the four horsemen of rescission moderator: joseph p. monteleone duane morris, llp panelists: harvey...
TRANSCRIPT
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
MODERATOR: JOSEPH P. MONTELEONEDUANE MORRIS, LLP
PANELISTS:HARVEY WEINERPEABODY & ARNOLD, LLP
JANICE RIZZOST. PAUL TRAVELERS, INC.
R. DAMIAN BREWMARSH FINPRO
KIERAN MURRAYLEXINGTON INSURANCE
Finally – A successful rescission litigation
victory after 86 years!!
There is a material misrepresentation in this application for the insurance policy.
Things Boston Fans Would Things Boston Fans Would Like to See RescindedLike to See Rescinded
ThingsThings BostonBoston FansFans Would Like Would Like to See Rescindedto See Rescinded
Things Boston Fans Would Things Boston Fans Would Like to See RescindedLike to See Rescinded
Things Boston Fans Would Things Boston Fans Would Like to See Rescinded Like to See Rescinded
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
1.1. The BrokerThe Broker
2.2. The UnderwriterThe Underwriter
3.3. The Claims The Claims HandlerHandler
4.4. The LitigatorThe Litigator
RESCISSIONRESCISSION Elements Vary From State To State Can Be Either Statutory Or Common
Law Usually Governed By Law Of State
Where Policy Is Issued Policy Is Void (ab initio) And Not
Voidable
LEGAL ELEMENTSLEGAL ELEMENTSOF RESCISSIONOF RESCISSION
There Must Be A Representation. The Representation Must Be False. The Misrepresentation Must Be Material. The Insurer Must Have Relied On The
Misrepresentation. In Some Jurisdictions, The Insured Must
Know The Falsity Of The Representation.
SEVERABILITYSEVERABILITY Full Severability
In Re Healthsouth Corporation Insurance Litigation,
308 Supp. 2d 1253 (N.D. Ala. 2004)
Limited SeverabilityCutter & Buck, Inc. v. Genesis Insurance Company,
306 F. Supp. 2d 988 (W.D. WA 2004), aff’d 2005 WL1799397 (9th Cir.)
Understanding Rescission and the Application of Rescission from a
Claims Prospective
Janice M. Rizzo, Esq.St. Paul Travelers, Inc.
Director of Field OperationsProfessional E&O Claims
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
WHEN TO RESCIND
• Material Misrepresentation/Fraud In The Application
• Inaccurate Financials
• Failure To Cooperate
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
STEPS TO TAKE WHEN CONSIDERING RESCISSION
• Conduct A Prompt And Appropriate Investigation• Review All Controlling Statutes Regarding Duties
And Chance of Prevailing• Preserve The Right to Rescind / Avoid Exposing
Your Company To Extra-Contractual Liability• Issue A Reservation of Rights Letter / Enter Into A
Negotiated Non-Waiver Agreement Regarding Rights And Duties Of All
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
THE APPLICATION AND WARRANTY
• Concurrent Submission Of Application And Policy• Fact-Based Response (Affirmative Information) To
A Given Question• Has The Warranty Been Breached?• Update Of Material Information Between Application
Submission And Policy Issuance• Severability Clause• Renewal Applications And/Or Proving Actual Fraud
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
CLAIMS PERSONNEL
• Upon Initial Indication Of A Potential For Rescission, Act Immediately
• Appropriately Reserve All Rights Or Obtain A Non-Waiver Agreement
• Alert Underwriting And All Involved Regarding Renewals And/Or Confirming Validity Of Policy
• Review And Analyze All Discovery Material That May Impact Rescission Rights
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
UNDERWRITING
• Do Not Renew Potentially Invalid Policy Without Properly Protecting Rescission Rights
• Duty Of Inquiry Rests With the Underwriter• When In Receipt of Information That May Raise A
Concern, Underwriter Has The Duty Of Further Inquiry
• Underwriter Should Be Able To Testify That, Had He/She Known The Truth, The Policy Would Not Have Been Issued As Written Or At All
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
INVESTIGATION
• Insurer Must Act Timely And Appropriately In its Investigation
• Make A Material Determination Whether It Was Underwriting Intent To Issue Policy
• Commence An Underwriting Investigation Confirming Rescission Rights While Investigating Underlying Claim
• Delay In Declaring Rescission Based On Evidentiary Information Could Serve To Defeat Your Rescission Rights
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
DEFENSES TO RESCISSION
Even If The Right To Rescind Appears To Be Valid, There Are Certain Defenses That Could Apply
Ratification: Rescission is an equitable remedy meaning that one who seeks equity must do equity. Do not take any action that may indicate to the policyholder that the policy is viewed as valid.
Waiver: Dependent upon evidence of the intentional relinquishment of a known right (did the insurer know of facts giving rise to the right to rescind, yet did not properly rescind?)
Estoppel: Insured must prove prejudice since estoppel requires proof that the insured relied to its detriment upon either the insurer’s actions or failure to act
THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION
OTHER REMEDIES
• Policy’s Prior Knowledge Exclusion
• Policy’s Warranty Language
• Misrepresentation
• Common Law Fortuity
• Known Loss Doctrine
Client Perspective on Client Perspective on RescissionRescission
• R. Damian Brew/Managing Director/FINPRO Claims
ENRON AND WORLDCOM ENRON AND WORLDCOM OUTSIDE DIRECTOR OUTSIDE DIRECTOR
SETTLEMENTSSETTLEMENTS
• Enron: $168 M
$145 M - Insurance
$13 M - Personal Assets
• WorldCom: $55 M
$36 M - Insurance
$19 M - Personal Assets
$5.5 M - Bert Roberts
FACTORS LEADING TO FACTORS LEADING TO PERSONAL LIABILITYPERSONAL LIABILITY
• Dearth of insurance limits• Bankrupt issuers• Egregious fraud• Liability under Section 11• Coverage issues• Regulatory considerations• High-profile defendants• Outside analysis
Challenges for Challenges for Clients/Brokers on Clients/Brokers on
Rescission Rescission
• Renewal Strategy/Pre-Renewal Meetings
• Late Breaking Information
• Application Questions
• Warranty Letters
• Subjectivities to Binding
• Renewals/Run-Off Coverage
D&O INSURANCE D&O INSURANCE PROGRAM — COVERAGE PROGRAM — COVERAGE
CONSIDERATIONSCONSIDERATIONS
• Order of payments
• Severability of the “Application” for
insurance
• Conduct exclusions
When do they apply?
Are they severable?
• Program limits / structure
Traditional D&O Program Traditional D&O Program Structure — How It Structure — How It
Works…Works…
Nil Retention Retention ($) Retention ($)
Coverage APersonal Asset Protection for
Directors & Officers
Insurance for covered
Non-IndemnifiableClaims
• Statute• Bankruptcy• Company’s
refusal
Coverage BCorporate Asset
Protection
Insurance Reimbursement
forcovered
IndemnifiableClaims
Coverage CCorporate Asset
Protection
Insurance for Corporate Liability when Company is a
defendant in covered Securities
Claims
Single Aggregate Limit
Excess Limits:• Underlying limits are eroded / exhausted
Difference in Conditions (“DIC”) Limits:• Insurer of Underlying:
– Wrongfully refuses– Is financially unable– Rescinds
• Underlying insurers are not liable• Bankruptcy; proceeds of underlying insurance are stayed
Traditional D&O Program Structure Plus Side A Traditional D&O Program Structure Plus Side A Only Coverage — How It Works…Only Coverage — How It Works…
Nil Retention Retention ($) Retention ($)
Coverage APersonal Asset Protection for
Directors & Officers
Insurance for coveredNon-Indemnifiable
Claims
• Statute• Bankruptcy• Company’s refusal
Coverage BCorporate Asset
Protection
Insurance Reimbursement for
covered IndemnifiableClaims
Coverage CCorporate Asset
Protection
Insurance for Corporate Liability when Company is a
defendant in covered Securities Claims
Coverage A Excess / DIC
Additional Personal Asset Protection for
Directors & Officers
Single Aggregate Limit
Traditional D&O Program Structure Plus Side A Traditional D&O Program Structure Plus Side A Only & IDL Coverage — How It Works…Only & IDL Coverage — How It Works…
Nil Retention Retention ($) Retention ($)
Coverage APersonal Asset Protection for
Directors & Officers
Insurance for coveredNon-Indemnifiable
Claims
• Statute• Bankruptcy• Company’s refusal
Coverage BCorporate Asset
Protection
Insurance Reimbursement for
covered IndemnifiableClaims
Coverage CCorporate Asset
Protection
Insurance for Corporate Liability when Company is a
defendant in covered Securities Claims
Coverage A Excess / DICAdditional Personal Asset
Protection for Directors & Officers
Single Aggregate Limit
Excess Limits:• Underlying limits are eroded / exhausted
Difference in Conditions (“DIC”) Limits:• Insurer of Underlying:
– Wrongfully refuses– Is financially unable– Rescinds
• Underlying insurers are not liable• Bankruptcy; proceeds of underlying insurance are stayed
IDL CoverageAdditional Personal Asset
Protection for onlyIndependent Directors
Similar policy features as Coverage A Excess / DIC policies
Underwriting PerspectiveUnderwriting Perspective
Kieran Murray
Lexington Insurance Company
National Branch
Manager- Employment Practices Liability
UNDERWRITING UNDERWRITING PERSPECTIVEPERSPECTIVE
• Obligatory Disclaimer- Views being expressed are my views and not the views of Lexington Insurance Company or AIG. In addition, as D&O coverage is not my expertise, EPLI is, I disclaim any knowledge in this area.
Underwriting ProcessUnderwriting Process
• Submission / Application Received From Broker
• Client Meeting
• Quote Presented
• Negotiation (could be before or after quoting)
• Subjectivities to Binding
• Policy Issuance
Submission / ApplicationSubmission / Application
• Application - Carrier or Market Application
• Loss Runs
• Financials
• Miscellaneous Information
• Missing Information Necessary to Quote
Client Meeting / Additional Client Meeting / Additional InformationInformation
• Additional Information Received Through Client Meeting or From Broker. Can be Verbal or in Writing.
• Late-Breaking Information Received.
• Underwriter Is Now Prepared to Analyze Complete Submission and Quote Based on All Information Received.
Quote PresentedQuote Presented
• Quote Based on and Relying On Information Received.
• All Coverages and Options Requested May or May Not be Offered in Quote.
• Subjectivities
NegotiationsNegotiations
• Terms and Conditions Including Severability
• Subjectivities Application
• Warranty Question• Other Subjectivities
SubjectivitiesSubjectivities
• Can be Received Prior to or After Binding.
• Are They What Were Expected?
• Never Want Surprises at This Stage.
Avoid Unwanted ResultsAvoid Unwanted Results
• Throughout Quoted / Underwriting Process Numerous Areas Where Process Can Head In the Wrong Direction. Important to:
Submit as Complete a Submission / Renewal Submission As Possible at Outset.
Be As Clear and Precise as Possible - Minimize Surprises.
Put In Writing if Possible. Satisfy Subjectivities ASAP.