Archive for the ‘Insurance Law’ Category
On February 3, 2012, the U.S. Court of Appeals for the Second Circuit issued its decision in Scandinavian Reinsurance Company Limited v. St. Paul Fire & Marine Insurance Co. The court reversed the lower court’s evident partiality ruling and denied Scandinavian Re’s petition to vacate the award.
The facts are interesting. The dispute arose over the failure of the umpire and one of the party-arbitrators to disclose that they were serving as panel members in another arbitration. The other arbitration was a dispute over some similar issues, involved related parties, and included a common witness who testified in both proceedings – in a contradictory fashion. The federal district court found that there was a material conflict of interest and that the arbitrators’ failure to disclose this conflict of interest warranted vacating the arbitral award.
In reversing the lower court, the Second Circuit unanimously held that evident partiality as that term is used in the Federal Arbitration Act § 10(a)(2) may be found only ‘where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration. It ruled that Scandinavian Re had not met the burden of establishing that the arbitrators’ failure to disclose their role in the two arbitrations was indicative of bias and constituted a conflict of interest that should lead to vacating the arbitral award. Their concurrent service in these arbitrations, according to the court, did not automatically suggest that they were not impartial nor did it show a predisposition to rule in a particular way in the arbitration even if the issues in the other concurrent arbitration were similar.
Even though Scandinavian Re argued that it was misled by the arbitrators’ repeated assurances to the parties that they understood themselves to be obligated to make thorough and ongoing disclosures, the Second Circuit disagreed that vacating the award was appropriate because an arbitrator failed to consistently live up to his or her announced standards for disclosure or to conform in every instance to the parties’ respective expectations regarding disclosure.
The Court observed, it would have been better for the arbitrators to have disclosed the fact of their involvement in the other case but that the remedy of vacating the award was not necessary. Despite the outcome in this case, the court did offer the following comment on the importance of timely and full disclosure by arbitrators: Disclosure not only enhances the actual and apparent fairness of the arbitral process, but it helps to ensure that that process will be final, rather than extended by proceedings like this one.
Scandinavian Reinsurance Company Limited v. Saint Paul Fire and Marine Insurance Company, Docket No. 10-0910-cv, 2012 U.S. App. LEXIS 2082 (2nd Cir. Feb. 3, 2012), rev’g 732 F. Supp. 2d 293 (S.D.N.Y. 2010).
A US Bankruptcy Judge has approved a $90 million settlement of a class action lawsuit against Lehman’s former CEO and 13 other executives.
The Judge was not persuaded by the objections made by other Lehman officers who argued that the release of insurance funds to effect the settlement might not leave enough money to cover settlements of other investor lawsuits (see In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555).
The settlement still must be approved by the federal judge overseeing the class action case.
For further information, see: http://www.reuters.com/article/2011/10/19/lehman-idUSN1E79I0YB20111019
An interesting legal dispute is taking shape among different groups of former directors and officers associated with Lehman Brothers Holdings Inc. and its affiliates.
Seven former directors – from Structured Asset Securities Corp, Lehman’s mortgage-backed securities issuer – are objecting to a proposed settlement of $90 million to settle a class action investor lawsuit against Lehman’s former CEO and 13 other executives, to be funded by a directors’ and officers’ liability insurance policy. The objecting directors are concerned that the settlement may not leave sufficient insurance proceeds to settle a separate class action lawsuit brought against them. The insurance policy reportedly has limits of US $250 million.
The dispute will come before a U.S. Bankruptcy Court Judge, who has been asked to authorize the release of the funds (In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555).
The case gives rise to difficult priority and equity issues among insured directors and officers given that there may well not be sufficient insurance limits under the policy to defend and settle all the outstanding claims. For this reason, it will be interesting to see how the Court resolves these conflicting claims to the available insurance proceeds.
For further information, see: http://www.reuters.com/article/2011/09/09/us-lehman-idUSTRE78801420110909
In Med-Chem Health Care Ltd. v. Misir (2010), 103 O.R. (3d) 769, the Ontario Court of Appeal agreed with the motion judge’s decision requiring a corporation to provide an indemnity to former directors for legal costs. The former directors were defending themselves against an action brought by a shareholder of the corporation (by way of a derivative action). It was alleged that the former directors and a secured lender had breached their duties of care to the corporation, causing the company to file for bankruptcy.
The appellant company agreed that it was obligated to provide an indemnity to the former directors under its By-laws and Section 136 of the Ontario Business Corporations Act. However, it argued that its obligation to pay legal fees did not arise until after the conclusion of the lawsuit. The action was still at the pleadings stage. The former directors sought an order requiring the company to advance an indemnity for legal fees from time to time.
Justice Goudge for the Court of Appeal stated, in part:
Section 136(2) of the OBCA allows the corporation (subject to a specified repayment condition) to pay advances of the legal expenses that the corporation may indemnify under s. 136(1). More importantly, s. 136(4.1), under which these proceedings are brought, allows the corporation to do the same (with the court’s approval), if the action is brought by or on behalf of the corporation itself and the individuals are made parties to it by virtue of their association with the corporation. Thus, s. 136 provides for advancement of the same legal costs, charges and expenses that may be indemnified by the corporation. In short, the legislature has made advancement a part of the statutory indemnification scheme, recognizing the reality that requiring an individual to fund his or her costs of litigation until its conclusion before being provided with indemnification would seriously impair the objective of indemnification itself.
From a directors’ and officers’ insurance perspective, the decision is interesting because the Court of Appeal expressly rejected the appellant’s argument that the motions judge should have considered whether there was proof of an inability on the part of the former directors to pay for the litigation without the advances and, in particular, the presence of insurance to fund the former directors’ defence.
In a recent American case – W3i Mobile, LLC v. Westchester Fire Insurance Company, 2011 WL 500213 (C.A.8 (Minn.)) – the US Court of Appeals for the 8th Circuit considered a “Products Exclusion” in a Business and Management Indemnity Policy.
W3i Mobile, a provider of mobile content to cellular phone users, sued its insurer for failing to defend and provide an indemnity for the expenses associated with two class actions brought by users of its mobile content. The lawsuits alleged that W3i Mobile billed cellular telephone users for unauthorized mobile content in violation of various state consumer protection statutes, among other allegations.
The Court of Appeals found that the products exclusion in the directors and officers section of the policy applied to preclude coverage for the claims. This exclusion provided that the insurer was not liable for any claims,
. . . alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving . . . any goods or products manufactured, produced, processed, packaged, sold, marketed, distributed, advertised or developed by [W3i Mobile].
The Court of Appeals noted that the class action claims alleged that customers were billed erroneously or without authorization for mobile content, being W3i Mobile’s “product”. The Court rejected M3i Mobile’s characterization of the claims as being merely billing disputes. In particular, the Court emphasized the words “in any way involving” in the products exclusion clause wording.
Sometimes, broadly worded exclusion clauses are “read down” and/or are found to be ambiguous by courts. However, this decision is a good example of an American appeal court giving effect to a broadly worded exclusion clause.
Dunn v. Chubb Insurance, 2011 ONCA 36, is part of the continuing saga of the failed Nortel Networks. There is nothing really new in this recent Court of Appeal of Ontario decision which discusses allocation of defence costs in directors and officers insurance when some claims are covered under a directors’ and officers’ liability policy and some are not. I say that because the Court looked at the wording in the policy and decided, on its plain meaning, that Chubb was responsible for paying 90% of the defence costs incurred in defending two former officers and directors of Nortel against allegations of misconduct in civil and regulatory proceedings.
After the demise of the company, an action was begun against Frank Dunn and Douglas Beatty alleging that they had committed certain Wrongful Acts, a term defined in the insurance policy issued by Chubb. The policy was a claims made policy and covered the 2001 period. There were allegations that wrongful acts were committed by Dunn and Beatty in both 2001 and 2003.
The insurer Chubb agreed to pay defence costs for Dunn and Beatty for proceedings relating to the 2001 conduct but refused to cover the full defence costs for other proceedings arising out of both the 2001 and 2003 conduct. Chubb argued that it was not responsible for the defence costs that related to the 2003 conduct. It was an important issue because the policy that covered the 2003 conduct had been rescinded by Chubb.
The issue before the Court arose out of a special endorsement to the policy that required Chubb to pay 90% of defence costs where there was a claim that included both covered and uncovered losses. Chubb argued that the claims still had to fall within the period of 2001 policy.
The Application’s Judge and the Court of Appeal agreed that the endorsement in the policy applied. The Court relied on the plain language of the endorsement and held that there was no condition that the whole claim relate to the 2001 policy period for the 90% allocation of defence costs to apply.
The words in the policy prevail!
According to a Towers Watson Survey released last month, many companies have decided to increase the limits of their directors and officers liability insurance policies.
According to Towers Watson, the trend towards increasing policy limits can be attributed to an increased potential for litigation and a heightened concern over the threat of regulatory investigations. According to the survey, 21% of respondents indicated that they had increased their D&O limits as compared to their prior D&O policy. (In a 2008 survey, only 12% of respondents had reported an increase to their limits over the previous year.) A further 75% of respondents said that their limits had stayed the same (as compared to 86% in the 2008 survey). Only 3% of respondents said that they had decreased their limits.
Other survey highlights include:
• 54% of respondents said that they had not conducted an independent review of their D&O program within the past two years.
• 35% of private organizations bought excess Side A coverage.
• More than 80% of public company respondents purchased excess Side A coverage.
• 35% of non-profit and 22% of private company respondents said they were not sure how their D&O program was structured.
A copy of the press release issued by Towers Watson can be found at: http://www.businesswire.com/news/home/20110222006279/en/Growing-Number-Companies-Increasing-Directors-Officers-Liability
In a recent American case – Foodtown Inc. v. National Union Fire Insurance Company of Pittsburgh, Nos. 08-3940 and 08-4083, United States Court of Appeals, Third Circuit (January 6, 2011) – the Court considered an “Organization vs. Insured” exclusion in a directors and officers insurance policy.
Foodtown is a close-held grocery cooperative whose members operate supermarkets. Food King Inc., a member of Foodtown, brought an action against Foodtown and members of its Board of Directors. National Union had issued an insurance policy to Foodtown and its directors and officers.
National Union denied coverage for all of Food King’s claims, in part on the basis of the “Organization vs. Insured” exclusion (i.e., with respect to three of the four Counts contained in a Second Amended Complaint).
The Court of Appeals for the Third Circuit found that the exclusion clause only applied to one of the Counts, namely, a derivative claim brought by or on behalf of the Organization against an “Individual Insured”. Specifically, the President of Food King was a former President of Foodtown and a former member of Foodtown’s Board of Directors, and was now actively participating in the litigation against Foodtown. Foodtown unsuccessfully argued that the prior status of the President of Food King was irrelevant. The Court of Appeals noted that the National Union insurance policy defined an “Individual Insured” to include a past director or officer.
The Court of Appeals declined to apply the exclusion to two other Counts.
On February 14, 2011, leave to appeal a ruling of the Ontario Superior Court was denied in Silver v. IMAX Corporation (Court File No. CV-06-3257-00). The result of this decision is to allow a class action to go forward against IMAX and its directors for false statements made regarding its 2005 financial results. This is the first case under the recent revisions to the Ontario Securities Act that are designed to permit investors, with leave of the Court, to bring actions for civil liability against directors and officers of public companies for misrepresentations in public disclosure documents.
Formerly, for such an action to succeed at common law, it was necessary to show detrimental reliance upon a misrepresentation. This requirement has been eliminated by the 2005 Ontario Securities Act.
This case is a reminder of the ever increasing potential for personal liability that is assumed when someone accepts a position as a director or officer of a company. However, this risk can be tempered with an appropriate directors and officers insurance policy which provides coverage for securities-related litigation.
On October 15, 2010, the United States District Court for the Southern District of Florida released a Decision in Office Depot, Inc. v. National Union Fire Insurance Company.
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