Life can be tough for an insurer, particularly in Wisconsin.  In a July 1, 2008 decision, the Supreme Court of Wisconsin refused to enforce an intentional ACTS exclusion where the insured intentionally built a home in violation of a setback restriction.  Liebovich v. Minnesota Insurance Co., 2008 WI 75.  What could be a more intentional act?

Interesting to see a criminal suit being brought against people named in subprime civil suits.  http://www.nytimes.com/2008/06/20/business/20bear.html?_r=1&hp&oref=slogin
Dishonest conduct exclusions will surely be asserted in some of these subprime cases.

Settling without the insurer's consent really can forfeit coverage.  See the recent case from New York's highest court, Vigilant Ins. Co. v. Bear Stearns Cos., 10 NY3d 170 NY Mar. 13, 2008).

My father the chemist taught me that "natural doesn't always mean good."  The Minnesota Court of Appeals took a similar view to hold that the pollution exclusion applied to composting, even though composting is natural.  It's an interesting decision.  Larson v. Composting Concepts, Inc., 2008 Minn. App. Unpub. LEXIS 551 (May 13, 2008).

Add Kansas to the list of states recognizing that distances in time and space distinguish circumstances into multiple occurrences. American Family Mutual Ins. Co. v. Wilkins, No. 98, 2008 Kan. Sup. LEXIS 73 (Mar. 28, 2008). 

A very short class action complaint was filed in New York State Court, Kurtz v. Cayne.  Defendants, Bear Stearns and a group of its directors, are alleged to have violated duties of "Candor" and "loyalty."  See para. 34.   It will be interesting to see how the coverage questions are resolved.

If you predicted that Bear Stearns officers and directors would be sued within “days” of the announced sale to J.P. Morgan you wildly underestimated this conflict. A suit was filed on March 17, 2008, the same day that the J.P. Morgan deal was announced. See Eastside Holdings Inc. v. Bear Stearns Cos., SDNY. Plaintiffs allege that “defendants disseminated or approved … false statements… which they knew … were misleading in that they contained misrepresentations and failed to disclose material facts…. Defendants … employed devices, schemes and artifices to defraud …[and] engaged in acts, practices and a course of business that operated as a fraud or deceit…. See paras. 61-62. You can surely expect the defendants to make D&O claims, and insurers will need to consider their fraud exclusions.

Late notice lives as a significant coverage defense in New York. On March 11, 2008, the Appellate Division entered summary judgment on late notice grounds, reversing the trial court, and rejecting the policyholder’s position that the delay should be excused because the policyholder thought that it was not liable. Donovan v. Empire Ins. Group, 2008 N.Y. Slip Op 2100 (App. Div. 2d Dep’t Mar. 11, 2008).

Policyholders often seek discovery of carriers’ representations to reinsurers. The thinking is that if the carrier took a certain position with its reinsurers it must also take that position with its policyholders. Not so, says the United States District Court for the Southern District of Indiana. Irving Materials, Inc. v. Ohio Cas. Ins. Co., 2008 U.S. Dist. LEXIS 18692 (D. Ind. Mar. 10, 2008). There, the policyholder challenged a multiple-occurrence ruling on the grounds that the carrier had made a single-occurrence argument to its reinsurer. The court, however, ruled that the representations to the reinsurer were not material.

On January 25, 2008, a Southern District of Ohio magistrate found that a reservation of rights letter established an expectation of litigation that supported a work product claim. St. Paul Fire and Marine Insurance Co. v. ConAgra Foods, Inc., 2008 U.S. Dist. LEXIS 8945 (S.D. Ohio Jan. 25, 2008). This decision will be welcomed by Insurers seeking work product protection. But, insurers should also expect that this shield will be the policyholders' sword. Policyholders will surely be arguing that reservation of rights letters trigger an expectation of litigation that requires a litigation hold. The developments in this area will be interesting to watch.

The Arizona Supreme Court handed down an interesting number of occurrences decision last week. Employers Mut. Cas. Co. v. DGG & CAR, Inc., 2008 Ariz. LEXIS 20 (Feb. 14, 2008). The court found multiple thefts to constitute a single occurrence. The decision, however, was shaped by language peculiar to the fidelity insurance policy: an Occurrence means “all loss caused by, or involving, one or more ‘employees,’ whether the result of a single act or series of acts.” It was also interesting to note the rule of interpretation that the court followed: “In interpreting an insurance policy, we apply ‘a rule of common sense’ thus, ‘when a question of interpretation arises, we are not compelled in every case of apparent ambiguity to blindly follow the interpretation least favorable to the insurer.’"  Can’t argue with common sense, right? Wrong, I expect policyholder advocates to criticize the common sense rule sharply.

Identifying the next emerging issue is often difficult, but recent actuarial reports indicate that the subprime mortgage crisis will surely develop into an insurance coverage issue. 

In January of 2008, Bear Sterns estimated that D&O insurers may face $9 billion in claims-related costs. To avoid the hype that often surrounds new insurance issues —remember the doomsday forecasts concerning Y2K— compare the subprime projection to other recent insurance issues. The $9 billion for subprime suits roughly matches the World Trade Center reconstruction cost. Insurers’ payments following Katrina and Rita were about $28 billion. On asbestos liability, it is estimated that insurers will ultimately suffer a total liability of $65 billion. The subprime crisis, therefore, appears to be significantly smaller than long-term insurance problems , but the subprime crisis is comparable to other recent discrete catastrophes, and certainly the subprime crisis is large enough to consider the coverage issues.

To identify these coverage issues, it is useful to note the types of suits being filed. Thus far, we have seen: borrower lawsuits against lenders (allegedly, loan did not fit needs or loan officer received the financial rewards for steering them towards loans with higher rates, and hidden fees and costs); borrower lawsuits against investment banks for providing financial backing to aggressive lenders despite questionable business practices; lender lawsuits against banks; shareholder suits against lenders; individual investor lawsuits; and regulators’ suits against lenders.

The common thread is that the suits generally allege some form of dishonest conduct, and this allegation creates the likely key coverage issue: fraud.

D&O policies generally exclude coverage for acts that are fraudulent. Although the policies are consistent in the concept of excluding fraud, the policies vary in the language for excluding fraud. 

A common exclusion bars coverage “for any deliberately fraudulent act or omission or any willful violation of any statute or regulation if a judgment or other final adjudication adverse to such Insured Person establishes that such Insured Person committed such an act, omission, or willful violation….” (italics added) This exclusion requires more than fraud allegations. Fraud, in this form, must be “established” by a “judgment or other final adjudication.” 

Other policies set the evidentiary bar lower, and coverage is barred for conduct that is fraudulent “in fact.” This language is friendlier to insurers. The “in fact” fraud exclusion does not require a final adjudication. But the application of the “in fact” exclusion is also more likely to be disputed; “final adjudication” is a brighter line than “in fact.” This is not to suggest, however, that the “final adjudication” provision will never be disputed; parties might dispute what is “final” or even what is “adjudicated.”

Dishonesty can raise coverage issues besides the fraud exclusion. For example, some policies include “personal profit” exclusions. Coverage is barred for claims “based upon, arising out of, or attributable to such Insured Person gaining in fact any personal profit … to which such Insured Person was not legally entitled.” (Italics added.) Some subprime suits will surely involve claims that the officers and directors made profits to which they were not entitled. This provision has been implicated in other recent corporate governance scandals (e.g., the personal profit exclusion was applied to Dennis Kozlowski’s claims concerning his compensation from Tyco).

 Ultimately, based on the reports now being received the subprime mortgage crisis will be a significant insurance issue, with significant coverage issues. 

$9 Billion.  That is the new Bear, Stearns estimate of directors and officers losses arising from the subprime crisis.  Bear, Stearns was tripling their estimate from this past September.  Can there be any doubt that subprimes are the next huge issue for insurers?

The January 15 Wall St. J. reported that a little-known hedge fund manager made $3 to $4 BILLION-- for himself-- by recognizing the problems in the subprime markets and other "bubble" issues.  The economists tell us that where there's winners there's also losers; another reason to expect suits and claims here.  I'm looking at policies now with my thoughts on subprimes.

All roads-- at least all liability roads-- lead to insurance, and soon we'll be seeing the subprime crisis lead to insurance.  It's been reported that the subprime issues has led to more than $170 billion in balance sheet writedowns.  We now reportedly have 113 lawsuits concerning these writedowns.  Can E&O and D&O claims be far behind?  Claims departments should begin considering these issues, if they have not done so already.

The Supreme Court of Texas held last week that a late notice defense requires a showing of prejudice. PAJ, Inc. v. Hanover Insurance Co., 2008 Tex. LEXIS 8 (Tex. Jan. 11, 2008).

Looking at today’s (1/9/08) Mealey’s Emerging Insurance Disputes, I again see coverage disputes concerning shootings and other assaults. Is it me or have these coverage disputes become more frequent recently? You would think that incidents of severe and intentional violence would be beyond any view of insurance. But, apparently insureds are seeking coverage for these incidents.

Add the Montana Supreme Court to the list of courts recognizing that the term “pollutant” must be given a broad meaning. The court recognized that diesel fuel is a pollutant within the meaning of the pollution exclusion. Montana Petroleum Tank Release Compensation Board v. Crumleys, Inc., 2008 MT 2, 2008 Mont. LEXIS 4 (Jan. 3, 2008).

Happy Thanksgiving.  Just as Thanksgiving is the sign that the winter holidays are upon us, insurance coverage articles are the sign that a new liability issue is upon us.  So, it was interesting to see Jerry Oshinsky's article entitled "Insurance Coverage for Subprime Lending Losses, Litigation, and Investigations."  Mr. Oshinsky notes that "insurance companies will be reviewing fraud allegations closely."  I agree.  I suspect that we will not agree as to the extent that such exclusions will apply.  I see fraud as a large component of this crisis.  Fraud exclusions will often apply to these claims.

Last week the Sixth Circuit weighed in on the pollution exclusion.  Mueller Copper Tube Products, Inc. v. Pennsylvania Manufacturers' Assoc. Insurance Co., 2007 U.S. App. Lexis 26629 (6th Cir. 11/13/07).  The court found that "sudden and accidental" means abrupt and unexpected.  It's amazing that this fight still goes on.