by Christopher Graham and Joseph Kelly

Sirius XM Radio, Inc. v. XL Specialty Insurance Co., et al, Case Nos. 650831/2013, 002 (Sup. N.Y. Cty. Nov. 7, 2013)

An insured timely notified its D&O insurer of one Claim, but then failed to notify that insurer timely of four others involving the same “Interrelated Wrongful Acts.” Did the insured’s timely notice of the first of five Claims involving the same Interrelated Wrongful Acts mean the Insured had no obligation to provide the insurer notice of the four subsequent Claims? Maybe.

XL received a notice of circumstance for the first of five suits relating to Sirius’s merger with XM Satellite Radio and mismanagement after the merger. XL claimed it didn’t receive a notice of the first suit, but for XL’s motion to dismiss the Court assumed XL did receive notice. XL denied coverage for four subsequent suits, claiming it didn’t receive notice of them and that Sirius didn’t get XL’s approval before incurring defense costs for them.

Sirius sued, and XL moved to dismiss.

XL issued a “Management Liability and Company Reimbursement Policy” providing:

“VI. GENERAL CONDITIONS

(A) NOTICE. (1) As a condition precedent to any right to payment under this Policy with respect to any Claim, the Insured shall give written notice to the Insurer of any Claim as soon as practicable after it is first made. . . .

(B) INTERRELATED CLAIMS. All Claims arising from the same Interrelated Wrongful Acts shall be deemed to have been made at the earliest of the time at which the earliest such Claim is made or deemed to have been made pursuant to GENERAL CONDITIONS (A)(1) above or GENERAL CONDITIONS (A)(2), if applicable.”

“Claim” includes “any civil proceeding in a court of law or equity, or arbitration.”

Additionally, “[n]o Insured may incur any Defense Expenses … without the Insurer’s consent, such consent not to be unreasonably withheld.”

Sirius argued that separate notice of the four subsequent suits was unnecessary because those suits and the first suit, for which notice was timely, arose from the same Interrelated Wrongful Acts and, thus, should be treated as a single Claim.

XL argued that the “Interrelated Claims provision determines when a Claim is deemed made against an Insured– it has absolutely no bearing on the XL policy’s separate notice requirement.”

The court rejected XL’s argument, stating:

“At this pre-answer stage of the case, it suffices to say that XL’s parsing of section VI (B), as merely stating that, ‘if timely notice of a Claim is given, that Claim will be treated as having been made in the policy period in which a previous notice of circumstance (or Claim) had been given’ (XL, reply, p. 12) is far from compelling. XL ignores the clause upon which Sirius relies, ‘[a]ll Claims arising from the same Interrelated Wrongful Acts shall be deemed to constitute a single Claim.’ At oral argument, too, counsel for XL ignored that clause, arguing that section VI (B) does not modify the requirement of prompt notice in section VI (A) (1), because § VI (A) (1) refers to ‘any Claim’ in the singular, while section VI (B) initially refers to ‘[a]ll Claims,’ in the plural.

Whether the deemed date of the later Claim relieves the Insured of the obligation to give notice each time a later Claim is made is not sufficiently clear from the words of Policy §§ VI (A) (1) and VI (B) to require dismissal of the complaint on the basis of documentary evidence under CPLR 3211 (a)(1) (see Goshen v Mutual Life Ins. Co. of N. Y., 98 NY2d 314, 326 [2002]; Morpheus Capital Advisors LLC v UBS AG, 105 AD3d 145, 148 [1st Dept 2013]).”

Sirius could have avoided any issue by providing notice of each subsequent suit timely to the D&O insurer. Ordinarily that’s what happens. It’s not clear why Sirius didn’t do so. The D&O policy wording at issue here is common. So we have at least one court suggesting a rewrite is in order–so there’s no question that an insured is expected to provide the insurer timely notice of each separate suit, where suits involve the same Interrelated Wrongful Acts as an earlier suit.

Tags: D&O, notice, interrelated

by Christopher Graham and Joseph Kelly

First Bank of Delaware, Inc. v. Fidelity and Deposit Company of Maryland, Case No. N11C-08-221 (Del. Super. Ct. Oct. 30, 2013

According to this Court, this was a case of an exclusion swallowing a coverage grant–so coverage was “illusory” and the exclusion shouldn’t apply. As explained below, the coverage in essence was for loss from certain unauthorized data use; and the exclusion applied to fraudulent data use. So this was problematic.

First Bank of Delaware contracted with Visa and Mastercard to provide debit card transaction services. First Bank processed those transactions using Data Access Systems’s (“DAS”) computers.

DAS’s servers were hacked resulting in millions of dollars in unauthorized customer withdrawals. Visa and Mastercard as a result imposed certain assessments on First Bank which First Bank paid.

First Bank then sought coverage for the assessments from Fidelity and Deposit Company of Maryland under a D&O SelectPlus Insurance Policy. Fidelity denied coverage, and First Bank sued.

Electronic Risk Coverage

First Bank sought coverage under the policy’s “Electronic Risk Liability” insuring agreement, which provided:

The Insurer will pay on behalf of the Insured all loss resulting from any electronic risk claim first made against the Insured during the policy period or the extended reporting period, if applicable, (1) for an electronic publishing wrongful act or (2) that arises out of a loss event.

“Electronic Risk Claim” meant “a written demand for monetary damages or nonmonetary relief.”

“Loss Event” included “any unauthorized use of, or unauthorized access to electronic data or software with a computer system.”

“Computer System” included “related communications networks including the internet, used by the Company or used to transact business on behalf of the Company.”

In considering summary judgment cross-motions, the Court found First Bank established that: Visa and Mastercard’s assessments were loss resulting from an electronic risk claim, namely, by Visa and MasterCard; against the Insured, namely, First Bank; during the policy period; and that arises out of a loss event, namely, unauthorized access to electronic data with a computer system, DAS’s computers. Fidelity argued the unauthorized access on DAS’s computers wasn’t with a “computer system” used to transact bsuiness on First Bank’s behalf. The Court disagreed, explaining that the DAS computers were used to transact business on behalf of First Bank because First Bank earned fees from debit card transactions conducted on DAS’s computers.

So First Bank’s loss was within the scope of the insuring agreement.

Fraud Exclusion

The Court’s analysis then shifted to Exclusion M which excludes coverage under the “Electronic Risk Liability” insuring agreement for any claim against First Bank “based upon or attributable to or arising from the actual or purported fraudulent use by any person or entity of any data or in any credit, debit, charge, access, convenience, customer identification or other card, including, but not limited to the card number.”

The Court found that First Bank’s loss fell within the scope of the exclusion because “the fraudulent use of data and subsequent Visa and MasterCard assessments are meaningfully linked in a way that qualifies as ‘arising from’ under Exclusion M.”

Illusory Coverage

But then First Bank argued that Exclusion M rendered the Electronic Risk Liability’ coverage part illusory.

The Court agreed stating:

…[W]hen the burden shifts back to First Bank to prove that Exclusion M should not be applied, the Court considers that a grant of coverage should not be swallowed by an exclusion. The principle that a grant of coverage should not be rendered illusory protects the reasonable expectations of the purchaser.

and

The Court finds that applying Exclusion M would swallow the coverage granted…for “any unauthorized use of, or unauthorized access to electronic data…with a computer system.” It is theoretically possible that an example of non-fraudulent unauthorized use of data exists. However, in the context of this Policy, all unauthorized use could be, to some extent, fraudulent. The abstract possibility of some coverage surviving the fraud exclusion is not sufficient to persuade the Court to apply an exclusion that is almost entirely irreconcilable with the Loss Event coverage. The Court finds that First Bank met its burden to prove that an exception prevents the application of Exclusion M.

Tags: D&O, illusory coverage, electronic risk liability, bank, fraud

by Christopher Graham and Joseph Kelly

Will your company allow alcohol at this year’s holiday party? If so, unless you do some risk management, you may end up with a ligation lump of coal in your Christmas stocking — such as claims from drunk driving and sexual harassment.

Here are some suggestions:

• Keep employees who overindulge from driving. Designate sober drivers or provide cab fare.
• Limit the number of drinks. No open bar, provide drink tickets, hire a professional bartender.
• Invite spouses and even kids. Employees are less likely to overindulge when it’s a family affair.
• Schedule the party on a weeknight.
• Make food or entertainment — not drinking — the focus.
• Make it voluntary.
• No mistletoe!

For more suggestions about how to avoid potential liability, check out of this useful post from the Corporate Law Report.

Tags: Employer, holiday party, liability, sexual harassment

by Christopher Graham and Joseph Kelly

For years OSHA has required employers with toxic chemicals in the workplace to make certain disclosures — Hazard Communications (“Hazcom”) — to its employees.

OSHA created a new Hazcom standard which requires employers to train employees regarding the new standard and the deadline for compliance is December 1, 2013.

Failure to comply can lead to significant fines.

For more information on the new Hazcom standard, here’s an informative Q&A from OSHA.

Tags: OSHA, Hazcom

by Christopher Graham and Joseph Kelly

The Illinois Sales Representative Act protects sales representatives upon termination of their relationship with a company.

There’s no shortage of litigation under that statute and similar state statutes. Much of it involves disagreement over commissions owed when a business and independent sales representative end their relationship. See, e.g., Penzell v. Taylor, 219 Ill.App.3d 680 (1st Dist. 1991). Those suits often arise because parties have no contract or their contract doesn’t address payment of commissions upon termination with sufficient precision. Id. If the contract doesn’t expressly provide when commissions will be paid, the procuring cause rule may apply. Under that rule, “a party may be entitled to commissions on sales made after the termination of a contract if that party procured the sales through its activities prior to termination.” Id.

The Illinois Sales Representative Act provides that:

[a]ll commissions due at the time of termination of a contract between a sales representative and principal shall be paid within 13 days of termination, and commissions that become due after termination shall be paid within 13 days of the date on which such commissions become due. 820 ILCS 120/2

If commissions due at termination aren’t timely paid, the principal:

• “shall be liable in a civil action for exemplary damages in an amount which does not exceed 3 times the amount of the commissions owed to the sales representative”; and
• shall pay the sales representative’s reasonable attorney’s fees and court costs.

820 ILCS 120/3

The Act thus is a powerful weapon for an independent sales representative who claims a failure to pay commissions. As a Google search will show, potential exemplary damages and attorneys’ fees is an incentive for numerous attorneys to seek these cases and take them on a contingent fee basis. If the company is in Illinois but the sales representative is out-of-state, the out-of-state statute where the employee is located may apply.

A well-drafted sales representative agreement is the best solution for all concerned. And we will cover this topic in a later blog post.

Tags: Illinois, Sales Representative Act,

In Szura & Co. v. General Ins. Co., Case No. 12-2505 (6th Cir. Nov. 5, 2013) an insurance agent sued for a declaration that its E&O insurer was obligated to defend the agent in an underlying suit for tortious interference with contract, tortious interference with business relationship, and civil conspiracy. The E&O policy defined “Wrongful Act” as “any actual or alleged negligent act, error or omission.” The E&O insurer successfully argued that there was only coverage for negligent acts and the allegations in the underlying suit against the agent were for intentional conduct. The E&O insurer, thus, had no duty to defend.

For further discussion of this issue in the context of the Szura opinion, here’s an excellent article from Randy Maniloff in “Coverage Opinions”

Tags: E&O, wrongful act, negligent

by Christopher Graham and Joseph Kelly

In Axis Surplus Ins. Co. v. Halo Asset Mgmt, LLC, et al, Case No. 12-cv-2419 (N.D. Tex. Sept. 27, 2013), the Northern District of Texas held AXIS had no duty to defend its mortgage broker insureds (collectively, “Halo”).

Halo was sued in Texas state court for fraudulent inducement, negligent misrepresentation, fraud, breach of fiduciary duty, among other theories, relating to a scheme by Halo to induce the underlying plaintiffs to invest in the purchase of failing residential mortgage notes that Halo would turn into performing loans.

Halo tendered the defense and indemnity of the underlying suit to AXIS under a professional liability policy. AXIS denied coverage and filed this suit seeking a declaration of no duty to defend or indemnify.

At summary judgment, AXIS argued it had no duty to defend because the underlying claims aren’t “Insured Services” as defined in the policy.

The policy defines “Insured Services” in part, as:

Mortgage broker services consisting of counseling, taking of applications, obtaining verifications and appraisals, loan processing and origination services in accordance with lender and investor guidelines and communicating with the borrower and lender. Debt settlement and credit services including arbitration and negotiations; real estate sales and brokerage services. . . .

The court ruled that the underlying allegations “are fundamentally based on [Halo’s] misuse of the [underlying plaintiffs’] invested funds, not in mortgage broker services. Taking the allegations in the petition as true, none of the funds even went to purchase mortgages. The fact that the proposed investment scheme was supposed to involve mortgages does not overshadow the fact that the allegations ultimately stem from fraud and misappropriation of funds.”

AXIS, thus, had no duty to defend.

The court denied AXIS’s motion for summary judgment on the duty to indemnify. Under Texas law, the duty to indemnify is based on the facts proven at trial, not the facts alleged in a complaint. The court stated “[A]n insurer may have a duty to indemnify its insured even if the duty to defend never arises” and that “unlike the duty to defend, which turns on the pleadings, the duty to indemnify is triggered by the actual facts establishing liability in the underlying suit, and whether any damages caused by the insured and later proven at trial are covered by the terms of the policy.”

by Christopher Graham and Joseph Kelly

A recent article from Business Insurance by Judy Greenwald — “Private Companies See Costs Rise for Management Liability Coverage” — concludes that EPL claims and increased mergers and acquisitions litigation are leading to higher private corp. D&O rates.

Coincidentally, Transched Systems, Ltd. v. Federal Ins. Co., Case No. 12-939-M (D. R.I. Aug. 2, 2013) is a recent case involving coverage under a private corp. D&O policy for an M&A gone bad. The United States District Court for Rhode Island denied Federal’s motion to dismiss, which was based on fraud and contract exclusions.

Federal issued a D&O policy to Versyss Transit Solutions, LLC, Versyss Commercial Systems, LLC, and Holbrook Systems, Inc. (“Versyss”). Transched Systems, Ltd. obtained a jury verdict against Versyss for: (1) breach of contract regarding misrepresentations and warranties in an asset purchase agreement (“APA”); (2) breach of the implied covenant of good faith and fair dealing; and (3) intentional misrepresentations. Federal defended Versyss, but denied any duty to indemnify, citing the policy’s fraud and contract exclusions. Versyss didn’t fulfill the judgment so Transched sued the D&O insurer under Rhode Island’s direct action statute for a declaration of coverage.

Fraud exclusion

The policy’s fraud exclusion excludes coverage for Claims:

based upon, arising from, or in consequence of any deliberately fraudulent act or omission or any willful violation of any statute or regulation by such Insured, if a final and non-appealable judgment or adjudication adverse to such Insured establishes such a deliberately fraudulent act or omission or willful violation. (emphasis added).

Federal argued the exclusion applies because there was a verdict against Versyss for deliberately fraudulent conduct. Transched countered that the fraud was by Versyss’s Vice President (who wasn’t a party and didn’t seek coverage), and, thus, it can’t be imputed to Versyss.

The court found that the fraud exclusion applies “only if ‘such Insureds’ committed a deliberately fraudulent act. By using the term ‘such Insured,’ the fraud exclusion is focused upon deliberate fraud committed by the particular Insured that is seeking coverage, in this case, Versyss.”

While the Vice President’s fraudulent conduct was imputed to Versyss for liability purposes; that wasn’t enough for the fraud exclusion to apply.

For purposes of the fraud exclusion, the Court looked to the policy’s “Severability of Exclusions” clause, which provides:

With respect to Exclusions (A)(10)[fraud exclusion]…: … (2) only facts pertaining to and knowledge possessed by any past, present or future Chief Financial Officer, President, Chief Executive Officer or Chairperson of any Insured Organization shall be imputed to any Insured Organization to determine if coverage is available.

The Vice President was not included in the list of individuals whose acts could be imputed to Versyss for purposes of the fraud exclusion, and, thus, the court found the fraud exclusion inapplicable.

Contract exclusion

The policy’s contract exclusion excludes coverage for Claims:

based upon, arising from, or in consequence of any actual or alleged liability of an Insured Organization under any written or oral contract or agreement, provided that this Exclusion (C)(2) shall not apply to the extent that an Insured Organization would have been liable in the absence of the contract or agreement[.]

Federal argued that “arising from” is broad and means “originating from, growing out of, flowing from, incident to or having connection with” a contract. Federal argued further that Versyss’s VP made intentional misrepresentations inducing Transched to enter into the APA and that the misrepresentations were in the APA and, thus, Transched’s intentional misrepresentation claim arose from the asset purchase agreement.

Transched argued the exception to the exclusion applied – namely, that the contract exclusion doesn’t apply if liability was independent of the contract.

The court rejected Federal’s contract exclusion argument finding that the misrepresentations here occurred months before execution of the asset purchase agreement and, thus, the misrepresentations were actionable independent of the APA.

Tags: Rhode Island, D&O insurance, EPL, fraud exclusion, contract exclusion, M&A

by Christopher Graham and Joseph Kelly

As every D&O insurer knows, the hourly rates of independent counsel can far exceed an insurer’s panel rates.

Here’s an interesting article from “Coverage Opinions” discussing the Colorado District Court’s take on the issue — albeit outside of the context of D&O insurance — in Azar & Associates, P.C. v. Farmers Ins. Exchange Case No. 13-cv-00658 (D. Colo. Sept. 26, 2013).

Tags: D&O insurance, independent counsel, rates

by Christopher Graham and Joseph Kelly

Iowa recently joined Illinois as one of the states permitting legal malpractice plaintiffs to recover emotional distress damages in limited circumstances. See Miranda v. Said, 836 N.W.2d 8 (Iowa 2013).

Klever Miranda and Nancy Compoverde — husband and wife — retained attorney Michael Said and his law firm to help them with immigration issues. Klever and Nancy were attempting to stay in the U.S. Their son, Cesar Miranda, married a U.S. citizen, and Said advised them that they could obtain permanent resident status and eventually citizenship if they first returned to their native Ecuador. Klever and Nancy followed Said’s advice and returned to Ecuador. But Said was wrong, and Klever and Nancy were barred from returning to the U.S. and their kids for 10 years.

Klever and Nancy sued Said for legal malpractice and sought emotional distress damages. Said successfully moved for a directed verdict arguing that Klever and Nancy weren’t entitled to emotional distress damages. Klever and Nancy won a $12,500 judgment for negligence but appealed the court’s directed verdict on emotional distress damages. The appeals court reversed and remanded the case for a new trial on emotional distress damages. Said appealed to the Iowa Supreme Court.

The Iowa Supreme Court affirmed. The court noted that Iowa law doesn’t generally allow emotional distress damages unless there’s physical injury or proof of intentional conduct; but there are exceptions when emotional distress was “foreseeable” and a “particularly likely result.” Here, the Klever and Nancy were permitted to seek emotional distress damages because Said knew that Klever and Nancy’s reaction to being separated from their kids would be very emotional and a particularly likely result.

Tags: Iowa, legal malpractice, emotional distress