Claims And Issues

One Bankruptcy Judge to Decide BP Fiasco Insurance Coverage Issues?

    Recent newspaper reports reflect anxiety over an unlikely possibility:  that BP will file for Bankruptcy.  BP's exposure to many Damages Claims of many kinds may force it to seek reorganization under the U.S. Bankruptcy Code, it is reported.  See, for example, John Schwartz, "Weighing the Possibility of Bankruptcy for BP/Liability Claims Expected to be Enormous" p. A11, col. 5 (New York Times Nat'l ed., Saturday, July 10, 2010).

   If BP filed for Bankruptcy in the United States, then under the U.S. Bankruptcy Code and established practice, the many Insurance Coverage Issues arising out of the Drilling Explosion Fiasco may well be decided by one (Bankruptcy) Judge.

   However, why must BP file for protection from creditors and Claimants in the United States?   Perhaps it will seek that protection in the Courts and Laws of the United Kingdom.  It used to be called "British Petroleum" for a reason.

Please Read The Disclaimer.

Misrepresentation in Insurance Application Regarding Corporate Financial Condition = Rescission.

   A Federal Court has held that misrepresentation of a corporation's financial condition in the corporation's application for Directors and Officers Liability Insurance warranted Rescission of the D&O Policy:  Download Admiral Insurance Co. v. Sonicblue, Inc. (N.D. Cal. Opinion Filed August 14, 2009), also published as Admiral Insurance Co. v. Sonicblue, Inc., 2009 WL 2512197 *7 (N.D. Cal. August 14, 2009)(Westlaw subscription required to access Westlaw).  The Court issuing this ruling attempted, apparently in vain, to limit its use:  "This disposition is not designated for publication in the official reports."  Further, the Online Docket of this case reflects that the Court entered Judgment for the Plaintiff, Admiral Insurance Company, on April 1, 2010.

Please Read The Disclaimer.

Fraudulent Acts/Willful Violation D&O Exclusion Bars Recession Misconduct Coverage.

**Author's Note:  If you have reached this blog through a list that carries advertising, your computer may or may not be put at risk either through the list or through the advertising.  I do not accept or authorize any commercial advertising of any kind on any list or post.  Placing commercial advertisements with or near any of my web log posts is prohibited.  Further, I do not recommend any products or services advertised with or near any of my posts or any list of my posts.** 

   In Download Herley Indus., Inc. v. Federal Insurance Co. (E.D. Pa. Opinion Signed August 21, 2009; Filed August 24, 2009), also published as Herley Industries, Inc. v. Federal Insurance Cos., 2009 WL 2596072 (E.D. Pa. August 21, 2009) the Federal Court was faced with a Fraudulent Acts/Willful Violation Exclusion in a case under Pennsylvania Law.  The Court held that the Exclusion, in a D&O Policy, barred all Coverage under the Policy.

   The Fraudulent Acts/Willful Violation Exclusion in the Director's and Officer's Liability Policy at issue in that case provided, in basic terms, that all Coverage under the Policy was excluded "for any claim 'based upon, arising from, or in consequence of any deliberately fraudulent act or omission or any willful violation of any statute or regulation by [an] Insured Person, if a judgment or other final adjudication establishes such a deliberately fraudulent act or omission or willful violation'".  Download Herley Indus., Inc. v. Federal Insurance Co. (E.D. Pa. Opinion Signed August 21, 2009; Filed August 24, 2009) attached Official Slipsheet Opinion at 13, Herley Industries, Inc. v. Federal Insurance Cos., 2009 WL 2596072 *8 (E.D. Pa. August 21, 2009).  [Boldface in original; italics added.]   "Arising from," in the eyes of the Court, was "akin to 'arising out of,'" which under Pennsylvania law essentially entails "but for" causation.   Download Herley Indus., Inc. v. Federal Insurance Co. (E.D. Pa. Opinion Signed August 21, 2009; Filed August 24, 2009) at 16-17, Herley Industries, Inc. v. Federal Insurance Cos., 2009 WL 2596072 *10 (E.D. Pa. August 21, 2009).

   Herley Industries' Chief Executive Officer and Chair of its Board of Directors, one Blatt, pled guilty in a criminal action brought against Herley and Blatt.  A "securities action" was filed against Herley and its Directors and Officers, and a shareholders' derivative action was filed against Herley's Directors.  Herley filed suit against its D&O Carrier, Federal Insurance Companies, in part here pertinent, seeking the costs of defending the criminal action and the securities action and also the derivative action.  Download Herley Indus., Inc. v. Federal Insurance Co. (E.D. Pa. Opinion Signed August 21, 2009; Filed August 24, 2009) at 1, Herley Industries, Inc. v. Federal Insurance Cos., 2009 WL 2596072 *1 (E.D. Pa. August 21, 2009).

   The Federal Court held that on the record of that case, the D&O Fraudulent Acts/Willful Violation Exclusion applied to bar all Coverage and, furthermore, entitled Federal to recoupment of defense costs it had advanced to Herley by agreement:

   This Court concludes "but for" Herley's deliberately fraudulent misconduct, the claims would not have arisen and the civil actions would not have been filed.  The consolidated securities action complaint alleged defendants had submitted fraudulent cost data to the Government and violated the securities laws as a result of public statements touting the health of Herley's relationship with the Government, Herley's primary client.  Had Herley not engaged in obstructing federal auditors, there would have been no allegation of securities laws violations.  Similarly, with the derivative action, defendants were alleged to have breached fiduciary duties, abused control, engaged in gross mismanagement, wasted corporate assets, unjustly enriched themselves, and caused substantial losses and damages to Herley.  The conduct alleged was directly related to the fraudulent conduct adjudicated in the criminal action because the defendants were accused of allowing the misconduct alleged in the criminal action to occur.  The securities and derivative actions therefore arose from the adjudicated criminal actions and are thus barred from coverage under the policy.

 Download Herley Indus., Inc. v. Federal Insurance Co. (E.D. Pa. Opinion Signed August 21, 2009; Filed August 24, 2009) at 18, Herley Industries, Inc. v. Federal Insurance Cos., 2009 WL 2596072 *11 (E.D. Pa. August 21, 2009).

Please Read The Disclaimer.

Bankruptcy Judgment For Fraudulent Transfer Repayment Not Covered D & O "Loss".

   **Author's Note:  If you have reached this blog through a list that carries advertising, your computer may or may not be put at risk either through the list or through the advertising.  I do not accept or authorize any commercial advertising of any kind on any list or post.  Placing commercial advertisements with or near any of my web log posts is prohibited.  Further, I do not recommend any products or services advertised with or near any of my posts or any list of my posts.** 

   In an appeal from a Summary Judgment entered by a United States District Court under Texas Insurance Law, a panel of the Fifth Circuit Court of Appeals affirmed the District Court's holding that the return of funds due to a fraudulent transfer is not a covered "Loss" within the meaning of a Director's and Officer's Liability Insurance Policy:  Download In re TransTexas Gas Corp. (Stanley v. U.S. Bank Nat'l Ass'n) (5th Cir. Case Nos. 08.20401, 08.41128, Opinion Filed February 10, 2010); also reported as In re TransTexas Gas Corp. (Stanley v. U.S. Bank Nat'l Ass'n), 2010 WL 447323 (5th Cir. February 10, 2010)(subscription required to access Westlaw).

   The D&O Policy at issue in that case provided:

   "Loss" means damages, settlements, judgments (including pre/post-judgement interest on a covered judgment), Defense Cost and Crisis Loss; however, "Loss" (other than Defense Costs) shall not include ... (6) matters which may be deemed uninsurable under the law pursuant to which this policy shall be construed.

Download In re TransTexas Gas Corp. (Stanley v. U.S. Bank Nat'l Ass'n) (5th Cir. Case Nos. 08.20401, 08.41128, Opinion Filed February 10, 2010), attached Official Slipsheet Opinion at 15; In re TransTexas Gas Corp. (Stanley v. U.S. Bank Nat'l Ass'n), 2010 WL 447323 *9 (5th Cir. February 10, 2010).

   A Bankruptcy Judgment entered against one Stanley in that case, the Chief Executive Officer of the Debtor Corporation, TransTexas Gas Corporation, compelled him to repay amounts of money received and which were held to be avoidable fraudulent transfers.  On appeal in pertinent part, the reviewing panel of the Fifth Circuit Court of Appeals held that this 'loss' was in no sense a "Loss" covered under the subject D&O Policy because it was uninsurable, holding "that the return of funds due to a fraudulent transfer is in the nature of restitution."  Download In re TransTexas Gas Corp. (Stanley v. U.S. Bank Nat'l Ass'n) (5th Cir. Case Nos. 08.20401, 08.41128, Opinion Filed February 10, 2010), at 16; In re TransTexas Gas Corp. (Stanley v. U.S. Bank Nat'l Ass'n), 2010 WL 447323 * 9 (5th Cir. February 10, 2010).  [Emphasis added.]

For "Coverage of the Allegations of a Claim" including under Director's and Officer's Liability Insurance Policies, see generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith'" § 3:48 (Second Edition Shepard's/McGraw-Hill; 2009 Supplement West Publishing Company).

Please Read The Disclaimer.

Attorney's Fees, Using Reserves Without Disclosure, and Good Faith.

   The Directors who serve on the Boards of Condominium Associations and Homeowners' Associations have certain duties.  In many jurisdictions (check your local laws), these duties include duties of Good Faith in how if at all they use the Association's Reserves:

The association board's duties include performing due diligence and acting in good faith when it comes to preparing a budget and anticipating increases in assessments. 

Stephen Glassman and Donie Vanitzian, "Associations/Owners Feel Left in the Dark on Use of Reserves for Legal Bills" (Los Angeles Times Online, Sunday, January 31, 2010).   The linked newspaper column specifically addresses a question concerning what may be inadequately disclosed use of Reserves to pay Attorney's Fee Bills.

Please Read The Disclaimer.
 

Directors and Officers Insurance for Bankers, More Now Than Ever.

   The number of total securities class-action lawsuits may have declined in the U.S. in the past year, see Jamie McGee, "'Litigation Explosion' for Bankers May Have Ended (Update 2)" (Bloomberg.com, Friday, December 18, 2009), but that does not mean the end of need for Directors and Officers Liability Insurance Coverage.  Far from it.

   We are living through a Great Recession that began two years ago.  It continues to be with us.  It can be expected to continue for years more.  The stock market improved but it is not bullish, it is a bear market to say the least.  These are the times that try lawsuits against Directors and Officers.  See id.  And the times are such that the prevailing public mood is to hold Directors and Officers accountable for the consequences of their investment decisions.  Investors may or may not win their lawsuits, but if they do not win and the Directors and Officers who made the investment decisions are "exonerated" under current law, it appears that "public reaction may lead to changes in regulation".  Id.

   Before closing this post, it is Christmas Eve Day.  Keep your joyful Spirits up and wish everyone the best!  Happy Holidays to All, and to All a Happy New Year!

Please Read The Disclaimer. 

SEC Files Massive Complaint Against Subprime Lender's Directors and Officers.

 In a massive Complaint implicating various questions of Directors and Officers Insurance Coverage, the Securities and Exchange Commission has filed a civil suit against Directors and Officers of a subprime lender. 

   The Complaint is 51 pages long.  It recites on its face that it addresses alleged Federal Securities Law Violations.  It contains 130 numbered paragraphs of allegations.  There are ten (10) paragraphs of Prayers for Relief.  The Claims are variously alleged against two or all of the three Defendants.  The eight (8) Claims alleged are for:

1. and 2.  Two Claims of alleged Fraud in regard to Securities;

3.  A Claim of alleged Reporting Requirements Violations; 

4.  Alleged Falsification of Books and Records;

5.  Alleged Circumvention of Internal Controls;

6.  Alleged False Statements to Accountants;

7.  Alleged Certification Violations; and

8.  Alleged Failure to Reimburse.

Here is a downloadable pdf of the SEC's Complaint in this new case:   Download Complaint.SEC v Brad A. Morrice, et al.CD Cal Case No SACV09-01426.Filed 1207009.

   Most interesting from an Insurance Coverage point of view, and from the point of view of learning about various subprime lending practices that led in large measure to the current Great Recession, the SEC has alleged in great detail what the three individual Defendants and their subprime lending institution, the New Century Financial Corporation, did and failed to do that led to the SEC filing the massive Complaint in this case against the three individual officers.  (New Century is apparently in bankruptcy and beyond reach of the SEC's civil Complaints.)

   In that regard, the Prayers for Relief in this Complaint may or may not include Prayers for "Damages," in particular.  The SEC seeks in this Complaint to compel the Defendants to "disgorge all ill-gotten gains from their illegal conduct" together with Prejudgment Interest, "reimbursement," and "civil penalties," among other things.

Please Read The Disclaimer. 

Executive Salaries, D&O Insurance Premiums Restructured by New German Law.

   A spokesperson for Zurich Financial AG's "global corporate division" reports that a new German law called "VorstAG" will force Directors and Officers Insurance Premiums to increase.  Carolyn Bandel, "German Salary Law Boosts Executive Insurance Cost (Correct[ed])" (Bloomberg.com, Friday, December 11, 2009).

   VorstAG is the German abbreviation for the new law.  Not only will it likely increase the cost of Directors and Officers Insurance Premiums, but "VorstAG stipulates manager pay needs to be in line with the achievements of the board and lets shareholders decide on the compensation of their management."  Id.

Please Read The Disclaimer.

Duke Disputes Directors and Officers Insurance Coverage, and Bad Faith.

   Duke University sued its D&O Carrier, National Union Fire, for failing to pay costs connected with settlement, and defense expenses, plus for National Union's alleged Bad Faith in handling Duke's Coverage Claims.  The settlement costs and defense expenses were allegedly incurrred in connection with infamous charges against three Duke lacrosse players including sexual assault, which turned out not to be true.  Here is a copy of Duke's Complaint:  Download Complaint.Filed112408.DukevNationalUnion (MDNC).

   National Union Fire filed a 44 page Answer with 30 alleged Affirmative Defenses, a Counterclaim in 5 Counts, and a Third-Party Complaint against United Educators Insurance.  Here are copies of the first 22 pages:  DownloadFirst22Pages.AnswerADsCCofNationalUnion.Filed01.16.09 (MDNC) .

And here are the last 22 pages, without attached Exhibits:  Download Last22PagesAnswerADsCCandTPCofNationalUnionFire.Filed 01.16.09 (MDNC). 

   On Tuesday, October 20, 2009 the Magistrate Judge assigned to the case as of that date, recused himself.  Another Magistrate Judge has just been assigned.

 Please Read The Disclaimer.

KPMG and D&O Insurance Back in News, Again in Courts.

   After a news hiatus of some two years, KPMG and Insurance Coverage Issues surrounding its Director's and Officer's Liability Coverage have returned to the news and to the Courts.

   Former KPMG partner David Greenberg was "charged with using tax shelters to help wealthy people escape more than $1 billion in taxes."  W.J. Hennigan, "Former KPMG Partner Sues Accounting Firm for $30 Million" (Los Angeles Times Online at latimes.com, Saturday, October 3, 2009).  Mr. Greenberg was acquitted.

   Alleging that he had to pay his own Attorney's Fees in order to defend himself, and that he suffered other Damages also as a result of KPMG refusing to foot his defense bill, Mr. Greenberg has filed suit in Los Angeles County Superior Court against KPMG for $30 Million.  Here is a link to the fee-required service of the Court to access the documents filed since the Complaint was filed on or about October 1, 2009.

   The linked newspaper article provides Mr. Greenberg's breakdown of the $30 Million he seeks from KPMG in this matter:

   Mr. Greenberg alleges that he incurred Ten Million Dollars or $10,000,000.00 in Attorney's Fees.

   "Greenberg's lawsuit also seeks an additional $20 million for defamation and emotional distress from spending five months in jail."  William Hennigan, supra.

Many of the issues inherent in Mr. Greenberg's current lawsuit against KPMG were previously examined in this space as they were happening in the news and in the Courts, most recently in 2007 before now, including posts here on May 25, June 10, June 12, June 26, July 3, and July 17, 2007.

Please Read The Disclaimer.

Directors and Officers Coverage Comes With Big Bills, Major Issues.

    Directors and Officers Liability Insurance Coverage is notoriously "complex".  It requires specialized handling and experience.  See Saskia Scholtes, "Insurers Face $6Bn Bill for D & O Claims" (Financial Times Online, Tuesday, June 23, 2009).

    Coverage disputes include allocating the available Policy Limits between and among the Policyholder and other Insureds.  Saskia Scholtes, "Insurers Face $6Bn Bill for Board Protection" (Financial Times Online, Monday, June 22, 2009).

    Accordingly, Directors and Officers Insurers have responded by, among other things, raising Premiums and decreasing Coverage. Id.; Suchita Nayar, "More Questions Than Answers in Financial Insurance" (Financial Times Online, Sunday, June 21, 2009).

    The increase in Premiums and decrease in Coverage come at a time when the number of Claims against Directors and Officers is increasing and in particular "investor claims related to mismanagement and failure to disclose risks ... are on the rise."  Id.

    Not a time for the fainthearted, nor the inexperienced.

Please Read The Disclaimer.

 

Fiduciary Duties, Accounting, and Directors and Officers Insurance.

    From the New York Times comes an interesting report of a lawsuit filed in State Court in Oklahoma.  See Gretchen Morgenson, "Fair Game/Shareholders Who Act Like Owners" p. 1, col. 6 (New York Times Nat'l Ed., SundayBusiness Section, Sunday, March 29, 2009).

    The plaintiffs in the lawsuit hold huge numbers of shares in Chesapeake Energy Corporation.  The plaintiffs seek "books and records" or apparently an accounting.  The reported plaintiffs include the Louisiana Municipal Police Employee Retirement System.  The reason alleged to have an accounting reportedly is a large amount of money paid to "the company's chief executive" while the corporation reportedly lost money.   According to the linked newspaper report, there may be allegations on the face of the Complaint that the Directors may have breached their fiduciary duties to the shareholders by paying out large amounts of 'compensation' to people who were in charge of the corporation -- and of the shareholders' investment -- during a time that the corporation lost much money in contrast.

    It will be hard for Chesapeake to challenge the motivation of the police officers who have sued it for an accounting, to say the least.

    In addition, this lawsuit and others like it are the appropriate response to the increasingly large number of commentators who seem to decry the lack of public outrage at those who allegedly caused or may have caused the Financial Collapse.  Our judicial system was put in place over time precisely in order to channel public outrage away from violence and into acceptable vehicles such as holding alleged wrongdoers accountable at law and in equity, and providing people with the opportunity to defend themselves.

    If the Complaint asks only for an accounting, will liability Insurance held by the corporation cover it, for defense or for indemnification?  Or will the Director's and Officer's Liability Insurance carrier, if any, instead attempt to raise a coverage defense based on a so-called "Bad Faith Exclusion"? 

    If anyone has a pdf copy of the publicly filed Complaint, I would appreciate a copy, with thanks.  In the interim, time will tell what allegations and claims have been made and how they fare in the Oklahoma State Court lawsuit.

A related post can be found today at www.insuranceclaimsbadfaith.typepad.com.

Please Read The Disclaimer.

Director's and Officer's Risk Management Included in Financial Fiduciary Duties.

    Fiduciary Duties include Risk Management.  Whether or not people sitting on corporate Boards of Directors had the duty to act as a Fiduciary on issues of Financial Risk Management, they apparently are seen as having Fiduciary Duties on financial Risk Management now.  See Zachary A. Goldfarb, "SEC to Examine Boards' Role in Financial Crisis" (Washington Post Online, Friday, February 20, 2009).

    Correspondingly, Insurance Coverage Claims on Director's and Officer's Policies are bound to follow in increasingly greater numbers as a result of these issues.

    A post on other features of this issue can be found at www.insuranceclaimsbadfaith.typepad.com.

Please Read The Disclaimer.

Fiduciary Duties: Bonus Pay for POSITIVE Performance?

    One of the many provisions of the stimulus package making its way to the President's desk on this President's Day, 2009, addresses restrictions on executive bonuses paid by financial institutions that take Federal Taxpayer Funds.

    If the provisions remain as they are before they reach the President -- and the provisions in question were reportedly hotly opposed by the Obama Administration -- they would not enact a pay cap.  Rather, the new Federal laws would require the Treasury Department to write new Federal Regulations.  The regulations would apply only to financial institutions that have taken Federal Taxpayer bailout funds in the past -- an extension of existing Federal Law -- or that take Federal Taxpayer money in the future.

    The New York Times reports that in basic terms, the Act will require that any new Federal Regulations limit the payment of cash bonuses to certain executives until the Federal Loans are repaid in full.  "The rules also severely limit retention and incentive pay."  Edmund L. Andrews and Eric Dash, "Stimulus Plan Puts New Limiits on Executive Pay" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, February 14, 2009).  Other newspapers report that cash bonuses are out entirely, and that the restriction applies to bonus awards, but the new Act now limits bonuses entirely to payment in shares of stock.  E.g., Daniel Dombey and Edward Luce, "US Stimulus Clears Congress" (Financial Times.com, Friday, February 13, 2009);  Tomoeh Murakami Tse, "Congress Trumps Obma by Cuffing Bonuses for CEOs" (Washington Post.com, Saturday, February 14, 2009).  All these newspapers report that the amount of bonus is limited under the new Act to one-third of the banker's total annual compensation. 

    The linked New York Times article quotes several commentators who are dubious about these new provisions.  One is a lawyer at a large firm in Chicago.  His law firm lists him on its web site as an "executive compensation" specialist.  He is quoted in the article as saying this about the new provisions which address executive bonuses paid by institutions which apply for Federal Funds:

                    There's no pay for performance in this.

Id.  I was mistaken the first time I read this observation, so I re-read it.  It is one way to look at the new provisions, I suppose.  I just misunderstood.

    I first thought that the comment was about existing pay plans.  They are not about pay for performance.  They are not even about pay for failure.  They are just about pay.  Regardless of how the corporations fare, the profiteers are paid well.

    The thing to remember is that the profiteers at institutions that are not in line for Federal Taxpayer Money are unaffected by the new Federal Laws.  Only when the tanking financial institution wants a capital injection of money from Federal Taxpayers would the new Federal Rules apply.

    In the interim, does continued adherence to the old rules satisfy anyone's Fiduciary Duties?  Is it ever in the best interests of the shareholders of a publicly traded corporation, for officers and employees to be paid extra amounts of money, for failure?

A separate post on potential Insurance Bad Faith Claims on this subject is at www.insuranceclaimsbadfaith.typepad.com.

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.

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.

Fiduciary Duties to Shareholders by Banks?

    Duties owed to Shareholders of Banks that allegedly are run by Officers or Directors who make loans they should not make, are currently under examination in many news reports, Court cases, and other places.   Shareholders are suing the executives who allegedly put such  systems in place which overrode shareholders' interests -- and which predictably resulted in failure of the lender that the shareholders held shares in.  Some of the allegations and testimony in one of many pending lawsuits is examined by Gretchen Morgenson, "Fair Game/Was There a Loan It Didn't Like?" p. 1, col. 1 (New York Times Nat'l Ed., SundayBusiness Section, November 2, 2008).

    Research on Sunday, November 2, 2008 on Pacer, the Federal Courts Electronic Court File, reveals that there are many such cases and it is unclear which of these is the one addressed in the linked newspaper report.

    A post addressing this issue can also be found on www.insuranceclaimsbadfaith.typepad.com.

Please Read The Disclaimer.

Bust Times, Bad Results: Insurers of Corporations Face Exposure, Risk.

    It is reported that poor corporate results, even bankruptcy, may not deter lawsuits against failed and failing corporations.  Instead, their Liability Insurance Coverage may be at risk from claims by shareholders against the insured corporations.  Jonathan D. Glater, "Financial Crisis Provides Fertile Ground for Boom in Lawsuits" p. B1, col. 2 (New York Times Nat'l Ed., Business Day Section, Saturday, October 18, 2008).

    What is not mentioned in this otherwise insightful report is that there are other types of Insurance Coverages held by failing corporations.  Claims on certain other kinds of corporate Insurance Coverages are anticipated to rise besides Liability Insurance Claims, including Claims under Director's and Officer's Coverage.

Please Read The Disclaimer.

Fallling Economy, Rising Lawsuits Mean More D & O Claims.

    A falling economy has brought corporate bankruptcies, job layoffs, and Government investigations.  Reportedly, "[i]insurance companies [are] the top target for litigation ...."  Lindsay Fortado, "U.S. Company Lawyers Expecting Litigation Surge, Survey Says" (Bloomberg. com, Tuesday, October 14, 2008).

    Lawsuits filed in the last 12 months included a large number of lawsuits against Insurance Companies.  Id.  In such a climate, claims implicating Director's and Officer's Insurance Coverage are on the horizon, and many are already here.

Please Read The Disclaimer.

Association Directors and Officers.

    Automatic renewal provisions in management contracts reportedly may not be a good thing for Directors and Officers of Homeowner and Condominium Associations.  Association Directors and Officers who agree to such provisions reportedly may be opening themselves up to claims that their agreement is a wrongful act that was not in the best interests of the Association.  See Stephen Glassman and Donie Vanitzian, "Homeowner Associations/Management Contract That Renews Automatically Should Be Rejected" (Los Angeles Times Online, Sunday, September 7, 2008).

Please Read The Disclaimer.

Homeowner's Associations and Condominium Associations: Professionalism, Business ... And Insurance.

      Boards of Directors of Condominium Associations, and of Homeowner's Associations and of other similar Community Associations, have a hard job.  Their many obligations and expectations are explored by Kay Senay, Forum Publishing Group, published online on Thursday, July 31, 2008 at South Florida Sun-Sentinel .com under the headline, "Board Responsibility Makes All the Difference".

     Among the responsibilties summarized there, is this one at the top of the list:  "Confirm that the association's master insurance policy is appropriate, including D&O coverage."

Please Read The Disclaimer.

To and From Each According to Their Abilities.

     The idea of underperforming corporate executives giving back some or all of their pay, in exchange for the opportunity that exists now of receiving enormous bonuses and other payments when the corporation performs well financially (and now, actually, even if it does not), has been joined by, among others, the president of a New York investment firm quoted in Gretchen Morgenson, "Fair Game/Approve This Deal, or Else" p. 1, col. 3 "SundayBusiness" Section (New York Times Nat'l Ed., Sunday June 15, 2008.

Please Read The Disclaimer.

More On "Socialized Risk, Private Gain?"

      

    In a March 21, 2008 post on Insurance Claims Bad Faith Law Blog at www.insuranceclaimsbadfaith.typepad.com, this question was asked in response to a newspaper editorial that contained the assumption that certain corporate executives would not have to disgorge allegedly ill-gotten gains:  "Why not?"

    Michael J. Missal may have an answer to that question in at least one case.  He is reportedly "a U.S. Bankruptcy Court examiner".  E. Scott Reckard, "Mortgages/Sub-prime Lender Allegedly Inflated its Profit" (Los Angeles Times Online, Thursday, March 27, 2008).   Mr. Mittal filed a Report with the Bankruptcy Court in connection with the Bankruptcy proceeding of former Mortgage Company New Century Financial Corporation.  Bonuses paid to certain former "top executives" and "senior managers" of that  company "were tied to reported financial results".  "These and other bonus payments to executives may be recovered 'under unjust enrichment and bankruptcy law theories,' he said."

    Would Directors and Officers Insurance Coverage respond in the event that such bonus payments are recovered under similar circumstances, or not?

Please Read The Disclaimer.

A.I.G. Alleges Former Officers and Directors Breached Fiduciary Duties.

    American International Group has reportedly sued other people for alleged Breach of Fiduciary Duties.  The seven defendants in the case, filed by A.I.G. in the New York State Supreme Court, are all former A.I.G. Officers and Directors including A.I.G.'s former CEO, Maurice R. Greenberg.

    In a twist, it appears that A.I.G. has alleged claims or causes of action only for alleged Breaches of Fiduciary Duties as stand-alone claims, without also alleging any other causes of action of any kind or nature.  "New A.I.G. Jab at Ex-Chief Focuses on Fiduciary Duties" p. C4, col. 4 (Reuters Report published in New York Times Nat'l Ed., Friday, March 28, 2008).

Please Read The Disclaimer.

Directors And Officers Insurance Claimed to Cover Inflated Stock Settlement.

    Directors or Officers of a corporation located in Florida reportedly assert that a nearly $7 Million settlement of a lawsuit accusing it of securities fraud involving inflated Stock prices, will cover the claim.   Richard Burnett, "Lawsuit is Settled For $7 Million/Lake Mary [Florida]-based Faro Technologies Still Denies it Misled Investors Regarding Company Information" p. C1, col. 5 "Central Florida Business" Section (Orlando Sentinel, Thurs., Feb. 28, 2008).
   
    It is unknown to this author what Insurance Company issued D & O Coverage to this particular corporation, but the tenor of this newspaper report suggests that the Insurer was involved in reaching a settlement for this amount of money, thus the assertion by the Officers or Directors of the Policyholder corporation that this settlement "would be covered."  Further, the particulars of the specific claim(s) may be among the reasons for this reported assertion of Coverage.

    An interesting and perhaps useful release about Director's and Officer's Liability Insurance Coverage and Underwriting is available on the web site of the Property and Casualty Insurers Association of America, which can be linked here.

Please Read The Disclaimer.

"Review Insurance Policies Now" Says Orlando Newspaper.

   Good advice with related links in this newspaper article published in the Orlando Sentinel, February 22, 2008, by Greg Groeller, "Review Insurance Policies Now".  Every Policyholder and their Agents and Brokers holding every kind of Insurance Policy can benefit from following the good advice published by this linked newspaper article.

Please Read The Disclaimer.

Late Loan Payments, Fewer Jobs And ... Insurance Claims More Likely.

    Late loan payments and as a result, an increasing number of defaults on all sorts of loans in the future, are major problems spreading from home payments and the prospect of ever-increasing mortgage foreclosures, to automobile loans and home equity loans.  See Jeannine Aversa, "Late Loan Payments Jump" p. C3, col. 1 (Associated Press Report published in The Orlando Sentinel, Central Florida Business, Fri., January 4, 2008).  Claims on Mortgage Insurance Policies are very likely to become increasingly greater as real estate foreclosures increase.   Credit Insurance Policies of all types increasingly seem subject to the same likely fate.

    The United States economy is also producing fewer jobs of any kind than in recent months, while the unemployment rate is increasing.  These twin factors have a potentially huge impact on future Insurance Claims.  The latest jobs numbers at the time of this post are for the month just past which at this time is December, 2007 and those numbers are, respectively, 18,000 newly made jobs of any kind, with a simultaneous unemployment rate reported at 5%.  See Peter S. Goodman & Michael M. Grynbaum, "Unemployment Sounds Warning About Economy" p. A1, col. 6 (New York Times Nat'l Ed., Sat., January 5, 2008):

As fewer jobs are created, spending power could dry up.  Faced with declining business, employers could further trim payrolls.  As unemployment grows, more homeowners could fall behind on mortgages, leading to more losses at banks, and more layoffs.

The overall figure of 18,000 newly made jobs masks a major increase of 93,000 jobs in the service industries, including the Insurance industry.  See "U.S. Economy:  Job Growth at Weakest Pace Since 2003 (Update 3)" by Bob Willis & Joe Richter (Bloomberg.com, Fri., January 4, 2008).  (Payroll counts are apparently decreased by job losses, such as a reported December decrease of 31,000 in factory payrolls reported in the same article, thus leading to an overall payroll increase of 18,000 in December.)      

    Take out the take by the American Bankers Association on these developments.  That ABA (not referring to the American Bar Association, the other ABA if you will) sponsors insurance products for its members, including automatic mutual ownership of a Reinsurance Corporation for various Lines of Insurance including Directors and Officers Liability Insurance, Financial Bond Insurance, and Employment Practices Liability Insurance.  Its views on these developments are thus instructive on Insurance implications.

Please Read The Disclaimer.

$17,500,000 For Defense, Advancing Still More For Directors and Officers.

     Defendants in an adversary proceeding filed as part of the Bankruptcy of Refco, Inc. argue that their Director's and Officer's Carrier, Axis Reinsurance, should cover the $17,500,000.00 of defense costs to date and advance them the money for past and future lawyer fees and costs.  They won in a ruling delivered at a Hearing scheduled in the case for Friday, October 12, 2007 at 10:00 A.M.:  Axis Reinsurance Co. v. Phillip R. Bennett, et al. (In re Refco, Inc.)(S.D.N.Y. Bankr. Case No. 05.60006, Adv. Proc. No. 07.01712).  No official written decision has been posted online, but when it becomes available it will be posted here for easy accessibility.

     Here is Axis Reinsurance's brief and general description of its Director's and Officer's Insurance Coverage in its own words on its web site (see "D&O" mentioned under "Professional Liability").

                                         Please Read The Disclaimer.

D&O Insurance Companies Feel the Heat of Climate Change.........

     .... And Soon Their D&O Policyholders May Feel the Heat Too.
    Writers of D&O Insurance Coverage Sweat Out D&O Liability Claims 
                              Based on Effects of Climate Change.

   
     This potential exposure surfaces in ever-increasing numbers of articles and news reports made available in particular to the Insurance industry.  See, for example, Meg Green, "D&O Heats Up/Directors & Officers Writers Are Paying Close Attention to the Issue of Climate Change -- Not Just How it Could Affect Earth, But How it Could Impact Regulations and Ultimately Lead to Future Litigation and Claims," 108 Best's Review 24 (August 2007) (subscription required for print edition), link here for subscription-required ONLINE edition; "Climate-Change Exposures Mount in Directors & Officers Line," BEST'S REVIEW (July 30, 2007; online subscription required).

     A significant measure of the Insurance industry's growing understanding of the risks inherent in climate change is in the behavior of leading Insurance Companies.  The Hartford Financial Services Group, Inc. and Prudential Financial, Inc. are two leading Groups of Insurance Companies.  They both recently agreed with Calvert, a mutual fund and one of their investors, to "improve their public reporting and disclosure regarding the potential financial risks they face from climate change and strategies for mitigating those risks."  Calvert then withdrew its climate change shareholder resolutions filed with both Insurance Companies, before the resolutions came to a vote of all the shareholders who could vote on the respective resolutions.  Calvert Press Release, "Insurance Companies Commit to Climate Change Disclosure" (April 10, 2007).

     If the Insurance Industry anticipates and expects D&O Claims to be made because of climate change, and expects that D&O Claims made on the basis of climate change will thereafter spiral higher and higher, then Claims to Coverage and Damages under D&O Coverage will not only soon be made but will result in mounting numbers of Claims in Suit.  Those lawsuits will be reported here and they will also be made available here whenever possible via online links, together with Insurance Coverage analysis of the reality of this exposure if, when and as the anticipated exposure becomes reality.

                                              Read The Disclaimer.
 

Due Process Denied? Directors and Officers Dismissed.

     Where a Federal Judge ruled that Due Process was denied them, Directors and Officers have been dismissed as defendants in a criminal prosecution.  This chapter of the story is told by Lynnley Browning, "Charges Dropped Against 13 in KPMG Tax-Shelter Case" (New York Times Online, Tuesday, July 17, 2007).   Previous chapters are told here, for example, in posts on May 25, June 10, June 12, June 26, and July 3, 2007.  The effects on many potential Director's and Officer's Insurance Coverage Issues surfaced many times in that case and they are addressed in the posts here.

                                      Please Read The Disclaimer.