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Unintended Consequences :: An Updateon the Impact of the Financial Crisis on  Your Insurance Coverage Practice            ...
The Financial CrisisLitigation arising out of the “Financial Crisis”:        Securities litigation        Bankruptcy lit...
Securities Litigation“Credit Crisis” Related Securities Litigation:                           2007—40 (20%)              ...
Securities Settlements   Settlements of subprime and credit crisis    litigation have been few, but large   As of Septem...
Staggering Settlements   Countrywide shareholders settlement —    $624m   Wachovia bondholders settlement —$627m   Merr...
Defense Costs Estimates     In many cases, defense costs alone may exceed the      limits of the defendants’ D&O coverage...
Corporate Bankruptcy           Business Bankruptcy Filings:                  2007—28,322                  2008—43,546   ...
Failed Bank Litigation   Total bank failures since Jan 2008—406   87 bank failures this year alone   FDIC has initiated...
Regulatory EnforcementSEC ENFORCEMENT ACTIVITY                                   2007         2008         2009Investigati...
Insurance Coverage Litigation   Derivative of underlying “financial crisis”    litigation   Direct actions on first-part...
Coverage Issues   The “fortuity doctrine,” “known loss” or “loss in    progress” defense   Rescission and the “fraud in ...
Fortuity Doctrine                      CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company     Insured $96.5 millio...
Fortuity Doctrine                   CASE STUDY:Chase Manhattan Bank v. N.H. Insurance CompanyQ.   If the terms of the fina...
Fortuity Doctrine                     CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company“Given the underlying basis...
Fortuity Doctrine                     CASE STUDY:Chase Manhattan Bank v. N.H. Insurance CompanyQ.   Does the “fortuity” de...
Fortuity Doctrine                      CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company    N.H. waived voluntary...
Fortuity Doctrine                   CASE STUDY:Chase Manhattan Bank v. N.H. Insurance CompanyQ.   If the insured subjectiv...
Fortuity Doctrine                     CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company   In Texas, “the fortuity...
Fortuity Doctrine                   CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company  Q.   Is the “fortuity” doct...
“Fraud in the Application”    Texas Insurance Code Section 705.004   Policy provisions voiding coverage on the basis    o...
“Fraud in the Application”                    CASE STUDY:Suntrust Mortgage, Inc. v. AIG United Guaranty Corp.    Master m...
“Fraud in the Application”                   CASE STUDY:Suntrust Mortgage, Inc. v. AIG United Guaranty Corp. Q.   Will kno...
“Fraud in the Application”                     CASE STUDY:Suntrust Mortgage, Inc. v. AIG United Guaranty Corp. “Armed with...
“Fraud in the Application”                       CASE STUDY:United Guaranty Mortgage Indemnity v. Countrywide Fin. Corp.  ...
“Fraud in the Application”                      CASE STUDY:United Guaranty Mortgage Indemnity v. Countrywide Fin. Corp.  Q...
“Fraud in the Application”                      CASE STUDY:United Guaranty Mortgage Indemnity v. Countrywide Fin. Corp. “U...
Numerous Claimants ::      Limited Proceeds         CASE STUDY: IndyMac Bank   16 insurance policies   $160 million in p...
Numerous Claimants ::       Limited Proceeds           CASE STUDY: IndyMac Bank   Case dismissed   D&O policies with ABC...
Numerous Claimants ::      Limited Proceeds       CASE STUDY: Lehman Brothers   Claims arising out of the largest bankrup...
Numerous Claimants ::      Limited Proceeds      CASE STUDY: Lehman Brothers   August 2011—former CEO and other D&Os reac...
Numerous Claimants ::       Limited ProceedsCASE STUDY: Creative Problem Solving    Coverage defenses => leverage for neg...
Coverage for Non-       Traditional “Claims”CASE STUDY: MBIA, Inc. v. Federal Ins. Co.    Bond insurer seeking coverage f...
Coverage for Non-       Traditional “Claims”CASE STUDY: MBIA, Inc. v. Federal Ins. Co.Q.   Does a regulatory subpoena cons...
Coverage for Non-        Traditional “Claims” CASE STUDY: MBIA, Inc. v. Federal Ins. Co.A subpoena is an “order” or “simil...
Coverage for Non-      Traditional “Claims”CASE STUDY: MBIA, Inc. v. Federal Ins. Co.Q.   Is coverage for the investigatio...
Coverage for Non-         Traditional “Claims” CASE STUDY: MBIA, Inc. v. Federal Ins. Co.Costs incurred to investigate, an...
Questions?
Unintended Consequences :: An Updateon the Impact of the Financial Crisis on  Your Insurance Coverage Practice            ...
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Unintended Consequences, Impact Of The Financial Crisis On Insurance Coverage

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Transcript of "Unintended Consequences, Impact Of The Financial Crisis On Insurance Coverage"

  1. 1. Unintended Consequences :: An Updateon the Impact of the Financial Crisis on Your Insurance Coverage Practice MICAH SKIDMORE AMY ELIZABETH STEWART 16TH ANNUAL INSURANCE LAW INSTITUTE NOVEMBER 3-4, 2011 AUSTIN, TEXAS
  2. 2. The Financial CrisisLitigation arising out of the “Financial Crisis”:  Securities litigation  Bankruptcy litigation  Regulatory/government enforcement actions  Insurance coverage litigation
  3. 3. Securities Litigation“Credit Crisis” Related Securities Litigation:  2007—40 (20%)  2008—103 (41.7%)  2009—58 (26.7%)  2010—36 (15%)Source: NERA Economic Consulting, Recent Trends in Securities Class Action Litigation: 2011 Mid-Year Review
  4. 4. Securities Settlements Settlements of subprime and credit crisis litigation have been few, but large As of September 2011, settlements totaled $3.4 billion Average $116 million per settlement Source: Kevin LaCroix, The D&O Diary, http://www.dandodiary.com/.
  5. 5. Staggering Settlements Countrywide shareholders settlement — $624m Wachovia bondholders settlement —$627m Merrill Lynch shareholders settlement — $475m WaMu—$208.5m Wells Fargo mortgage backed securities — $125m National City—$168m Lehman Brothers—$9om Source: Kevin LaCroix, The D&O Diary, http://www.dandodiary.com/.
  6. 6. Defense Costs Estimates In many cases, defense costs alone may exceed the limits of the defendants’ D&O coverage or other available insuranceSource: J. Robert Brown, US v. Stockman and the Burn Rate on the D&O Policy,THERACETOTHEBOTTOM.ORG (June 2, 2008), available at www.theracetothebottom.org/stockman/us-v-stockman-and-the-burn-rate-on-the-do-policy.html (detailing the exhaustion of a $50 million tower ofD&O insurance through defense costs accruing at a rate of $1.67 million per month).
  7. 7. Corporate Bankruptcy Business Bankruptcy Filings:  2007—28,322  2008—43,546  2009—60,837  2010—56,282Source: American Bankruptcy Institute, U.S. Bankruptcy Filings 1980-2010 (Business, Non-Business, Total)
  8. 8. Failed Bank Litigation Total bank failures since Jan 2008—406 87 bank failures this year alone FDIC has initiated 15 lawsuits to date FDIC has authorized lawsuits involving 34 failed banks and 308 directors and officers for liability of at least $7.3M Litigation expected to increase Source: Kevin LaCroix, The D&O Diary, http://www.dandodiary.com/.
  9. 9. Regulatory EnforcementSEC ENFORCEMENT ACTIVITY 2007 2008 2009Investigations Opened 776 890 994Cases Filed 656 671 664 Source: SECURITIES AND EXCHANGE COMMISSION, PERFORMANCE AND ACCOUNTABILITY REPORT 36 (2009).
  10. 10. Insurance Coverage Litigation Derivative of underlying “financial crisis” litigation Direct actions on first-party financial guaranty insurance, i.e., mortgage insurance, trade credit insurance
  11. 11. Coverage Issues The “fortuity doctrine,” “known loss” or “loss in progress” defense Rescission and the “fraud in the application” defense Priority of payments among insured defendants Coverage for non-traditional “claims”
  12. 12. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company  Insured $96.5 million in loans to film production company  No foreign distribution required by Chase  Coverage for default denied as not “fortuitous”
  13. 13. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance CompanyQ. If the terms of the financing transaction were equally known to the insurer, is the “fortuity doctrine” a defense?A. No.
  14. 14. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company“Given the underlying basis of the doctrine, and the rightof the parties to agree to cover existing losses, it has beenrecognized that the known loss doctrine does not apply ifthe insurer also knew of the circumstances on which itbases the defense.”
  15. 15. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance CompanyQ. Does the “fortuity” defense apply to risks that were not investigated prior to issuance of the policy?A. Probably not.
  16. 16. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company  N.H. waived voluntary disclosure for Chase.  Other cases have inconsistently addressed the insurer’s obligation to investigate potential risks as a prerequisite to the “fortuity” defense.
  17. 17. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance CompanyQ. If the insured subjectively was unaware but objectively should have known of a “loss in progress,” will the “fortuity” defense apply?A. It depends on the jurisdiction.
  18. 18. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company In Texas, “the fortuity doctrine precludes coverage for known losses and losses the insured knows, or should know, are ongoing at the time the policy is issued.” In other jurisdictions, the standard is “subjective” only.
  19. 19. Fortuity Doctrine CASE STUDY:Chase Manhattan Bank v. N.H. Insurance Company Q. Is the “fortuity” doctrine inconsistent with or preempted by statutory provisions addressing “fraud” in an insurance application?
  20. 20. “Fraud in the Application” Texas Insurance Code Section 705.004 Policy provisions voiding coverage on the basis of false statements in an application No effect and will not bar coverage, unless:  Shown at trial  Material to the risk  Contributed to the event for which coverage is sought
  21. 21. “Fraud in the Application” CASE STUDY:Suntrust Mortgage, Inc. v. AIG United Guaranty Corp.  Master mortgage insurance policy  Insured Combo 100 loans  AIG denied coverage defaults and rescinded the policy  Allegations that ST misrepresented the underwriting standards for the subject loans
  22. 22. “Fraud in the Application” CASE STUDY:Suntrust Mortgage, Inc. v. AIG United Guaranty Corp. Q. Will knowledge of past “misrepresentations” or a failure to investigate impair the insurer’s “fraud” defense? A. Yes.
  23. 23. “Fraud in the Application” CASE STUDY:Suntrust Mortgage, Inc. v. AIG United Guaranty Corp. “Armed with a sweeping right to audit ST’s loans and being in possession of information that would have alerted a reasonable insurer (especially a sophisticated insurer like UG) to the prospect of material, wide-scale misrepresentations by ST years before UG raised its fraud defense, UG cannot now claim that it was duped by ST into covering the loans.”
  24. 24. “Fraud in the Application” CASE STUDY:United Guaranty Mortgage Indemnity v. Countrywide Fin. Corp.  Master mortgage insurance policy  Claim for rescission as to all insured loans  Allegations that Countrywide misrepresented the underwriting standards for some loans
  25. 25. “Fraud in the Application” CASE STUDY:United Guaranty Mortgage Indemnity v. Countrywide Fin. Corp. Q. Do “misrepresentations” as to some loans justify rescission of coverage for all loans? A. No.
  26. 26. “Fraud in the Application” CASE STUDY:United Guaranty Mortgage Indemnity v. Countrywide Fin. Corp. “United Guaranty cannot articulate any limiting principle for when misrepresentations as to some loans would entitle it to global rescission for all loans. . . . [T]he parties spelled out the procedures and remedies for misrepresentation or fraud—and those procedures apply on a loan-by-loan basis.”
  27. 27. Numerous Claimants :: Limited Proceeds CASE STUDY: IndyMac Bank 16 insurance policies $160 million in policy proceeds Bank’s failure prompted numerous lawsuits IndyMac subsidiary sued the insurers Sought declaration regarding priority of proceeds Asked court to determine its entitlement
  28. 28. Numerous Claimants :: Limited Proceeds CASE STUDY: IndyMac Bank Case dismissed D&O policies with ABC coverage prioritized payment to individuals before entities Individuals’ entitlement could not be determined prior to adjudication of the claims against them Subsidiary did not have an adequate injury; so, no justiciable dispute Subsidiary had no interest in proceeds of Side-A policies
  29. 29. Numerous Claimants :: Limited Proceeds CASE STUDY: Lehman Brothers Claims arising out of the largest bankruptcy in American history ($691 B) $250 million insurance program Single primary D&O policy; 16 layers of excess Substantial defense costs eroding policies
  30. 30. Numerous Claimants :: Limited Proceeds CASE STUDY: Lehman Brothers August 2011—former CEO and other D&Os reach $90 million settlement funded entirely by insurance Would nearly exhaust remaining limits D&Os of a different Lehman entity also facing significant litigation/exposure Objection to settlement—inequitable Court approved settlement October 19, 2011
  31. 31. Numerous Claimants :: Limited ProceedsCASE STUDY: Creative Problem Solving  Coverage defenses => leverage for negotiating reduced settlement  Saving partial limits (consider impact)  Release policy (consider impact), except carve-back for SEC/DOJ defense costs—could ultimately erode policy completely notwithstanding coverage defenses  When there’s not enough money, outcome will be short of perfect
  32. 32. Coverage for Non- Traditional “Claims”CASE STUDY: MBIA, Inc. v. Federal Ins. Co.  Bond insurer seeking coverage for regulatory investigations and follow-on shareholder litigation  Three challenged transactions  $29.5 million in defense costs
  33. 33. Coverage for Non- Traditional “Claims”CASE STUDY: MBIA, Inc. v. Federal Ins. Co.Q. Does a regulatory subpoena constitute a “Claim” as defined by the subject policies?A. Yes.
  34. 34. Coverage for Non- Traditional “Claims” CASE STUDY: MBIA, Inc. v. Federal Ins. Co.A subpoena is an “order” or “similar document”triggering the policies’ coverage for “a formal orinformal administrative or regulatory proceedingor inquiry commenced by the filing of a . . . formalor informal investigative order or similardocument.”
  35. 35. Coverage for Non- Traditional “Claims”CASE STUDY: MBIA, Inc. v. Federal Ins. Co.Q. Is coverage for the investigation of a shareholder derivative demand limited to the costs incurred until the demand is accepted or rejected?A. No.
  36. 36. Coverage for Non- Traditional “Claims” CASE STUDY: MBIA, Inc. v. Federal Ins. Co.Costs incurred to investigate, and if necessary reject, theshareholders’ demand are covered, but further costsexpended by the Special Litigation Committee to continueto investigate the shareholders’ claims are also coveredirrespective of the primary policy’s $200,000 sublimit forinvestigation costs on account of all ShareholderDerivative Demands.
  37. 37. Questions?
  38. 38. Unintended Consequences :: An Updateon the Impact of the Financial Crisis on Your Insurance Coverage Practice THANKS! 16TH ANNUAL INSURANCE LAW INSTITUTE NOVEMBER 3-4, 2011 AUSTIN, TEXAS
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