Loss of SEC “Neither Admit, Nor Deny” Settlements Could Have Significant Impact

In this preview of an article from Issue XXV, Volume 5 of the PLUS Journal (May 2012) author  Kara Altenbaumer-Price looks at how changes to the SEC’s “neither admit, nor deny” settlements could impact the D&O insurance market.

From the article:

Coverage Issues

The impact on D&O insurance is easy to envision.  More trials with the SEC leads to litigation costs and poses a significant risk of loss for companies.  Settlements with the SEC that admit wrongdoing will likely increase the number of follow-on civil suits by shareholders, but more importantly, such admissions could leave companies and their executives virtually unable to defend themselves in civil litigation, leading to larger settlements.  Companies will turn to their D&O carrier for these losses.  D&O carriers will look for ways to avoid or minimize these losses.

All D&O insurance policies contain conduct-based exclusions, which provide that if it is shown that certain conduct occurred, coverage for losses related to that conduct is excluded.  For example, virtually all policies exclude coverage for fraud or intentionally violating the law.  Thus, if admissions in SEC settlements prove that the company or certain executives committed fraud or intentional violations of the law, coverage could be lost.  Carriers may attempt to use the conduct exclusions to both avoid indemnification for settlements in SEC and civil litigation matters, as well as to cut off defense costs.

In order to avoid loss of coverage, it will be very important to draft policies in a manner that tries to prevent or delay the application of conduct-based exclusions, such as delaying the trigger for conduct exclusions until the underlying matter is un-appealable.  To ensure coverage for individuals under a D&O policy, it will be imperative to ensure that the policy contains language to prevent the admission of one individual from being imputed to other individuals covered under the policy.  Also, it may be important to consider the policy’s language on rescission and any warranties made by the company when the policy is placed to avoid scenarios in which admissions by senior-level officials or the company lead to rescission of the policy altogether, thereby denying coverage to those innocent of wrongdoing.

Finally, companies may need to consider whether higher limits may be necessary to address the possibility of additional defense costs or greater settlements in follow-on civil litigation.

For more D&O related coverage check out the video clips from the 2012 D&O Symposium.

Court Revives New Haven Firefighter’s Lawsuit

From the New York Times:

A federal appeals court in New York has revived a lawsuit brought by a black Connecticut firefighter who claims he unjustly lost a promotion in a 2003 exam that became the subject of a ruling by the United States Supreme Court.

The appeals court, the United States Court of Appeals for the Second Circuit, has sent the case back to a lower-court judge.

That judge initially dismissed it, apparently believing that the Supreme Court ruling had prevented the firefighter, Michael Briscoe, from suing. The appeals court disagreed.  In the earlier case, 17 white firefighters and one Hispanic firefighter sued the City of New Haven. The city had failed to certify results of an exam in which white candidates outperformed minority candidates. The results were certified after the Supreme Court ruled.

Federal Appeals Court Upholds Individual Health Insurance Mandate

A U.S. appeals court on Wednesday upheld President Barack Obama’s landmark healthcare law that requires Americans to buy insurance as constitutional, an early victory for the White House.

The U.S. Court of Appeals for the 6th Circuit, based in Cincinnati, said the “minimum coverage provision is a valid exercise of legislative power by Congress under the Commerce Clause” of the U.S. Constitution.

The decision is the first at the appeals court level and legal experts say they expect the issue to ultimately be addressed by the Supreme Court later this year or next year, a critical time for Obama as he seeks re-election in 2012.

The Thomas More Law Center filed a lawsuit in Michigan the day Obama signed the healthcare measure into law, arguing the provision requiring Americans to buy coverage by 2014 under threat of penalty was beyond Congress’ authority and an unconstitutional tax.

A federal judge in Michigan upheld the law and the group appealed.

The appeals court affirmed that judge’s ruling, saying those who opt out of buying health insurance were still engaging in commerce because they were paying for healthcare services on their own and therefore the law was constitutional.

You can read the full article here on the Insurance Journal website.