Articles Posted in D&O

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Sometimes you just can’t win.

Under the law of most states, the doctrine of rescission provides that when a policyholder gives a materially misleading answer on an application for insurance, the court may hold it void ab initio,iStock-867667916-yes-no-recission-300x200 meaning the policy is unenforceable from the outset, as if there had never been any coverage. But in Western World Insurance Co. v. Professional Collection Consultants, a split panel of the U.S. Court of Appeals for the Ninth Circuit put a new twist on the doctrine. It rescinded a D&O policy when the policyholder gave an answer that the panel majority considered misleading—even though it was factually the truth.

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It’s that time of the year when Americans gather together, enjoy a feast, and fall asleep in front of the TV. But before the tryptophan kicks in, we also like to give thanks for the good things that have iStock-623763994-t-giving-300x200happened in the past year. Corporate policyholders can share in the tradition, as this year has produced a number of court decisions that favored insureds and protected their coverage expectations. Here are a few of the cases we are most thankful for:

Harleysville Group Insurance v. Heritage Communities, Inc.

This case out of the South Carolina Supreme Court gave generously to policyholders in a number of ways this year (giving us the opportunity to post in this blog again and again and again). The case involved defective construction claims against a developer. The developer’s insurer, Harleysville, provided a defense under a vague reservation of rights letter. After the underlying plaintiffs were awarded verdicts against the developer, Harleysville sued to avoid covering the judgments. The court ruled against Harleysville on four issues:

  1. Harleysville’s vague, general reservation of rights letter did not effectively reserve its rights to contest coverage under the terms and exclusions in the policy;
  2. Where the underlying verdicts did not apportion the damages between covered and uncovered losses, the insurer bore the burden of proving amounts allocable to uncovered losses. Where the insurer failed to meet that burden, it had to cover the entire verdict;
  3. Punitive damages awarded in the verdicts were found to be covered under Harleysville’s policy; and
  4. The owners’ association, which was asserting the dissolved developer’s coverage rights in the case, had standing to challenge the insurer’s reservation of rights letter.

Harleysville is a case that just keeps on giving.

Verizon Communications v. Illinois National Insurance Company

The duty to provide a defense, or reimburse defense costs, is one of the most important features of liability insurance. You could say it’s the stuffing, where indemnity is the turkey. The Delaware Superior Court emphasized that obligation in Verizon to the tune of $48 million in defense costs that the insurer had refused to pay. This decision was important because it rejected the insurer’s attempt to define the vague term “securities claim” narrowly to avoid its obligation to pay defense costs. More broadly, the court upheld the pro-policyholder interpretative doctrine of contra proferentem, rejecting the insurer’s argument that the doctrine should not apply where the insured is a large, sophisticated corporation. Applying the doctrine, the court held that unless it can be shown that the insured had a hand in drafting the policy language, ambiguous terms should be interpreted against the insurer. A more detailed analysis of the decision by this firm can be found here.

All State Interior Demolition Inc. v. Scottsdale Insurance Company and McMillin Management Services v. Financial Pacific Insurance Company

Thanksgiving dinner is always better with more guests. Additional Insured endorsements in policies extend the invitation to more parties that may require a seat at the table of insurance protection. This is especially important in the construction context, where developers and general contractors rely on numerous subcontractors’ insurance policies to protect them from liability arising from those subcontractors’ work. These two decisions rejected insurers’ attempts to narrow the application of additional insured endorsements.

In All State Interior, previously highlighted here, a New York County trial court interpreted an endorsement broadly, granting additional insured status to companies that didn’t technically contract with the subcontractor, and who weren’t named in the endorsement. The court, in essence, incorporated the terms of the contract between All State and the subcontractor into the endorsement to trigger additional insured coverage for the project owner, site lessor, and construction manager as All State’s “partners, directors, officers, employees, agents and representatives.”

In McMillin, the insurer’s policy granted additional insured status to McMillin, the general contractor of a project, for “liability arising out of [the subcontractor’s] ongoing operations,” and excluded additional insured status for the insured’s completed operations. The insurer denied defense coverage on the basis that the subcontractor had finished working on the project. The California Court of Appeal disagreed, stating that the endorsement’s phrase “arising out of” is broader than “during,” and so the liability did not have to arise while the insured was still working on the project.

Nooter Corporation v. Allianz Underwriters Insurance Company

When it’s time for dessert, allocating the available pie to make sure everyone gets what they deserve can be tricky. This year, Missouri joined the ranks of “all sums” states that maximize coverage for policyholders with long-tail claims stretching over several years. The “all sums” method of allocation allows an insured to allocate all of its damages from long-tail losses to a single year of coverage. This ruling by the Missouri Court of Appeals was based on the plain language of the policies, which promise to indemnify the insured for all sums the insured is legally obligated to pay for occurrences during the policy period. The court also ruled that all triggered primary policies across a period of years need not be exhausted before excess policies in the period selected by the policyholder can be triggered. The court ruled that only the primary policy in one year needs to be exhausted before that year’s excess policies are triggered. For a more thorough analysis of this case, click here.

Medidata Solutions, Inc. v. Federal Insurance Company

Rather than brave the stampedes of Black Friday, one can get good deals on holiday gifts on Cyber Monday. But to protect against cyber thieves, make sure your insurance coverage will protect you. In this case, the U.S. District Court for the Southern District of New York interpreted the computer fraud provision of a crime policy to do just that. Policyholder Medidata was the victim of fraud when someone tricked its employees into wiring money overseas, using spoofed emails that looked like they came from the company’s president. Medidata’s insurer denied its claim, stating that the computer fraud clause of the crime coverage required actual hacking into and manipulation of Medidata’s computer system. But the court sided with Medidata, ruling that the spoofing of emails violated the integrity of the insured’s computer system enough to trigger coverage, and actual entry by hackers was not required by the policy language or by precedent.

We at Pillsbury hope you all had a very Happy Thanksgiving!

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potholes policiesAs summer comes to a close, road repair crews across the country are identifying the street repairs and potholes that must be filled before the cold weather approaches. Now is also a good time for policyholders to identify some of the “potholes” that may accompany their claims-made insurance policies and get them filled before it is too late.

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A great deal of premium exchanges hands to buy the Difference in Condition (DIC) or “drop-down” component of excess Side A DIC coverage. Yet policyholders, brokers, and to a large extent, D&O Insurance-300x168-300x168liability carriers have surprisingly little understanding of just how that standard coverage feature is triggered—or how it works in practice. Recent experience with the drop-down provision suggests that it can be a highly valuable tool to help resolve disputes in which one or more carriers is refusing to meet its coverage obligations. But triggering the coverage is fraught with difficulties.

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In the world of Directors and Officers insurance, no coverage may be less understood than the Side A Difference in Conditions (DIC) policy. While this type of insurance is generally available in the iStock-498460683-safety-net-300x199market, the vast majority of corporate policyholders do not know what the policy covers or whether it’s worth purchasing in the first place. Even corporations that have Side A DIC coverage are often mystified by how the policy works in conjunction with their standard form D&O policies, and are unaware of how to trigger that coverage when a claim arises. This post seeks to bring Side A DIC coverage—which often sits shrouded in darkness at the top of a D&O tower—into the light, and provides a primer on the significant safety net the policy provides for officers and directors.

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In Verizon Communications v. Illinois National Insurance Company, a group of D&O insurers essentially asked, “When is a securities claim not a ‘Securities Claim’” (as defined in their policies)? And a Delaware Superior Court judge effectively answered, “Never.” Judge William Carpenter Jr. rejected the insurers’ crabbed reading of the term “securities claim” under their D&O policies, awarding Verizon some $48 million in defense costs the insurers had withheld.

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The case arose from Verizon’s decision in 2006 to spin off its print directory subsidiary, Idearc. After Idearc filed for bankruptcy protection US Bank, as Idearc’s bankruptcy litigation trustee, sued Verizon and a Verizon executive who was Idearc’s sole director at the time of the spin-off, asserting claims of promoter liability and breach of fiduciary duty, payment of an unlawful dividend under Delaware corporation law, and fraudulent transfer under U.S. bankruptcy law and Texas statute.

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Readers of this blog have come to expect from our lawyers incisive and reliable analysis of the most important insurance coverage issues of the day. At least one judge apparently feels the same way.

In a recent decision in the ongoing coverage dispute brought by TIAA-CREF against its various D&O carriers, Judge Jan Jurden cited a piece written by Peter Gillon in Law360 (“Another Blow Dealt to Restitution, Disgorgement Defense”) as legal authority for her conclusion that “the current trend in New York and additional jurisdictions ‘has been for courts to narrow the [disgorgement] defense considerably,’ and in some cases ‘reject[] insurers’ restitution/disgorgement defense outright.’”

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While the fast-paced world of insurance evolves every day, some advice stays golden. Partners Peter Gillon and Alex Hardiman opined on the importance of maximizing the return on your D&O insurance for the Kevin LaCroix-run D&O Diary blog last summer, and the words in their post remain relevant. Click here to read “Maximizing the Return on Your D&O Insurance for Merger Objection Lawsuits.”

 

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Purchasers of D&O and professional liability insurance often are stunned when their carriers deny coverage on the theory that their policies do not cover liabilities characterized as “restitutionary,” i.e., where a judgment or settlement requires the insured to “disgorge” a sum of monies. Insurers contend such damages are “uninsurable.”  The surprise stems from the fact that some insurers attempt to stretch the argument that restitutionary payments are uninsurable to encompass claims for ordinary compensatory damages – such as breach of fiduciary duty claims or consumer class actions – arguing that these claims are asking the insureds to return “ill-gotten gains.”  While it is far too early to administer last rites to the “restitution/disgorgement defense,” recent rulings Beautiful swan reflection while yelling.suggest that the courts have recognized that denying claims based on vague concepts of “insurability” creates too much uncertainty for policyholders and have found several ways to curtail this overreaching practice.

 

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Feeling wired about risks arising from the Telephone Consumer Protection Act? Maybe you should. The TCPA subjects businesses that use text messaging, auto-dialing, and bulk faxing for advertising and marketing to potential class action litigation. Financial institutions, various supermarket chains, and recently Caribou Coffee have all been targeted in TCPA class actions. But policyholders who get static over such claims are not without recourse: several lines of liability insurance may answer the call.

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