Presenting a live 90 ‐ minute webinar with interactive Q&A Defeating Phantom Exclusions in D&O and E&O Coverage: Guidance for Policyholders Overcoming Denials of Coverage Based on Restitution and Disgorgement After U.S. Bank N.A. v. Indian Harbor Ins. Co. THURS DAY, JULY 26, 2018 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Alexander D. Hardiman, Partner, Pillsbury Winthrop Shaw Pittman , New Y ork Noel Paul, Reed Smith , Chicago The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1 .
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Defeating Phantom Exclusions in D&O and E&O Coverage: Guidance for Policyholders Noel Paul npaul@reedsmith.com
Key Policy Terms and Provisions • Professional Liability/Errors & Omissions Policy – Provides coverage for professional negligence. – Coverage grant: Insurer agrees to pay on behalf of any Insured Damages and Claims Expenses … arising out of any Wrongful Act … in rendering or failure to render Professional Services. – “Wrongful Act”: Any negligent act, error, omission, misstatement, misleading statement, neglect, or breach of duty by the Insured in providing (or failing to provide) Professional Services. 6
Key Policy Terms and Provisions • Professional Liability/Errors & Omissions Policy – Defense provision: Insurer shall have the right and duty to defend any Claim against the Insured … even if any of the allegations of the Claim are groundless, false or fraudulent. – “Damages”: a monetary judgment, award or settlement, provided that the term Damages shall not include or mean: (1) future profits, restitution, disgorgement of unjust enrichment or profits by an Insured…. 7
Key Policy Terms and Provisions • Professional Liability/Errors & Omissions Policy – “Loss”: Damages, settlements and Costs, Charges and Expenses which the Insured is legally obligated to pay, but shall not include … matters deemed uninsurable under the law pursuant to which this Policy shall be construed. – Conduct exclusion: Insurer shall not be liable to make any payment in connection with any Claim, brought about or contributed to by: (i) any deliberately dishonest, fraudulent or criminal act or omission by any Insured; or (ii) any personal profit or advantage gained by any Insured to which they were not legally entitled; which is established by: a final judgment, ruling or finding in the underlying civil, criminal, administrative, regulatory or arbitration proceeding. 8
Key Policy Terms and Provisions • Directors & Officers Policy – Provides coverage for claims against directors and officers and Securities Claims against Company. – Coverage grant: This policy shall pay the Loss of any Company arising from any Securities Claim made against such Company for any Wrongful Act of such Company. – “Wrongful Act”: Any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act with respect to the Company, any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act by such Company, but solely in regard to a Securities Claim. 9
Key Policy Terms and Provisions • Directors & Officers Policy – “Loss”: Damages, settlements, judgment, and Defense Costs; however, “Loss” shall not include: (1) civil or criminal fines or penalties; (2) taxes; (3) punitive or exemplary damages … (7) matters which may be deemed uninsurable under the law pursuant to which this policy shall be construed. – “Most favored nation” provision: “Enforceability of this paragraph shall be governed by such applicable law that most favors coverage.” 10
Key Policy Terms and Provisions • Directors & Officers Policy – Conduct exclusion:The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured arising out of: remuneration, profit or other advantage to which the Insured was not legally entitled; or deliberate criminal or deliberate fraudulent act by the Insured; if established by any final, non ‐ appealable adjudication in any action or proceeding other than an action or proceeding initiated by the Insurer to determine coverage under the policy. 11
Rules of Policy Interpretation • Coverage grant construed broadly and exclusions construed narrowly in favor of coverage. • Ambiguities typically construed against insurance carrier. • Burden on insurer to prove limitation on coverage. • Policy interpreted as a whole to give meaning and effect to each provision. 12
Defeating Phantom Exclusions in D&O and E&O Coverage: Guidance for Policyholders Strafford Presentation July 26, 2018 Alexander D. Hardiman 212.858.1064 Alexander.Hardiman@pillsburylaw.com
Level 3 Communications • Level 3 Commc'ns, Inc. v. Fed. Ins. Co. , 272 F.3d 908 (7th Cir. 2001) • Judge Richard R. Posner: “Modern judicial opinions tend to be too long, and we shall try to be brief. We shall even forgo the usual prefatory statement of facts, which would disclose an utterly routine, though very large, illegal drug operation.” U.S. v. Herrera ‐ Medina (1988). • A two page opinion cited 747 times. 14
Level 3 Was Not The First • Level 3 was not the first to consider the insurability of “restitution” and “disgorgement of ill ‐ gotten gains” • Various courts had already held that restitution or disgorgement are not covered under insurance policies • But Level 3 was the most influential as it brought together the broad interpretive principles used as a basis to bar restitutionary payments 15
PRE ‐ LEVEL 3 CASES • Nortex Oil & Gas Corp. v. Harbor Insurance Co., 456 S.W.2d 489 (Tex. Civ. App. 1970). • Town of Brookhaven v. CNA Insurance Cos ., 1988 WL 23555 (E.D.N.Y. Feb. 24, 1988). • Bank of the West v. Superior Court, 833 P.2d 545 (Cal. 1992). 16
Level 3 When a “Loss” isn’t a “Loss” • Underlying securities fraud suit in which former shareholders of acquired corporation sought to recover monetary value of shares sold to Level 3 • District court ruled that an $11.8MM settlement was a covered “Loss” under Level 3’s D&O policy • 7 th Circuit reverses, no “Loss” here, and upends D&O coverage for securities suits 17
Level 3 Securities Fraud Cases are Essentially Uninsurable • “The interpretive principle for which Federal contends ‐ that a “loss” within the meaning of an insurance contract does not include the restoration of an ill ‐ gotten gain ‐ is clearly right.” • "They were seeking the difference between the value of the stock at the time of trial and the price they had received for the stock from Level 3. That is standard damages relief in a securities ‐ fraud case. But it is restitutionary in character. It seeks to divest the defendant of the present value of the property obtained by fraud, minus the cost to the defendant of obtaining the property.” 18
Level 3 Thieves Don’t Get Insurance "An insured incurs no loss within the meaning of the insurance contract by being compelled to return property that it had stolen, even if a more polite word than “stolen” is used to characterize the claim for the property’s return.” 19
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