Claims And Issues

Insurance Sector Snapshot Is Here!

    It is time once again for the Insurance Sector Snapshot, courtesy of The New York Times, here.

    Instructions for navigating the Snapshot are given in it.  A couple of things about it are  pretty easy to understand, and if I can understand them, believe me, that makes them easy to understand.

    Allstate's recent poor financial news -- including it first annual posted loss as a public corporation, and its termination of 1,000 jobs -- clearly puts it in the position of the weakest "one-week price return," but no Insurance Company in the Sector was weaker than AIG in its "one-year price return".

    Life Insurance Companies have been crying poor in recent days, raising the specters of terrible things that might happen if they are not given financial help including Federal Taxpayer Funds -- although as the National Association of Insurance Commissioners determined in their vote yesterday, these same Life Insurance Companies did not prove their case for emergency relief by putting on evidence to back up their claims.  (See today's earlier post on the NAIC vote.)  The Snapshot shows that the Life Insurance Companies turned in by far the top financial performers in the Insurance Sector over the last week.

    The Insurance Sector as a whole compares very poorly with the rest of the market.  The S&P 500 is listed as losing 38.0 percent over the last year, in a box accompanying the Snapshot on page B8, Business Day Section, of the Friday, January 30, 2009 National Edition of The New York Times.  The same box shows that the Insurance Sector has lost 65.3% in value over the last year compared with the rest of the market.  Only the Financials Sector has performed more poorly in that regard than the Insurance Sector, with Financials reportedly losing a collective 66.9% of their value.

Please Read The Disclaimer.

Postscript of Monday, February 2, 2009:  AND HERE TOO:  Sector Snapshot:  Insurance, Online, February 2, 2009.

Secrecy Stipulations Do Not Survive Open Records Without Good Cause.

    As many attorneys do in Insurance and other cases, the attorneys for the parties in a recent Federal Declaratory Relief action stipulated that certain Insurance Coverage information would be produced under seal.  In fact, the attorneys apparently stipulated to a Protective Order saying so.  Thereafter, they filed some of those materials in the Federal Court File.

    The Federal Judge said that although the secrecy stipulation arguably facilitated discovery, the parties could not stipulate that everything they filed in the Court records was confidential and thus to be kept forever from the public eye, not without "good cause" shown to keep them secret under Federal Rule of Civil Procedure 26(c)(1):  "The records and decisions of the courts should be within the public's view to allow the public access to the reasoning upon which judicial decisions rest."  Download Kreuger Int'l, Inc. v. Federal Ins. Co. and St. Paul Fire & Marine Ins. Co. (E.D. Wis. Dec. 16, 2008).

    According to a Court Order opening all such materials but one to public scrutiny as of January 26, 2009, the attorneys requested only one item to be kept secret under the "good cause" requirement.  Download Kreuger Int'l, Inc. v. Federal Ins. Co. and St. Paul Fire & Marine Ins. Co. (E.D. Wis. January 26, 2009).

Please Read The Disclaimer.

Director's and Officer's Insurance Coverage -- for Fiduciary Duties?

    Questions arise every day, it seems, concerning the extent of Fiduciary duties and relationships, if any, that are owed by and among corporate officers, directors, shareholders and consumers.  Lawsuits have reportedly been filed challenging the decisions of officers or directors to enter into certain mergers and acquisitions, and claims have also been made concerning spending decisions involving shareholder money at publicly held corporations, as well as the timing and amount -- in one case, $4 Billion reportedly -- of so-called bonuses.  See generally Julie Creswell, "Market Place/Price Paid For Merrill Is Rising" p. B1, col. 6 (New York Times Nat'l Ed., Business Day Section, Saturday, January 24, 2009); Julie Creswell and Louise Story, "John Thain, Merrill's Former Head, Is Out At Bank of America" p. A1, col. 1 (New York Times Nat'l Ed., Friday, January 23, 2009), published online with the headline, "Thain Resigns Amid Losses at Bank of America"; Andrew Ross Sorkin, "Dealbook/The Titans Take It On The Chin" (New York Times Online Tuesday, January 27, 2009); Louise Story and Julie Creswell, "Bank of America Board Under Gun From Critics" p. B1, col. 2 (New York Times Nat'l Ed., Business Day Section, Wed., January 28, 2009).

    Director's and Officer's Insurance Companies beware.  The claims that have not already reached your office are coming to you for Insurance Coverage determinations, very soon.  A lengthy post today on this Issue, "Directors and Officers and Fiduciary Duties," can be found at www.insuranceclaimsbadfaith.typepad.com.

Please Read The Disclaimer.

Texas Court Answers "Injury in Fact" Property Damage, Occurrence Questions.

    In a ground-breaking answer in a Construction Insurance Coverage case, the Texas Supreme Court recently adopted an "Injury in Fact" test under a standard "occurrence-based commercial general liability [CGL] insurance policy":  Download 07-0639 Don's Building Supply, Inc_ v_ Onebeacon Ins_ Co.

    The Court unanimously answered certified questions from the Federal Fifth Circuit Court of Appeals in this case.  The first of the certified questions is addressed in this post.  In it, the Fifth Circuit basically asked how Texas Insurance Coverage Law would determine whether and when there was "Property Damage" and an "Occurrence" within the policy period, or not, for alleged damages resulting from installation of a synthetic stucco product called an "Exterior Insulation and Finish System (EIFS)."

    The Texas Court's answer is instructive in how the Texas Justices unanimously read seemingly different provisions of the CGL Policy together, before reaching a conclusion about any one or more of those Policy provisions.  As a result, their answers to the certified questions in that case affect Texas Insurance Law issues that go way beyond "Property Damage" and "Occurrence" definitions.  Their answers also reach out toward how, in determining when and whether there was an "Occurrence" of "Property Damage" within the Policy period, Texas Courts would simultaneoulsy be forced to thereby address other provisions in the Insurance Policy including "per occurrence" and "aggregate" limits of the Insurance Company's liability under the Policy.

    The Texas Supreme Court's answer in this regard is worth reading, repeated below without footnotes:

    The policy defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."  We recently noted, in construing the same CGL language, that "[a]n accident is generally understood to be a fortuitious, unexpected, and unintended event."  The policy's requirement that property damage be caused by an "occurrence" limits coverage in at least two respects.  First, because the occurrence must be an "accident," coverage for intentional torts is excluded.  Second, because a single occurrence can be "an accident" and consist of "continuous or repeated exposure to substantially the same general harmful conditions," the definition of occurrence serves to limit the number of occurrences an insured can claim for what the policy deems to be a single accident.  This limitation is sometimes important because the dollar limits of the policy include an aggregate limit and also a lower dollar llimit per occurrence.

Following the language which has just been quoted, the Texas Supreme Court examined the Policy's brief "Property Damage" definition, stated that it had construed all these Policy provisions together, and answered the question by stating that, under Texas Insurance Law at least, "property damage under the policy occurred when actual physical damage to the property occurred."

    The possibility that damage to property might not be discovered did not give the Texas Court much pause:  "So in this case, property damage occurred when a home that is the subject of an underlying suit suffered wood rot or other physical damage.  The date that the physical damage is or could have been discovered is irrelevant under the policy."  However, the Court carefully limited its answers to, among other things, the duty to defend in this particular case:

    Today's decision rests upon the specific language of these parties' CGL policies regarding property damage in the construction-defect context, and it is directed only to the specific questions posed by the Fifth Circuit.

The Texas Court in answering the certified questions in this case was careful to note that there is a split in authority on the question of whether and when "Property Damage" takes place, i.e., is an "Occurrence" within the Policy period, with many Courts lining up behind an alternative point of view that there is an "Occurrence" when "Property Damage" manifests itself.  Judges, lawyers, Insurance Companies, and Policyholders in any given jurisdiction should consult the Insurance Law of their own jurisdiction to determine where their chosen jurisdiction lines up on this question.

Please Read The Disclaimer.

Appraisal Award Establishes Preconditions For Florida Statutory Bad Faith Claim.

    A Federal Judge in Florida has recently held that an Appraisal Award establishes that determinations were previously made of both the liablity of the Insurance Company and the damages of the Policyholder in order for the Policyholder to bring an action under the Florida Bad Faith Statute, F.S. 624.155.  Download Tropical Paradise Resorts, LLC v. Clarendon Am. Ins. Co. (S.D. Fla. Aug. 20, 2008).

    The online docket of this case shows that an Order was entered approving a later Stipulation of Dismissal.

Please Read The Disclaimer.

If Insurance Trades Like a Security, Regulate Like a Security?

        Apparently the new Administration in Washington has made a decision that the Federal Government should have the power to regulate Credit Default Swaps as securities.  This means that the States would perhaps completely lose any power to regulate CDS's that act like Insurance, as the Credit Insurance they really are.

    One option is frequently found in Federal Statutes:   Provide an exemption in favor of State Regulation where State Regulation exists; otherwise, Federal Regulation will occupy the vacuum.  In this instance, whenever CDS's function like Insurance and are regulated by the States, which after all have been regulating Insurance of various kinds long enough to be fully experienced at it, then the Regulation of those particular kinds of CDS's can and should be "exempted" from Federal Regulation in favor of the existing State Regulation.  In an earlier post here, it was reported that New York State for one example will begin regulating Insurance-like Credit Default Swaps this month.   See also posts of December 24, 2008 and January 7, 2009 archived in the Categories of Credit Insurance, Market Performance, Regulation, Reserves, and Risk Management. 

    "Tradeability" seems to be the determinative test used by the Obama Administration for Federal Regulation of CDS's at this early date.  If a CDS cannot be traded "on exchanges or through clearinghouses" then the Obama Adminstration reportedly will not try to regulate them.  If on the other hand a CDS can be traded, then regardless of other characteristics -- such as the distinction between Insurance in which the purchasing party has an Insurable Interest should a nonparty "default," vs. wagers or bets in which the purchasing party has no dog in the fight but instead is only placing a bet or wager that the nonparty will (or will not) default -- then the fact that the given CDS can be traded like a security is all that will count in the Federal Government attempting to regulate it like a security, rather than treating a qualifying CDS like Insurance.  (Insurance has for many years been regulated by the States.)  See generally Stephen Labaton, "Obama Plans Fast Action to Tighten Financial Rules/New Scrutiny for Hedge Funds, Derivatives Market and Credit Rating Agencies" p. 1, col. 5 (New York Times Nat'l Ed., Sunday, January 25, 2009).

    Happily, the Obama Administration reportedly would or "could" include new requirements for Reserves in its attempts to fashion regulatory schemes for Credit Default Swaps:  "The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments."  Id.

Please Read The Disclaimer.

Derivatives and Despair: Insurance Companies (and Others) Beware

    Derivatives include Collateralized Debt Obligations and Credit-Default Swaps.  Their role in the current credit chaos is deadly.   Credit-Default Swaps, in particular, are an unregulated form of Credit Insurance issued by Companies without sufficient capital to pay them off.  See generally Gretchen Morgenson, "How the Thundering Herd Faltered and Fell/Merrill Lynch Couldn't Escape the Housing Crash" p. 1, col. 1 (New York Times Nat'l Ed., SundayBusiness Section, Sunday, November 9, 2008).

Please Read The Disclaimer.

"Triple Benefits" of Health Insurance: Joseph Stiglitz.

    Nobel Prize-winning economist Joseph Stiglitz has written a clear and informative essay in the Financial Times, entitled, "Do Not Squander America's Stimulus on Tax Cuts" (FT.com, Thursday, January 15, 2009).  In the essay, he sees three benefits to the U.S. economy from providing Health Insurance to the unemployed:

1.  The obvious benefit of insuring against the costs of Medicalcare;

2.  Keeping families from bankruptcy in the event of a catatrophic medical occurrence; and

3.  "Helping the unemployed meet house payments reduces foreclosures, addressing one of the underlying causes of the [Financial] crisis."

Please Read The Disclaimer.

A Tarp, or an Umbrella?

    There seem to be differing perceptions over the purposes of the Troubled Assets Relief Program ("TARP").  Congress and the Federal Taxpayers, whose Tax money is being used to fund the program, understood Congress to provide for the purchase of troubled assets from banks.  This program would clear the way on the basis of strengthened credit for banks to make loans to start-ups and growing businesses, which would in turn would hire employees, who in their turn would have money to spend, all to the good for the national economy.

    On the other side of the perception divide stand not a few bankers.  They for their part think of TARP as Insurance, a hedge against bad times, and not an incentive to make loans they otherwise would not have made (and before TARP, they were not making many loans):

We see TARP as an insurance policy.  That when all this stuff is finally over, no matter how bad it gets, we're gong to be one of the remainng banks.

John C. Hope, III, Chair, Whitney National Bank of New Orleans, speaking at the Palm Beach Ritz-Carlton in November, 2008,  quoted by Mike McIntire, "Bailout is a No-Strings Windfall to Bankers, if Not to Borrowers" p. 1, col. 2 (New York Times Nat'l Ed., Sunday, January 18, 2009).

Please Read The Disclaimer..

Privacy No Rightful Impediment to Electronic Medical Records.

    Today is Inauguration Day!  Good luck to our new President.  You are in our hopes and in our prayers.     

The drive to bring Information Technology to Doctors and Hospitals through electronic medical records is reportedly stalled by concerns about protecting privacy of the records. Robert Pear, "Privacy Issue Complicates Push to Link Medical Data" p. 11, col. 6 (New York Times Nat'l Ed., Sunday, January 18, 2009).

    The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") already provided the possible answer to those concerns.  (In the eyes of some, this will be the first time that  HIPAA may have provided an answer to almost anything.)  Access to patient records is already restricted under HIPAA, as is the use made or dissemination of those records.  Extend the HIPAA protections to all forms of medical records, electronic as well as paper.  Provide for the punishment of unauthorized access to and unwanted sharing of information about patients from their medical records, even as such conduct is punishable now; if greater punishments are desired, enact them.

    Further, all internet and computer users are familiar with the need for and use of passwords.  All persons accessing electronic medical records should be required to use a password.

    Unless I am missing something new and unusual about the privacy of electronic medical records, which are after all only one more form of medical records and cause the same concerns that have been caused over the privacy of medical records since Moses was a baby, this seems like an issue that has largely already been solved.

Please Read The Disclaimer.

Hope.

    Dr. King's Birthday will be celebrated on January 19 in 2009.  Dr. King is being honored with a National Holiday to be observed on the occasion of his birth because he was a great American.  His life gave evidence to us all that perfection is not required in order to be a good person, let alone, in his case, a great one.

    Hope is a singular quality he provided.  And which his memory continues to provide.  I call often to my mind something that Dr. King said about a person who had lost hope.  This is what he said:

The cessation of breathing in his life was merely the belated announcement of an earlier death of the spirit.  He died when he lost hope.

[Emphasis in original.]

    Hope can be found for most Americans in the Inauguration of a new President.  See, e.g., Maya Angelou, "At Long Last, Ready For The Real Deal" (Washington Post.com, Sunday, January 18, 2009).

    That is much.  More even than that, and in addition to that, hope can be found in other things previously despaired of.  Such as courage and competence under pressure.  The pilot and all the members of the crew of Flight 1549 provided that kind of hope in the week before this post.  Their names are Chesley B. Sullenberger III, the pilot; co-pliot Jeffrey B. Skiles; and Flight Attendants Doreen Welsh, Sheila Dail, and Donna Dent.  See, e.g.,  Ray Rivera, "In a Split Second, a Pilot Becames a Hero Years in the Making" p. A19, col. 1 (New York Times Nat'l Ed., Saturday, January 17, 2009); Ray Rivera and Liz Robbins, "For Flight 1549, With Age Came Wisdom," The Lede web log, January 17, 2009 post.

    Hope.  That Insurance Premiums will be forced to be based on actual actuarial information and not Computer Model GIGO 'projections'.

    And that among other things Insurance Companies' market performance will be a result of their strong Insurance operations rather than CDSs and CDOs and other false profits.

    Hope.  This is a great message sent by Dr. King's Birthday.  His Birthday is observed as Washington's Birthday is observed together with Lincoln's Birthday.  The commemoration of Dr. King's Birthday was not enacted by the U.S. Congress as a day they gave Dr. King as his "Day," which they can take away.  To the contrary.  An annual observance of Dr. King's Birthday was enacted into law because of the accomplishments which Dr. King had already conferred upon the Country.

Please Read The Disclaimer.

Professional Liability Insurance Claims Anticipated Against Unregulated Investors.

    A spokesperson for Marsh & McLennan, reportedly the second-largest Insurance Broker in the United States, is cited recently as reporting that "[r]egistered mutual funds and their advisers pay about $250 million for errors and omissions insurance each year".  Erik Holm and Andrew Frye, "Madoff May Cost Insurers $1 Billion to Cover Funds (Update 3)" (Bloomberg.com, Friday, January 9, 2009).

    In the same article, it is reported that as cases involving Mr. Bernard Madoff are tried (if they are tried), Professional Liability Insurance or "E and O" Claims Expenses will rise.  See id.  Unfortunately for wealthy investors such as those catered to by Mr. Madoff, hedge funds and unregulated investment vehicles often do not buy Insurance Coverage.  See id.

    Whether and when Claims will be made on Professional Liability Insurance Policies that were actually issued remains to be seen.  "'I think it's too early to tell,'" according to the Marsh and McLennan spokesperson quoted in the linked news report.  Id.

Please Read The Disclaimer.

Staying All Discovery (Costs) in Insurance Coverage Cases.

The Chief Judge of the U.S. District Court for the Middle District of Pennsylvania has recently ruled in favor of staying all discovery in an Insurance Coverage and alleged Bad Faith case where a potentially dispositive motion would decide the Insurance Coverage issue without the need for discovery. 

            In Babalola v. Donegal Mutual Insurance Co. (M.D. Pa. December 18, 2008), download Babalola v. Donegal Mutual Insurance Co. (M.D. Pa. Dec. 18, 2008),  the Chief Judge had already granted the Insurance Company’s motion to dismiss the original complaint.  She gave leave to amend.  The Plaintiff filed an amended complaint.  The Defendant filed a second motion to dismiss, and this time, also filed a motion to stay all discovery because the second motion to dismiss would decide the Insurance Coverage issue and so it would decide the entire case.

         The Chief Judge agreed and granted the motion to stay all discovery – and stayed the costs of discovery too of course although the costs of discovery in that case are not addressed ‘out loud’ in the opinion.  First, she ruled that the decision was within her discretion.  The exercise of discretion calls for a balancing test, balancing the competing interests of each party to determine the benefits and harm from staying discovery.  The Federal Judge also preliminarily reviewed the motion to dismiss in that case.  She agreed that deciding the second motion to dismiss in that case would decide the entire case and that no discovery on the dispositive motion was necessary.  “The balance favors granting the stay where the pending motion to dismiss disposes of the entire case and where no discovery is needed to rule on such a motion.”

         There are likely to be many Insurance cases in other Federal Courts, and in State Courts too perhaps, in which a stay will be requested.  In a case like this new decision attached for your ease of reference, requesting a stay of all discovery at an appropriate juncture will arguably be in each party’s interest, on the whole, because a Judge is convinced by Insurance Counsel that a pending dispositive motion will decide the Insurance Coverage issue without the need for discovery.

         On the authority of this new Insurance Coverage case, parties and their counsel in any similar case should seriously consider requesting a stay of all discovery and thus a stay of all the costs that go along with that  discovery.

Please Read The Disclaimer. 

   

Unemployed? Likely Uninsured Now. COBRA? Many Unemployed Cannot Afford It.

    The consequences of Employment-based Health Insurance include that when there is no longer employment, there is no longer any Health Insurance, either, for many people.  For example, Florida is reportedly one of 9 States where the Family Coverage Premiums for COBRA are the same or greater than "total unemployment benefits."   Jeff Harrington, "Families Feel COBRA's Sting" (St. Petersburg Times Online, Friday, January 9, 2009).  This very informative linked newspaper article also provides a useful chart of the 9 States in question, entitled "Unemployment Squeezed by Health Insurance".

    The U.S. Congress passed the Consolidated Omnibus Reconciliation Act in 1985.  Known as "COBRA," it extended Health Insurance Coverage to unemployed workers for as much as 18 months.  The costs are high, however.  In Florida, again as an example, "[t]he state's average COBRA premium for family coverage, $1,037, represents 102.4 percent of the average unemployment monthly benefit, which is $1,013."  Id.  [Emphasis added.]  See Ceci Connolly, "COBRA Too Costly For Many Unemployed, Report Finds" (Washington Post.com, Saturday, January 10, 2009)(reporting that  "the individual must pay 102 percent of the policy's full cost.").

    The U.S. percentage comparison of monthly Family COBRA Coverage Premiums vs. monthly Total Unemployment Income is almost but not quite as stark:  83.6%, or $1,069 vs. $1,278.  Harrington, St. Petersburg Times, supra.

    Individual COBRA Coverage Premiums across the U.S. equal an average of 30% of Total Monthly Unemployment Benefits, while in Florida reportedly the same percentage comparison is 37%.  Id.

    According to a report released by"Families USA," the Premium availability mandated by COBRA may take a percentage of unemployment benefits ranging from 30% to 84%.  See id.  The web site for "Families USA" is www.familiesusa.org.

    The Kaiser Family Foundation further recently reported that every 1% rise in unemployment leads to a 1.1% rise in Uninsured people.  See id.  The web site of the Kaiser Family Foundation is www.kff.org.

Please Read The Disclaimer.

Munis: TARP To Be Thrown Over Issuers and Insurers.

    According to a January 9, 2009 Press Release Outline of Legislation to Amend TARP, the Chair of the U.S. House Financial Services Committee Barney Frank (D-Mass.) will offer amendments to TARP, the Troubled Assets Relief Program, to "clarify" the Treasury Department's authority under the Emergency Economic Stablization Act of 2008 "to provide support to issuers of municipal securities for new issuance or remarketing of existing auction rate securities."  [Emphasis added.]

    Whether and how these proposed amendments will work remains to be seen, of course.  Time will tell.

   Please Read The Disclaimer.

Sector Snapshot: Insurance -- Lagging Life Insurers.

    News posted here on December 21, 2008 and updated most recently last night, "They Bet Your Life Insurance Reserves.  And You Lost?  Maybe Not," posted in the categories of Life Insurance, Market Performance, and Reserves, is reflected in the news of today.   Life Insurance Companies are leading the laggards or lagging behind much of the rest of the Insurance Sector in share price in this latest New York Times Sector Snapshot:  Insurance (New York Times Nat'l Ed., Business Section, Tuesday, January 13, 2009).  (Go to the "Categories" box on the snapshot and select "Financials".  On the dropdown bar that appears when you click on "Financials," select "Insurance".)

    Yesterday the National Association of Insurance Commissioners denied a very recent request made by many Life Insurance Companies, which have lost large amounts of money betting on Credit Default Swaps and other securitization "products," to immediately reduce the amount of Reserves they must carry.  See Andrew Frye, "Hartford Falls As Plea For Speedier Reform Rebuffed (Update 4)" (Bloomberg.com, Monday, January 12, 2009).   The consistent lag in share price of these Life Insurance Companies in question reflects the stock market's response to their financial decisions over the past year as well as over the past week.

Please Read The Disclaimer.

Loan Modifications to Forestall Foreclosures: Federal Immunity for Loan Servicers.

    Mortgage or Loan Servicers may be sued by Lenders if they agree to modify a loan or mortgage to forestall foreclosure on Borrowers' homes.  In other words, Mortgage Servicers can be sued for doing a good thing.  Lenders may sue such Mortgage Servicers for Breach of Contract or Breach of Fiduciary Duties -- owed only to the Lenders.  In the current age, fear of being sued is for many an unrelenting terror.  Such is the headshaking news posted, for example, on December 3, 2008 on www.insuranceclaimsbadfaith.typepad.com.

    The financial fiasco is not easy to understand, for a lot of reasons.  For one thing, if a person is a liberal arts major from a working family, like the author is, then learning the language of finance may be something like learning a second language.  Help is on the way, as they say.  One of the usually undefined words recently in vogue is "servicers".  Here is a friendly and useful working definition, friendly and useful to liberal arts majors and working families alike:

    Servicers act as a bridge between lenders and borrowers, taking in mortgage interest payments from borrowers, often paying property taxes and distributing income to the investors who own the real estate.

Gretchen Morgeson, "Fair Game/Before We Award a Taxpayer Seal of Approval..." p. 1, col. 2 (New York Times Nat'l Ed., SundayBusiness Section, Sunday, January 11, 2009), published online under the headline, "Beyond the Boldface Names in the IndyMac Deal".  

    The U.S. Congress may step in to provide some protection to Loan and Mortgage Servicers that do the right thing.  Immunity protections are among the amendments which are going to be offered to the Troubled Assets Relief Program ("TARP") of the Emergency Economic Stabilization Act of 2008.  The amendments will be offered by the Chair of the U.S. House Financial Services Committee, Rep. Barney Frank (D-Mass.).  See January 9, 2009 Press Release Outline of Legislation to Amend TARP.

    Most of the press regarding these proposed amendments has concentrated on other features such as restricting executive compensation and banning the use of corporate jets.  See, e.g., Andrew Ward, "Frank Moves to Tighten TARP Aid" (Financial Times.com, Friday, January 9, 2009); Tom Petruno, "Money & Co." Web Log, "Frank Wants More Bank Pay Restrictions, And No Private Jets" (Posted at Los Angeles Times Online, Friday, January 9, 2009).

    The news addressed in this post, however, is that which may have a major effect on Immunity for certain Servicers.  The potential consequences of adopting these amendments are great.  And they are potentially very beneficial.

    The above January 9, 2009 Press Release Outline of the proposed amendments in this area reveals that if enacted, Federal Law will extend Immunity from "liability" for Servicers who extend "loan modifications":

The Federally conferred Immunity will apply "regardless of any provision in a servicing agreement," i.e., regardless of any contract provision in the agreement between the Lender and the Servicer; and

Unsuccessful Plaintiffs who dare to sue protected Servicers will have to pay the successful Servicers' Attorney's Fees in addition to Court Costs.

Immunity Laws like these may go a very long way toward easing the Credit Crisis, reducing the number of Foreclosures displacing Homeowners from their homes, and providing a new application of Federal Immunity Laws to people other than wiretappers and 21st Century "Black and Tans" and other thugs.  While there may be other effects which cannot yet be known, in general terms enactment of Federal Laws like these would in short lead to more than a few welcome developments.

Please Read The Disclaimer.

Latest Legal Irk: "Cramdown Provisions".

    Lenders including Bankers and Mortgagees have until now dictated the framework available to Homeowners to find solutions, other than Foreclosure, to their inability to repay their Home Loans.  How is that going?

    Citigroup reportedly has agreed to support amendments to the Federal Bankruptcy Laws to allow a limited authorization of so-called "cramdown provisions".  Citigroup's support of these proposed amendments has irked Bankers and Mortgagees and other Lenders immensely.  See, for example, Renae Merle and Binyamin Appelbaum, "Industry Recoils at Citi's Mortgage Deal/Banks Seek More Limits on Bankruptcy Judges' Authority to Rework Mortgages" (Washington Post.com, Saturday, January 10, 2009).

    "Cramdown provisions" authorize Bankruptcy Judges to take certain actions, which reportedly include:

Lowering the interest rate on a loan;

Reducing the Principal; or

Extending the time over which the loan must be repaid.

See id.  "Currently, judges are allowed to modify the terms of a mortgage for a second or vacation home but not a primary residence."  Id.  [Emphasis added.]  Citigroup's support, however, concerns only existing mortgages and loans.  Citigroup reportedly does not support -- and the proposed amendments do not provide for -- authorizing "cramdown provisions" for future mortgages.  See id.

    What if any effects such amendments would, if adopted, have on Insurance are open to speculation.  It seems clear however that Premiums on Mortgage insurance Policies will be subject to change as well.

Please Read The Disclaimer.

Reinsurance Premiums Predicted to Rise With Exposure.

    Reinsurance Premiums are predicted to rise in double digits in the New Year.  Andrea Felsted, "Embattled Insurers Ready to Benefit From Lessons Learned" (Financial Times.com, Saturday, January 3, 2009).

    This prediction has peculiar force concerning Reinsurance Premiums that are widely expected to increase for Insurance Companies exposed to paying Claims following Hurricanes, including onshore Property and offshore Property which in turn includes oil and gas infrastructure.  See, e.g., id. among other recent news reports.

Please Read The Disclaimer.

Why No Regulation, Even Now?

    Regulation of the financial system is long overdue.  Lessons can be learned from the imperfect but workable experience of State Insurance Departments and other State regulators over Insurance.  Given the more recent experience of failure in the financial system, the question might well be asked:  Why no Regulation, even now?

    And here's the most incredible thing of all:  18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

Michael Lewis and David Einhorn, "The End Of The Financial World As We Know It" p. 9, col. 1 (New York Times Nat'l Ed., Week in Review Section, Sunday, January 4, 2009).

    The answer may be written at the very end of the same excellent newspaper column, as is  linked above:

    The funny thing is, there's nothing all that radical about most of these changes.  A disinterested person would probably wonder why many of them had not been made long ago.  A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.

Id.

Please Read The Disclaimer.

Credit Ratings Corporations No Insurance Against the Credit Crunch.

"Given their performance it's hard to believe credit rating agencies are still around."  Michael Lewis and David Einhorn, "The End Of The Financial World As We Know It" p. 9, col. 1 (New York Times Nat'l Ed., Week in Review Section, Sunday, January 4, 2009).

    Credit Ratings Corporations seem to have been operating for decades with an inherent conflict.  They were, and apparently still are, paid by the corporations whose credit they rate.  The seemingly precipitous downfall of Credit Ratings seems to be evidence that the Credit Ratings Corporations did not dare to downgrade the Credit of the Corporations which paid the bills.  See id.  The ramifications of this apparent conflict are the subjects of a related post on www.insuranceclaimsbadfaith.typepad.com.

    The lengthy newspaper article by Messrs. Lewis and Einhorn, linked on this post, is very easy to understand particularly for those, like the writer of this post, whose eyes tend to glaze over when economics is discussed.  Refusal to understand economics in the face of the current financial fiasco is just not an option, you might say.  The article by Messrs. Lewis and Einhorn is an outstanding point at which to begin to understand the crisis.

    It is a mistake to blame the current crisis simply on the Credit Ratings Corporations.  They did play a major role, particularly in the way that they rated the credit of Bond Insurance Companies  (as readers of past posts in this space know well).  However, Credit Ratings Corporations are by no means the only ones at fault for the financial fiasco.  They should not be scapegoats for it.  The role of the Credit Ratings Corporations in the financial crisis, which was decades in the making, is summed up very well in the linked newspaper article, as follows:

    These oligopolies, which are actually sanctioned by the S.E.C. [Securities and Exchange Commission], didn't merely do their jobs badly.  They didn't simply miss a few calls here and there.  In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do:  rather than expose financial risk they systematically disguised it.

Please Read The Disclaimer.

CDS Unregulated "Insurance": Regulation and Risk Management Mean Capital Reserves.

    A previous post exposed the little-known fact that there are several different kinds of Credit Default Securities or CDSs.  See "CDS Unregulated 'Insurance':  How the AK-47 Chewed Up Wall Street," December 24, 2008.  See also "CDS Unregulated 'Insurance':  The AK-47 Loose on Wall Street," December 15, 2008.

    Some CDSs function like Insurance.  Other CDSs function like wagers or bets.  Few CDSs are regulated.

    There is general agreement that the lack of regulation of CDSs must change.  There is disagreement, though, over many specifics of how the different types of CDSs can most efficiently be regulated.  There is no disagreement, however, that CDSs require Reserves:

The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.

Michael Lewis and David Einhorn, "The End Of The Financial World As We Know It" p. 9, col. 1 (New York Times Nat'l Ed., Week in Review Section, Sunday, January 4, 2009).

Please Read The Disclaimer.

OMG! It is NOTRE DAME That They Are Talking About!

"I feel like we're the nerd in college football."  Cierre Wood, Notre Dame Football recruit, quoted in Thayer Evans, "Commitment to Notre Dame Is No Joke For Top Recruits" (New York Times Nat'l Ed., Sports Section, p. 6, col. 1, Sunday, January 4, 2008).

Did you EVER think that an incoming member of the Notre Dame Fighting Irish Football Team would ever be quoted as saying such a thing, and be right on? 

Mr. Weis' publicity department is constantly touting how well he recruits new incoming players.  How is that going?

Over the last two years of Weis recruits to the Fighting Irish, the Notre Dame Football Team has lost more games than over any previous two-year stretch in history.

For God's sake, Mr. Weis, go.  For Notre Dame's sake, sir, leave.

As soon as can be.

Please Read The Disclaimer.

Hurricanes Not Buffeting Florida, Benefits Both Florida and Mr. Buffett.

    After Hurricanes Charley, Ivan, Jeanne, Rita and Wilma et al. pummeled Florida properties in recent years, the Florida Legislature established a fund for the avowed purpose of enabling Florida Property Owners to purchase Property Insurance Coverage.  The fund was so large that there were warnings that with one Catastrophe, the Taxpayers of Florida would potentially be on the hook for more money to fund CatClaims than anyone had yet dreamed of.

    To its credit, the State of Florida purchased a reported "option agreement" from Mr. Warren Buffett's Berkshire Hathaway Inc.  In exchange for $224 Million, Berkshire Hathaway agreed in the event of a Catastrophe "to buy $4 billion of bonds to finance storm recovery".  That agreement expired as of December 31, 2008.  Although it has been characterized as another shrewd business move for Mr. Buffett, see, e.g., Hugh Son, "Buffett Wins $224 Million Storm Bet With Florida (Update 2)" (Bloomberg.com, Monday, December 29, 2008); Tom Petruno, "Buffett's Berkshire Scores on Florida Hurricane Season Bet" (Money & Co. Blog, Los Angeles Times Online, Monday, December 29, 2008), with all due respect to Mr. Buffett it was also a shrewed business move under the circumstances for Florida Taxpayers as well.

Please Read The Disclaimer.

Computer Models: The New Astrological Charts.

"Their credibility suffered for it last year."   Louis Uchitelle, "Forecasters See Fast Recovery; Others Doubt Their Eyesight"  p. A1, col. 5 (New York Times Nat'l Ed., Sat., Jan. 3, 2009).

    Their credibility suffered because they failed.  They could not predict what they said they could predict. 

    They used Computer Models.  The Computers were filled with information.  The Models digested that information and displayed the directions reflected by that mass of information.  The Computer Models did not work.

    Computer Models of Catastrophes?  In a sense.  The Catastrophes in this illustration are financial.  But financial Catastrophes only for the many.  A few including the self-proclaimed predictors made a lot of money.

    Even though they failed.  Even though their Catastrophe Models were wrong.

    Now they are at it again, the predictors of things that they do not have the capacity to predict.  For some reason, they are still speaking, still demanding to be listened to, still touting their failed Computer Model printouts as Astrologers touted (and continue to tout) their Star Charts.  See generally Louis Uchitelle, supra.

    Property Insurance Companies use their own Computer Models too.   They too jealously guard the secrets of their Computer Models.  They do not generally allow others to test the information they put into their Computer Models, either.  They too tout untested or just plain false Computer Model printouts, and for the same purpose:  Financial Astrology.  In their case, higher Premiums for Property Insurance.

    Otherwise, why would they hide the information that goes into the Computer Models, why would they make their Computer Models so mysterious, and why in short would they pretend that these Computer Models are able to predict the future when so clearly they cannot?

Please Read The Disclaimer.

 

Two W's: A Tale Never Before Told.

    In the past two years, there have been more losses than during any other two-year period in history.

    Not "than during any other two-year period since the Great Depression."

    In history.

    Insurance Companies and Catastrophe Claims? 

    No.

    Wall Street?

    No.

    Weis.  See generally  Thayer Evans, "Commitment to Notre Dame Is No Joke For Top Recruits" (New York Times Nat'l Ed., Sports Section, p. 6, col. 1, Sunday, January 4, 2008).

    And the destruction of an enormous amount of the value established by the Notre Dame Fighting Irish Football Team before he came. 

    So, does Mr. Weis work for Wall Street, that he too still has bonuses to expect and a job to hold at a time when demonstrated incompetence and previously unseen failure, seem to be guarantees for securing a personal portfolio while other people suffer the consequences instead?

    There should be no reward for demonstrated incompetence.  There should be shame in producing previously unseen failure.  That there is a reward, and there is no shame, are evidence of a much greater problem than some people may have realized before now.

Please Read The Disclaimer.

Contractual Provisions no Insurance of Payback.

    Upon taking another $20 Billion in Federal Taxpayer Funds, making a total taken of $45 Billion in Federal Taxpayer Funds as of New Year's Eve 2008, Citigroup's CEO sent a memo to employees announcing the growing bailout and also announcing that some Citigroup "executives" will be working under contracts that contain so-called "clawback provisions".   Serena Saitto, "Citigroup CEO Pandit, Chairman Bischoff Forgo Bonuses (Update 2)" (Bloomberg.com, Wed., December 31, 2008).   (Background:  There are many press releases to be found online at the Citi site.  This "memo to employees on New Year's Eve" was not found among them in an extensive search of Citigroup press releases.  Query:  Why announce this instead in a "memo to employees"?)

    The exact kind of "clawback" provision mentioned in Citigroup's CEO's memo to employees is just not clear.  There are at least four (4) kinds, and which one or perhaps a fifth kind, is the one mentioned in the Citgroup CEO memo remains to be determined.  See generally   "Clawback Provisions Soar" (Treasury & Risk July-August 2008 at www.treasuryandrisk.com (summarizing four [4] kinds of provisions, each called a "clawback," listed in a Corporate Library Survey at that time). 

    An in-depth post exploring these kinds of contractual provisions, and their role in the formation of Fiduciary Duties allowing recoupment of monies previously paid either as a result of Contract Breach or Breach of Fiduciary Duties, is found at www.insuranceclaimsbadfaith.typepad.com.

HAPPY HOLIDAYS AND A HAPPY NEW YEAR TO ALL!

Please Read The Disclaimer.

AIG "a systemically important company"--New Deal, Old Company, Again.

    A post here on November 10, 2008 explored new deals for AIG from the current Treasury Department.  The post addressed raising capital, with Federal Taxpayer Funds or with private funds.  After receiving Federal Taxpayer Funds, AIG is reportedly asking for new deals on paying them back.  See Francesco Guerrera, "AIG Seeks Easing of Rules on Disposals" (Financial Times.com, Tuesday, December 30, 2008).

HAPPY HOLIDAYS and HAPPY NEW YEAR to ALL!

Please Read The Disclaimer.