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Anne Freedman

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.

The Law

Legal Spotlight: October 15, 2014

A look at the latest decisions impacting the industry.
By: | October 15, 2014 • 5 min read
You Be the Judge

Legal Fees Must Be Returned

In the early 1990s, the O’Quinn law firm began representing women in a class-action lawsuit against breast-implant manufacturers.

10152014_legal_spotlight_implantAs litigation continued, the firm began to allocate the general expenses associated with the lawsuits by deducting 1.5 percent of each woman’s gross recovery, even though the contingent fee contracts did not provide for such a deduction and clients were not informed of the deduction.

In 1999, a group of former breast-implant clients filed suit against the firm, alleging they were improperly charged those expenses. A similar lawsuit was filed by other former clients in 2002, and it was later incorporated into the 1999 litigation.

National Union Fire Insurance Co., which had issued a primary Lawyer’s Professional Liability policy, agreed to provide the firm with a defense, subject to a reservation of rights, and in 2001, the U.S. District Court for the Southern District of Texas, Houston Division, upheld the firm’s right to a defense, but stayed the indemnity issue. The case was later closed.

The dispute entered arbitration, which ruled in 2007 that the law firm was liable for $41.5 million for breach of contract, attorneys’ fees and interest, as well as forfeiture of $25 million of its $263.4 million fee for the underlying breast-implant litigation. The firm later settled the final award for $46.5 million in 2009.

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The firm also settled with a group of insurers that had issued an excess professional liability policy in separate actions, except for Lexington Insurance Co., which was sued by O’Quinn seeking indemnification up to the limit of liability.

Lexington asked the court to dismiss the case, arguing that the policy excluded losses that consisted of fines; penalties; sanctions; reimbursement of legal fees, costs, or expenses; or “matters which may be deemed uninsurable under the law,” which includes “the restoration of an ill-gotten gain,” according to court documents.

The insurer also argued that O’Quinn’s “improper billing practices” were not professional legal services, noting that the policy covers “only those acts which use the inherent skills typified by that professional, not all acts associated with the profession.”

The court agreed that the billing practices do not require specialized legal knowledge and that the law firm had received a “profit or advantage to which [it] was not legally entitled.” It dismissed the case.

Scorecard: The insurer did not need to pay up to the limits of its excess policy liability limits for the $46.5 million in damages and fees paid by the law firm.

Takeaway: Billing practices were not covered by the “professional legal services” policy issued by the insurer.

Millions Provided in D&O Coverage

Faced with six lawsuits seeking more than $1 billion in damages from the now-bankrupt MF Global Holdings, which is accused of improperly accessing customer money to cover trading losses, executives of the company sought defense coverage from D&O and E&O policies.

In April 2012, the U.S. Bankruptcy Court in the Southern District of New York set a “soft cap” of $30 million for insureds to use for defense. In May 2013, the insureds requested additional funds and eventually the court agreed to increase the cap to $43.8 million.

Later, the insureds asked the court to focus just on the D&O primary and excess policies, and eliminate the cap altogether. They argued the D&O proceeds should not be subject to bankruptcy court oversight or limitation.

And even though the judge found the amount of money spent so far for defense was “staggering, even before the first deposition has been taken,” he agreed with that position.

In September, Judge Martin Glenn withheld only $2.5 million for self-retention and $13.06 million that is the amount of a possible claim against the D&O policies if it pays the indemnification of former CEO Jon Corzine, Bradley Abelow, former president, and ex-CFO Henri Steenkamp. That decision provides up to an additional $200 million in coverage.

Scorecard: Former executives of MF Global were given access to an additional $200 million for defense of stockholder lawsuits.

Takeaway: Insurance policies that provide exclusive coverage to directors and officers are not part of the estate for bankruptcy purposes.

Lawsuit Fires Blanks

Marion E. “Bud” Wells, the sole shareholder of SSO, a retail firearm and security safety store, and Rex McClanahan agreed in 2007 to be owners of BGS, which used to be known as Bud’s Gun Shop in Paris, Ky.10152014_legal_spotlight_guns

All of its employees, including employee Matthew Denninghoff, were asked to execute noncompete agreements.

About that time, Wells began to liquidate his interest in SSO via a stock purchase agreement with Earley M. Johnson II. As part of the transaction, SSO assigned the federal and state trademark rights in the Bud’s Gun Shop name to Wells, who licensed the rights back to SSO.

For a time, BGS and SSO shared a building, but in January 2009, BGS relocated to Lexington, Ky., opening its own retail store. SSO continued to supply product and fulfill orders for it, however, until April 2010.

At some point before January 2010, Denninghoff — who quit that month without notice and began working for SSO — “deliberately erased” his work email and other contents but “secretly kept” BGS’s customer database, giving them to SSO, where his sister was a vice president, according to court documents.

SSO then opened a competing online firearms operation and sent mass promotional emails to BGS customers, according to court documents. BGS sued for misappropriation of trade secrets and breach of contract, among other charges.

SSO sought defense and indemnification under its commercial general liability policy with Liberty Corporate Capital Ltd. It claimed that BGS’s accusation that it stole customer information that was used for emails fell under the “advertising idea” section of the policy.

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It also argued that trademark infringement claims constitute “property damage.”

Liberty Corporate Capital sought to dismiss the request for coverage, and the U.S. 6th Circuit Court of Appeals agreed.

Electronic data is not “tangible” property, and the use of customer database information did not involve advertising ideas, it ruled.

Scorecard: Liberty Corporate Capital did not have to indemnify or defend an insured accused of theft of trade secrets.

Takeaway: Because Kentucky law did not define “advertising idea,” it must be interpreted “according to the usage of the average man.”

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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The Law

Legal Spotlight: October 1, 2014

A look at the latest decisions impacting the industry.
By: | October 1, 2014 • 5 min read
You Be the Judge

Firms Given More Control Over Independent Counsel

Signal Products Inc. manufactured handbags and luggage using a design known as the “Quattro G Pattern executive in brown/beige colorways,” in accordance with its license from Guess? Inc.

10012014_legal_spotlight_gucci_230x300In 2009, Gucci America Inc. filed suit against Guess?, Signal and others, claiming the design “infringed on a distinctive Gucci trade dress known as the ‘Diamond Motif Trade Dress.’ ” Signal’s share of the infringement claim was $1.8 million.

Signal filed suit in U.S. District Court in California after its insurers — American Zurich Insurance Co., which had issued a primary commercial general liability policy, and American Guarantee and Liability Insurance Co., which had issued an umbrella liability policy — refused to pay $1.9 million in defense costs.

Zurich countersued, seeking a summary judgment that it was not required to reimburse Signal for a $750,000 interim legal payment to the primary legal firm retained by Guess? (of a total $1.9 million in fees for Signal) or for $1.2 million in legal fees for a second law firm that represented Signal in the action.

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The insurers argued they were not required to pay fees to the second law firm because Signal had already retained another law firm to represent it, and that the fees were not incurred in connection with Signal’s defense.

U.S. Judge Christina Snyder in August rejected requests from both sides for summary judgment, ruling more information was needed to determine reasonableness of legal fees and other “genuine issues of disputed material fact.”

However, she did rule, in this case of first impression, that Signal could use more than one law firm as independent counsel when there is a potential conflict of interest in insurance cases.

“Having accepted that multiple attorneys may serve as … counsel, there does not appear to be any principled grounds for requiring as a matter of law that all of those attorneys need to be employed at the same law firm,” she wrote.

Scorecard: The insurers may have to pay up to $1.2 million to the second of two law firms, in addition to possibly having to pay up to $1.9 million in litigation costs to the primary firm.

Takeaway: California law allows an insured to retain more than one law firm as independent counsel in an insurance dispute.

Attorneys’ Fees Not Included in Damages Exclusion

10012014_legal_spotlight_check_230x300Several years ago, two class-action lawsuits were filed against PNC Financial Services Group, each claiming the bank improperly charged customers $36 overdraft fees.

Both actions were settled by PNC: One in 2010 for $12 million — which included $3 million in attorneys’ fees, $77,857 in costs and expenses, and $15,000 toward incentive fees for the representative plaintiffs — and one in 2012 for $90 million, including $27 million for attorneys’ fees, $183,302 for reimbursement of costs, and $30,000 in plaintiffs’ incentive awards.

On May 21, a U.S. judge in the Western District of Pennsylvania recommended that the insurers cover the settlement costs. Both Houston Casualty Co. and Axis Insurance Co. had issued policies with a $25 million liability limit, subject to a $25 million retention.

In June, U.S. Judge Cathy Bissoon in that district disagreed. She ruled that the insurers were not responsible for the part of the settlements that returned overdraft fees to customers — since fees were excluded from the definition of “damages” in the policy.

Attorneys’ fees and costs totaling $30.3 million, she ruled, were not excluded. She ordered more proceedings on the claims expenses and damages.

Scorecard: Two insurers are responsible to cover up to $30.3 million for attorneys’ fees and costs that were included in settlements of two class-action lawsuits.

Takeaway: The fee exception to damages does not extend to the entirety of settlement costs, particularly attorneys’ fees, costs and incentive awards.

Underwriters Must Pay Recall Costs

When Abbott Laboratories agreed in December 2000 to acquire the global operations of Knoll Pharmaceutical Co., it notified its Lloyd’s of London carriers, in accordance with its product recall insurance coverage. That coverage stated the new entity would automatically be covered, but additional premiums would have to be negotiated.

10012014_legal_spotlight_tablets_230x300As part of the negotiation with a group of underwriters led by Beazley and American Specialty Underwriters, Abbott indicated there was no “current situation, fact or circumstance” that would lead to a claim under the Accidental Contamination policy (which would include any government drug recalls).

A premium was eventually paid and accepted in July 2001, even after the company advised the underwriters that the U.S. Food and Drug Administration may pull Knoll’s popular thyroid drug Synthroid from the market.

The company and its underwriters did execute in October 2001 a “tolling agreement … that would allow the parties to preserve their rights with respect to any Synthroid-related claims.”

On March 6, 2002, the Italian Ministry of Health suspended all sales and marketing of sibutramine (manufactured by Knoll as Meridia).

Abbott filed a claim under the policy, and on May 16, 2003, the underwriters informed Abbott the tolling agreement was cancelled because Abbott “had not fully responded to their document and information request.” When it asked what information was needed, Abbott received no response.

On June 2, 2003, the underwriters filed suit to rescind the policy, while Abbott countersued for a declaratory judgment for coverage, breach of contract and “vexatious delay damages.”

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A judge rejected the underwriters’ claim for recission, noting that the insurers had accepted the additional premium and that the Synthroid situation had been disclosed in a timely manner.

For damages, the court put the company’s losses at $155.2 million. Minus a deductible and 10 percent coinsurance, the underwriters were told to pay $84.5 million, plus about $2.8 million in costs and interest.

A three-judge panel on the Appellate Court of Illinois, First Judicial District, upheld that decision on appeal on July 28.

Scorecard: The underwriters have to pay $84.5 million plus $2.8 million in costs and interest.

Takeaway: By accepting the premium and failing to pursue issues of due diligence, the underwriters undercut their argument for a “material misrepresentation” by the company.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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NAPSLO Report

E&S Going Strong

Optimism about the opportunities in excess and surplus lines was strong during the NAPSLO conference.
By: | September 24, 2014 • 5 min read
NAPSLO

The state of the excess and surplus lines market is strong, as evidenced by the nearly 4,000 attendees, who networked their way through the annual convention of the National Association of Professional Surplus Lines Offices in Atlanta, from Sept. 15 to17.

“There’s a lot of optimism about the market and [the number of attendees] is a testament to the strength and vitality of surplus lines,” said Brady Kelley, executive director of the national organization, which focuses on networking and education for the surplus lines industry.

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In fact, A.M. Best reported that surplus lines companies “have been extremely successful when compared with the overall property/casualty (P/C) industry.”

Surplus lines now account for about 13.7 percent of all commercial lines direct premiums written, up from 6.1 percent in 1993, according to a 20-year retrospective on U.S. surplus lines released by A.M. Best in September.

“In 2013, 22 of the top 25 surplus lines groups produced year-over-year growth in premium (as measured by direct premiums written) — a testament to what is likely a contraction in the standard market’s appetite for risk and a broad flow of business back into surplus lines,” according to the report.

“A lot of people are optimistic because the economy is still growing and when the economy is growing, it can make up for a lot of foolish decisions.” — Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox

But the sector is not without its challenges, specifically overcapacity in the market, according to Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox, international insurance brokers and underwriting managers.

“The market here is soft,” he said. “I think it’s soft in more areas than people want to talk about. … I would not say ‘doom and gloom.’ A lot of people are optimistic because the economy is still growing and when the economy is growing, it can make up for a lot of foolish decisions.”

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E&S underwriting, said Stanley Galanski, president and CEO of The Navigators Group Inc., is “the essence of underwriting. There are no rules. There are no rates. There are no mandatory forms. In E&S, it’s all about your expertise and your judgment.”

To be successful, companies must have underwriters who can bring a “high level of expertise to the risk” and deep relationships with wholesale brokers, he said.

It also requires constant innovation, said Mario Vitale, CEO, Aspen Insurance. “Specialty E&S is tailored for high risk situations. It allows underwriters skilled in these special niches to apply their tools of the trade to help the insured, to help the brokers, with creative risk-based solutions.”

He said Aspen would be releasing some new products in 2015, and noted that there were numerous emerging risks to occupy carriers, including the impact of climate change, nanotechnology, fracking, drones, bitcoin and wearables.

“I believe all of these trends and all of these emerging technologies will bring risks and will bring demands for solutions and underwriter innovations to find them,” he said.

“It’s unbelievable how that [cyber] market is developing so quickly.” — James Drinkwater, president of AmWINS Brokerage

Jeremy Johnson, president and CEO of Lexington Insurance Co., the E&S division of AIG, said in a recent A.M. Best webinar that his organization is designing products to deal with risks from drones, celebrity risk and cyber bullying, and also has “in the pipeline” products to address risks related to Uber and Airbnb.

“If we are not staying ahead of where our customers are going as an industry, we won’t be relevant,” he said.

Bruce Kessler, division president, ACE Westchester, which focuses on the wholesale distribution of excess and surplus lines products, said, “You have to be strategic as an E&S company as to where to grow and where to shrink.”

But, he also noted, the “ease of entry” into the space, which he sees as “healthy and robust.”

“It’s easy for new capacity to come in,” he said, and that has put some pressure on property/catastrophe rates. That softening is “probably the biggest talk of the conference.”

Overcapacity offers one of the industry’s biggest challenges, Kaufman said. “Standard lines companies are aggressively looking to write the gray areas that may at one time have been E&S and now it’s back to standard lines. … You will see companies taking greater risks than they normally have in the past — risks that they don’t understand.”

Jeff Saunders, president of Navigators Specialty, said, “The capital in the industry is looking for a better return than from a Treasury note.”

While the influx of capital has reduced rates — significantly on property and less significantly elsewhere — the company has to compete “no matter what the rate environment is,” he said. That requires E&S insurers to be “agile while rotating in and out of sectors.”

E&S strategies are also increasingly being influenced by predictive modeling, ACE Westchester’s Kessler said. He also noted that he is seeing greater interest in product recall and cyber coverage.

Other experts at the NAPSLO conference agreed that cyber policies were finally taking off.

“It’s unbelievable how that market is developing so quickly,” said James Drinkwater, president of AmWINS Brokerage and one of NAPSLO’s Wholesale Broker directors, during a panel discussion at the conference.

“Companies are getting hit [with cyber attacks] constantly,” Vitale said. “As long as there are more hackers, they will get more sophisticated and we will have to do a better job of staying on top of emerging trends.”

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The opportunities in E&S outweigh the challenges, said Peter Clauson, senior vice president, excess casualty, Liberty International Underwriters.

When LIU excess casualty was established in 1999, he said, the E&S business was about a $10 billion market. “Fifteen years later, we are at $37 billion, and there’s a lot of talk that in five years, we could be a $50 billion market.

“That’s a lot of growth and opportunity,” he said.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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