the level needed to pay claims, policyholders First, facing the prospect of an AIG creditor-led would receive a decreased, pro-rata share of assets run on subsidiary assets, state regulators will be available to their priority class. State insurance incentivized to preemptively institute delinquency guarantee funds would in some instances cushion proceedings to protect the assets of the AIG the blow to policyholders, but there would be many insurance subsidiaries. Upon petition to a state who walked away less than whole. court by a state insurance commissioner, the court in which an insolvent insurer is domiciled will Second, much of this article assumes that the AIG issue a stay that purports to extend to all assets of subsidiaries can recover from the crisis of confidence the insurer. Enforcement of these orders can be and erosive competitive forces currently taking place. A problematic, as there is no clear federal mandate that weakened AIG has brought a spate of price competition a court in, for example, Arkansas honor an equitable from other insurers looking to win accounts long held order issued by a court in New York. by AIG companies. AIG companies have no choice but to try to compete, lowering premium and keeping Adding to the complexity of the proceedings is terms soft at a point in the cycle when insurers have the number of states in which AIG companies are historically tightened to reign in boom-time excess and domiciled or have significant assets. Although ensure their survival. By pushing soft conditions for a most are concentrated in Pennsylvania and New few more quarters, large portions of the commercial York, AIG insurers are domiciled in different states insurance market appear engaged in a game of chicken and there likely would be multiple AIG-related after which only those insurers with strong balance domiciliary proceedings. Ancillary proceedings, sheets will survive. which are initiated by a non-domiciliary state and use “special deposits” to pay claims from Further, it is possible that the relationships policyholders residing in the ancillary state, between the parent and the insurance likely would be initiated by regulators in states Continued next page
Volume 7 | issue 1 13 subsidiaries are such that the mere act of AIG going reported exposure to credit default swaps linked to into bankruptcy would set in motion a chain of corporate bonds and other debt instruments, most events leading to the subsidiaries’ own insolvency. notably collateralized debt obligations. Under the Most troubling in this regard is credit enhancement credit default swaps, AIG is obligated to pay the provided the subsidiaries by AIG — it disclosed protection buyer the difference between the notional in its most recent 10-Q that the subsidiaries are value of the credit default swap and the post-credit beneficiaries to $5.7 billion in outstanding letters of event value of the referenced asset. The notional value credit. If AIG entered bankruptcy, the direct creditors of outstanding credit default swaps on which AIG of the subsidiaries likely would require new collateral sold protection has been reported at a staggering $441 to replace the credit enhancement previously billion. provided by AIG, resulting in a demand for cash or other assets the subsidiaries might not be able to meet. This figure likely is misleading. For example, on October 22, 2008, holders of protection on credit default swaps that referenced Lehman Brother’s bonds Conclusion settled these accounts for net payments of $5.2 billion. The laws of every state where an AIG insurer is Outstanding notional values on Lehman Brothers domiciled give the insurance commissioner broad credit default swaps were reported to be in excess of discretion in blocking sales of insurance company $400 billion portion prior to its bankruptcy filing. assets and wholesale movement of insurance Given that post-default bonds were trading below .10 company capital. The reason for this discretion is to (implying a $360 billion gross exposure for protection ensure protection for policyholders. The insurance sellers), the net exposure to Lehman Brothers credit regulator is duty bound to retain enough hard default swaps appears to have been remarkably low. currency and liquid equivalents in-state to pay any and all conceivable claims. Insurance regulators can The low net exposure to protection sellers following be expected to use this discretion aggressively. When the Lehman Brothers credit event bodes well for an insurer (or an AIG trustee or creditor committee) AIG should some other, large credit event take asserts that surplus assets can safely be removed from place (e.g., General Motors). As does the Federal the regulator’s jurisdiction because all claims are Reserve Bank of New York’s program to purchase adequately reserved, the regulator can be expected to collateralized debt obligations on which AIG sold argue that reserves are not sufficient because, say, they protection and cancel the outstanding default swaps. are based on incorrectly modeling or calculations. If matters continue to proceed in this manner, and And if all else fails, the regulator can always simply barring some other large, external shock, then AIG increase statutory reserve requirements. may be back in the saddle relatively soon.
The lengths to which regulators go to prevent Still, the critical question for corporate consumers migration of AIG capital out of its insurance company of insurance is whether AIG insurers will be at risk subsidiaries back to their parent may surprise in the event of a parent company bankruptcy. The us — until we recall that insurance regulators, even if answer is: If conventional wisdom prevails and the appointed by a governor rather than elected directly, subsidiaries of AIG are sold as going concerns, then are political animals. The insurance commissioner probably not (although the crisis in perception AIG who lets cash out of his or her state bound for is now experiencing will almost certainly hurt the AIG, leaving policyholders even marginally less subsidiaries’ underwriting revenue). But if creditors secure, would be committing political seppuku. If have their way in bankruptcy court and evade or AIG becomes insolvent, the struggle between its frustrate regulators’ efforts to protect the subsidiaries’ administrators (via either creditors committee or assets, then Katy bar the door: AIG carrier policies trustee) and state insurance regulators will be intense, could be rendered worthless in short order. and the creditors’ representative undoubtedly will pull out all the stops to prevail. If this happens, the corporate insurance-buying public will find out in short order whether the gloomy But it would be premature to assume that an AIG predictions of full-scale, economy-wide meltdown in bankruptcy is inevitable, or even likely. AIG’s the event of an AIG failure were well-taken. s financial troubles have been linked primarily to its
14 Enforce: The Insurance Policy Enforcement Journal • CLAIM REPORT • What’s Causing Insurers the Most Heartburn? Financial turmoil in the insurance world has many concerned the companies will be less likely to pay claims. In the following interview, a highly respected expert in the industry, William A. Boeck, gives Enforce his views on insurance companies’ financial stability, willingness to pay, and the brokers’ role in navigating the claims process.
Publicly-available financial statements show a claim is covered but may lack the funds to pay the that many insurance companies’ underwriting claim. I am not aware of any major insurer with a Q income has dropped substantially from this realistic likelihood of being in this position any time time a year ago. In your view, does a downturn in the foreseeable future. in financial condition generally affect a carrier’s willingness to pay large claims? Are you seeing, among strong carriers, a pulling in of horns or psychological conservatism that I focus on directors’ and officers’ liability, Q expresses itself in the claims process in any way, employment practices liability, errors and such as holding onto money longer? A omissions policies, crime, and other executive liability insurance policies. From my perspective, the I am not seeing any unusual hesitation on the current downturn is not having any effect on insurers’ part of insurers to pay claims. I am not getting willingness to pay large claims. Where a claim is covered, Aany sense that they want to hold onto the insurers generally pay it without any significant delay. money longer than they are entitled to. In fact, I have seen very large insurers — some of whom have been There is a concern among insureds that financial in the news over the past several months — make difficulties may lead insurers to take more aggressive some very fair settlements. I have also seen some coverage positions. While that fear is understandable, redouble efforts to focus on delivering good basic I have not seen anything to suggest that any insurer’s claims service. It continues to be a very competitive financial condition has affected the resolution of a claim. insurance market. There are a lot of insurers who want the business and they have realized they need Although unlikely, it is certainly possible that an to deliver a very high quality claims service to insurer’s own financial difficulties could affect its differentiate themselves from each other. ability to pay claims. An insurer may concede that Continued next page
Volume 7 | issue 1 15 What is the role of the broker in getting insist that the insurer do better. A broker must treat disputed claims resolved? insurers fairly though. To be an effective advocate with Q an insurer, a broker must be honest about the strengths and weaknesses of a claim, respectful toward insurers, This topic is not discussed as often as it should and avoid inflaming a difficult situation. If an insured be. Insureds frequently don’t ask as much from believes it can no longer proceed cooperatively and that A brokers as they should. Where difficulty arises the insurer must be treated as an adversary, it should in connection with a claim, the broker’s job is to use consider retaining legal counsel. every available means to position the claim and the client to obtain the best possible recovery from the What happens if the underwriter and the insurer. There are a number of ways brokers do that. insured differ on how the policy can reasonably Q be read? What kind of discussion do you have Brokers see a lot of claims. That experience, and their with the policyholder under these circumstances? knowledge of the insurance policies, gives them the expertise needed to critically evaluate an insurer’s It isn’t unusual for insureds and insurers to coverage position, and to suggest and implement differ about how to interpret policy language. strategies to maximize the recovery. Some brokers A Insurers will occasionally have an interpretation employ former practicing attorneys with expertise in of policy terms consistent with their underwriting insurance coverage to assist in this area. intent and long-held assumptions about how the policy works. Brokers can often use their knowledge and Brokers must also identify the strengths in the experience to persuade insurers that their interpretation insurer’s coverage position. Insureds need to is inconsistent with the precise language used in the understand when the insurer has a good argument. policy or with the underwriting intent as expressed to They also need to know what the insurer is going the client when the policy was negotiated. to feel strongly about. A good broker will use this information to help a client form realistic expectations Where an insurer and insured must agree to disagree, about what the insurance recovery should be. brokers’ discussions with clients revolve around the three options generally available to them. The first option is Brokers negotiate policy terms on behalf of insureds, to accept the insurer’s evaluation. The second option is and know what the underwriter agreed to cover. to negotiate a compromise. Insurers are almost always Insurer claims staff are seldom involved in those willing to negotiate. A client may hire a lawyer to lend negotiations. As a result, claims people may erroneously some legal muscle to the discussions. Hopefully the interpret policy terms to exclude losses that should be pieces in the negotiation chess game can be arranged covered. Brokers can help bridge this knowledge gap so that each side walks away from the negotiation and help steer a claim in the right direction. happy, or at least equally unhappy. Option three is to sue the insurer. A client can make up its mind that the Brokers also have the ability to involve insurers’ insurer is wrong and decide that negotiations will be a underwriters and senior executives to help resolve tough waste of time. While filing suit does not preclude future claim situations. Those people have a vested interest in negotiations with the insurer, as a practical matter it trying to keep clients happy, and often can be influential makes those negotiations more difficult. While insurers in helping claim people find a way to compromise. do not enjoy being sued, they accept it as an unavoidable part of their business. To the extent possible, clients and their counsel need to approach the litigation in a way How do you respond to the argument made that tries to preserve the existing business relationship by some brokers that they cannot take an between the client and the insurer. Q aggressive stance to get a claim paid if to do so would jeopardize underwriter relationships? All we can do as a broker is lay out the options and let the client decide. s I reject that premise completely. Brokers absolutely can and should be aggressive. Where William A. Boeck is senior vice president and A an insurer is making a poor claim decision, or insurance and claims counsel with Lockton delivering bad claim service, a broker should forcefully Financial Services in Kansas City, MO.
16 Enforce: The Insurance Policy Enforcement Journal Is it Time to Regulate The Insurance Industry?
In late September and early October 2008, AIG teetered on the brink of collapse. As it sought cash from all possible sources to keep operations afloat, AIG proposed to New York Governor William Patterson and Superintendent of Insurance Eric R. Dinallo that it be allowed to borrow $20 billion from the parent company’s insurance carrier subsidiaries. The loan was approved but never funded, because on Sept. 16, 2008, the Federal Reserve agreed to make $152 billion in taxpayer funds available to AIG on a five-year repayment schedule, for what is in effect a controlling stake in the company during that time, to avoid its imminent collapse.
The following exchange of commentary between AKWB partner David E. Wood and Superintendent of Insurance Dinallo took place in early October 2008 in the Ventura County Star.
he collapse of financial A dozen states have elected insurance giant American commissioners. The rest are appointed by T International Group is more governors. Some argue that insurance regulators than a cautionary tale about the should be appointed because elected officials are subprime mortgage mess. It’s too susceptible to insurer influence. Others argue a wake-up call for anyone who that regulators should be elected because appointed thinks state insurance regulators commissioners have no public accountability. are up to the task of making sure Both sides assume that effective state regulation of David E. Wood carriers are sufficiently liquid to insurance companies is actually happening. Strong pay all conceivable claims. In fact, evidence suggests that it isn’t. regulators are doing a frighteningly poor job. It’s time for regulation of insurance on a national basis. Consider AIG, a massive company that sells insurance and financial services. The subprime In 1945, Congress passed the McCarran-Ferguson mortgage crisis hit it hard. AIG had sold a lot of Act protecting insurers from any uniform regulatory credit default swaps, products protecting lenders scrutiny. The job of making sure that carriers are and secondary-market investors from the risk of financially able to pay claims is left to a series of defaults on debt. The deterioration of mortgage state regulators — most of whom are weak and portfolios holding subprime debt prompted claims underfunded, many of whom have political agendas under these products. The financial markets and inconsistent with challenging influential insurers. rating agencies began adjusting the company’s value to reflect impairment to its capital when it Regulators Outgunned paid these claims. State insurance regulators keep track of the financial condition of every insurer doing busi- AIG’s counterparty bond rating fell, allowing ness within its borders, making sure it has enough counterparties in credit default swaps to demand liquid capital to pay claims. Yet, regulating car- additional collateral to ensure payment of riers must compete for state tax revenue with claims. Analysts estimated a $25 billion loss on schools, repairing roads and fighting crime. It’s these products, and the company’s stock price a losing battle. As a result, regulators are vastly plummeted. Very quickly, AIG reached the brink of outmanned and outgunned by the insurers they bankruptcy. are tasked to restrain. Continued next page
Volume 7 | issue 1 17 A Bright Idea by the federal government, rather than the states. Then, somebody came up with a bright idea. The insurance industry is no less vital to American Although AIG, the parent company, was in ter- security and prosperity. A uniform hand at the rible financial condition, AIG’s insurance company tiller, backed by federal law, would guarantee what subsidiaries were in relatively good shape. policyholders do not have now: the assurance that carrier capital will be preserved for all conceivable As required by New York insurance regulations, claims, even if a parent company collapses. these insurers had set aside cash to cover statistically likely claims. What if these insurers If AIG can plunder subsidiary insurers with made a loan to their parent, secured by some of impunity, without even attracting the public’s AIG’s deteriorating assets? This would instantly attention, then the absence of effective regulation improve the AIG balance sheet, clearing the way is a national disgrace reparable only by national for a much larger loan from the Federal Reserve. oversight.
So, AIG asked New York Governor David Paterson and Insurance Superintendent Eric R. Dinallo No single act of to approve a $20 billion loan by the insurer subsidiaries of their cash reserves set aside for the regulator of a state claims, for a note secured by lousy assets that AIG in which“ many carriers couldn’t profitably sell. Incredibly, they agreed. The transaction was publicly announced. No one are headquartered complained. Life went on. could better illustrate As it turned out, the $20 billion loan was never funded because the Fed provided AIG with how dangerously taxpayer money instead. But note what just irrelevant state happened here. With AIG in a death spiral, its senior managers in effect grabbed $20 insurance regulation billion (that’s billion with a “b”) in set-asides for policyholders. And chief regulator Dinallo has become. . and his boss let them do it. No single act of David E. Wood the regulator of a state in which many carriers are headquartered could better illustrate how dangerously irrelevant state insurance ” regulation has become. Monumental Failure AIG Insurance Companies Solvent, Dinallo certainly knows better. He is former Able to Pay Claims general counsel of insurance broker Willis Group Holdings, and former managing direc- ERIC R. DINALLO tor and head of regulatory affairs for Morgan Stanley. In giving his buddies at AIG a help- olicyholders of American International ing hand, Dinallo showed just how rapidly and Group insurance companies are safe and it completely a state insurance regulator can fold P was irresponsible of Mr. Wood to suggest when the chips are down. This was a failure of otherwise in his commentary. With absolutely insurance regulation on a monumental scale. no facts to support him, Mr. Wood wrote that I Not only did the security guards fail to keep the allowed AIG to “loot” the assets of its insurance bank robbers out, they unlocked the vault and subsidiaries. Nothing like that ever happened and helped load the truck. it never will.
Other cornerstones of the national economy, such as AIG’s insurance companies, which are regulated the banking and securities industries, are regulated by New York and other states, are solvent and have
18 Enforce: The Insurance Policy Enforcement Journal the funds to pay claims. AIG’s problems came from The governor’s proposal came at a key moment and its parent company and from its noninsurance helped lay the basis for the eventual federal rescue, operations, which are not regulated by the states. which preserved a company that employs tens of thousands of Americans. Mr. Wood says the transfer New York Governor David Paterson’s proposal took place, but, in the end, it was not needed because would not have reduced the amount of assets that of the $85 billion federal loan, so again he is wrong. protect policyholders at AIG insurance companies. In fact, it might have increased them. We were Policyholders of AIG’s insurance companies willing to consider allowing AIG to move some are, and will continue to be, protected by strong assets, such as ownership of some of its strong regulation by New York and other state regulators. life insurance units, into some of its property The case of AIG does not, as Mr. Wood claims, insurance companies and move a smaller amount show the failure of state insurance regulation. of more liquid assets, such as municipal bonds, Quite the opposite, the federal rescue was only possible because state regulation protected AIG’s insurance companies. Policyholders of AIG’s insurance companies“ are … Wood: protected by strong n an October 5 commentary, “Insurance regulation by New York industry needs federal regulation,” I observed I that most insurance regulators are unwilling or and other state unable to face off with giant insurance companies. The commentary pointed as an example to the regulators. unexecuted transfer of $20 billion from AIG’s healthy insurer subsidiaries to the parent company. ERIC R. DINALLO Engineered by AIG senior management to protect the company’s shareholders and employees, New temporarily out to use” as collateral to provide cash York’s Superintendent of Insurance Eric Dinallo the parent company needed immediately. approved this transfer, even though the deal offered no benefit to the policyholders he is charged with We were very carefully vetting the replacement protecting. assets to ensure they were of high quality. In his October 7, response, “AIG insurance We would never have allowed AIG to use devalued companies solvent, able to pay claims,” Mr. Dinallo subprime-related securities, as Mr. Wood falsely bristles at the notion that this transfer was in any claims. The plan was for the property insurance way improper. He assures us he would never permit company to sell the life insurance companies and AIG to exchange worthless credit default swaps for other assets and use the cash from those sales to cash, although no one suggested he did. According obtain its municipal bonds back from the parent. to Mr. Dinallo, AIG was allowed to withdraw cash This temporary transfer was needed because, at the and liquid assets from its subsidiaries, replacing time, the parent had an immediate need for cash. them with AIG-owned life insurance companies Selling the life-insurance companies would take a that might take up to “a few months” to sell. This few months, more time than the parent could wait. would give AIG much-needed liquidity, with no adverse impact on policyholders of its subsidiaries. In addition, the transferred assets were only part of the property companies’ surplus, which are above It is a wonder that Mr. Dinallo can make this the reserves they are required to hold to protect assertion with a straight face. AIG needed cash policyholders. Continued next page
Volume 7 | issue 1 19 badly, but could not raise it quickly by selling life Dinallo is our Insurance Regulator, Too insurance companies it owned. So, it got approval While it is flattering that New York regula- to dip into its subsidiary insurers’ cash surplus, tors read Southern California newspapers, one giving the life insurance companies as collateral wonders why Mr. Dinallo is polishing his image for the loan. This reduced the subsidiaries’ cash with the population of this state. The answer is position. that, by default, he is our insurance regulator, too. Suppose National Union (an AIG subsidiary headquartered in New York) were to melt down. All About Cash It would be placed in receivership in New York, In the event of a catastrophe, the fact that the and a plan would be hatched to save the carrier insurer subsidiaries own life insurance companies for the benefit of policyholders. — no matter how valuable — would mean little to policyholders. When claims occur, policyholders Even if these policyholders included more expect to be paid in cash, not in shares of life residents of California than any other state, insurance companies. Mr. Dinallo — not California Insurance Commissioner Steve Poizner — would execute And the actual value of these life insurance this plan because National Union resides companies is far from certain. Such companies in New York. We do not elect the New York are valued investments less policy obligations. governor who appoints the superintendent of The value of an AIG life insurer could plunge if insurance. We have no stake or voice in New its investment portfolio deteriorated due to, say, York government, even though disposition of an unprecedented drop in the stock market. National Union would impact many of us here.
Whether this life insurer could be sold at all The state insurance regulation system has proved depends on the availability of willing buyers. inappropriate among national and international Would-be purchasers might stop buying insurance markets. Mr. Dinallo’s willingness to and begin conserving cash, as companies do allow the $20 billion transfer to AIG illustrates in times of financial crisis caused by, say, a why we need an insurance regulator with major drop in the stock market. In a volatile backbone at the helm. environment, why would insurer subsidiaries risk accepting illiquid assets in return for Can you imagine the head of the Federal much-needed cash? The answer is: because Deposit Insurance Corp. allowing a failing parent company AIG, aided by Mr. Dinallo, told bank holding company to swap illiquid assets them to, even though anyone looking out for for cash on deposit with subsidiaries, just to policyholders wouldn’t let a dime out the door help keep the parent afloat? People would go to in exchange for illiquid assets useless in the jail. Such a transaction would never happen in event of catastrophic claims. the banking industry because no single bank is powerful enough to control federal regulators. Why does Mr. Dinallo care about the financial Sadly, this is not the case in the insurance health of AIG? He says in his letter that he industry. s approved the $20 billion transfer not out of concern for policyholders, but because “it helped lay the basis for the eventual federal rescue, which preserved a company that employs tens of thousands of Americans.” Mr. Dinallo points out that he does not regulate AIG because it is not an insurance company. Then why is he concerned with ensuring the solvency of AIG for the benefit of its shareholders, at the expense of those who bought insurance policies from its subsidiary insurers?
20 Enforce: The Insurance Policy Enforcement Journal • MERGING CULTURES • A Community of Service
hey operated on separate coasts but they were grown a tradition of service to others — be they kindred spirits. For nearly 40 years, Anderson clients or members of the various communities in T Kill & Olick, P.C., ran its law practice on the which its attorneys live and work. East Coast focusing on aggressive advocacy of policyholder interests adverse to insurers. For the Mirroring Anderson Kill’s culture of service, past 10 years, Wood & Bender LLP has operated a Wood & Bender has a well-deserved reputation for successful practice in the same arena on the West serving children’s causes, including Casa Pacifica Coast. (a shelter and treatment center for mentally ill, abused and neglected kids) where a Wood & While the firms were hugely successful in Bender partner serves on the board of directors, their areas, their practices also grew in their Boys & Girls Clubs and Little League Challenger commitment to the communities and the people Division for handicapped children. they serve. Now, with the merger of the two firms, their professional and personal commitments are Anderson Kill Managing Shareholder Robert finding the same path. Horkovich told the Los Angeles Daily Journal recently, “We found in Wood & Bender a Anderson Kill & Olick has enjoyed the respect of kindred spirit.” its peers because of its pro bono work and programs of service to and on behalf of those in need. Since Here are brief profiles of the key people at the Gene Anderson started the firm Anderson Kill has firms.
Volume 7 | issue 1 21 • MERGING CULTURES •
David P. & Bender, Mr. Bender was a insurance recovery issues for Bender, Jr., partner in the Los Angeles office CNBC Television, Bloomberg co-founded of Epstein, Becker & Green. He Radio, USA Today, and Forbes. Wood & has the highest rating possible He is a highly sought-after Bender in from Martindale-Hubbell. speaker on insurance policy 1997. He and enforcement matters before partner David He has extensive experience in organizations such as the E. Wood, community service, serving as a Association of Corporate David P. BENDER, JR. long-time trustee on the Board of Directors Counsel, the Society of Corporate advocates of for Holy Cross College in South Secretaries and Governance policyholder’s Bend, IN.; former Chairman Professionals, Mealey’s, the rights, have grown Wood & of St. Joseph’s Health and International Risk Management Bender into one of the nation’s Retirement Center Foundation; Institute and the Risk & leading law firms focusing on former Director of the Board Insurance Management Society. insurance policy enforcement. of Hospitaller Brothers Health Mr. Wood’s clients include Mr. Bender has represented Care of California, Inc.; Fortune 1000 corporations public and private corporations, former President of Catholic and corporate directors and financial institutions, private Charities for Ventura County officers, with special emphasis on and public educational and a member of the Board of construction risks. Representative institutions, and boards of Directors, Boy Scouts of Ventura clients include Turner directors in insurance policy County. s Construction in the United States enforcement cases. and Aecon Group Inc. in Canada.
Mr. Bender recently won a David A skilled writer, Mr. Wood has binding arbitration hearing E. Wood published articles for trade and against the London and co-founded legal publications including Bermuda reinsurance markets Wood & D&O Advisor, The John Liner on a significant coverage dispute Bender in Review, The National Law involving the 2003 California 1997. He and Journal, Risk Management wildfires. He has collected partner David Magazine, California Lawyer, millions of dollars from carriers P. Bender, San Francisco Recorder and Risk on behalf of policyholders David E. Wood long-time & Insurance Magazine. including $25 million in policy advocates of limits on behalf of a major policyholder’s Mr. Wood earned his retailer. Mr. Bender also rights, have grown Wood & bachelor’s degree, cum laude, represents two major California Bender into one of the nation’s at Williams College in 1979 municipalities in separate leading law firms focusing on and his JD at the University of challenges regarding policy insurance policy enforcement. California, Hastings College benefits, one of which arises With two decades of experience of Law in 1985. He has the under comprehensive litigation in the insurance industry, Mr. highest rating possible from involving a city’s affordable Wood devotes his practice Martindale-Hubbell. housing program. to evaluating and enforcing business insurance claims and He is involved extensively in He earned his bachelor’s degree to handling litigation aimed at community service in Ventura in 1978 from the University getting insurers to pay. County, serving on the boards of Notre Dame and his JD at of the Boys and Girls Club of Southwestern University School Mr. Wood is recognized as a Camarillo and Casa Pacifica of Law in 1985 where he was national expert on insurance home for abused, neglected and associate editor of the Law policy enforcement and is severely emotionally disturbed Review. Before forming Wood frequently interviewed on children and adolescents. s
22 Enforce: The Insurance Policy Enforcement Journal • MERGING CULTURES •
Robert M. Fuller-Austin: Won jury verdict William G. Horkovich, of $188,793,014.00 against Lloyd’s Passannante shareholder and other insurance companies is co-chair at Anderson in an asbestos insurance coverage of the Kill & Olick, case (one of the top 10 verdicts Anderson P.C., is “the in the U.S. in 2003), presently on Kill & ‘go-to person’ remand. Gross settlements of over Olick, P.C., in the area $190 million from 14 different Insurance ROBERT M. of insurance insurance companies before trial. WILLIAM G. Recovery HORKOVICH recovery” PASSANNANTE Group and a reports Weyerhaeuser: Two Washington member of the Chambers USA. Mr. Supreme Court decisions the executive committee. Horkovich is a top ranked recognizing joint and several lawyer nationally, recognized liability of multiple insurance Mr. Passannante is a leading by Chambers USA 2008: companies on the risk over lawyer for policyholders in the America’s Leading Lawyers for time and recognizing coverage area of insurance coverage. He Business as “the first and only for environmental clean-ups has represented policyholders choice for clients seeking total even without a government in litigation and trial in major commitment to a case.” lawsuit. Two jury trial victories precedent-setting cases. He recognizing coverage for the has represented The Glidden Mr. Horkovich has obtained clean-up of six environmental sites. Company, The Trustees of over $5 billion in settlements Princeton University, HLTH and judgments from insurance Mr. Horkovich has also been Corporation/WebMD, Picker companies for his clients engaged on several significant International, Weyerhaeuser over the past decade. Mr. projects by the United Nations as Company, Occidental Horkovich is a trial lawyer its general insurance counsel and Chemical Company, Imperial with substantial experience has represented General Electric, Chemical Industries, The in trying complex insurance Thiokol, Waste Management, Lefrak Organization, Quest coverage actions on behalf of Clorox (First Brands), Saks, NYU, Diagnostics, Automatic Data policyholders. His victories Princeton, Textron, Maidenform, Processing, The Fleming include one of the top 10 jury Spalding, Cascade, Tektronix, Companies and others. Prior verdicts in the United States Bijan and Evander Holyfield. to joining Anderson Kill, Mr. in 2003, the top insurance Passannante was a Financial, recovery jury verdict in the Mr. Horkovich has been Industrial, and Econometric United States in 2005, four selected by his peers to Best Consultant with Standard and landmark state Supreme Court Lawyers in America and has Poor’s/Data Resources Inc. decisions, eight jury verdicts the highest rating possible in and eight bench trial decisions Martindale-Hubbell. Mr. Passannante has in favor of the policyholder appeared in cases throughout since 1994 including: LexisNexis has named Mr. the country and has been Horkovich as the Policyholder recognized by Chambers State of California: Selected Lawyer of the Year for 2008. USA 2006: America’s Leading by the state of California as Lawyers for Business as “a lead trial counsel. Won jury He earned his bachelor’s degree tremendous tactician and an verdict securing coverage for and JD at Fordham University incredible trial lawyer.” In 2007 the Stringfellow Acid Pits, and was a captain in the United and 2008, Chambers USA once described as the most complex States Air Force. He was an aide again ranked Mr. Passannante environmental clean-up in to former U.S. Senator James L. a leading lawyer in Insurance: the world. Buckley. s Dispute Resolution. Chambers Continued next page
Volume 7 | issue 1 23 • MERGING CULTURES •
USA 2008 ranked Anderson Finley T. Liner Review, Risk Management Kill’s Insurance Recovery Harckham Magazine, The National Law Group No. 1 in New York for is a senior Journal and New York Law Insurance: Dispute Resolution. litigation Journal. Mr. Harckham has shareholder been quoted by the Wall Street Mr. Passannante was a drafter in the New Journal, Business Insurance and of the precedent-setting York office other publications as an expert Weyerhaeuser case in the of Anderson on insurance law. Mr. Harckham
Supreme Court of the State FINLEY t. Kill & Olick, is a frequent lecturer at RIMS of Washington which held HARCKHAM P.C., and the conferences and other insurance that no overt threat against President seminars. a policyholder is required to of Anderson Kill Insurance trigger insurance policies. Mr. Services, LLC. He also serves on Mr. Harckham is author of Passannante co-chaired the the firm’s executive committee. a soon-to-be published book program “Current Issues in for in-house counsel and risk D&O and Professional Liability Mr. Harckham regularly managers on legal issues in risk Insurance” sponsored by the represents and advises management. ABCNY and the ABA. policyholders in insurance coverage matters. He has Mr. Harkham earned his He testified before the New York successfully litigated, arbitrated bachelor’s degree at Hamilton State Legislature regarding the and settled hundreds of College and his JD at New York insurance industry response to complex coverage claims. His University School of Law where the victims of the terrorist attack areas of particular expertise he won the National Moot Court on September 11, 2001. include property loss, business Competition. s interruption, directors and Mr. Passannante is co-author officers’ liability, professional of the book Insurance Coverage liability and general liability Litigation, and an editor of the claims. recent book, The Policyholder Advisor. He has published Mr. Harckham also founded widely including in Risk two Anderson Kill non-legal Management, The (ABA) Brief, subsidiaries: Anderson Kill Corporate Counsel Magazine, Insurance Services, LLC, and Policyholder Advisor, Copyright Anderson Kill Loss Advisors, World, Healthcare Financial LLC. Those companies Management, Insurance Litigation provide insurance consulting Reporter and Mealey’s Insurance. and property and business interruption loss quantification Mr. Passannante is a member of and settlement services. the Regis High School Alumni Board (2006-present) and Legal 500 cited Mr. Harckham as served on the Executive Council one of the leading practitioners (1998-2006). in the United States in the field of insurance and reinsurance for He has the highest rating natural disasters. possible from Martindale- Hubbell. He earned his Mr. Harckham has written bachelor’s degree at Oberlin numerous articles on insurance College and his JD at Fordham coverage topics for publications University. s such as CPCU Journal, The John
24 Enforce: The Insurance Policy Enforcement Journal Keeping an Eye on the Ball Advocating and Protecting the Scope of Coverage in a Sensitive Market
John G. Nevius, P.E. and Edward J. Stein Anderson Kill & Olick, P.C. David E. Wood, Partner anderson kill wood & bender, llp
hen markets harden and insurance companies Liberty Mutual has retrenched and undertaken pull in their horns, one of the first places they lay-offs in the wake of its purchase of Safeco last Wtry to save money is by reducing the scope of year. Liberty traditionally has provided petroleum- coverage, often in small increments that over time service-related coverage; its appetite for such risks can add up to substantial dilution of the value of appears to have diminished. AIG, as everyone a policy. Avoiding this requires constant vigilance who now owns it should know, has gone through by the corporate risk manager and general counsel, tremendous changes. AIG Environmental purports advised by a broker willing to go toe-to-toe with to remain open for business, but its free-wheeling underwriters, and insurance enforcement counsel days may be over with the recent departures of its with no loyalties to insurers. long-time chairman, Joe Boren, and president, John O’Brien. Quanta Holdings, which consisted largely The following hot button issues reflect major bones of a former Chubb underwriting team and styled of contention between corporate policyholders in itself a Brownfield Redevelopment facilitator, has certain industries and the insurance industry. In been bought by Catalina Holdings and suffered its an uncertain financial climate, carriers may fight own financial issues. XL, ACE and Zurich remain these issues — in an effort to contract the scope of in the environmental coverage business, but coverage — harder than they have in the past. continue to be choosy about underwriting coverage and paying claims.
Hot With respect to historic general liability insurance Button for environmental liability today, there is still value Issue Environmental in policies that may be even 50 years old. The various forms of the pollution exclusion continue to represent Liability a significant issue in policies circa 1970 or later. In Important to: Chemical companies, an important related case, the California Supreme manufacturers, public entities, any industry Court decided in March that when a loss results with legacy pollution liabilities from both covered and non-covered causes but the policyholder is unable to identify how much damage resulted from non-covered losses, the policyholder is entitled to coverage for the entire loss up to its policy limits. Similar disputes are in the courts across the There has been a general shake-out in the country, especially in areas where policyholders have environmental insurance market looking lost insurance coverage for their hurricane losses due forward. Looking back, general liability insurance to anti-concurrent causation clauses placed in their companies continue to come up with creative ways policies where they can’t prove how much damage to minimize the scope of coverage when all else was caused by wind as compared to flooding. fails in avoiding it completely. Continued next page
Volume 7 | issue 1 25 The Court also ruled against the insurance charging the policyholder for the costs of a claim, companies regarding a qualified “polluter’s the insurance company can generate revenue and exclusion” in their policies. The California Supreme tie up policyholder resources. Reserves often shoot Court ruled that to deny coverage based on a up in the event of nonrenewal. polluter’s exclusion, an insurance company must prove that the policyholder not only meant to place In short, there is much to watch out for in 2009. waste into a site, but also expected or intended that While new specialty environmental policies offer it would then leak out or be discharged to pollute protection, policyholders should not overlook their the environment. historic occurrence-based coverage, which with appropriate advocacy can remain a valuable asset. In the context of anticipated climate-change litigation, insurance companies are likely to make that very argument. As claims relating to global warming pick up and potentially gain traction, additional attempts at stretching pollution exclusions and marketing new specialty insurance coverage policies are likely. One General vs. Professional key case to watch is pending in California Federal Court and involves an Inuit community damaged, in Services Liability part, by rising sea level. See Native Village of Kivalina v. Exxon Mobil, et al. Important to: Construction companies, architectural and For many years, the product MTBE was added engineering firms, any company that to gasoline to boost octane as a replacement for renders services in an environment in lead. The asbestos plaintiffs’ bar continues its which there is a potential for physical efforts to make an issue out of the use of this damage or bodily injury octane-boosting product and to tag the petroleum industry with class action liability. Just as in asbestos and prior environmental liability, a big Hot Button issue here will be the duty to defend and the scope Issue of any exclusion on coverage, including alleged prejudice arising out of untimely notice. Commercial general liability policies typically More traditional coverage issues continue to crop exclude from coverage property damage and bodily up in all kinds of coverage matters that increasingly injury resulting from an insured’s professional encompass a broad range of what is styled by the services. The theory behind these exclusions insurance industry as environmental liability. is that such risks should be covered under the Allocation of liability based largely upon notions insured’s professional liability policies. However, of equity (not policy language), undefined or many professional liability carriers seek to limit poorly-defined terms such as what is a “suit” seeking exposure to bodily injury and property damage “damages,” and the continuing value of broader by including limitations or exclusions for such umbrella coverage and claims of bad faith, all risks. This tension between commercial general continue to play a large part in the environmental liability insurers and professional liability insurers coverage area and the increasingly tight market. presents a constantly shifting marketplace, in which both sides’ tolerance for this type of risk Side agreements, retrospective premiums and varies with market conditions. As the line between deductible or premium security agreements a “professional services” claim and a bodily injury continue to be used improperly in all lines of or property damage claim is often blurred, the coverage, including specialty environmental potential for a gap in coverage is very significant, insurance policies. While these are marketed requiring careful coordination of policy terms in as cost savers, policyholders should be cautious both commercial general and professional liability because these largely unregulated agreements policies. Insureds should pay close attention to the turn traditional risk management on its head. By following provisions:
26 Enforce: The Insurance Policy Enforcement Journal Definition of Professional Services: The insured even when the insured’s conduct is respective definitions of professional services in remote from the actual bodily injury or property both types of policies should be coextensive. If, for damage (e.g., strict liability or conspiracy). In example, the definition of professional services is these situations, an insuring agreement with a relatively narrower in the insuring provisions of the tight requisite nexus between the conduct of the professional liability policy than in the exclusion insured (i.e., the professional services) and the in the commercial general liability policy, a gap in bodily injury or property damage might not be coverage will likely result. Further, the definition triggered. Conversely, an exclusion with a broad in both policy types should make clear the specific requisite nexus between the insured’s liability types of activities the insurers will consider to be and the bodily injury or property damage can professional services. Disputes frequently arise bar a broader scope of claims. Asymmetry of when a company traditionally regarded as a service this nature between the insuring agreement in provider, such as an architecture firm, performs an insured’s professional liability policy and the work not traditionally regarded as professional exclusion in the commercial general liability services, such as construction work under a policy could result in unintended gaps in design-build contract, is sued in a claim involving coverage. property damage or bodily injury. In the absence of a clear definition of professional services, the Professional Services Exclusions: In recent commercial general liability insurer will argue that years insurers have been amenable to removal of the work excluded professional services while the professional services exclusions in commercial professional liability insurer will argue that the general liability policies. Those carriers work was non-covered construction, resulting in a unwilling to entirely remove the professional gap in coverage for the insured. services exclusion would issue conditional limitations on coverage for claims involving Nexus Terms: Insurers can change the scope of a professional services, such as provisions provision by altering the nexus required between specifying the commercial general liability two concepts and the concepts between which policy was excess to or not applicable when there must be a nexus. Consider the following two coverage existed under the insured’s professional examples: liability policy. Insureds should continue to push for these concessions, but expect that carriers • The phrase “damages because of bodily injury or will be less likely to agree. property damage arising from your professional services” is susceptible to being construed more Bodily Injury/Property Damage Exclusions: broadly than “damages because of bodily injury Some professional liability insurers include in or property damage caused by your professional their policies limitations or exclusions for bodily services” because “caused by” is frequently injury or property damage. These exclusions are considered to require a tighter nexus than rarely absolute, and usually reflect an attempt by “arising from.” professional liability insurers to push back on to general liability carriers the insured’s exposure • The phrase “damages because of bodily injury or for bodily injury and property damage. These property damage arising from your professional limitations or exclusions should be avoided at services” differs from “bodily injury or property all costs, unless the commercial general liability damage that results in liability arising from your carrier has clearly acknowledged that its policy professional services” in that the former requires covers mixed claims involving bodily injury or a connection between the “bodily injury or property damage and a professional services property damage” and the “professional services” component. That said, and all else being equal, it while the latter requires a connection between is generally better for mixed claims to be covered the “liability” and the “professional services.” under commercial general liability policies than professional liability policies as the market for These slight differences can have a significant the former generally has greater capacity at a impact on the scope of coverage for a given lower price. claim. Often times, liability is imposed on an Continued next page
Volume 7 | issue 1 27 insured to instruct the D&O insurer to pay policy proceeds first to the liabilities of individual directors and officers. This gives the corporation flexibility to apply the limits under Directors’ and Hot the main body of the policy first to individuals’ Button Issue liability if it wishes, adding a layer of protection Officers’ Liability for directors and officers. Important to: All publicly-traded Allocation: Allocation provisions in D&O companies policies should be avoided if at all possible. A D&O insurer may rely on such a provision to decline coverage for what it views as the portion of “loss” (defense costs, a settlement of a judgment) attributable to non-covered claims in Insurance companies wishing to reduce the suit against the insureds. Such lawsuits very their exposure to D&O risk — while keeping often allege every theory of liability under the underwriting income up — are likely to press for sun. If the carrier denies coverage for theories and concessions in the following areas: damages that it thinks — at the outset of litigation and based on a necessarily incomplete record — Order of Payments/Side A: Under modern threaten non-covered liability for the insureds, it D&O policies, the insured directors and officers will reduce defense expense coverage to a level it are covered for a wide range of economic losses believes matches directors’ and officers’ relative resulting from their acts, errors or omissions exposure to liability for covered theories and committed in the scope of their work for the damages only. This can decimate defense costs insured corporation. Although the corporation coverage from the outset of the claim, leaving may claim coverage under the D&O policy to the directors and senior management understandably extent it has indemnified directors and senior frustrated with the choice of D&O policy form officers (called Side B of the typical policy, the and carrier. corporate reimbursement coverage), Side B does not cover the corporation’s own liabilities. The solution is to negotiate the allocation provision Only Side C covers the corporation itself, for out of the policy altogether. Failing that, make securities-related liabilities only. Side B and sure that allocation is based upon the “greater Side C often share the same limits, leading to a settlement” test for allocation in use in the Seventh conflict if individual insureds are sued in the and Ninth Circuits, rather than the “relative same lawsuit with the corporation. Who gets exposure” test relied upon in the Eighth Circuit priority over policy limits? Here are two possible and District Courts in New York and Pennsylvania. solutions: Fraud Or Self-Dealing “In Fact”: Many D&O • Make sure to buy Side A coverage, with separate policies exclude claims based on the insured limits of coverage available only to individual having committed “in fact” acts of deliberate insureds, apart from and in addition to the limits fraud and self-dealing, as established by a judicial of the main policy. Side A covers the liabilities determination or an oral or written admission of directors and officers exclusively — it never by an insured. These exclusions are intended to applies to liabilities of the corporation — and protect the corporation and other insureds from pays whether or not the corporation indemnifies erosion of limits caused by the acts of a rogue the insureds. Side A ensures that come what officer or director, by cutting off the rogue’s right to may, there will always be policy limits in place to claim under the policy if it is shown that he or she protect directors and officers, regardless of the in fact acted fraudulently. needs of the corporation. While this means of protecting limits from • Make sure the policy contains an Order of a rogue officer or director is superficially Payments provision permitting the corporate appealing, it takes control over the problems
28 Enforce: The Insurance Policy Enforcement Journal posed by a rogue (how to protect limits, etc.) — recognize claims before they ripen into (1) away from the corporation and individual litigation of any scope; or (2) litigation alleging insureds. This device also allows the carrier loss of such a magnitude that the need for notice considerable latitude in determining the to the D&O program is obvious. This creates circumstances under which coverage will be an excessive risk that the company might not withdrawn from a rogue officer or director, recognize a claim when one arises, placing potentially creating very messy indemnity coverage in jeopardy. The solution is to alleviate litigation between the rogue and the company or transfer this risk by the following alternative while an underlying claim is ongoing. For methods, all of which are in use under D&O instance, the insurer could perform its policies in the United States today: own investigation of the insured’s alleged misconduct, and long before any record is made • Designate a single lawyer or insurance specialist in the underlying action, decide that the facts to review all lawsuits, demands on the company, mandate a conclusion of insured fraud and deny and demands on employees and directors of the coverage. company, to determine what matters constitute potential claims and therefore need to be A better solution is to use “final adjudication” noticed to insurers. This method represents the language, removing all discretion of the timing most thorough approach, and is appropriate of a coverage withdrawal: if an insured is found for companies involved in a large volume of to have committed fraud or self-dealing in a disputed claims and litigation; or final adjudication of these issues, coverage is terminated (perhaps retroactively) and the • Make sure that the notice provision extends company’s duty to indemnify the rogue very the period within which notice must be given likely ends as well (again, perhaps retroactively). following knowledge of a claim by the senior Make sure that D&O underwriters use “final management control group. The extension can be adjudication” language in the conduct exclusions, up to a year; or rather than “in fact.” • Ask the D&O underwriters to amend the notice Notice: Almost without exception, D&O provision to require notice “as soon as possible,” policies are written on a claims-made-and- without more; or reported basis, meaning that for coverage to attach, the plaintiff must make a claim (usually • Delete the notice provision altogether, “a demand for monetary or non-monetary rendering the policy a claims-made, not a relief” or similar definition) against an insured claims-made-and-reported, form. This would during the policy period, and the insured must then prompt a warranty statement by the report the claim to the insurer within the same insureds to the insurer, given annually (or policy period. Various forms on the market more often) with the renewal application, introduce many exceptions and qualifications in which the company and its directors and to this basic text, but the bottom line is officers answer questions aimed at ferreting universal: Unless the insured recognizes within out any actual or potential claims for reporting the policy period that some person or entity has to the carrier. A claim not reported in the made a claim (as defined by the policy) against warranty statement would be excluded. The him, her or it, and also reports this claim to the key to this method is negotiation of the scope carrier (in the manner defined by the policy) of questions asked in the warranty statement; within the policy period, coverage may well be and identification of whose knowledge will be lost. Therefore, if this result is to be avoided, imputed to whom. s the insured must understand exactly what the insurer considers a “claim” and “notice” within the meaning of the policy.
Under a typical D&O notice provision, the company must — as a condition to coverage
Volume 7 | issue 1 29 Attorney Conflicts of Interest A Tool for Insurance Companies William G. Passannante, Shareholder Anderson Kill & Olick, P.C. David P. Bender, Jr., Partner anderson kill wood & bender, llp
n the legal industry, the trend in recent years has matter. The firm may do no insurance coverage been toward consolidation, driven by two business work for any insurance company, apparently Igoals. Some firms join or acquire each other in clearing the way for it to aggressively pursue order to increase the menu of services available to coverage for the new client adverse to a carrier. clients, and to create cross-selling opportunities (the But large law firms (and, quite often, smaller ones) “one-stop shopping” model). Others set out to load have important and lucrative tax, corporate and so much single-practice-area expertise as possible regulatory practices serving insurance companies. into a single firm that the consolidated firm corners These practices have nothing to do with coverage the market in a particular field (the “concentration disputes, yet they often create a barrier to entry of forces” model). The Anderson Kill & Olick, P.C./ into the policy enforcement field nonetheless. Wood & Bender, LLP merger is an example of Indeed, recent law firm history shows that the latter consolidation model: concentration of insurance recovery practices at large law firms have insurance policy enforcement practices to form the become increasingly unwelcome. largest policyholder law firm in the country with no loyalties to the insurance industry. The reason is political. Insurance companies employ and engage armies of attorneys around the country Some of the largest firms in the world are the to advise them on whether claims are covered, and amalgamation of many smaller firms, consolidated to defend them when they are sued for enforcement under the one-stop shopping model. Many of of claims and attendant counts of bad faith and them enjoy enviable success linked directly to their other tort theories unique to insurance disputes. ability to marshal resources from throughout the These lawyers are insurance coverage experts. They spectrum of legal services to address client crises specialize not only in specific kinds of policies, but rapidly and expertly. also, specific kinds of disputes under these policies.
One of the great challenges for these firms, due to An example is coverage for environmental their sheer size, is the clearance of conflicts: the contamination asserted under a Commercial process by which a law firm determines, before it General Liability (CGL) policy. Many insurance accepts an engagement, whether any present or defense attorneys concentrate their practices not on former client representations pose a conflict of CGL policies, but on application of CGL coverage interest barring acceptance of the new matter. If and pollution exclusions to environmental losses. such a conflict exists, the firm may ask the existing And virtually without exception, these insurance client and the new client to waive the conflict, and defense specialists represent insurance companies if they do, the new engagement may be accepted. only. By contrast, a mere handful of law firms provides the same degree of issue-specific insurance In the insurance policy enforcement practice area, coverage specialization to corporate policyholders. an additional set of challenges faces a law firm As a result, corporations who need the services of contemplating acceptance of an insurance recovery an insurance policy enforcement firm have very
30 Enforce: The Insurance Policy Enforcement Journal few resources available to them — unless they are trained and specialized insurance coverage defense willing to make compromises to their insurance lawyers into the litigation marketplace, increasing companies at the very outset of a claim in dispute. the number of policy enforcement lawyers available to policyholder clients by the tens of thousands — The reason for this phenomenon lies in client virtually overnight. Insurance companies prefer to willingness to waive conflicts. Suppose that a retain as much expertise as possible on their side corporation is sued in a California pollution of the bargaining table. Consequently, they rarely liability action, and its carrier denies coverage. waive conflicts. And in those instances where a General Counsel consults Martindale-Hubbell (the carrier indicates an initial willingness to make preeminent directory of lawyers and their practice such a waiver, it usually does so because it feels areas in the world) to find an environmental coverage it can deal better with requesting counsel rather lawyer in California to sue the insurer and enforce the than a lawyer with no loyalties to it or any other claim. Martindale identifies 7,541 attorneys and law insurer. Or the insurance company may condition firms in the state practicing environmental coverage. the waiver on the lawyer’s and client’s agreement General Counsel calls a few of them and immediately to prospectively abandon remedies such as bad realizes that all of them represent insurance faith. These tactics reflect a larger strategy by which companies, not policyholders. insurance companies work hard to keep the stable of competent coverage counsel devoted solely to When he goes back to Martindale to look for a policyholder interests small. policyholder-side environmental coverage lawyer, he finds none listed. Wondering how there could be This is why clearing conflicts for insurance policy enough environmental coverage work in California enforcement is such a difficult job for large law firms. to keep 7,541 attorneys busy for insurance companies Such a firm wants to help its clients with policy but zero for corporate policyholders, General enforcement issues, but may not want to risk asking Counsel asks around and learns the real story: No for a waiver of conflict (legal or business) from the insurance defense coverage lawyer can represent a insurers its tax and corporate partners represent. policyholder because insurer clients almost never Creative means of working around conflicts (like waive conflicts. Well aware of this fact, this lawyer waiver of bad faith claims) can sap the policyholder’s may not even ask for a conflict waiver, fearing that bargaining power in dealings with the carrier. Ignoring the request alone could hurt his or her relationship the conflict, on a theory that an insurance company with the insurance company. client in Hong Kong is unlikely to realize that the same firm has sued it in New York, is a perilous path with There is no disqualifying conflict if the prior potentially severe legal consequences. representation is not substantially similar in subject matter from the current one, in states that follow the As the consolidation trend continues, responsible ABA Model Rules of Professional Conduct and in large law firms clear conflicts as rigorously as they those that do not. See ABA Model Rule 1.9; cf. California always have, while advocating the bar associations Model Rules of Professional Conduct, Rule 3-310. Unless of the several states for more uniform conflicts rules there is some overwhelming factual similarity between that address the realities of modern multi-national the two representations, reflecting a degree of closeness law practice. The economy of scale they achieve between the firm and the prior or existing client that through one-stop shopping mergers and acquisitions the lawyer is said to “know the playbook,” no legal continues to justify the hard work necessary to avoid conflict prohibits acceptance of the new matter. Yet conflict pitfalls. At the same time, concentration of the business conflict may well trump the absent legal forces consolidations guarantee clients top flight, one. Asking the insurance company client that sends issue-specific resources where one-stop shopping corporate or tax work to the firm for a conflict waiver firms cannot — by virtue of their size and wide could strain the relationship, particularly in light of the scope of practice — serve certain needs. perception that insurance companies generally do not waive conflicts. The merger of Anderson Kill & Olick, P.C., and Wood & Bender, LLP has created just such a If insurance companies routinely waived conflicts, resource in the field of corporate insurance policy they would unleash their captive army of carefully- enforcement. s
Volume 7 | issue 1 31 Risk RadarhOT tOPICS tO wATCH iN tHE cOMING mONTHS
California Supreme Court Rules Against In essence, governments would be providing insurance against extreme recessions. They would offer contracts Insurance Companies that pay out if economic growth falls below some In a decision important to all policyholders in the State threshold level. Banks could make buying the insurance of California and all policyholders whose policies are a condition for loan approval. governed by California law, the California Supreme Court in early March ruled in favor of the State of California The IMF acknowledged the risk that “the government and against its insurance companies in a case arising out may not be able or willing to honor its obligations,” and of insurance coverage for the environmental clean-up of said countries offering such insurance would need to Stringfellow waste site in Glen Avon, California. budget accordingly. U.S. officials have been struggling to find a way to break First, the California Supreme Court decided that when a a self-reinforcing cycle of economic fear and paralysis loss results from both covered and non-covered causes but that has contributed to a year-long recession. The IMF the policyholder can’t identify how much damage resulted proposal would be one way to deal with this cycle. s from non-covered losses, the policyholder is entitled to coverage for the whole loss up to its policy limits. © Copyright 2008 Thomson Reuters This is an important issue in insurance coverage disputes New York High Court Expands Bad Faith across the country, including Mississippi, Louisiana, Alabama and Texas where policyholders have lost insurance coverage Remedies — Start of a Trend? for their hurricane losses due to anti-concurrent causation The New York Court of Appeals has agreed with Anderson clauses placed in their policies where they can’t prove how Kill’s argument that an insurance company may be much damage was caused by wind as compared to flooding. liable for consequential damages after failing to pay out a policy covering business interruption losses in good Second, the California Supreme Court ruled against the faith. Bi-Economy Market, Inc. v. Harleysville Insurance Co. insurance companies regarding a qualified “polluter’s Bi-Economy Market was a meat market, which in 2002, exclusion” in their policies. The California Supreme Court suffered losses when a fire destroyed the company’s inven- ruled that the relevant inquiry is whether the policyholder tory and damaged its building and equipment. When the expected or intended a discharge of contaminants from the insurance company failed to pay the business interruption waste disposal facility, not to the waste disposal facility. claim in full, the policyholder lost its business and was forced to sue for bad faith. A jury in Riverside California found in May 2005 that the State of California did not willfully cause property Upholding the insured’s right to recover the value of the damage at the Stringfellow waste site. lost business as a loss consequential to breach of the insur- ance policy, the Court held that business interruption Read more about this important case in the next issue insurance specifically contemplates that the insurer would of Enforce.. s investigate and pay covered claims in good faith. Such pol- icies are not merely a contract to pay money — they pro- tect a policyholder’s “peace of mind” while the interrup- IMF Urges Banks to Require tion of the business is ongoing. It was the loss of this peace Recession Insurance of mind that justified expanding the scope of recoverable bad faith losses to include consequential damages. Should banks make companies buy recession insurance from governments before they can borrow? The Several commentators, including the Harvard Law Review, International Monetary Fund (IMF) thinks so. The IMF see the decision as a “major shift in New York, a state with proposed this as a way to help situations like the current generally insurer-friendly liability laws.” It remains to be seen one where economic uncertainty is so high that companies whether this decision is a flash in the pan, or part of a trend s and consumers put off spending, deepening the downturn. toward softening New York rules that favor carriers. ATTORNEY ADVERTISING
WWW.andersonkill.COM 864 East Santa Clara Street Tel: 805.288.1300 Settle for Everything.® Ventura, CA 93001 Fax: 805.288.1301