As I have noted in prior posts, and as a result of a number of factors, the current marketplace for D&O insurance marketplace is disrupted, with many buyers experiencing significant price increases. In the following guest post, Jeff Hirsch, Head of Product at Scale Underwriting, takes a detailed look at current D&O insurance pricing trends. A version of this article previously was published on the Foundershield blog. I would like to thank Jeff and Foundershield for allowing me to publish this article. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jeff’s article. *************************** With a hands-on approach in 2019, the D&O insurance industry continued its market corrections to make up for poor underwriting results in year’s past. Starting in 2018’s Q4, we saw steeper premiums, higher retentions, reduced capacity, more restrictive terms, and plenty of non-renewal. Historically, D&O underwriters reacted to linear claim trends—claims that were often based on business judgment errors, usually in terms of inaccurate financial forecasting. These claims were relatively easy to follow and understand, and their impact on pricing was objective. Also, D&O underwriters’ fears were focused on accounting misstatement claims and other exposures that were more fundamental. However, event-driven lawsuits and data breach litigation climbed last year—merger objection lawsuits topping the list of cases. Also, the US Securities and Exchange Commission (SEC) lawsuits hovered near-record high, as well. Among the big names, Google faced two Derivative Actions lawsuits, and Boeing faced a Securities Class Action (SCA) lawsuit. Plus, numerous breach and non-breach events motivated legal actions among several companies, including Federal Express, Facebook, Marriott, etc. This past year was not at all dull in terms of D&O claims activity. Here’s how 2019 wrapped up and what 2020 has up its sleeve regarding D&O pricing trends. What Affects D&O Premium? Even with much event-driven litigation and high profile cases underway, a few elements impact D&O premiums historically, including:
Experts are calling the D&O industry a hard market, and expect the trend to continue for a couple of years. About one in every 11 companies are being sued, but it’s not necessarily that fraudulent activity is honestly to blame—that’s not plausible.
Source: Stanford Law School – Securities Class Action Clearinghouse As mentioned, however, the SACs and litigation trailing after high-profile events are causing price hikes in the sector. Chubb drove this point home in a June 2019 white paper entitled, “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation.” Highlighted in the document was the astonishing amount of $23 billion, which was the cost of securities litigation over the last five years. Shockingly, half of that went to attorneys while the other half covered settlements. With the uptick in SCA lawsuits, many insurers are adjusting their underwriting approach, even exchanging growth for fair pricing. Many are taking a more conservative approach by reducing primary commercial D&O aggregate limits. Some are doubting whether rates can outpace claim expenses and payments loss trends. How Much Has D&O Pricing Changed? The most significant D&O pricing changes relate directly to the increase in SCA lawsuits. Although for nearly every D&O risk, rates are up. We’ve also seen a rise in excess lines, which is vastly different from even one year ago. The 2019 take-home message is that premiums are up. This approach seems to be a step in the right direction to counteract inadequate pricing of the past. However, losses are also up. Experts are predicting the D&O dynamics of a hard market to play out well into 2020, if not the entire year. (All pricing charts in this article are from Trans Re’s 2019 Update to its U.S. Public Directors and Officers Liability Insurance Market Analysis (here) and are published in this article with the authors’ permission.) According to Kevin LaCroix, executive vice president of RT ProExec, particular companies face significant increases. Some of these firms include those with a recent initial public offering (IPO), financial troubles, or a hefty claims history. While this comes as no surprise, given the D&O activity on 2019’s docket, it’s still a jagged pill to swallow for some business owners. Some other major events that continue to impact the D&O sector include: Event-Driven Litigation Also known as “bad news” claims since they often cause a severe price fall, disappointing shareholders, and the public alike. The most common scenarios are human-made or environmental disasters, product problems, and cyber attacks. However, event-driven litigation often calls upon the strength of a D&O policy. Brand Value According to Allianz, the loss of a company’s reputation or brand value is ranked as the ninth top business risk overall. From environment to social and governance failings, many variables factor into whether a company is “hot or cold.” What’s more, is that D&O underwriters consider the social media temperature of a company to gauge reputation. Economic Growth Whether it’s politics, trade wars, or something else entirely, experts predict a slow-down in economic growth in 2020. What this means is that more businesses will inevitably shut, facing insolvency or bankruptcy. While this outlook does seem bleak, it impacts the D&O sector significantly. Mainly because these insolvencies will translate into D&O claims. Litigation Funding The fact that litigation funding is now becoming a global investment class only makes sense, especially in light of other trends influencing the D&O space. Investors are looking for a better return on investment (ROI) after years of relatively risky business. The litigation funding industry, which tops $10 billion globally, has grown significantly in recent years. Plus, the US market makes up half of that. High Profile D&O Suits The once highest-valued private unicorn’s headlined a Fortune article titled, WeWork’s Legal Floodgates May Have Just Opened. With such a bold title, who can help but shake their heads at this calamity. The most significant problem is many of the directors and officers named in WeWork’s claims are shaking their heads back at us—in denial. At the heart of this unfortunate situation is the issue of the “entire fairness standard.” But let’s back up. In San Francisco County Superior Court on November 4, former WeWork employee Natalie Sojka filed a lawsuit against former CEO Adam Neumann, SoftBank, and specific members of WeWork’s board of directors. Sojka claimed that they used their control of the company to benefit themselves, which turned out to be detrimental to the company’s minority shareholders. The ongoing class action lawsuit continues to unveil severe accusations, including breaching fiduciary duty. Since the business was spiraling already, some believe the company’s leadership was stuck between a rock and a hard place—aka choosing the SoftBank buyout or JP Morgan’s loan offer. Nevertheless, Neumann and several other individuals (not to mention WeWork, in general) are in hot water because of the decisions that were made. The entire process has destroyed billions of dollars of value. To make matters worse, hundreds of people were laid off during the incident, not to mention the mounds of cash investors lost along the way, too. Cost of D&O Insurance by Company Size It’s no surprise that company size impacts the cost of D&O insurance. According to a price index report by TransRe, a property and casualty reinsurance company, rates are picking up across the board. Large-Cap Companies The report shows an upturn in D&O pricing in 2018, and it’s been climbing since. That said, prices for all D&O layers up 3.4% for large-cap companies. As mentioned, experts predict the climb to continue throughout 2020. Mid-cap Companies Mid-cap companies show an uptick in the working layer D&O premiums with a 7.1% increase. The report shows an overall increase of 8.4% for all D&O layers for mid-cap companies, but only 5.4% for excess lines. Small-Cap Companies Small-cap companies were the outlier last year, whereas this year, the differences aren’t as profound. With an 11.6% increase for all D&O layers, small-cap companies are experiencing the same uptick in overall D&O premium costs. The D&O Market Outlook for 2020 As the D&O sector continues its much-needed transformation, here’s what we can look forward to in the new year.
With such significant past changes, D&O players are learning now more than ever how to roll with the punches. Although more transition lies ahead, overall, players are gearing up for another rousing D&O game in 2020. Guest Post: D&O Insurance Pricing Trends published first on via Tumblr Guest Post: D&O Insurance Pricing Trends
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A recent judicial ruling out of the U.K. provides an interesting perspective on director’s duties under applicable law when a bankrupt company is in liquidation. As discussed below, the Court held that the director’s duties continue in relevant respects even if the director’s powers cease as of the date of the bankruptcy filing. The circumstances of the case provide an interesting example of a claim that arose against a former director post-liquidation. As discussed below, the circumstances also provide an illustration of why the purchase of post-liquidation run-off coverage is advisable. Though the circumstances arose under U.K. law, the situation bears enough similarities to what might arise under equivalent U.S. law that the liability and insurance lessons are instructive even in the U.S. context. A copy of High Court of Justice Insolvencies and Companies Court Judge Sally Barber’s January 20, 2020 decision in Re Systems Building Services Group Limited can be found here. A January 31, 2020 memo about the decision by the Stevens & Bolton law firm can be found here. The Liquidation At relevant times, Brian Michie was the sole director of Systems Building Services Group (the company). The company went into administration on July 12, 2012. Gagen Sharma was appointed as administrator. The company exited administration through a creditors voluntary liquidate on July 3, 2012, and the company dissolved on February 24, 2016. Post-Liquidation Developments In connection with a separate company proceeding with which she was involved, Sharma was found liable for misfeasance in her office-holder position and ordered to pay damages. She was herself declared bankrupt, and she agreed to an 8-year restriction on serving in bankruptcy positions. Stephen Hunt subsequently was appointed as administrator for a number of the companies in connection with which Sharma had previously served, including Systems Building Services Group. Following an investigation, Hunt applied to have the company restored. The company was restored on May 3, 2017. The Successor Liquidator’s Breach of Duty Action Hunt then filed claims against Michie for breach of his director’s duties under the Companies Act 2006. Specifically, Hunt alleged that in connection with the prior liquidation proceedings Michie had purchased properties from the company (with Sharma acting as liquidator) at a price substantially under marketplace values. Hunt also filed claims against Michie with regard to three cash payments paid out of the company’s bank account after the company had entered administration. Hunt filed a number of other claims having to do with payments made by the company prior to entering administration. The Director’s Defenses In response to Hunt’s action, Michie raised a number of defenses. Among other things, he argued that Sharma should have been joined as a respondent to the proceedings. Michie also argued that his general directors’ duties did not survive the company’s entry into administration and voluntary liquidation and would only survive with respect to any exercise by that director of powers “qua director” (that is, in the function or capacity of a director). Michie argued further that Hunt had failed to show that any specific duty applied to him following the beginning of the liquidation. Judge Barber’s Rulings While noting the limited amount of case law addressing the point, Judge Barber rejected Michie’s arguments. Among other things, she accepted Hunt’s counsel’s argument that “in an administration or a creditors’ voluntary liquidation … the officeholder and the director owe independent duties to the company.” In insolvency context, the directors’ duties, as preserved by the applicable statute, require the director “to have regard to the interests of the creditors as a whole.” She added that “in my judgment, the duties owed by a director to a company and its creditors survive the company’s entry into administration and voluntary liquidation,” adding that those duties “are independent of and run parallel to the duties owed by an administrator or liquidator appointed in respect of the company.” Judge Barber then turned to the specific allegations against Michie. With respect to real estate that Michie purchased from the company in liquidation, Judge Barber noted, based on a detailed review of the evidence, that Michie “saw an opportunity to pick up an asset ‘on the cheap’ and took advantage of that opportunity,” which he knew about based on his position as the company’s sole director. She further concluded that when he made the purchase, Michie “acted entirely out of self-interest” and “without regard for the impact which his actions would have on the interests of the creditors as a whole.” Moreover, Sharma’s actions in selling the property to Michie at an undervalued price does not afford Michie a defense. Judge Barber noted that “the fiduciary duties owed by Mr. Michie to the Company as its director were independent of the duties owed by Mrs. Sharma as liquidator.” Judge Barber ruled against Michie with respect to the real estate transaction, as well as with respect to the cash payments in issue. Discussion I acknowledge at the outset that this case arises under U.K. law. There undoubtedly are important specific differences between the U.K. law and the U.S. law. In particular, Judge Barker’s conclusions about the director’s continuing duties are very much a reflection of the applicable U.K. statutes. However, even if there are important specific difference between the law applicable in the two jurisdictions, the two legal system’s approaches in this context are sufficiently similar as a general matter that the outcome of these proceedings is instructive both in the U.S. as well as in the U.K. With respect to Judge Barber’s conclusions about the director’s continuing duties when a company is in administration, the law firm memo to which I linked above notes that this case provides “a cautionary statement of the law for any directors who might seek to use an insolvency proceeding as a means to purchase assets at a reduced prices from a weak or ineffective insolvency practitioner.” As to whether the ruling represents a substantial deviation from settled practices or reasonable expectations, the law firm memo quotes unnamed practitioners as saying that the ruling “merely underscores what most of the profession felt was already the position, i.e., a director’s duty continued beyond insolvency and were not just confined to the duty to cooperate with the appointed insolvency office-holder.” While the primary precedential value of Judge Barber’s decision is its conclusion with respect to directors’ continuing duties when a company is in administration, the overall circumstances of the case are also instructive as a thought problem for insurance issues in the insolvency context. The important thing to focus on when thinking about the insurance issues is that the successor liquidator only asserted his claim against Michie after the company went through liquidation and after the company itself was legally dissolved. Even after all of those seemingly terminal events, Michie was hit with a liability action seeking to recover damages from him for alleged wrongful acts he allegedly undertook in his capacity as a director, during the bankruptcy process. I have no first hand way of knowing, but I can only suspect that Michie’s costs of defending himself against Hunt’s actions were substantial. (Indeed, assessing this case from the perspective of Judge Barber’s decision, I have to assume that this was a painstakingly thorough proceeding of the kind that can only be processed at considerable expense.) Moreover, Michie stands liable for substantial damages as a result of Judge Barber’s rulings against him. When Michie was served with Hunt’s action against him, Michie clearly would have wanted to have had a D&O insurance policy in place to which he could turn for defense and indemnification. Michie would only have had insurance to which he could turn to then if at some point prior to the final dissolution and liquidation of the company, the company had purchased run-off D&O insurance policy that would protect him in the future for claims based upon prior alleged wrongful acts. Indeed, the circumstances in this case provide a sterling example of the reason why any well-advised company embarked on bankruptcy proceedings would make sure that run-off insurance protection is put into place to protect against the possibility of future claims arising from events prior to the completion of the bankruptcy proceedings. But there is more to thinking about the insurance issues here than just considering the advisability of having run-off insurance in place. These further issues have to do with the date of the alleged wrongful acts. A run-off policy will only apply to provide coverage for alleged wrongful acts that take place before the date the run-off policy goes into effect. Ideally, the run-off policy would not go into effect until the date of the termination of the bankruptcy proceedings. (I will leave it to U.K law practitioners to weigh in on whether that date in these circumstances is the liquidation date or the dissolution date). Of even greater importance, the run-off coverage should apply not just to wrongful acts that took place prior to the initial bankruptcy filing. The run-off coverage should also extend to wrongful acts that took allegedly place during the bankruptcy proceedings – as, by way of illustration, here, Michie is alleged to have committed wrongful acts during the process of the administration of the estate. Under these circumstances, the company would want to maintain its existing D&O insurance coverage in place through the completion of the bankruptcy, with the policy to convert to run-off upon completion of the bankruptcy. The bottom line for me is that this case shows how a claim can arise against a director even after the director’s company has been liquidated and dissolved. It is important to think about the possibility of these kinds of claims arising to think about the best way to structure the D&O insurance coverage in order to try to ensure that if one of these post-bankruptcy claims might arise, that there is insurance in place to help the former directors respond to the claims. One final note. I was deeply impressed with Judge Barber’s consideration of the issues in this case. Her decision is detailed, painstaking, and thorough. If her consideration of these issues is at all representative of the U.K. courts overall, the attorneys who appear in the courts and the parties the attorneys represent are very fortunate. Directors’ Duties in Insolvency and the D&O Insurance Implications published first on via Tumblr Directors’ Duties in Insolvency and the D&O Insurance Implications In numerous prior posts, I have meditated on the meaning of “relatedness” and what it takes to make two claims sufficiently similar that they should be treated as the same claim. That was the question that a Pennsylvania federal district court addressed in a recent decision in an insurance coverage dispute. As discussed below, on January 27, 2020, Eastern District of Pennsylvania Judge Timothy J. Savage, applying Pennsylvania law, concluded that, despite overlaps, a subsequent shareholder derivative suit was not sufficiently related to another shareholder’s prior demand letter and lawsuit to preclude coverage for the later claim. The court’s decision provides abundant grounds for further ruminations on the meaning of relatedness. Judge Savage’s January 27, 2020 opinion in the case can be found here. A February 6, 2020 post on the Wiley law firm’s Executive Summary blog can be found here. Background In June 2018, Joseph D’Ascenzo filed a shareholder derivative lawsuit (the D’Ascenzo action) against Unequal Technologies Company (UTC), its CEO and director Robert Vito, and director William Landman. In his multi-count complaint, D’Ascenzo alleged that the defendants had wrongfully barred his efforts to fill an empty third seat on the company’s board by wrongfully disregarding the results of a December 2017 shareholder vote. The complaint contains numerous other allegations, including assertions that the company had disregarded corporate formalities, that Vito had engaged in self-interested transactions, and that Vito had attempted to raise corporate funds using misinformation. At the time D’Ascenzo filed his lawsuit, UTC was insured under a management liability insurance policy with a policy period of November 2017 through November 2018. The 2017-2018 policy was the latest renewal in a series of insurance policies that first incepted on November 19, 2013. UTC submitted the D’Ascenzo action to the insurer. The insurer denied coverage for the lawsuit, contending that the lawsuit was interrelated with a February 2015 shareholder demand and a June 2016 shareholder derivative lawsuit, and that that the later lawsuit was by operation of the policy deemed first made at the time of the prior demand and lawsuit, prior to the inception of the then-current policy. The insurer also asserted that the D’Ascenzo lawsuit was based upon alleged Wrongful Acts that allegedly occurred prior to the policy’s past acts date of November 19, 2013. The author of the prior demand letter and the plaintiff in the prior lawsuit was Landman, the UTC director who was one of the named defendants in the D’Ascenzo lawsuit. The demand letter had alleged that UTC’s business actions were eroding shareholder value, and that Vito had withheld required information, disregarded corporate formalities, and engaged in self-dealing. The demand letter sought the inspection of the company’s books and records and other relief. In the June 2016 derivative suit, Landman sought damages and an injunction barring Vito from concealing the company’s poor performance in the course of company fundraising efforts. The June 2016 lawsuit was settled and dismissed a month after it was filed. After the insurer denied coverage for the D’Ascenzo action, Vito and Landman each filed lawsuits against the insurer seeking a judicial declaration that the insurer has a duty to defend them in the D’Ascenzo action. The insurer filed a motion for judgment on the pleadings. The Relevant Policy Provisions The Policy’s “related acts” provision provides that: All Claims based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events, or the same or related series of facts, circumstances, situations, transactions or events, shall be deemed a single Claim for all purposes under this policy … and shall be deemed first made when the earliest of such Claims is first made, regardless of whether such date is before or during the Policy Period. The Policy’s “prior acts” exclusion provides that: The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured that alleges, arises out of, is based upon or attributable to, directly or indirectly, in whole or in part, and actual or alleged Wrongful Acts which first occurred prior to November 19, 2013. The January 27, 2020 Opinion In his January 27, 2020 opinion, Judge Savage denied the insurer’s motion for judgment on the pleadings, holding that “among the multiple claims asserted in the D’Ascenzo Action are several that are covered by the policy and are not excluded.” The insurer had argued that there were “multiple overlapping allegations” between the D’Ascenzo action and the prior demand letter and lawsuit. Among other things, the insurer argued that the overlap included allegations that the third board seat improperly had not been filled; that UTC had failed to follow required corporate formalities (such as regular board meetings); that Vito had engaged in self-interested transactions; and that Vito had misrepresented UTC’s financial information to solicit new investors. In opposing the insurer’s motion, the UTC parties argued that the insurer “glosses over obvious distinctions”; that factual allegations surrounding the December 2017 and January 2019 shareholder meetings formed “the core” of the D’Ascenzo action; and that while the is some “overlap” with the demand letter and prior lawsuit, the “overlapping allegations do not form the basis” for the relief sought. In considering the insurer’s motion, Judge Savage noted that while there “are similarities” between the D’Ascenzo action and the prior lawsuit, there are “significant differences.” The parties, he noted are different and the relief sought is different. The later lawsuit, while “sounding much like” the earlier suit, is “not the same”; the later lawsuit “goes beyond” the earlier suit, complaining of irregularities in connection with the December 2017 election, which took place after the prior suit was dismissed. The “factual bases” of D’Ascenzo’s action “did not exist before the inception of the policy.” The demand letter is also “significantly different” in that Landman, who made the demand, is a defendant in the later suit. Judge Savage noted that while one of the counts in the D’Asenzo complaint “may be predicated on facts related to” the demand letter and prior lawsuit, “the other ten counts do not.” The request for relief, Judge Savage said, “does not rely on any of the allegations central to the relief sought” in the demand letter or the prior lawsuit. Rather, the “conduct at the heart” of the “other ten counts” began in 2017 and involved subsequent events. These events “occurred after the acts cited” in the demand letter, and involve “discrete acts” and ‘”claims that did not exist prior to the relevant policy periods.” Accordingly, Judge Savage said, the related claims provision “does not bar the majority of D’Ascenzo’s claims.” With respect to the prior acts provision, the insurer argued that the D’Ascenzo complaint involves a “scheme to defraud” that began as early as 2008; an alleged failure to observe corporate formalities since 2008; and self-dealing transactions beginning in 2009, as well as actions by Landman beginning after he went on the board on November 7, 2013. The UTC parties, by contrast, argued that the “core” of the D’Ascenzo complaint has to do with the UTC board election and the “overwhelming focus” is on the election. Judge Savage said that while “some counts in the D’Ascenzo action may be based on conduct occurring before November 19, 2013,” that Count VIII of the complaint is “clearly predicated on specific allegations” beginning before the cut-off date,” and that Count VI “arguably involves pre-November 19, 2013 conduct” the “remaining nine counts are based entirely on events surrounding the 2017 and 2019 elections,” and the pre-November 2013 conduct “was not a necessary ‘but-for’ cause of the election claims.” Discussion While he did not frame his analysis this way, Judge Savage’s consideration of the related claims issue is in essence a meditation on the meaning of relatedness. The insurer argued, the UTC parties conceded, and Judge Savage found that there was indeed “overlap” between the D’Ascenzo action and the demand letter and prior lawsuit. In effect, Judge Savage concluded that there was not enough overlap, or perhaps enough of the right kind of overlap, to make the claims sufficiently related to render them interrelated. One curious thing about Judge Savage’s conclusion on the relatedness issue is that he seems to have completed his analysis without express reference to the policy’s language on the issue. To be sure, he did, on page 12 of his opinion, recite verbatim the text of the relatedness provision. Otherwise, however, he made literally no reference to the policy language. Look, these days I am a policyholder-side kind of guy, and I like coverage decisions that favor policyholders, but even I have to concede that the policy language must be the reference point for any coverage issue. In that regard, it undeniably is (or should be) relevant that the policy’s relatedness provision deems as a single Claim all Claims that are “in any way involving the same or related facts, circumstances, situations, transactions or events.” Judge Savage specifically concluded that at least one of the counts in D’Ascenzo’s complaint is “predicated on facts related” to the demand letter. Even if it is true, as Judge Savage concluded, that the entire rest of the complaint does not rely on overlapping allegations, the fact that one of counts does overlap certainly does seem to suggest that the D’Ascenzo complaint does “in any way involv[e] the same or related facts” as the demand letter and the prior lawsuit. The “in any way involving” phrasing would seem to preclude any further analysis of whether the “same or related facts” overlap enough, but that kind of analysis is exactly what Judge Savage relied upon in concluding that the subsequent and prior claims were not related for purposes of the provision. In effect, he concluded – notwithstanding and without reference to the policy’s “in any way involving” requirement — that because most of the substantive counts in D’Ascenzo’s complaint did not overlap, the fact that one substantive count did overlap was not determinative. Judge Savage’s analysis of the prior acts exclusion issues is very much of the same nature. Even though the provision precludes coverage for Loss in connection with any Claim that “alleges, arises out of, is based upon or attributable directly or indirectly, in whole or in part” any actual or alleged wrongful act taking place prior to November 19, 2013, and he expressly concluded that at least two substantive counts in D’Ascenzo’s complaint involve alleged acts prior to the cut-off date, he nevertheless concluded that the prior acts exclusion does not apply because the “core” of the complaint related to alleged acts after that date. I would say that Judge Savage’s analysis seems inexplicable to me given the policy language, but as I further considered his conclusions it occurred to me that perhaps what is going on here is that Judge Savage has conflated a Capital C Claim with a lower-case c claim. There is only one Capital C Claim in connection with the D’Ascenzo complaint, even though the complaint itself asserts multiple lower case c claims. Indeed, in summarizing his decision, Judge Savage specifically said that “among the multiple claims” in the D’Ascenzo action are “several that are covered by the policy and not excluded.” However, both the related claims provision and the prior acts exclusion refer to Capital C Claims, not lower case c claims. The fact that there may be some small case c claims in D’Ascenzo’s complaint that are not related or that do not involve prior acts is not determinative; what matters for coverage purposes is whether the Capital C Claim that D’Ascenzo’s complaint represents is related or involves prior acts. If as I suspect the outcome of Judge Savage’s analysis is the result of his confusion of lower-case c claims with a Capital C Claim, his analysis is both misconceived and flawed and the outcome is contrary to the meaning and intent of the policy. In the end, and regardless of the outcome, this coverage decision provides fodder for further meditations on the meaning of relatedness. What makes any two things related? What makes any two things unrelated? What degree of similarity is sufficient to make them related? These are the vast and enigmatic concerns that perennially surround the relatedness issue. As I once noted, “Relatedness” is not self-defining. It is, in fact, a concept that recedes away from you the harder you try to think about it. At a certain level of generalization, everything in the universe is related, all joined together in the all-powerful and all- knowing mind of almighty God. Yet from another perspective, nothing is related, as all of creation consists of nothing more than chaotic, swirling bits of matter randomly spinning away within the cosmic void. Today’s Word of the Day: In his characterization of the allegations in the D’Ascenzo complaint, Judge Savage wrote “the gravamina of Counts I and VII and Count IX through XI are the December 2017 and January 2019 shareholder meetings and elections.” The word “gravamina” is the plural of the work “gravamen,” which is a law Latin word that, according to Merriam-Webster, means “the material or significant part of a grievance or complaint.” (Merriam-Webster advises that the plural of “gravamen” is sometimes written as “gravamens.”)
Owing to my legal education, I have been known to use the word “gravamen” from time to time. But I have never used the word “gravamina.” Indeed, prior to reading Judge Savage’s opinion, I don’t think I had previously encountered the word “gravamina.” I also had no idea that the plural of “gravamen” is “gravamina.” Now I know. My world is enriched by the knowledge. Despite Factual Overlap, Later Claim Unrelated to Prior Demand and Suit published first on via Tumblr Despite Factual Overlap, Later Claim Unrelated to Prior Demand and Suit In the following guest post, Paul Ferrillo, a partner in the McDermott, Will & Emery law firm, takes a look at Excess Side A insurance and discusses its importance as part of a well-structured D&O insurance program. I would like to thank Paul for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article. ************************* When I and several of my colleagues now go to Directors and Officers (D&O) Liability insurance events, we often remark that “boy, we are getting old.” Indeed many of us remember when Side A excess D&O insurance (Side A) was just the jelly on a peanut butter and jelly sandwich. Nice to have, it added some sweetness to the sandwich, but it was pretty much an afterthought for most companies. Times changed, the form of Side A changed (and gotten better) and then suddenly large shareholder derivative settlements started to happen in M&A or “deal” related cases post the financial crisis. Side A became important because, under Delaware law, a corporation could not indemnify its directors or officers for the settlement of a shareholders derivative action (the same problem exists for a Chapter 11 bankruptcy, where both defense costs and settlement amounts likely won’t be indemnifiable). Today, Side A insurance is not just a “must have”, it’s a vital thing for corporations to carry, and for directors to insist upon when they join a board of directors. The numbers of shareholder derivative settlements have increased, and so have settlement amounts, as many companies not only have just securities cases, but significant regulatory investigations where fines and penalties and defense costs have dramatically escalated the cost of doing business. Many of these regulatory settlements have reached $100 million alone. And several shareholder derivative action settlements have approached $200 million or more. We explain below that amount does right to the damages line in the shareholder derivative action. It’s not just amounts of Side A coverage that matter, but the type of Side A insurance, as well as the carrier chosen for the Side A tower of insurance. Some of these questions are harder to answer than most, but we do our best below to analyze how litigation and regulatory trends have made Side A a vital part of the D&O insurance equation. How Much Side A coverage should you carry? Probably A lot.
There are lots of judgement calls here, so we won’t be presumptuous. No right answers here as it depends upon the financial status and business prospects of the company. A good D&O broker can help give good perspective. But so can we. Let’s assume you are a $10 billion dollar market cap, publicly traded financial institution. You are regulated by a lot of different regulators (both federal and state). In terms of sizing your Side A tower of insurance, let’s assume hypothetically you announce a super big regulatory problem, and your stock drops 15% (big problems can cause that type of drop). Let’s assume the challenged conduct by the regulator is truly “not good” and that the board “should have” theoretically “known” about it (making the class action fact pattern not so great). The result of the announcement — a securities class action, a formal, regulatory proceeding and the inevitable Side A shareholder derivative action. What sort of D&O insurance should you carry (again, our view)? The securities class action math is a little simpler. Under conventional wisdom and settlement viewpoints (that have been around for years), the securities case should settle for, plus or minus, about $125 million or so, plus defense costs and expert fees. It’s the derivative action that now needs to be settled. Let’s make up a fine of $75 million coming down from the XYZ agency (that amount would not be unheard of for a bad case today). So your Side A D&O tower should be near or exceed that amount. So for the heavily regulated public company at issue here, a traditional D&O tower with entity coverage might be $150-175 million. The Side A tower — probably $100 million would be a good measure. Too high you say? Just view previous articles from the D&O Diary on the growth of Side A derivative action settlements (especially event-driven D&O settlements). See Largest Derivate Lawsuit Settlements here (Kevin keeps a pretty up to date list on these settlements). Too high you say? Directors and officers can read the newspapers and the blogs too. They see the writing on the walls too. Too high you say? Well a board needs good board members with both financial and (today) cyber experience. They will be unlikely to serve if their own personal financial interests are not protected through sufficient D&O insurance. Enough said. Again here a good broker can confirm or deny the math, but I bet we are not far off the mark. Better to buy a lot — then too little. Especially if economic times change, or if the fortunes of the company are changing for the worse. Type of Side A Excess
There are many types of Side A excess D&O insurance – traditional Side A excess follow form, Side A excess difference in conditions coverage and other variants that either drop down, or have terms that require certain of their terms to drop down. We don’t pretend to know every form of Side A coverage. But we prefer “Side A excess difference in conditions (DIC) coverage” or Side A DIC coverage, which not only serves as excess Side A coverage, but it will drop down when underlying insurance refuses to pay. Certain Side A DIC coverage is broader than others, so again check with us or your broker for exact terms and conditions. Will your Side A carrier pay your claim?
You have seen this issue come up a lot in the professional literature around D&O coverage. Why? Because with the plethora of carriers getting into the Side A mix, there are a plethora of attitudes around claims paying and claims-handling. There are some name-brand carriers that truly get the term “partnership” with their insured, and there are some, well….no comment. This is spoken from the perspective of 25 years of experience at the mediation table where some Side A carriers have been great, and some have been very ineffective on the settlement of the “bad” case. Though there is no math here, some correlate that the new carriers in the market have charged the least amount of money to “get in” on the D&O game. Unfortunately, we have been primed that cheap D&O coverage means “good value.” See “Does a Low Price Mean Good Value or Bad Quality?” (discussing consumer research of the “value” of a cheaply priced product). In D&O land, cheap unfortunately most of the times doesn’t mean good. It means cheap. It means potentially that the insurer will give the insured a hard time about coverage. Or giving the insured a hard time about paying its limits when the insureds really need to settle the bad case. Side A coverage is sometimes coverage of last resort. The last thing a director needs is his D&O Carrier to take an aberrant position to avoid paying the claim. Our advice truly is caveat emptor, or buyer beware. Ask lots of questions if you are a director. Of your risk manager, your broker, your defense counsel, and even friends who sit as directors on other public company boards. Side A coverage is no place to count your dollars. It’s a special coverage that directors need in today’s litigious and regulatory perilous environment. Make sure you can depend upon it when you really need it. ______________________ About the author Paul Ferrillo is a partner with McDermott, Will & Emery. He focuses his practice on corporate governance issues, complex securities class action, major data breaches and other cybersecurity matters, and corporate investigations. He can be reached at [email protected]. Guest Post: Side A Excess D&O Insurance: Why Directors Need a Lot of It — Now! published first on via Tumblr Guest Post: Side A Excess D&O Insurance: Why Directors Need a Lot of It — Now! Before the ice age, before the flood, before some of the people reading this were even born, the big D&O insurance coverage issue was allocation – that is, the division of loss between covered and non-covered claims or between covered and non-covered parties. After a flurry of judicial decisions in the mid-‘90s, after the addition of entity coverage to the standard D&O insurance policy (also in the mid-‘90s), and after policy allocation language became more or less standardized, litigated allocation disputes became much less frequent. Indeed, the last time I had occasion to write about an allocation coverage decision on this blog was in 2007. (Although, to be sure, allocation is still very much an issue in many D&O insurance claims.) It was with some surprise and interest that I read a recent Delaware Superior Court decision in the long-running Dole Foods insurance coverage dispute dealing with the question of allocating the underlying settlements between covered and non-covered amounts. The decision itself contains some surprises, as discussed below. A copy of Delaware Superior Court Judge Eric Davis’s January 17, 2020 opinion on the allocation issue can be found here. A January 30, 2020 post on the Wiley law firm’s Executive Summary blog can be found here. Background The Underlying Chancery Court Lawsuit The November 1, 2013 transaction in which David Murdock, Dole Food Company’s Chairman and CEO, acquired Dole shares did not already own was the subject of a breach of fiduciary duty lawsuit filed in Delaware Chancery Court. In 108-page August 27, 2015 post-trial opinion (here), Delaware Court of Chancery Vice Chancellor Travis Laster found that and Murdock and C. Michael Carter, Dole’s COO and General Counsel, had employed “fraud” to drive down the Dole’s share price to lower the amount Murdock and Carter paid in the deal. Laster entered a damages award against Murdock and Carter, jointly and severally, of $148.1 million, as discussed here. On December 7, 2015, Murdock and Dole reached an agreement to pay the shareholders a total (including interest) of $113.5 million, with the remainder of the judgment amount to be paid to the plaintiffs in a separate appraisal action, as discussed here. As part of the settlement, the defendants gave up their right to appeal the Chancery Court rulings and judgment. The Underlying Securities Class Action Lawsuit On December 5, 2015, while the approval of the settlement of the Chancery Court action was pending, plaintiff shareholders filed a securities class action lawsuit against Dole and Murdock in the U.S. District Court for the District of Delaware, as discussed here. The plaintiffs in the securities lawsuit alleged that Dole and Murdoch misled investors in connection with the Dole take-private transaction, in violation of the federal securities laws. The parties to the securities class action lawsuit entered mediation. As reflected in the parties’ March 2017 stipulation of settlement, the securities lawsuit ultimately settled for $74 million. The total amount of the two settlements is $222.1 million. The Insurance Coverage Litigation Dole maintained a $100 million program of D&O insurance consisting of a layer of primary insurance and eight layers of excess insurance. The primary layer and several of the lower level excess layers were exhausted by defense expense. In January 2016, after the parties had agreed to settle the Chancery Court lawsuit and after the securities lawsuit had been filed, the remaining excess insurers filed an action in Delaware Superior Court seeking a declaratory judgement that there was no coverage under their policies for any portion of the Chancery Court settlement. They also later argued that there was no coverage for the separate securities class action lawsuits. As discussed here, in a December 21, 2016 decision, Superior Court Judge Davis ruled in the coverage action that because Laster’s findings of fraud were not part of the post-settlement final judgment in the Chancery Court action, the fraud exclusion in Dole’s D&O insurance program did not preclude coverage for the settlement. As discussed here, in a March 1, 2018 decision, Judge Davis denied the insurers’ summary judgment motions in which the insurers sought to argue that under California law, which the insurers contended applied to the policies, coverage for the under the policy for the settlements is precluded as a matter of public policy. Judge Davis ruled, among other things, that Delaware law rather than California law applied to the policy’s interpretation, and that the Chancery Court’s determination that the individuals had committed fraud did not preclude coverage for the claim as a Delaware public policy. In two May 2019 rulings, discussed here, Judge Davis ruled on two further motions for summary judgment, the first granting the insurer’s motion for summary judgment on the Dole defendants’ bad faith counterclaim, and the second denying the insurers’ summary judgment motions, among other things, on consent to settlement and cooperation clause issues. In his May 2019 rulings, Judge Davis expressly left open issues relating to subrogation, allocation, and exhaustion. The Allocation Provision The parties subsequently filed cross-motions for summary judgment on the allocation issue. The Allocation Provision in the Policy provides that: If in any Claim, the Insureds who are afforded coverage for such Claim incur Loss jointly with others (including other Insureds) who are not afforded coverage for such Claim, or incur an amount consisting of both Loss covered by this Policy and loss not covered by this Policy because such Claim includes both covered and uncovered matters, then the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of covered Loss. The Insurer’s obligation shall relate only to those sums allocated to matters and Insureds who are afforded coverage. In making such determination, the parties shall take into account the relative legal and financial exposures of the Insureds in connection with the defense and/or settlement of the Claim. Of significance to the Court’s ultimate ruling on these issues, the Court noted that “the factual record is bereft of any fact that show[s] that the Insurers and/or the Insureds engaged in any efforts to determine any allocation of covered Loss. Moreover, the parties do not discuss any allocation efforts undertaken by anyone in the various motions for summary judgment.” Historical Background on the Allocation Issue Some background on D&O insurance allocation issues is pertinent here, and provides important context for the parties’ positions on allocation. Back in the day, D&O insurance policies did not have express allocation provisions. Insurers argued then, in reliance in a 1986 Southern District of New York decision in the Pepsico case, that amounts should be allocated between covered and non-covered amounts, based on the “relative exposure” of the defendants to the covered and non-covered matters. Policyholders urged that a different rule should apply, in reliance on a 1990 7th Circuit decision in the Continental Bank case, which had first articulated what became known as the “larger settlement rule.” Under the “larger settlement rule” as it ultimately was described by subsequent court decisions, allocation is appropriate “only if, and only to the extent that, the defense or settlement costs of the litigation were, by virtue of the wrongful acts of the uninsured parties, higher than they would have been had only the insured parties been defended or settled.” Insureds and policyholders duked it out for several years, with insurers urging the “relative exposures” allocation standard based on the Pepsico-line of cases, and policyholders urging the “larger settlement rule” allocation standard in reliance on the Continental Bank case. Then in 1995 there were a trio of federal appellate cases that came down squarely in favor of the “larger settlement rule” – the Nordstrom and Safeway cases in the Ninth Circuit (which can be found here and here), and the Caterpillar case in the Seventh Circuit. (I have to say, going through all this makes me feel ancient and even a little weary, as if I were hundreds of years old. Yes, there were dinosaurs back then. ) In the wake of the 1995 trio of appellate cases, several things happened in quick succession. First, insurers modified their standard D&O insurance policies to incorporate entity coverage, which eliminated many of the disputes over allocation between covered parties (individual directors and officer) and non-covered parties (before entity coverage, the company itself). Next, insurers modified their policies to expressly include allocation provisions – much like the allocation provision in dispute in the Dole policy – that not only required an allocation but that incorporated the “relative exposures” test. Almost all D&O insurance policies these days contain an allocation provision, and most expressly refer to the “relative exposures” standard. The Parties’ Positions on Allocation In their summary judgment motion on the allocation issue, the Dole parties argued that the Court should apply the Larger Settlement Rule, and they argued further than under the Rule, the entire amounts of both underlying settlements are recoverable unless the insurers are able to show that some uncovered liability increased the settlement amounts. The insurers argued in their summary judgment argued, first, that the Dole parties had the burden to prove allocation between covered and non-covered amounts. The insurers argued further that the allocation provision expressly requires an allocation between covered and non-covered amounts, and that the provision is specific enough that the allocation provision does not apply. The January 17, 2020 Opinion In his January 17, 2020 opinion, Judge Davis, applying Delaware law to an issue of first impression in Delaware, held that the Larger Settlement Rule applies with respect to the allocation issue. In reaching this conclusion, Judge Davis found that while the allocation provision is “unambiguous,” it is “mostly unhelpful under the facts presented here.” The provision, Judge Davis said, speaks only to situations where the insurer and policyholder use their best efforts to arrive at a fair and proper allocation of covered loss. The provision, he said, “does not address the situation where the parties fail to agree.” In the absence of language specifying what is to be done if the parties do not agree, and in light of the policy language, he said, the larger settlement rule applies. Specifically, Judge Davis said that the larger settlement rule applies in situations where “(i) the settlement resolves, at least in part, insured claims; (ii) the parties cannot agree as to the allocation of covered and uncovered claims; and (iii) the allocation provision does not provide for a specific allocation method (e.g., pro rate or alike.)” The application of the Larger Settlement Rule here would “protect the economic expectation of the insured – i.e., prevent the deprivation of insurance coverage that was sought and bought.” Judge Davis said that he found the reasoning underlying the Larger Settlement Rule to be persuasive, as the policy, but its terms, covers all Loss that the Insureds become legally obligated to pay. Any type of “pro rata or relative exposure analysis seems contrary to the language of the Policies.” The insurers urged the court to note and apply the relative exposure language found in the allocation provision, which Judge Davis rejected, noting that he “does not see how the Allocation Provision establishes a method in the event the parties cannot, using best efforts, agree upon allocation between covered and uncovered claims.” He specifically found that the Allocation Provision is “not drafted in a manner that would provide for a specific allocation manner in the event [the parties] cannot agree to allocation. This is especially true here where the parties did not even attempt to allocate covered and uncovered claims.” Finally, the court deferred resolution of the factual issues pertaining to the application of the standard and on the burden of proof on allocation issues for later proceedings in the case. Discussion I suspect that for many insurer-side representatives – and indeed for many if not all of the excess insurers directly involved in the case – Judge Davis’s ruling that the larger settlement rule applies may be something of a surprise outcome. (Although maybe not; I am guessing that by now the excess insurers involved in this overage dispute are getting mighty weary of Judge Davis’s courtroom.) The reason I say that Judge Davis’s decision that the larger settlement rule applies is surprising is that the allocation provision at issue has the “relative exposures” language. Allocations provisions of this very kind were the exact kind of provisions that the insurers adopted way back in the ‘90s when they wanted to try to circumvent the trio of appellate decisions and instead enshrine the “relative exposures” test directly in the policy. It seems odd, to say the least, for Judge Davis to say that application a “relative exposures” analysis here would be “contrary to the language of the policy,” given that the allocation provision – the very provision that he was construing – expressly referred to the “relative exposures” test. In the end, Judge Davis’s decision to apply the larger settlement rule rather than the relative exposures test does have a sort of matter-of-fact quality about it. He is right that the allocation provision in the Dole policy only addresses what happens if the parties use their best efforts to agree on a fair allocation. The provision does not, in fact, expressly say what should happen if the parties are unable to agree. When he put it this way in his opinion, it seems pretty clear that he is right about what the provision does and doesn’t say. But just the same, in so many policies out there, insurers have relied and continue to rely on this kind of language in support of an assumption that the “relative exposures” test would govern allocation disputes. (Indeed, in the 2007 blog post in which I last wrote about an litigated allocation dispute, the court had no trouble concluding based on nearly identical language, that the provision required application of the “relative exposures” standard.) There are some allocation provisions in some policies that do go further than the provision at issue in this case, that contain a provision that usually begins “In the event the parties are unable to agree…” However, these provisions usually only say that the insurer will in that event pay what it agrees it owes while the parties try to sort out the remaining disputed items. These “in the event” provisions usually do not expressly say that the “relative exposure” test will or will not apply to the determination of the allocation of the disputed amounts. It is worth noting that it was important to Judge Davis that there was no evidence that the parties had tried to agree on a fair allocation. It isn’t clear how it would have affected his decision if they had attempted but failed to agree. However, the fact that this was important to Judge Davis – he repeated it multiple times – does suggest that insurers could be better advantaged for subsequent disputes if they can show that they attempted but failed, using “best efforts,” to come up with an agreed allocation. On the other hand, given that the Dole parties are arguing the entire settlement amounts are covered and the insurers are arguing that there is no coverage at all, conversations about allocation here likely would have been futile. I wonder if this is the kind of decision that might motivate some insurers to go back and reconsider the language in the allocation provisions, in order to clarify what is supposed to happen if despite their “best efforts” the parties are unable to agree on an allocation. I am not going to make any language suggestions here – that is clearly somebody else’s job – but I will say that it is easy for me to envision language that would, from the insurer’s perspective at least, both address Judge Davis’s concerns and also ensure that the “relative exposures” test rather than the “larger settlement” rule would be applied in the event of an allocation dispute. A couple of final things about this ongoing coverage dispute. First, it is getting to the point that you could build an entire course about D&O insurance coverage issues based just on this one dispute. Second, I am beginning to understand why I have been hearing from various insurers that they are thinking of incorporating choice of law clauses — or even choice of law and choice of forum clauses — in their policies, in order to ensure that coverage disputes are not decided under Delaware law or even in Delaware courts. I am guessing that by this point the excess insurers involved in this case have had just about as much fun in Delaware as they can stand. How Should Insurers Respond to the Historically High Levels of Securities Class Action Litigation?: As has been documented in several recent posts on site (most recently here), the rate of securities class action lawsuit filings is at all time highs. It is likelier now for a company to get hit with a securities class action lawsuit than it has ever been. This trend has had a significant impact on the D&O insurance marketplace. Insurance buyers face a significantly disrupted insurance arena. We already know part of the answer to the question of what insurers are going to do in response to these securities litigation trends — they are all trying to raise rates, and many are increasing retentions or cutting capacity. There are other things insurers can do to try to address these issues, at least according to a January 30, 2020 meme from John McCarrick and Andrew Lipton of the White and Williams law firm (here). In their memo, John and Andrew propose a number of steps insurers can take in light of the current litigation environment. Most of their suggestions are with respect to claims handling and resolution, rather than with respect to underwriting, risk selection, or limits management. Readers primarily involved on the claims side will find John and Andrew’s memo interesting and helpful. Delaware Court Rules “Larger Settlement Rule” Governs D&O Insurance Allocation published first on via Tumblr Delaware Court Rules “Larger Settlement Rule” Governs D&O Insurance Allocation On January 31, the U.S. Citizenship and Immigration Services (USCIS) released a new Form I-9, designated as the 10/21/2019 version. The only changes are the additions of Eswatini and Macedonia, North to the list of countries in the drop down fields on the fillable version of the Form and an update to the Form’s instructions. Employers should begin using the new Form I-9 as soon as possible. Employers may continue to use the prior version of the Form (Rev. 07/17/2017N) until April 30, 2020. After April 30, employers are permitted to use only the Form I-9 with the 10/21/2019 version date. The current edition of the Form I-9 can be found at the USCIS website. USCIS Releases New Form I-9 published first on via Tumblr USCIS Releases New Form I-9 In my recent year-end summary of corporate and securities liability trends (here), I identified privacy as an important area of growing area of corporate risk and specifically mentioned biometric privacy issues of particular concern. Almost as if to prove my point, on January 29, 2020, in its SEC filing on Form 10-K, Facebook announced that it had agreed to pay $550 million dollars to settle a biometric data privacy class action lawsuit that had been filed on behalf Illinois users in connection with the company’s use of facial recognition software. According to plaintiffs’ lawyers involved in the case, the settlement represents the largest-ever cash settlement to resolve a privacy-related lawsuit. This massive settlement shows the significance of privacy issues and underscores the likelihood that privacy issues – particularly biometric privacy issues – are likely to be an important corporate liability battleground concern. Background On April 2015, plaintiffs’ lawyers filed a putative class action against Facebook in the U.S. District Court for the Northern District of California on behalf of Facebook users and alleging that Facebook’s “tag suggestions” facial recognition feature violates the Illinois Biometric Information Privacy Act (BIPA), and seeking statutory damages and injunctive relief. (For further background about BIPA, refer here.) In April 2018, the district court certified a class of Illinois residents. In May 2018, the district court denied the parties’ cross-motions for summary judgment. Facebook appealed the district court’s ruling that the plaintiffs had alleged a sufficient injury to establish Article III standing. In an August 2019 opinion (here), the Ninth Circuit affirmed that district court’s ruling that the plaintiffs had alleged sufficient injury to establish Article III standing. The appellate court held that Facebook’s development and use of facial recognition technology without the consent of users constituted an invasion of the privacy interests that BIPA was intended to protect. In December 2019, Facebook filed a petition to the U.S. Supreme Court for a writ of certiorari, seeking to have the Court take up the case, and arguing that the district court had erred in concluding that the plaintiffs had adequately pled standing where they failed to allege that they had suffered a personal, real-world injury from the alleged violation of BIPA. In a January 21, 2020 order (here), the U.S. Supreme Court denied the cert petition, sending the case back to the district court, where trial was set to begin soon. As a result of the parties’ mediation efforts, the parties reached a settlement. Facebook disclosed the settlement in its January 29, 2020 earning call with analysts. The settlement is subject to court approval Under the terms of the settlement, Facebook would be required to establish a $550 million cash fund on behalf and for the benefit of millions of the class of Illinois users. The district court’s class certification order defined the class as Facebook users in Illinois for whom Facebook created a stored-face template after June 7, 2011, the date Facebook made its tag suggestion feature available in most countries. Discussion The most immediately notable thing about the settlement is of course its massive size. But as distracting as the gigantic size of the settlement is, there are some other things that should not be overlooked here. The first is that Facebook is not an Illinois company. It is a Delaware corporation that is based in California. Yet it was sued – not in Illinois, but in federal court in California – for an alleged violation of the Illinois biometric privacy law. Clearly the liability risk under BIPA reaches far beyond the borders of Illinois itself. One possible explanation of the settlement’s massive size is the potential under BIPA for per-violation damages, creating the possibility for a massively multiplied judgment. BIPA allows for the recovery of the damages of the greater of actual or liquidated damages of $1,000 for liquidated damages (for negligent violations) or $5,000 (for intentional reckless violations). Given Facebook’s millions of Illinois users, the potential damages in the case were enormous. It might be tempting to try to minimize this settlement as the odd outcome resulting from Illinois’s peculiarly strict privacy law. That fact is that though Illinois’s biometric privacy laws are strict, Illinois is far from the only state that has laws protecting biometric privacy. Both Texas and Washington state have long had legislation on the books protecting biometric data privacy. In recent years, a number of other states have enacted legislation protecting biometric data privacy, including Arkansas, California, and New York. In addition, a number of other states are considering legislation to protect biometric data privacy, including Alaska, Delaware, Florida, Arizona, Hawaii, Oregon, Massachusetts, New Hampshire, New Jersey and Rhode Island. Though there are many important things about this settlement beyond just its gigantic size, the settlement’s gigantic size does present its own message. The settlement clearly shows that significant risk that biometric privacy issues present for companies. Biometric privacy issues are likely to remain a significant concern and corporate risk exposure going forward, for the very basic reason that the breach or disclosure of biometric data cannot be remedied as are other types of data breaches; while a consumer whose credit card data is breached can cancel the old card and get a new credit card, an individual whose biometric date is breached or disclosed cannot change their biometric data. Thus, the potential breach of disclosure of biometric data will remain a significant concern, which in turn puts significant pressure on companies to protect, secure, and not misuse the biometric data. As this settlement demonstrates, companies alleged to have committed biometric data privacy violations could face significant liability exposure. For those readers interested in thinking about other potential areas of corporate privacy liability exposure will want to consider the statement by one of the plaintiffs’ lawyers from the Facebook case, who was quoted in a January 29, 2020 Law 360 article about the settlement (here) as saying that “Biometrics is one of the two primary battlegrounds, along with geolocation, that will define our privacy rights for the next generation.” So, for those readers who have read this far, the point is corporate privacy liability exposure will includes both biometric privacy exposures and geolocation exposures. Put it down on your watch list – there will be further biometric privacy violation lawsuits, and geolocation privacy could be next. There is one more aspect of this settlement that bears comment here, and that is the fact that it involves Facebook. You can speculate about why, but for whatever reason Facebook repeatedly finds itself representing a first-of-its-kind example of important liability trends. For example, Facebook was among the first companies to be hit with a GDPR-related securities class action lawsuit (about which refer here). Last year, Facebook’s massive $5 billion settlement with the FTC presented an example of privacy violations could lead to significant corporate exposures. A Cambridge Analytic scandal-related securities class action lawsuit against Facebook provided an example of how privacy-related allegations could lead to a securities class action lawsuit. While Facebook clearly has its own company-specific issues regarding privacy concerns, it would be a mistake to generalize about privacy concerns as problems that are peculiarly distinctive to Facebook and to Facebook alone. The vast reach of Facebook’s user base does multiply the seriousness Facebook’s privacy issues, but Facebook is far from the only company with liability exposures relating to privacy violations. Facebook may well have fallen into a peculiar pattern as being the first company to experience a particular problem but the liability exposures arising from privacy violations do not relate just to Facebook alone. I know there are some readers who will object that as serious as privacy liability issues may be, they are not D&O exposures. The fact is that any serious liability concern a company faces could be translated into a mismanagement claim or a disclosure omission claim. The likelihood is that we will see management liability claims followed in the wake of biometric privacy liability claims, as well as other types of claims alleging privacy law violations. I continue to believe that privacy-related issues represent a significant area of future corporate and executive liability exposure. Facebook to Pay $550 Million in Largest-Ever Privacy Settlement published first on via Tumblr Facebook to Pay $550 Million in Largest-Ever Privacy Settlement If you have not yet seen it, you will want to be sure to read the January 29, 2020 Harvard Law School Forum on Corporate Governance post entitled “Challenging Times: The Hardening D&O Insurance Market” by Carl Metzger and Brian Mukherjee of the Godwin Proctor law firm (here). As Carl and Brian point out, the D&O insurance “is becoming increasingly challenging to purchase and maintain. Premiums and deductibles have been increasing, sometimes dramatically, and some insurers are cutting back on the number of companies they insure, causing the supply of insurance to lag behind demand.” The authors review what is causing the hardening market and what the impacts of the harder market are. They also suggest that in order to deal with the hardening market, policyholder should get out in front of their insurance renewals well in advance of the renewal date, and that some policyholders will want to consider alternative structures. I encourage everyone to read Carl and Brian’s article. The Current D&O Insurance Market Turmoil: Causes, Effects, and What to Do published first on via Tumblr The Current D&O Insurance Market Turmoil: Causes, Effects, and What to Do One of the areas of significant concern in the global insurance underwriting community is the potential exposures insurers face from “silent cyber” – that is, the coverage of cybersecurity-related losses under traditional insurance policies that are not expressly designed to cover cyber losses. In a recent ruling in an insurance coverage dispute in which a small business sought insurance coverage for its losses following a ransomware attack, a Maryland federal court judge, applying Maryland law, held that the company’s business owner’s policy (BOP) covered the damages the company incurred. The ruling highlights the potential coverage available for companies experiencing cyber-security losses under their traditional insurance policies. As discussed below, there are a number of interesting features to this ruling. Background National Ink and Stitch LLC is an embroidery and screen printing business. In December 2016, its computer server and networked computers were hit with a ransomware attack. The attack prevented the company from accessing all of its art files and other data on its server, and all of its software. The company paid the bitcoin ransom the attacker demanded, but then the attacker demanded further payment. At that point, the company paid a security company to replace and to install its software, and to install protective software. As the court later said, “In the end, although Plaintiff’s computers still functioned, the installation of the protective software slowed the system and resulted in a loss of efficiency.” The art files formerly housed on the server cannot be accessed. Computer experts testified that there likely are dormant remnants of the ransomware virus on the company’s server that could “re-infect the entire system.” In order to eliminate the risk of further infection, the company would be to “wipe” the entire system and reinstall all of the software and information, or to purchase an entirely new server and components. National Ink and Stitch submitted a claim to its BOP insurer in December 2016. However, the insurer denied coverage for the cost of replacing the entire system, arguing that the company had not experienced “direct physical loss of or damage to” its computer system in order to justify reimbursement of the replacement cost of the entire system under the Policy. National Ink and Stich filed a lawsuit against the insurer. The parties filed cross-motions for summary judgment. The Relevant Policy Language The policy provides, in relevant part, that the insurer “will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” The policy’s Special Form Computer Coverage endorsement expressly defines “Covered Property” to include “Electronic Media and Record (Including Software),” and defines “Electronic Media and Records” to include: “(a) Electronic data processing, recording or storage media such as films, tapes, discs, drums, or cells; (b) Data stored on such media.” The January 23, 2020 Opinion In her January 23, 2020 opinion (here), District of Maryland Judge Stephanie Gallagher granted National Ink and Stich’s summary judgment motion and denied the cross-motion of the insurer. In a seeking summary judgment, the insurer had argued that because National Ink and Stitch had only lost data, an intangible asset, and could still use its computer system to operate its business, it did not experience a “direct physical loss” as required under the policy. National Ink and Stitch said, for its part, argued that because the policy expressly provides that computer data and software are “Covered Property” subject to “direct physical loss,” and the computer system itself sustained damage, in the form of impaired functioning, it is entitled to coverage. Judge Gallagher concluded that National Ink and Stitch is entitled to recovery under the policy based both on the loss of data and software in its computer system, and on the loss of functionality to the computer system itself. In reaching her conclusion that National Ink and Stitch was entitled to recover based on the loss of data and software, Judge Gallagher noted the “inherent contradiction” between the policy and the insurer’s interpretation, since the policy expressly refers to Electronic Media and Record (and Software) as “Covered Property.” Under the insurer’s argument, damage to software and data could never be covered because software and data are not physical. Judge Gallagher, quoting prior case law with approval, noted that “the plain language of the policy’s provisions and definitions dictates that such property is capable of sustaining a ‘physical’ loss.” Judge Gallagher said further that the mere fact that the computer system retained some limited functionality did not prevent the court from concluding that the company had suffered physical damage. The more persuasive case is that “loss of use, loss of reliability, or impaired functionality demonstrate the required damages to a computer system, consistent with the ‘physical loss or damage to’ language in the Policy.” Indeed, she noted, “in many instances a computer will suffer ‘damage’ without becoming completely inoperable.” Here, Judge Gallagher said, National Ink and Stitch had sustained loss of its data and software, and is left with a slower system that appears to be harboring a dormant virus, and is unable to access a significant portion of software and stored data. Because “the plain language of the Policy provides coverage for such losses and damage, summary judgment will be granted in favor of the Plaintiff’s interpretation of the Policy terms.” Discussion Judge Gallagher’s ruling in this insurance coverage dispute is significant because she has found coverage for ransomware virus-related losses under a BOP policy. Most small businesses carry some form of BOP coverage, so the court’s ruling suggests an important potential avenue for small business owners that have suffered these kinds of losses to pursue. It is particularly noteworthy, as emphasized in a January 27, 2020 Law 360 article about the decision (here), that the ruling “marks the first time that a court has squarely addressed the availability of coverage for costs linked to a ransomware incident.” The significant of the decision, according to a January 27, 2020 post on the Hunton Insurance Recovery Blog (here) is that the ruling “demonstrates that insureds can obtain insurance coverage for cyber-attacks even if they do not have a specific cyber insurance policy.” The possibility that a traditional insurance policy like a BOP policy might pick up coverage for these kinds of losses also seems, according to the Law 360 article, to confirm the insurance industry’s “worries that courts may interpret traditional policies to cover” these kinds of risks. The Law 360 article expressly cites Judge Gallagher’s ruling as an instance of “silent cyber.” I will say that from my perspective, in considering the insurer’s arguments here, it almost seemed like the insurer was trying to dispute coverage as if the policy did not contain the Special Form Computer Coverage endorsement expressly defining “Covered Property” to include “Electronic Media and Records (Including Software)” and providing further that Electronic Media and Records expressly include “Data stored on such media.” I do not profess expertise on property insurance coverage, and maybe there is more to it, but given the policy’s express language, it seems to me it was always going to be difficult for the insurer to argue that the company’s damaged data and software were not “covered property,” and, given that the policy expressly covers “physical loss” but “damage to” covered property, to argue that the company had to show complete destruction of the computer system to recover its damages. As the Hunton Insurance Recovery Blog notes, the decision is significant because it shows that an insured’s business “does not need to be completely shut down in order to get insurance coverage.” A slow-down in functionality “should be sufficient to trigger coverage.” At a minimum, the ruling is a reminder that cyber-insurance policies may not be the only source of insurance available in the event of a cyber-attack. Policyholders should carefully consider all their insurance policies to determine where coverage might be available. As the Hunton blog post notes, companies experiencing a cybersecurity incident should “carefully review and consider making a claim under all potential insurance policies.” Readers of this blog, and indeed most insurance industry participants these days, are well aware that potential “silent cyber” exposures under traditional insurance policies is a big concern for insurers these days. As I noted in a recent post, there are a number of high-profile pending cases in which policyholders are seeking coverage for cyber-related losses under traditional insurance policies. From their perspective, the insurers feel their never intended to pick up cyber-related losses under these “non-affirmative” policies. Insurers wary of these kinds of losses may well seek to amend their policies to try to avoid coverage for cyber-related claims. For that reason, policyholders and their advisors should, as I discussed in a recent post, be alert to any policy changes that may have the effect of narrowing coverage. From the policyholder’s perspective, the willingness of courts to find coverage for cyber-related losses under traditional policies provides some comfort that companies can get insurance coverage when they experience these kinds of losses. But I am concerned that this good news for policyholders will be misinterpreted. In my view, it would be a big mistake for companies to conclude based on favorable decisions like this one that the companies do not need to buy cyber insurance policies. Cyber policies provide much more comprehensive and much more specific coverage for cyber exposures. The policies provide both first-party and third-party policies. Well-advised policyholders know that in order to be best protected against cyber exposures, a purpose-built cyber insurance policy is an indispensable part of their insurance program. Policyholders with questions about this topic should be sure to discuss this with their insurance advisors in order to fully understand how they will be best protected. Court Holds Business Owner’s Policy Covers Ransomware Caused Losses published first on via Tumblr Court Holds Business Owner’s Policy Covers Ransomware Caused Losses
Berlin Cathedral
The D&O Diary was on assignment in northern Europe last week, with stops in Berlin, Hamburg and Paris. I know from past experience that traveling in northern Europe in January can be a formidable experience. On this trip, however, mild and dry weather conditions generally prevailed, allowing for some really pretty enjoyable travel experiences. The primary purpose of the European visit was to attend the annual Euroforum Haftpflicht Konferenz in Hamburg. I have attended this event before, and it was a pleasure to be back and part of the event again this year. I delivered the Internationale Keynote address on the topic of “Key Developments in D&O Claims.” Fortunately, I was able to address the audience in English. I would like to thank Karin Hanten of Euroforum for inviting me to participate in this well-organized and well-attended event. It was a pleasure to be able to see many old friends and make new friends as well. It was also enjoyable to learn how many in the audience members follow The D&O Diary. When I look at this picture, taken during my presentation, all I can see is that somehow the cord for the microphone got looped outside of my suit jacket.With Sebastian Gemberg-Wiesike, Financial Lines Underwriter for Germany and Switzerland at Tokio Marine HCC. Sebastian spoke immediately after I did, discussing the liability risks for companies with American Depositary Receipts trading in the U.S. With Matthias Andres of Zurich Insurance With Markus Haefeli of Haefeli & Schroeder Financial Lines AG in Zurich, Switzerland With Sebastian Vogel of Airbus Aeroassurance. With Alexander Stampf of Tokio Marine HCC in Barcelona Before traveling to Hamburg for the conference, my wife and I traveled to Berlin for the weekend. I have been to Berlin before, and every time I have visited I have made exactly the same mistake, which is that I fail to allow enough time to explore this vast and fascinating city. This trip was my wife’s first visit to Berlin and so of course we had to visit the city’s most famous landmarks, including the Brandenburg Gate, the Reichstag, and the Berlin Cathedral. In Pariser Platz, facing the formerly East Berlin side of the Brandenburg Gate
In front of the Reichstag The Berlin Cathedral with the Fernsehturm in the background. We attended the worship service at the Cathedral on Sunday morning. We were very fortunate that the service featured the choral performance of a Bach cantata.
There is so much history in Berlin, in some ways almost too much history. We spent a considerable amount of time exploring the remnants of the Berlin Wall and the other remaining vestiges of the city’s division between 1961 and 1989. A remaining section of the Berlin Wall, in the Berlin Wall memorialA preserved watch tower, in the Berlin Wall Memorial. Before the Wall came down, the Wall cut straight across the road on the right side of the picture. Checkpoint Charlie, the security control gate for the former American sector of Berlin. (Note the McDonald’s on the right side of the picture; things have changed a little bit since the Wall came down.)
One thing we did this trip that we both enjoyed was exploring some of the city’s residential neighborhoods. We walked through the atmospheric streets of the Prenzlauer Berg neighborhood, a pleasant area full of shops, cafes, and restaurants that was inside former East Berlin. We came upon a lively street market, where we enjoyed a makeshift currywurst lunch. A little bit of unexpected sunshine during our stroll made for a very pleasant visit. We also visited the Kreuzburg neighborhood the next afternoon, which was also a very interesting place to visit. A street market on Kollwitzstraße in Prenzlauer Berg, Berlin
One tip for anyone planning a visit to Berlin anytime soon is to make sure to make time for a long visit to the Deutsches Historisches Museum, which is located right on Berlin’s most famous street, Unter den Linden. We spent three hours there and could have easily spent longer. The ground floor exhibits on Germany’s fraught and complicated 20th Century history were particularly well done. I would go back to Berlin just to spend some more time in the museum. Another tip, the Gemäldegalerie art museum, located near Potsdamer Platz, has an excellent collection of northern European paintings, including works by Dürer, Cranach, Holbein, van der Weyden, van Eyck, and Vermeer. One particularly enjoyable thing we did while in Berlin was to attend a concert at the Konzerthaus Berlin. The concert hall was beautifully illuminated at the night we were there.
From Berlin, we took one of the excellent Deutsche Bahn Inter-City Express (ICE) trains for a quick two hour trip to Hamburg. The mild weather followed us to Hamburg, which allowed us upon arrival to enjoy a quick walk around Hamburg’s two famous lakes, the Außenalster (Outer Alster) and the Binnenalster (Inner Alster). I actually walked around the Außenalster three times during our visit; the Fitbit that my children gave me for Christmas recorded that it is about 10,000 steps around the larger lake. (It is about 4.7 miles around.)
We also attended a concert while we were in Hamburg, at the venerable Laiszhalle, in the Hamburg city center. There is a brand new concert hall, the Elbphilharmonie, on the river. When we arrived at our seats for the concert hall, we discovered why the city might have felt the need to build the new hall. The column almost entirely blocked our view of the stage — I was able to see only the percussion section and two french horns. The sound was muffled as well. I could hear just enough of the music to get the feeling that we were missing a pretty good concert. We left at intermission.
We left Hamburg to spend this past weekend Paris. It was chilly in Paris, but we continued to enjoy dry and pleasant weather. By a long standing tradition, my first stop in Paris is to visit the Jardin du Luxembourg. When I am there, I feel fully in Paris.Even deep in winter, the Jardin is still beautiful One of our other important priorities in Paris was to stop by Notre Dame, to check in on the progress of the repair and restoration of the cathedral, after the April 2019 fire. Signs posted around the work site explained that the repair process at this point is still focused on trying the stabilize the structureAround the structure, they have inserted wooden braces to support the buttresses and columns. It is clear that this process is going to take a very long time.
Our main objective on this visit to Paris was to see the Leonardo da Vinci exhibition at the Louvre. The exhibit had been sold out when I was in Paris in November, so this time I was sure to purchase timed-entry exhibits in advance, online. With the timed-entry requirement, there was a little bit of crowd control. Just the same, the exhibit was mobbed. It was, nevertheless, amazing. There are only 15 surviving paintings attributed in whole or in part to Leonardo; many of them had been gathered for this exhibit. The exhibit also featured extensive displays of Leonardo’s notebooks. The notebooks very convincingly showed Leonardo’s vast curiosity and brilliance. Even with the crowds, it was a really great exhibition.
When we emerged from the museum, we found that while we had been in the exhibit, a massive protest march had developed along the river. The march was organized as part of national strike organized as a protest by the transportation unions about proposed French pension reform. The march was peaceful and had even something of a festive atmosphere. The relatively pleasant weather helped. The problem for us was that the march blocked our route back to the other side of the river and to our hotel. So instead, and in the best Paris tradition, we found a cafe and enjoyed a late lunch. We had assumed that by the time we finished our lunch the marchers would finished filing into the Place de la Concorde. We underestimated the size of the march. The marchers paraded along for hours. We finally managed to made our way around the parade and found a river crossing so that we could make our way back to our hotel. A nice light lunch while we waited for the protest march to pass. Protesters fill the Place de la Concorde One of the highlights of our Paris sojourn was a return visit to the Le Christine restaurant in the 6e Arrondissement. We first dined at the much earlier version of the restaurant while we were in Paris on our honeymoon in 1983. We returned to the restaurant with our children in 2000, and again in 2005. Though the restaurant has changed over the years, it remains excellent. Once again, we enjoyed a wonderful meal there. In addition to many familiar sites in Paris, we also visited some new places. One of our more interesting discoveries on this visit was the Musée National Gustave Moreau, in the 9e Arrondissement. Moreau was one of the prominent members of the Symbolist artistic school in the 19th century. His unusual paintings are full of references to Greek mythology and Christian iconography. When Moreau died in the late 19th century, his home and studio were converted to a museum. The walls of the museum are covered with Moreau’s paintings, many of them unfinished. Many of his paintings are unusual and interesting. All in all, it was a great visit to Europe. You wouldn’t think that January would be a great time to visit, but it actually turned out to be a fine time to be there. Of course, I know we were very fortunate with the weather. (The only rain we had the entire trip was on the day of our departure from Paris.) But the cities themselves made the visit so enjoyable. As always, on the way back I found myself trying to figure out when I can go back again. More pictures of Paris: Here’s something you won’t see very often — the Jardin du Tuileries without any people. The Jardin was closed during the protest marchesThe Louis XIII statute in the Place des Voges Scenes of Montmartre
January in Northern Europe published first on via Tumblr January in Northern Europe |
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