Lessons to Learn from Recent Lloyd’s Coverage Settlement
Since 2018, Monster Energy Company (“Monster”) has been embroiled in litigation with Vital Pharmaceuticals, Inc. (“Vital”). The dispute has generated over two dozen judicial decisions with more still to come. The related coverage action between Vital and Certain Underwriters at Lloyd’s London (“Lloyd’s”) was recently resolved via settlement. Although the settlement avoids creation of new coverage case law, helpful inferences can be made based upon Lloyd’s decision to settle. This saga also highlights an important lesson for policyholders about the importance of notifying all insurers of litigation as soon as possible.
Fifth Circuit Reverses District Court’s Broad Reading of Contract Exclusion
After years of litigation, the dispute between SXSW and its insurer has been resolved via settlement. The parties reach an agreement following a reversal by the Fifth Circuit that adopted a narrow reading of the policy’s Contract Exclusion. The court concluded that a defense was owed in the underlying class action lawsuit against SXSW following cancellation of the 2020 South by Southwest Festival due to COVID restrictions implemented by the city of Austin, Texas where the event is held each year.
Fourth Circuit Improperly Rejected Reasonable Construction of Exclusion
In a saga of litigation stretching back to 2021, Towers Watson continues to seek insurance coverage under its Directors & Officers (“D&O”) policy for a settlement agreement with shareholders who allegedly received below-market consideration for their shares following Towers Watson’s merger with Willis Group Holdings. The insurer, National Union Fire Insurance, argues that coverage is excluded by the policy’s “bump-up” exclusion. After initially winning in the district court, Towers Watson’s victory was reversed by the Fourth Circuit. On remand, the district court granted National Union’s Motion for Summary Judgment. Towers Watson now must take on the role of Appellant before the Fourth Circuit.
Securing Insurer Funded Resolution of Securities Lawsuits
Whether government investigations by the Securities Exchange Commission (“SEC”), Department of Justice (“DOJ”), another federal or state entity, or unanticipated drops in Company stock value precipitate shareholder litigation, securing the best possible insurance coverage to address the asserted claims is critical. The entity then evaluates whether actionable conduct has arisen that allows a government agency to pursue a claim. Such investigations create significant potential exposure for policyholders in investigation costs. Additionally, in responding to government subpoenas or demands for information, even before the start of an investigation, policyholders often expend significant amounts of time and money securing the information required. Luckily, reimbursement may be attained through a policyholder’s “Directors and Officers (“D&O”), Errors & Omissions (“E&O”), or Commercial General Liability (“CGL”) policy.
California Courts Cannot Base Coverage Analysis on Arbitration Results
In most states, an arbitrator’s conclusions can be used by insurers as the basis of a coverage denial. California, however, represents an exception to that general rule. In Vandenberg v. Superior Court, 21 Cal. 4th 815, 836–37 (1999), the California Supreme Court determined that arbitration results should not be usable by non-parties unless both arbitrating parties specifically agree otherwise. The impact of this decision should not be underestimated, particularly in the context of Employment Practices Liability Insurance (“EPLI”) coverage where employer-employee disputes so often turn to arbitration as a first option for a resolution.
Insurance Coverage During Mergers & Acquisitions
When considering mergers and acquisitions (“M&A’s”), a company must assess the potential liability it could be taking on. Whether such liability transfers as part of the process is an entire topic of its own, but let’s skip past that and assume that potential liability has developed into a lawsuit. Who’s going to pay for it? Luckily, the answer doesn’t have to be “you.” With the right insurance policy, M&A liability can be an insurer’s problem instead.
District Court Ignored Narrow Exclusion Construction Case Authority
Exclusionary provisions in insurance contracts must be narrowly constructed to provide coverage for policyholders. So what happens when “arising out of” is included in an exclusion? The issue came to a head in the Texas case SXSW, LLC v. Fed. Ins. Co., No. 1:21-CV-900-RP, 2022 U.S. Dist. LEXIS 183423 (W.D. Tex. Sep. 29, 2022).
What Insurers Do Not Want You to Know About the Policies They Sell
Insurance policies are difficult to read at the best of times. This is a calculated move by the insurance providers in the hopes that policyholders will not avail themselves of all the protections contained therein. On occasion, however, the insurers’ tactics can be turned upon them. The twisting, complicated language can sometimes open the door for policyholders to argue for coverage in areas the insurer may not have intended to provide it. Careful lawyering and receptive judges have codified several of these expanded coverage areas over the years, and a few such examples are presented below.
When Does Appointed Counsel Not Discharge an Insurer’s Duty to Defend?
Insurers often fall short of properly discharging their duty to defend by not providing the counsel demanded by the law and the terms of the policy. In some instances, insurers will deny coverage but still provide a “courtesy defense.” In other cases, the insurer may agree that a claim triggers the duty to defend but only provide attorneys who are ultimately loyal to the insurance company, despite the conflicts of interest created by that loyalty. In either situation, the insurer is attempting to take advantage of the policyholder’s ignorance and failing to hold up its end of the agreement.
The Coverage Attorney’s Role as Expert Witness in Proving Damages Against an Insurer
Historically, insurance coverage counsel have had a limited role as testifying experts. Typically, testimony of defense counsel who incurred the defense fees whose recovery is sought suffices to prove their reasonableness. But when insurers challenge their analysis, testimony from experts inform that determination. A pair of recent Texas decisions demonstrate when expert witnesses can aid in resolving damage recovery disputes. An earlier decision applying California law and several assessing New York law also explore the limitations on use of expert testimony in addressing defense fee recovery issues. Indeed, one New York court specifically identified jurisdictional differences, one of the primary complaints of America Can! plaintiffs, as the reason for entirely discounting expert reports.
Directors & Officers Coverage for Government Investigations
The availability of insurance coverage for investigation defense costs is unclear leading to apparent inconsistent decisions. The policyholder, however, that actually pursues coverage for those claims often succeed. The failure to notify the insurers of the claims will deprive insured of any potential coverage where the investigation proceeds to a “Claim.” At minimum, these interactions should be reported to the present D&O carrier as a potential claim under the policy provisions allowing the report of a “notice of circumstance.”
Arbitrator Rules Delay in Paying Defense Fees Constitutes Bad Faith
Where an insurer withholds policy payments on grounds that are unreasonable or without proper cause, the insurer tortuously breached the implied covenant of good faith and fair dealings. A recent arbitration decision – Independent Physicians Associates Medical Group, Inc. dba AllCare IPA v. Ironshore Specialty Insurance Co. – clarifies why delaying defense fees payments while pursuing another insurer for contribution, or negotiating a settlement of defense fees due, breached of the insurer’s duty of good faith and fair dealing.
Unpresented Arguments Should Not Be Alternative Grounds for Decision
In the recent Unicolors, Inc. v. H&M Hennes & Mauritz, L.P., No. 20-915, 2022 U.S. LEXIS 1226 (Feb. 24, 2022), Supreme Court case, Unicolors failed to comply with a copyright registration technicality. The argument that prompted certiorari review was that joint mistakes of both law and fact secured a safe harbor protection for the registrant. The Court determined that section 411(b)(1)(A) was satisfied so long as the copyright holder lacked “knowledge that it was inaccurate.” In so ruling, the Court did not follow any prior precedent.
Coverage for Restitutionary Relief Based on Disgorgement
While many insurance policies define “Loss” to include settlements, judgments, damages, and litigation expenses, restitutionary awards for disgorgement are on occasion expressly excluded from the definition of “Loss” where it is deemed “uninsurable” under the statutes and laws of the controlling jurisdiction of the lawsuit. Where no policy provisions address this issue, jurisdictions vary on the rules that govern insurance coverage for restitutionary relief. Insurer’s argument that disgorgement claims are overbroad especially where the intuition monies secured were not obtained illegally.
Are Insurance Policy Applications Traps for the Unwary?
When applying for insurance coverage, the policyholder must complete a policy application. Completing the policy application can be a tedious process containing a number of questions that, to the average person, can seem convoluted and confusing. This is especially the case as policyholders face questions that do not have objective answers. The complicated nature of policy applications raises serious issues where insurers have the ability to rescind the policy contract if the policyholder misrepresents information provided in their policy application.
Delaware Superior Court Rules Pursuit of Affirmative Claims Was Strategically Defensive
On February 8, 2022, the Delaware Commercial Court, in Legion Partners Asset Management, LLC v. Underwriters at Lloyds of London, ordered payment of the principal amount of $1, 186, 946.08 plus prejudgment interest for defense fees at the legal rate of 5.25% pursuant to Delaware statute, 6 Del. C. sec. 2301(a) for a total sum of $1, 249, 260.75 accruing from the date of presentment of the fees to Underwriters.
In so ruling, it brought to a conclusion a coverage dispute addressing claims for wrongful conduct by an ex-employee held compensable after a counterclaim in the employment arbitration dispute incorporated mirror image fact allegations to those addressed in a stayed state court action for “breach of fiduciary” duty by an ex-employee.
WHAT A CEO NEEDS TO KNOW ABOUT INSURANCE
When is the last time you thought about your company’s insurance coverage? How broad is its scope? How might it address litigation which could arise out of the company’s operations?
Insurance concerns are rarely a priority for CEOs. But, a CEO brings a unique perspective to the oversight of insurance acquisition and use. CEO involvement is inescapable where a Lawsuit becomes an “existential” concern for the Company.
Preferred General Partnership Liability ("GPL") Policies for Private Equity Firms
Private equity firms could be spending to much money on their D&O policies to cover their partnerships. Or, they could be leaving considerable gaps in their D&O policies to claims arising out of partnerships. A GPL policy can change all that, saving private equities money and providing critical coverage appropriate for private equity partnerships.
Insurance Coverage Under E&O/D&O Policies for Fraud
In RSUI Indemnity Co. v. Murdock, a D&O policy was found to require the defense of a federal securities action. The court affirmed the trial court’s determination that a Profit/Fraud Exclusion did not apply, because there was no adjudication of the underlying action, which was a requirement for the exclusion.
Navigating Issues of Dual Representation Where Both Appointed Counsel and Independent Counsel Jointly Defend a Covered Lawsuit
In many cases, a defendant in a lawsuit may want to select their own lawyer, even if they believe that their liability insurance obligates the insurer to appoint one. If the defendant chooses to do so: “both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation. Counsel shall cooperate fully in the exchange of information that is consistent with each counsel’s ethical and legal obligation to the insured.”