Farella’s Insurance Recovery Group lawyers regularly collaborate with and learn from different players and functions within the insurance industry. To provide more value to our readers, we have reached out to a series of insurance brokers to create the Insurance Broker Series Q&A.
Mary McCutcheon represents policyholders in insurance coverage disputes arising out of: securities investigations, class actions and derivative actions, venture capital and private equity litigation, intellectual property and technology errors and omissions lawsuits, highly sensitive employment claims, mass casualty personal injury actions and construction defect claims. She also represents companies in business interruption and property damage claims arising out of natural disasters such as earthquakes and fires. Ms. McCutcheon is known for the placement of directors' and officers' liability, management liability and financial services liability insurance and related indemnification issues and handling claims under those policies. She is a founding member of the American College of Coverage Counsel and chairs Farella's Construction and Insurance Department.
For decades, California courts have mandated that an insurer is obligated to accept a “reasonable” settlement demand within policy limits on behalf of its insured. If it fails to do so, it is liable for the entire judgment, including amounts in excess of the policy limits. Comunale v. Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 659. Subsequent cases have addressed whether an insurer can escape excess liability if its decision-making process, as opposed to the settlement itself, was “reasonable”. California law is clear that even an honest mistake as to whether the claim is covered does not absolve an insurer from excess liability. Johansen v. Calif. State Auto Association Inter-Ins. Bureau (1975) 15 Cal.3d 9, 15-16. However, courts have also considered whether an insured must show the insurer acted “unreasonably” in assessing the value of the claim. In Crisci v. Security Ins. Co. of New Haven (1967) 66 Cal.2d 425, 431, the California Supreme Court held that the very fact of an excess judgment created an inference that the insurer was liable for the excess judgment. Other cases, however, looked at whether the insurance company properly investigated all facts relating to liability and damages. See, e.g., Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 707.…
In what it described as a case of first impression, the Northern District of California ruled that a professional liability policy that excluded the insured’s “assumption of liability obligations in a contract or agreement” did not extend to breach of warranty or false advertising claims arising out of a genetic data testing company’s marketing and sale of a personal genome service. See Ironshore Specialty Ins. Co. v. 23andMe, Inc. (July 22, 2016) N.D. Cal. No. 14-cv-03286-BLF. What is noteworthy about this case is not so much the decision, but the fact that the insurer challenged coverage on this ground. While this issue apparently has never been decided in the context of a professional liability policy, both case law and custom and practice recognize that the same phrase used in a general liability policy applies only to liabilities “assumed,” i.e. created by, a contractual indemnity agreement.…
As Bay Area residents prepared for thousands of football fans and media to descend on their region for the Super Bowl, one began to hear the sorts of rumblings that typically precede big events. Traffic will be terrible. Parking will be worse. Good luck getting a table at a restaurant. Oh, and good luck finding a place a sleep if you’re from out of town.
Former Mayor Willie Brown had advice for the naysayers: Rent your house on Airbnb! “Everyone is going to make a killing, including the private citizens who are smart enough to schedule a vacation paid for by Airbnb’ing their homes.”
No one insurance policy covers all liability risks. Risk managers expect to purchase several types or layers of insurance to cover different types of insurance liabilities, to provide sufficient limits for a catastrophe loss, or to provide coverage over multiple policy years. They may be surprised to learn however, that what they thought was a comprehensive and seamless program in fact contains glaring but avoidable gaps.
Consider the following:
- A social networking site for minors purchases an insurance policy which contains a “Technology, Media and Professional Services” component defining “Professional Services” as “providing advertising services for others, for a fee.” The same policy also includes a D&O component which excludes coverage for any claim “based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the rendering or failing to render professional services.” “Professional services” is not defined in the D&O component. Consumers complain that the site contains inappropriate content, and the State Attorney General sues the site for false advertising, alleging it misrepresented its efforts to protect minors from inappropriate content. The insurer denies coverage under the Technology, Media, Professional and Services component of the policy because the claim does not relate to the site’s “paid provision of advertising to others,” i.e., the claims do not allege covered “Professional Services” (the defined term). It also denies coverage under the D&O component on the grounds that the “professional services” (the undefined term) exclusion extends to all services involved in operating the website. Surprisingly, the liability does not fall under either policy because the coverage grant in the professional services coverage was not broad enough to pick up the services the court found were excluded under the D&O coverage.
An automatic stay in bankruptcy prevents anyone from accessing the property of the debtor estate, including the directors’ and officers’ liability (D&O) policies which insure individual directors and officers of the estate as well as the debtor. That does not mean, however, that the policy limits can be treated as a slush fund to satisfy creditors’ claims against the estate. The policy limits (or proceeds) remain available to settle covered liability claims against the covered individuals or, if they exist, covered liability claims against the company which survive the bankruptcy proceeding.
In deciding whether the D&O policy proceeds are subject to the stay, courts look to whether the policy only provides coverage to directors and officers (Side A coverage), or whether it also provides coverage to the debtor (Side B coverage or Side C coverage). In the former case, the proceeds are not considered property of the estate. However, if the individuals and the company both maintain legitimate claims for coverage under Side B or C of the policy, the result can turn on the specific facts unique to the case. See In re Mila, 423 B.R. 537, 543 (9th Cir. BAP 2010). Where the individuals and the estate have legitimate competing claims against the policy, “the bankruptcy court must balance the harm to the debtor if the stay is modified with the harm to the directors and officers if they are prevented from executing their rights to defense costs.” Even in cases where the D&O policy proceeds are considered property of the estate, courts may nonetheless grant relief from the stay “to allow the insurer to advance defense costs payments when the harms weigh more heavily against the directors or officers than the debtor.” Id. at 544.
A five-paragraph opinion by the New York Appellate Division suggests the potentially devastating consequences of ignoring the fine print of Directors & Officers Liability insurance policies. In Associated Community Bancorp., Inc., et al. v. St. Paul Mercury Ins. Co., 2014 NY Slip Op 04697 (App. Div., First Dept.), the court held that a bank caught up in the Madoff debacle had no coverage, not even for defense costs, for investor claims.
The court devoted one paragraph to each of the four exclusions which it found eliminated coverage for the investors’ claims. Three of those exclusions are fairly unique to Bankers Professional Liability Insurance Policies and are not found in most D&O policies. However, the Court’s final ground for denying coverage was the policy’s “Personal Profit and Advantage Exclusion” (often called the Profit/Advantage Exclusion).