The Insurance and Reinsurance Report

Fourth Circuit Finds Professional Liability Insurer has Duty to Defend Accounting Firm in Pension Plan Action

Trice, Geary & Myers, LLC v. Camico Mut. Ins. Co. (U.S. Ct. Apps., Fourth Circuit, Dec. 22, 2011)

The Fourth Circuit ruled that a professional liability insurer had a duty to defend its insured against negligence suits arising from advice the accounting firm gave relating to defined pension plans which were entirely funded by life insurance policies. The underlying actions accused the insured of negligence for recommending the plans which led to audits by the IRS citing numerous defects with the plans. The insurer argued that the policy excluded coverage for claims “in connection with or arising out of any act, error or omission by any Insured in his/her capacity as an [insurance] agent or broker.” The Court found that the underlying allegations of substandard tax and accounting advice raised a potentiality for coverage triggering the duty to defend.

The district court granted summary judgment in favor of the insurer finding that all of the claims asserted were in connection with or arising out of the accounting firm’s acts, errors, or omissions regarding the sale of life insurance and annuity products. The Fourth Circuit applied Maryland law to the case and analyzed the issue under a two-prong inquiry focusing on the language and requirements of the policy and the allegations of the suit. Under the first part of the inquiry the Court held that the language of the endorsement applies only to claims asserting insurance agent or broker professional liability and therefore did not preclude coverage for the insured. The Court found that the gravamen of the underlying actions was that the insured rendered substandard accounting and tax advice.

Under the second part of the inquiry, the court focused on the issue of the capacity in which the insured acted when he provided advice to the plaintiffs in the underlying actions. Finding that the underlying claims alleged actions relating to the insured’s role as accounting and tax advisors and not as insurance agents or brokers, the Court held that the insured had a duty to defend. The Court stated that although one of the underlying actions contained a “fleeting” allegation relating to the insured’s status as an insurance agent, this sole allegation did not put all of the actions within the Exclusion. Additionally, the Court stated that while the district court had noted that the insureds received a commission on the insurance sales, that fact alone is not enough to show a principal-agent relationship or employment as a broker.

For a copy of the decision click here

Joseph Oliva and Sharon Angelino

District Court Declares Insurer Must Provide Coverage for Boiler Explosion Under E&O Policy

Hartford Steam Boiler Group v. SVB Underwriting Ltd., Case No: 3:04cv2127 (D. Conn. 2011)

Hartford Steam Boiler Group, Inc. (HSB) is one of the largest equipment and machinery insurers in the United States. HSB specializes in equipment breakdown policies. Clara Barton purchased an insurance policy from HSB that provided coverage for losses resulting from a boiler explosion. Under the policy HSB was required to reimburse Clara Barton for property damage and lost income caused by such an explosion. Tragically, on November 1999 an explosion occurred at the Clara Barton facility causing 5 deaths and a significant number of injuries.

For a number of years up to December 1, 2000 HSB maintained a “claims made” E&O policy with defendant SVB. In 2000, HSB purchased an extended reporting period often referred to as a “tail” or “run off” coverage. The purpose was to provide coverage for claims that would have been covered under the policy but which were made known after the policy ended. The extended coverage included a provision excluding coverage for any claim or circumstance that could be reasonably expected to give rise to a claim and was known by HSB’s general counsel prior to December 1, 2000. SVB denied coverage for losses arising out of the Clara Barton explosion based upon this exclusion.

The resulting question was whether general counsel was aware of facts and circumstances indicating a claim could arise. The court recited in detail the investigation following the explosion, including the initial theory that the incident was the result of a steam boiler explosion. This theory later changed to a gas leak. The court also noted that an attorney retained by HSB to investigate the incident determined it was not caused by HSB and it would not likely be a defendant in any resulting actions.

Despite the fact parties had requested information from HSB, HSB received a letter from another insurer stating payments made and its continued investigation, a subsequent theory that the gas leak was caused when the boiler pilot light went out and the overall nature of the accident, the court concluded general counsel was not aware of facts and circumstances that would likely lead to a claim.

The court made this conclusion while acknowledging that lawsuits typically follow such catastrophic events name all potentially responsible parties.  Accordingly, the exclusion did not apply and the insurer was required to provide coverage.

For a copy of the decision click here

Brian Biggie and Rick Cohen

Federal Judge Ends Insurer’s Effort to Recoup Money Paid to Insured

Houston Cas. Co. v. Sprint Nextel Corp., Case No. 09-CV-1387 (E.D.Va, November 22, 2010)

This coverage dispute arose out of an underlying securities action. In 2004, Sprint discontinued one line of stock. The shareholders whose stock was converted filed a securities action accusing Sprint of undervaluing their stock. Eventually, a settlement was reached in the amount of $57.5 Million.

At the time of the conversion, Sprint was insured under a number of D&O policies providing $100 Million in coverage, including an excess policy issued by Houston Casualty providing $15Million in coverage. Houston Casualty agreed to contribute to the settlement, but reserved the right to deny coverage and seek reimbursement. Houston Casualty filed the instant action after another insurer (Federal Insurance Company) secured a decision declaring that it was not required to provide coverage for the underlying securities claim.

Initially, the court rejected Houston Casualty’s argument that the underlying settlement was not a “loss” because the settlement merely redistributed assets among different classes of Sprint shareholders.  Moreover, the court held that paying the settlement did not violate Kansas public policy.

Turning to Houston Casualty’s effort to recoup the monies provided to fund the settlement, the court held that Houston Casualty could not obtain restitution because there was no basis under the policy for an insurer to make a settlement advance and later seek its return. The court noted that the policy contemplated the return of defense costs, but did not provide for the return of settlement payments. Further, Sprint did not reach an agreement beyond the terms of the policy granting Houston Casualty the right to seek reimbursement.

In the end, the court awarded summary judgment in favor of Sprint and dismissed Houston Casualty’s claim.

For a copy of the decision, click here

Brian Biggie and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Lloyd’s and Akin Gump Trying to Skip Out on Stanford Legal Fees?

The Sydow Firm v. Certain Underwriters of Lloyd’s (D.C. Texas November 12, 2010)

The Sydow Firm, the firm retained to represent alleged Ponzi scheme mastermind Allen Stanford has filed a petition seeking payment of nearly $650,000 in legal fees. The petition filed in Texas Federal District Court says that Lloyd’s and Akin Gump are refusing to pay the fees owed under three separate policies insuring Stanford.

While Lloyd’s cannot choose counsel and agreed to the Sydow Firm, Lloyd’s and Akin Gump have reserved the right to review the billed time and have apparently objected to various services.

This is simply the most recent dispute in a long standing battle over insurance coverage for the $8 Billion Ponzi scheme involving Stanford that is the subject of an ongoing criminal and civil investigation.

For a copy of the petition, click here

Brian Biggie and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Insurer Obligated to Defend Company President Under D&O Policy

Goerner v. Axis Reinsurance Co., No. 09-55385, 2010 U.S. App. LEXIS 21624 (9^th Cir. 2010).

Axis Reinsurance issued a D&O policy requiring it to defend and indemnify claims against the insured company’s officers for “any actual or alleged error” committed by an officer “in [his] capacity as such.” A lawsuit filed against the former CEO did not specifically allege the plaintiff’s damages stemmed from actions by the former CEO while acting in his capacity as such. The insurer argued, because the allegations did not allege the CEO was acting in his capacity as such but instead was based on allegations that the former CEO was acting on behalf of two other companies in the same industry, the policy was not triggered, relieving Axis of a duty to defend.

The court noted the “guiding principle” in determining whether an insurer has a duty to defend is whether the insured would “reasonable expect a defense” and an interpretation that defeats the very purpose of the insurance would not stand. The Court considered Axis’ argument but disagreed finding such an interpretation of the duty to defend would allow the insurer to avoid coverage for allegations that the former CEO engaged in activities he was directly ordered to do by his superiors merely because a third-party plaintiff failed to allege he did so in his capacity as CEO. The complaint at issue included allegations that the CEO’s company paid for his travels, an essential element of one cause of action against him, raising the potential for coverage under the D&O policy.

The court held Axis was required to defend because the complaint against the former CEO raised the “potential for coverage.” Because there was a potential for coverage, the underlying plaintiff’s failure to allege the CEO act in his capacity as CEO did not defeat coverage. 

For a copy of the decision click here

Patrick Omilian and Joanna Roberto

http://www.goldbergsegalla.com/attorneys/Omilian.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

General Star v. Mid-Atlantic Youth Services et al  (M.D. Penn. September 27, 2010)

Last year, news outlets across the country picked up a story about the administrator of a juvenile detention facility paying county judges for sending teens to the facility. The insurer issued three insurance policies to the Mid-Atlantic Youth Services Corp providing a variety of coverage, including professional liability coverage. Subsequent to the scheme being discovered numerous individuals and class actions were field against Mid-Atlantic seeking damages and alleging that the judge’s improperly convicted the juveniles in order to maintain occupancy levels and to receive payoffs. Mid-Atlantic sought defense and indemnity for these claims.

The insurer denied coverage resulting in the instant action. The court held that the policies did not apply to the underlying claims because the actions did not involve claims of negligence but malicious and intentional actions that could not be considered an “accident.” Moreover, the court held that the policies “knowing violation” and “criminal acts” exclusions applied.

For a copy of the decision, click here

Brian Biggie and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

 

Ex-Exec’s Seek Coverage for SEC Suit

Isilon Systems v. Twin City

(W.D. Wash. August 27, 2010)

 

Ex-Executives of Isilon Systems Inc. have filed suit against Twin City Fire Insurance Company contending that the insurer wrongly denied coverage for losses arising out of an accounting fraud action started by the SEC. The SEC action was on the heels of two shareholder actions. While Isilon had nearly $20 Million in underlying coverage, the underlying policies have been exhausted, with defense costs reaching $75 Million.

 

The complaint seeks damages based upon breach of contract, breach of covenant of good faith and requests a declaration of coverage. The complaint seeks both defense costs incurred in the shareholder and SEC actions, as well as indemnity under the policy.

 

To see a copy of the complaint see here 

 

Brian Biggie and Joseph Oliva

 

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Oliva.html

Second Circuit Concludes D&O Policy is Ambiguous

Macy v. Carolina Cas. Ins. Co.

(2^nd Cir. (Conn.) June 30, 2010)

 

This dispute hinged on the sordid corporate history of Community Research Associates, a homeland security consulting firm. The underlying dispute alleged that a merger with CRA Acquisitions left “legacy shareholders” without any interests in the new company. The “legacy shareholders” alleged the board of directors breached their fiduciary duty. The claim was settled for $3Million prompting the instant action against Carolina Casualty Insurance Company.

 

The District Court ruled that the “insured vs. insured” provision applied to bar coverage. The Second Circuit disagreed and held that it was unclear whether CRA was the same entity before and after the merger and remanded the matter back to the trial for further consideration. While the Second Circuit held the insured vs. insured provision was ambiguous it did not construe coverage against the insurer but instead held it was necessary to consider parole evidence.

 

For a copy of this decision, click here

 

Brian Biggie and Rick Cohen

 

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

Florida Court Of Appeals Affirms Dismissal Of Complaint Against Insurer For Denial Of Professional Liability Claim, Despite Default By Insurer.

Appel et. al. v. Lexington Ins. Co.

(Florida Court of Appeals, February 26, 2010)

 

Appellants challenged the dismissal of their complaint and summary judgment in favor of insurer where the trial court held that the complaint failed to state a case of action even after the insurer defaulted.  The appellants, a group of creditors, fell victim to a Ponzi scheme when they invested in a company known as SOS Industries.  The creditors filed suit against SOS and its two directors for breaching their fiduciary duty.  Lexington provided coverage to SOS under two commercial general liability policies, which included professional liability coverage.  The insurer refused to defend the directors in the SOS lawsuit based on an exclusion in the policy; however, the insurer failed to answer and a default was entered against it.

The court held that appellants were not entitled to the entry of a judgment on the default against the insurer if the complaint failed to state a cause of action.  Specifically, the court held that the default operates as an admission by the insurer of the allegation in the complaint, but not as an admission of facts not properly pled or conclusions of law; further noting, the defense of failure to state a cause of action may be raised by motion, even after a default. 

Since the court determined that the directors’ negligence in failing to detect the Ponzi scheme did not fall with the definition of “professional services,” there was no coverage for the alleged claim.  Thus, the plain language of the professional liability endorsement negated the cause of action alleged in the complaint, despite the default by the insurer.

 

A copy of the decision is attached here.  Case is provided courtesy of Lexis. 

 

Paul Steck and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Insurer Required to Defend Directors and Officers Against Ponzi Claims

Pendergest-Holt v. Certain Underwriters at Lloyd's of London

(S.D. Tex. January 26, 2010)

 

The directors and officers of a corporation were indicted for involvement in an alleged Ponzi scheme, and the Securities and Exchange Commission commenced a civil action alleging that the insureds conspired to deceive investors and sold sham certificates of deposits ("CDs").  As an initial matter, the Court noted that the policy's Fraud Exclusion could not be a valid basis for the insurer's refusal to pay defense costs because the Fraud Exclusion explicitly requires a "final adjudication" that Plaintiffs committed a "fraudulent or criminal act" before relieving the insurer of defense obligations.

 

The insurer disclaimed coverage and the duty to defend based upon a Money Laundering Exclusion.The Money Laundering Exclusion does not explicitly state that a "final adjudication" must be made. Rather, that exclusion provides that allegations of money laundering will preclude payments when "it is determined that the alleged act or alleged acts did in fact occur." Underwriters contend this "in fact" determination is Underwriters' decision to make. The insurer insisted that because the government's case turned on allegations of money laundering, and one of the directors made a plea allocution admitting the fraud, the exclusion was applicable.

 

The court rejected the insurer's argument and held that the duty to defend was determined by the complaint and the policy (the "eight corners" test). The Court held that the determination of "in fact," "may mean something less than a judicial determination but also may mean much more than an insurer's own determination based on nothing more than mere allegations supplemented by the self-serving statements of an indicted co-defendant who elects to plead guilty and cooperate with the prosecution."  It therefore enjoined the insurer from denying a defense.

 

Please click here for a copy of the case.  Case provided courtesy of Lexis.

 

Sarah Delaney and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Tenth Circuit: Insured’s Coverage Claims for Ponzi Scheme Reinstated

Apartment Investment & Mgmt. Co. (“AIMCO”) v. Nutmeg Ins. Co.

(10^th Cir. (Colo.) Feb. 2, 2010)

 

The Tenth Circuit Court of Appeals recently held that an insurer has a duty to defend its insured based on allegations contained in several separate but factually-related complaints. The policyholder, AIMCO, self-managed a real estate investment trust that provided property management services. Included within the services AIMCO offered was selection and procurement of necessary insurance coverage for the managed properties. AIMCO, in turn, retained an independent contractor to create and manage its insurance program. One the brokers, allegedly without AIMCO’s knowledge, used AIMCO’s program as part of a Ponzi scheme by adding unaffiliated companies to the policies and then retaining their premiums, as well as by using the companies to fraudulently obtain additional premium financing.

 

Within a year of the scheme’s discovery, AIMCO was sued as a defendant in several lawsuits. AIMCO tendered its defense and indemnity to Nutmeg Insurance Company, through which it had procured two professional liability policies. Nutmeg denied coverage. AIMCO objected to the denial on the ground that an insurer cannot avoid its duty to defend where facts alleged in separate complaints, but which arise from the same operative set of facts, trigger the insurer’s defense duty. The Tenth Circuit agreed, stating that the complaint rule (which requires an insurer to defend when the underlying complaint alleges any facts that might fall within coverage of the policy) was not meant to be used by insurers as a shield to avoid a legitimate duty to defend. The court found that an insurer “should not be able to escape its defense obligation by ignoring the true facts and relying on either erroneous allegations in the complaint or the absence of certain material allegations in the complaint.” The court held that an exception to the complaint rule was in order that required an insurer “to consider facts which it is aware of in parallel complaints that tend to show a duty to defend would not undercut an insured’s legitimate expectation of a defense."

 

Considering the complaints together, the Tenth Circuit held that they might allege facts that fall within the scope of Nutmeg’s coverage. As a result, the court reversed the lower court’s grant of summary judgment and ordered Nutmeg to defend AIMCO in the underlying lawsuits.

 

For a copy of the decision, click here

 

Carrie Appler and Joe Oliva

 

http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Oliva.html

 

The case is provided courtesy of Lexis 

 

 

Two Legal Malpractice Claims Against Former Stonewall Attorney Dismissed

Stonewall Corp. v. Conestoga Title Ins. Co. et al

(Southern District of New York, January 7, 2010) 

 

Stonewall Corporation commenced a third-party action against its former attorney alleging he committed legal malpractice while providing it representation with respect to property rights in New Jersey.  Stonewall claims that its attorney (1) failed to pursue certain legal actions, as well as failed to provide proper advice regarding related proceedings; (2) failed to convey a settlement offer; and, (3) failed to produce documents.  The court dismissed the first and third claims, but found an issue of fact existed with respect to the attorney’s failure to convey a settlement.

 

The background to the legal malpractice claims stems from Stonewall’s purported purchase of a property located in New Jersey.  Stonewall contacted a title insurer, who allegedly failed to discover a lis pendens on the property.  Shortly before Stonewall purchased the property, a bankruptcy receiver brought a lawsuit in the SDNY against officers of a separate insurance company alleging it used stolen money to purchase the property.   Those officers were later indicted in a Florida district court.  Thereafter, Stonewall sought to demonstrate its legal title to the property and was provided legal representation by the title insurer.  Stonewall’s attorney made a series of legal decisions, which were not ultimately successful and a Florida court entered an order of forfeiture on the property.  The instant action was commenced against the title insurer for full coverage with respect to the title under the policy.  The insurer filed counter-claims seeking to void the policy based on allegedly fraudulent representations with respect to Stonewall’s ownership interest in the property.  Stonewall then filed a third-party complaint alleging legal malpractice against its attorney.

 

The court held that Stonewall failed to demonstrate the attorney commitment legal malpractice with respect to how he handled the underlying matter, stating that the attorney legal decisions were  reasonable.  In addition, the court rejected Stonewall’s argument that there was an alleged conflict of interest between the insurer and the attorney.  The district court did not grant summary judgment on the claims that the attorney failed to disclosure a settlement offer, because there were conflicting affidavits between the parties.  Finally, the court held that Stonewall’s remedy regarding undisclosed documents is in the form of a motion to compel and not a legal malpractice claim.

 

For a copy of the decision, click here

 

Kim Whistler and Richard Cohen

 

http://www.goldbergsegalla.com/attorneys/Whistler.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

 

Feature Article: New York Attorney General's Office Files Suit Against Law Firms Based Upon Alleged Process Service Malfeasance

This is an interesting article regarding the recent Attorney General lawsuit regarding alleged process service malfeasance by law firms.  For a free copy click here

Any questions regarding this subject, contact Albert D'Aquino at ajdaquino@goldbergsegalla.com

Insurer Moves for Summary Judgment in a D&O Declaratory Judgment Action on the Basis of Lack of Notice and that the Claim was Not Made During the Policy Period

Cox Communications, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA

(N.D. Georgia, November 12, 2009)

 

Insurer moves for summary judgment of declaratory judgment action seeking damages under a claims made Directors, Officers and Corporate Liability policy.  Plaintiff's damages include reimbursement of certain costs associated with an $80 million settlement of an underlying action, with approximately an additional $8 million in legal fees and expenses.  The insurer's motion seeks relief on three grounds: the claim was not "first made" during the policy and that the prior notice and insured v. insured exclusions, respectively, apply.

 

The allegations in the complaint indicate that plaintiff seeks coverage payments allegedly made on behalf of an executive for  breach of fiduciary claims, while he served as plaintiff's representative on an outside entity's Board of Directors.   The allegations in the underlying action alleged the executive unfairly transferred control of the board in exchange for "puts" worth billions of dollars while negotiating an agreement in 2000.  Thereafter, the outside entity filed for bankruptcy and a trust was appointed to prosecute the claims arising from the 2000 Agreements arguing they were derivative claims that belonged to the estate. 

 

The insurer argues that the same breach of fiduciary claims were asserted in separate actions commenced in 2000 and reported under the D&O policies effective at that time.  As such, the insurer argues the claims were made prior to inception of its 2002 policy.  For this same reason, the insurer argues that the prior claims constitute prior notice, triggering an exclusion in the policy.  Finally, the insured argues because the claims arose from alleged wrongful actions while serving as an executive of an outside entity, brought by the outside entity,  triggers another excluded in the policy.  The Insurance and Reinsurance Report will continue to monitor this case as it develops. 

 

A copy of the defendant Insurer's motion for summary judgment can be found here

 

Kimberly Whistler and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Whistler.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

 

District Court Blocks Stanford International Bank from Obtaining Defense Funds in Alleged Ponzi Scheme

SEC v. Stanford Int'l Bank

(U.S. Dist. Ct., N. Dist. of Texas, September 28, 2009)

 

Robert Allen, the alleged architect of the Stanford Ponzi scheme, sought to secure up to $90 Million in insurance funds to pay defense costs. Stanford had made an emergency application to an English court seeking the policy proceeds.

 

The court, claiming jurisdiction over the policies at issue entered an order enjoining “Allen Stanford and anyone acting in concert with him, including his attorneys, from taking further steps to seek relief in any court other then this relating to the Policies.” The Insurance and Reinsurance Report will continue to monitor this action as it moves forward. 

 

A copy of the order can be found here

 

Brian R. Biggie and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

DISTRICT COURT REJECTS AIG’S CLAIM FOR A MULTI-BILLION DOLLAR ORAL TRUST

Starr International, Inc. v. AIG, Inc.

(Southern District of New York, August 31, 2009)

 

In a counterclaim to a suit filed by Starr International Company, Inc. (“SICO”) against AIG seeking the return of artwork and other property, AIG claimed that SICO held certain AIG stock in trust for AIG’s benefit. Unfortunately for AIG, there were no trust documents, and it was left to claim that billion dollar oral trust had been created in its favor in 1970.  In a lengthy and dramatic court opinion, Jed S. Rakoff, U.S.D.J. for the Southern District of New York, rejected AIG’s claims in total.

 

The claim arises from the 2005 departure of Hank Greenberg from AIG. Greenberg was the CEO and Chairman of AIG, and was a dominating force behind SICO. SICO become a holder of the stock because in 1970, a reorganization took place which resulted in substantial amounts of AIG Acquired Stock being transferred to SICO.  Sometime later in the 70’s, the stock was ultimately designated to benefit a charitable trust, related to but independent of both AIG and SICO. In the meantime, SICO owed and controlled the AIG Acquired Stock, and used that stock to fund incentive compensation for AIG employees, among others.

 

In 2005, after Greenberg was forced out of AIG, SICO stopped funding the AIG incentive programs. AIG then claimed that it had transferred the stock to SICO to be held in trust for its own benefit, and to fund the incentive programs. Citing AIG’s lack of any evidence, the court rejected its claim. Noting that the law will recognize oral trusts where such evidence of its creation is “unequivocal,” the court held that AIG did “not come close to shouldering” its evidentiary burden. Even though the players in the 1970 reorganization were common to both AIG and SICO, the court found it “bordering on  incredible” that  a public company as large as AIG would “commit shares representing approximately one fourth of its total market capitalization to a trust of which it is the sole beneficiary without the slightest documentation of that fact.”  It also was unable to present any witnesses who testified that such a trust existed. 

 

A copy of the court’s decision can be found here

 

by Sarah J. Delaney and Joanna M. Roberto

 

http://www.goldbergsegalla.com/attorneys/Delaney.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

District Court Rules that D&O Dispute Involving a Defunct Tax Shelter is Ripe and Allowed to Proceed Forward

Sprint Nextel Corp. v.  Executive Risk Indemn et. al.

(District Court of Kansas, September, 1, 2009)

 

Sprint Nextel Corporation has filed suit against a number of insurers providing Directors and Officers coverage seeking a declaration of rights under the respective policies for losses arising out of a 2003 securities litigation. Sprint Nextel has expended in excess of $2Million in costs resulting from the derivative action. 

 

The coverage dispute concerns, in part, which insurer is on the risk for the 2000 and 2001 derivative claims arising out of a defunct “tax shelter” scheme in 1999. Travelers Indemnity Company and St. Paul Mercury Insurance Company made a motion to dismiss arguing the coverage action should await a determination in the underlying action.

Judge Murguia of the U.S. District Court for the District of Kansas disagreed noting the substantial amount of expenses Sprint Nextel has incurred in the underlying litigation and concluded that the coverage dispute was “ripe” for trial. 

 

For a copy of the decision, click here

 

Brian R. Biggie and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Insurers Settles With Broadcom For $118M For Backdating Suit

In Re Broadcom Corp.

(Central District, California)

 

A proposed partial settlement with numerous insurers is set to allow Broadcom Corp. to recovery $118 million for a derivative suit involving a $2.2 billion stop options backdating scheme.  Most of the funds come from the insurers providing Broadcom Corp. with directors and officers coverage.

 

The proposed settlement was filed Friday in the U.S. District Court for the Central District of California.  The settlement would resolve the consolidated federal derivative suit for most of the individual defendants while still allowing Broadcom to pursue its claims against three former executives that are currently facing criminal charges for the scheme.  The settlement would also resolve the coverage dispute among Broadcom Corp. and the contributing insurers. 

 

This would be the second-largest derivative settlement ever, second only to the multimillion-dollar United Health Group Inc. settlement that came piecemeal last year.  The hearing date to discuss the settlement is scheduled on September 21, 2009 at 10:00 am. 

 

For a copy of the settlement click here.   For a copy of the memorandum in support of the settlement click here

 

Sarah X. Fang and Joseph A. Oliva

 

http://www.goldbergsegalla.com/attorneys/Fang.html

http://www.goldbergsegalla.com/attorneys/Oliva.html

Breach of Obligations Relating to Stock-Option Plan Are Not Covered Under Fiduciary Liability Policy

AT&T Corp. v. Certain Underwriters at Lloyd’s London (NJ App. August 3, 2009)

 

AT&T sought coverage under both primary and excess fiduciary liability policies for several suits against it relating to a stock-option plan.  The suits alleged that AT&T breached its contractual obligations relating to stock options provided in its acquisition of a company.  In addition to liabilities arising out of breach of a fiduciary duty, the policies provided coverage for negligent acts in the administration of certain employee-benefit plans.  The court held that the insurers were not obligated to provide a defense or coverage for the suits since they did not allege a negligent act in the administration of benefits.  Instead, the allegations amounted to a breach of contract, for which the policies do not provide coverage.

 

For a copy of the decision click here

By Bryan D. Richmond and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Richmond.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

Marketing Company and its Officers who Circulated Spam to MySpace Users are Not Entitled to Coverage and Insurers Are Granted Reimbursement

Greenwich Ins. Co. v. Media Breakaway, LLC 

(C.D. Cal. July 22, 2009)

Defendants online marketing company and corporate officer were sued by MySpace Inc. for sending spam mail through MySpace users’ accounts without their knowledge through ‘phishing’.  Defendants held a directors’ and liability insurance policy and an errors omissions insurance policy.  Each policy excluded coverage for intentionally dishonest conduct, and claims made as a result of profit gained by the policyholder to which it was not entitled.  The court held that MySpace’s claim was not covered because the arbitrator clearly found that defendants engaged in intentionally dishonest activity and obtained profits from their phishing scheme to which they were not entitled.  Additionally, the court held that the California Insurance Code §533 barred coverage for losses caused by the willful act of the insured, such as defendants’ acts.

 

For a copy of the decision, click here

 

By Toni L. Frain and Joanna M. Roberto

 

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Roberto.html

Georgia Court Of Appeals Affirms Summary Judgment For Broker On Claims Alleging Failure To Procure Sufficient D&O Coverage

Four Seasons Health Care, Inc. et al v. Willis Insurance Services of Georgia, Inc.

(Georgia Court of Appeals, July 15, 2009)

Policyholders initiated this action alleging that broker failed to procure adequate directors and officers (D&O) liability insurance to cover claims arising out of a shareholder’s suit.  The underlying suit involved claims by a shareholder’s group (owning more than 5%of the voting stock) that they were wrongfully frozen out of the opportunity to purchase foreclosure stock by the policyholder’s, one of whom was the chief executive officer and chairman of the board of the companies being liquidated.  Specifically, the suit involved two policies of insurance issued by AIG, which disclaimed coverage under both policies relying on the fact that the policy excluded coverage for “prior acts” and that the policy excluded coverage for claims brought by shareholder owning more than 5% of the policyholder’s voting stock (i.e., 5% major shareholder exclusion). 

 

The Court of Appeals held that the broker was appropriately granted summary judgment because the policyholders knew about, and requested, that the “prior acts exclusion” be included in the policy, against the specific advise and recommendation of the broker, and failed in their duty to read and discover the plain and unambiguous 5% major shareholder exclusion.  On these findings, the policyholders were charged with knowledge of the exclusions and barred from recovery under the general rule cited in Atlanta Women’s Club, Inc. v. Washburne, 207 Ga. App. 3 (1992)(“where the agent procures the requested policy and the insured fails to read it to determine which particular risks are covered and which are excluded, the agent is thereby insulated from liability, even though he may have undertaken to obtain ‘full coverage’”).  The court further concluded that, even assuming the broker acted in a fiduciary relationship and held itself out as an expert, (i.e., an exception to the general rule governing the broker/policyholder relationship), the exception did not apply because the policyholders had actual knowledge of the prior acts exclusion and the major shareholder exclusion was plain and unambiguous, thereby, making both exclusions “readily apparent.” Lastly, because there was a lack of evidence establishing that the broker could have procured the D&O policy without the shareholder exclusion, there was no evidence that the broker’s alleged negligence proximately caused the lack of coverage. 

 

For a copy of the decision click here

 

By Paul C. Steck and Sharon Angelino

 

http://www.goldbergsegalla.com/attorneys/Steck.html

 

http://www.goldbergsegalla.com/attorneys/Angelino.html

Seventh Circuit Declares Insured Versus Insured Exclusion Applies In D&O Context

Biltmore Associates, LLC v. Twin City Fire Ins. Co.  (9^th Cir. (Az.) July 10, 2009)

A bankrupt corporation assigned its claims to its creditors’ trust.  The trustee for the creditors’ committee sued the insurer under a directors and officers liability insurance policy that excluded from coverage various claims brought by the insured corporation against its own officers or directors.  The complaint was properly dismissed because a cause of action by a corporation against its officers or directors for mismanagement belongs to the corporation.  The lawsuit was instigated and continued by the corporation, even though as a Chapter 11 “debtor and debtor in possession.”  An assignee of a claim against an insurance company can have no stronger claim that the assignor who assigned it, and in the bankrupt corporation’s shoes, plaintiff’s claims are barred by the exclusion.

For a copy of the decision click here

By Toni L. Frain

http://www.goldbergsegalla.com/attorneys/Frain.html

Excess Insurer Seeks Declaration that Certain Sprint D&O "Claims" Are Unrelated

Old Republic Insurance Company has made a counterclaim against Sprint Nextel Corp. seeking a declaration that no coverage is owed under a 1999-2000 claims made policy for a 2003 securities lawsuit.

According to the counterclaim, in 1999, Sprint announced a proposed merger between it and MCI WorldCom, Inc. Shortly thereafter, it was sued in eight separate class action suits, alleging that Sprint gave preferential treatment to WorldCom, failed to seriously negotiate with other potential merger partners, and failed to use open auction procedures to ensure the highest stock prices. The lawsuits were eventually abandoned and the merger was scrapped.

In 2003, Sprint and several of its officers and directors were sued in several class action lawsuits that were eventually consolidated. The 2003 litigation alleged that Sprint violated the Exchange Act by issuing a series of false statements that artificially inflated Sprint’s stock prices. The false statements were regarding the long-term employment status of key Sprint employees. It is alleged that Sprint indicated that the long-term employment prospects for the employees were good, when it was aware that the employees would likely be forced to leave the company in the near future. That litigation is ongoing.

According to Sprint’s complaint, its insurers are arguing amongst themselves regarding whether policies in effect in 1999-2000 cover the 2003 claims, or whether only policies subsequent to 1999-2000 cover the claim. In its counterclaim, filed June 29, 2009 Old Republic fires the fire arrow by asserting that based on the 1999 and 2003 suits are wholly unrelated.

A copy of Old Republic’s Answer with Counterclaims can be found here

By Sarah J. Delaney

http://www.goldbergsegalla.com/attorneys/Delaney.html

Madoff Related Suit Against Fairfield Greenwich Group for $3.5 billion

Irving Picard, trustee for Bernard Madoff's business and representatives of investors, sued the Connecticutbased company, Fairfield Greenwich Group (“FGG”) for $3.5 billion.  FGG was the largest feeder fund and the allegations are that it therefore should have been aware Madoff was engaged in fraud.  The monetary calculation of $3.5 billion represents money that FGG received from Madoff on behalf of clients.This suit is one of many brought or to be brought by the trustee in charge of liquidating the assets of Bernard L. Madoff Investment Securities LLC (“BLMIS”).  The allegations against FGG include failure to conduct due diligence when it invested in three of the their hedge funds; failure to audit BLMIS; failure to match any trade confirmation provided by BLMIS with actual trades executed; and fraudulently collecting fees amounting to $100 million per year from BLMIS investments.

The firm’s founder, Walter Noel, has a defense: My family and I are also victims of Madoff.

Related Articles:

http://www.huffingtonpost.com/2008/12/29/irving-picard-madoff-trus_n_154029.html; http://www.cnbc.com/id/30817971

 

By Joanna M. Roberto

http://www.goldbergsegalla.com/attorneys/Roberto.html

D&O Policy Exclusion of Coverage for Claims Arising From a Contract Does Not Apply

S.J. Amoroso Construction Company, Inc. v. Executive Risk Indemnity, Inc.

(9th  Cir.(Cal.), April 30, 2009)

The underlying complaint alleged damages as a result of a third party’s misrepresentations that induced one party to contract with another. The theory of liability depended on the fact that the third party was not a party to the contract and had no liability under it. Therefore, the exclusion did not apply.

By Richard J. Cohen and Carrie P. Appler

 http://www.goldbergsegalla.com/attorneys/Appler.html

http://www.goldbergsegalla.com/attorneys/Cohen.html