Category Archives: Insurance Recovery

Gilbert LLP Convinces Sixth Circuit to Rule in Favor of Asbestos-Containing Product Manufacturer-Policyholders

By Mark Packman and Krishan Thakker

Comprehensive general liability policies limit the amount the insurer has to pay for each “occurrence”, which is typically defined as an “accident” or “exposure to [injurious] conditions”. Insurers and policyholders frequently battle over the number of occurrences that result from asbestos lawsuits and other toxic-tort claims.

Miriam Smolen, a partner at Gilbert LLP, recently won a significant victory for policyholders, convincing the Sixth Circuit that Ohio law treats each asbestos tort claim against a policyholder as arising from a separate “occurrence” for insurance purposes. See LuK Clutch Sys’s, LLC. v. Century Indem. Co., No. 11-4212 (6th Cir. Oct. 11, 2012), aff’g LuK Clutch Sys., LLC v. Century Indem. Co., 805 F. Supp. 2d 370 (N.D. Ohio 2011). The decision delivers a blow to general liability insurers nationwide on the hotly contested issue of number of occurrences.

LuK Clutch (“LuK”) was sued in hundreds of product liability personal injury actions alleging exposure to asbestos-containing automotive clutch products manufactured by a corporate predecessor of LuK. LuK sought coverage under four commercial general liability policies issued by the defendant- insurers over the period from 1985 to 1987. Each of the policies had a per “occurrence” limit. When the defendant-insurers claimed exhaustion of the policies, LuK brought a declaratory judgment action against defendant-insurers and MTD Products, Inc., a joint owner of LuK’s predecessor, for coverage under the policies.

The insurers argued that there was a single occurrence, namely, LuK’s initial decision to use and manufacture asbestos-containing products, and therefore that no coverage remained under the policies. LuK Clutch, 805 F. Supp. 2d at 371, 380. LuK argued there were multiple occurrences i.e. that each individual claimant’s exposure to asbestos-containing products constitutes a separate occurrence. Id. at 371, 377.

Ruling for LuK, the District Court held that the “occurrence” is the exposure to asbestos fibers, and that each asbestos claim arose from a “separate occurrence.” The district court, in rejecting the insurer’s argument that the decision to manufacture asbestos was a single occurrence, reasoned that it is “difficult to characterize a decision to use asbestos in clutch facings as a condition to which the claimants were exposed.” Id. at 378. Additionally, the court said the definition of the term “occurrence” includes the clause, “which happens during the policy period and which result in personal injury.” Id. Since the claimants’ exposure to LuK’s products occurred during the relevant policy periods, it was possible that this exposure “result[ed] in personal injury” to the claimant. Id. Thus, the court reasoned that “it is impossible that a decision made in the 70s took place in 1985 or 1986 and resulted in personal injury.” Id. (emphasis in original).

The court further found the policies’ “Limits of Liability” provisions did not require a “single occurrence” to result, since the relevant part of that provision stated that “all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence.” Id. at 373, 380. In addition to analyzing the policies’ language, the court adopted the so-called “cause test,” which holds that the number of occurrences is equal to the number of causes of the policyholder’s tort liability. Id. at 380-381. Accordingly, the court held that each asbestos claim arising from an individual claimant’s “continuous and repeated exposure” to LuK’s asbestos-containing products constituted a separate, “single occurrence.” Id. at 381. Significantly, the court also noted the underlying complaints alleged exposure with differing injuries in different places, at different times, under different circumstances. Id. at 380-381.

The Sixth Circuit, after oral argument, issued a one-sentence order stating “that the judgment of the district court be, and it hereby is, affirmed upon the opinion of the district court for the reasons stated in open court.” LuK Clutch Sys’s, LLC. v. Century Indem. Co., No. 11-4212 (6th Cir. Oct. 11, 2012).

Ten Things Every Company Needs To Know About Insurance Coverage For Superstorm Sandy

By Richard Shore and Jonathan Cohen

  1. There is a good chance you have coverage.  There is a good chance that affected companies have insurance for some or all of the property damage, loss of profits, and expenses resulting from Superstorm Sandy.
  2. Your policies may cover flood damage.  Many business property policies cover both flood and wind damage, sometimes subject to special terms or limitations.  Even if there are exclusions for flood damage, companies may be able to establish coverage through other covered causes.
  3. Hurricane deductibles should not apply.  Some policies have special deductibles for hurricane-related damage.  Sandy, though, likely was not classified as a “hurricane” when it made landfall, and damages thus may not trigger hurricane-related deductibles.
  4. You may have coverage for losses due to business interruption.  Most business property policies cover losses that occur when a company loses profits due to physical damage to its own facilities.  These policies also often cover extra expenses that businesses incur to mitigate losses, potentially including expense of shifting production form a damaged plant to other facilities.          
  5. You may be covered even absent physical property damage.  Even if your facilities or offices sustained no physical property damage, you may still have coverage under most property policies if (a) your location was shut down by acts of civil authority, (b) you had a sustained inability to enter or leave your facility, or (c) there were interruptions in key services, such as power or phone outages.
  6. You may be covered for the costs of preparing for Superstorm Sandy.  Many property policies provide coverage for costs incurred to prevent or mitigate imminent damage.  Because reasonable steps taken to prepare for and minimize losses may have saved insurers money, insurers should pay for these efforts.
  7. You may need to consider liability insurance as well as property insurance.  Because business interruptions sometimes can result in third-party claims against your company, you may need to seek coverage under your general liability policies, and you should provide prompt notice under those policies if circumstances warrant it. 
  8. Some policies contain strict time requirements.  Many policies contain tight deadlines for complying with certain coverage requirements, including short time frames for providing notice and submitting proofs of loss, and time limits on when you can sue the insurer if there is a dispute.  If necessary, communicate now with your insurer to negotiate an extension or tolling arrangement.
  9. Supply chain losses may be covered.  Many property policies cover lost profits and extra expenses incurred due to interruptions that block a company’s ability to obtain components necessary to make its own product, or its ability to deliver its product to the customer.  Even disruptions at a supplier’s supplier may be sufficient to trigger this “contingent business interruption” coverage.
  10. You should review all of your policies and get help if you need it.  Companies should review all relevant policies to identify potential coverage.  Because there can be many pitfalls in securing insurance coverage for Sandy-related losses, it is best to consult experienced professionals early in the process, including your broker, private claims adjusters, and counsel.

Whether Because of Floods or Droughts, Weather Can Shut Down the Mississippi River and Cause Business Interruptions

By Jonathan Cohen and Barry Buchman

Last year, we wrote an article published in the Corporate Counselor that discussed the coverage consequences of business interruptions caused by unprecedented flooding of the Mississippi River.  In the article, we discussed the fact that the flooding could cause supply chain interruptions, which could result in very large losses to companies that lost access to suppliers or could not get their products to market.   We also discussed the fact that many companies have insurance coverage for “contingent business interruptions,” which may cover all or part of the losses caused by disruption of river traffic.

Last week, the Washington Post published an article warning of severe economic fallout potentially on the horizon because of the crippling drought that has severely lowered water levels on the Mississippi River.  The article pointed to the fact that the “stubborn draught that has gripped the Midwest for much of the year has left the Mighty Mississippi critically low – and it will get even lower if the Army Corps of Engineers presses ahead with plans to reduce the flow from a Missouri River dam.”  The article raised the specter that a dip in water levels could mean a closure of the Mississippi River, and thus the same types of losses and disruptions that arose from flooding last year.  The Washington Post quoted a senior vice president of the Waterways Council (a public policy organization that represents ports and shipping companies), as saying:  “This could be a major, major impact at crisis level . . . . It is an economic crises that is going to ripple across the nation . . . .”

If the Mississippi River becomes impassable, companies again may need to look to their insurance to ameliorate the financial impact.  The same issues that we discussed in our article last year again will come to the forefront.  As we discussed in our article, companies need to review their policies to determine whether they might have coverage, act quickly to ensure compliance with all time-related policy conditions, prepare to counter the arguments that insurers might raise to evade their coverage obligations, and take care to track losses and damages to enable companies to present their claims effectively.

Jonathan Cohen to Speak at Webinar on Coverage Issues Resulting from Hurricane Sandy on November 27, 2012

This Perrin Conference, The Imperfect Storm: Surfacing Coverage Issues in Sandy’s Wake, will cover the following topics:

  • An overview of the coverages potentially available for covering damages and business interruptions arising from Sandy
  • A guide to a healthy working relationship between insurers and policyholders, including how when to involve insurers, how to identify and quickly resolve disputes, and what to do if faced by an insurer that refuses to pay
  • Practical tips and next steps if your company has incurred Sandy-related losses
  • The need for prompt technical expertise for losses involving specialized plant and machinery, especially where there is a BI element to the potential claim
  • Discussion of potential for ongoing losses even after recovery due to displaced local community

The webinar will take place on Tuesday, November 27 at 2:00 pm EST.  Click here for more information.

Mold, Asbestos, and Raw Sewage – The Toxic Stew that Sandy Left Behind

By Jonathan Cohen and Aisha Cassis

Superstorm Sandy wreaked havoc across the Eastern Seaboard and is predicted to be one of the costliest natural disasters in U.S. history.  New York’s Governor Cuomo estimates that the storm may have had a $50 billion impact on the northeastern states in damage and economic loss.  Particularly because a major Nor’easter followed right on Sandy’s heals, businesses throughout the region suffered significant property damage and lengthy business interruptions.

But Sandy’s wrath may not have ended there.  If Hurricane Katrina is a good model, Sandy’s direct property damage and business interruptions may be exacerbated by future environmental harms that will require costly environmental cleanup well after the flood waters subside.  Companies should be aware they may be able to rely on existing insurance policies to cover these costs.

Secondary hazards from Superstorm Sandy may remain for months after the flood waters have been pumped out.  Numerous communities reported that Sandy caused thousands of gallons of raw sewage to pour out from overwhelmed treatment plans into the Long Island Sound.  The storm also may have affected open-air impoundments that store millions of gallons of toxic fracking waste and sludge.  The humid conditions that Sandy left in many buildings could result in the growth of mold or other environmental risks.  And, asbestos, which previously had been encapsulated in building materials, may deteriorate if the encapsulating materials became wet, causing deterioration that could allow asbestos to become friable and requiring environmental redress.

Companies may have coverage for these costly hazards under one or more of their commercial insurance policies.  These policies may provide coverage for, among other things, the costs of cleaning up the environmental impacts, and/or property damage and business interruption resulting from those impacts.  Companies also may have coverage under general liability or other policies for third-party claims alleging tort liability for environmentally-related property damage.

But watch out – these policies may contain exclusions for certain or all of these hazards, including express and broad exclusions for damage arising from mold, bacteria, and asbestos.  As Sandy is expected to provoke four times the number of insurance claims as last year’s Hurricane Irene, policyholders reasonably should expect that insurers will try to invoke all possible exclusions.  Policyholders should prepare now to counter the insurers’ likely coverage defenses, and they should recognize where they have strong counterarguments.  For example, multiple causes of an accident may trigger coverage even if one of the causes is excluded.  Companies should review their policies carefully, with insurance counsel if needed, and take steps to preserve and pursue all available coverage.

For more information, click here for our alert on Sandy-related coverage issues, or contact Jonathan Cohen at cohenj@gotofirm.com or at (202) 772-2259.

Insurance Coverage for Wage & Hour Claims Arising Out of Superstorm Sandy

By Barry I. Buchman, Kami E. Quinn, and Jason S. Rubinstein

Although the full scope of Superstorm Sandy’s financial impact will not be known for some time, there is little debate that Sandy will go down in history as one of the nation’s most costly natural disasters.  In fact, many experts already estimate total losses in excess of fifty billion dollars.

In the aftermath of Sandy, businesses undoubtedly will focus on restoring operations as soon as possible.  Indeed, their insurers will argue that businesses have a duty to do so, in order to mitigate business interruption losses.

It is likely that such efforts will necessitate asking employees to work overtime.  Among other things, the process could involve the reorganization of work schedules and/or increased telecommuting. 

During this process, businesses must ensure that they do not inadvertently violate state and/or federal wage and hour laws (note: state and federal wage and hour laws often differ — with states sometimes imposing stricter obligations on companies than those imposed by federal law).  See, e.g., Abigail Rubenstein, Employers Can’t Ignore Wage Laws In Hurricane Sandy’s Wake, Law360, Nov. 1, 2012.  Failure to adhere to applicable wage and hour laws could result in litigation and/or government investigation down the road.

The cost of paying this overtime could be a significant cost item for businesses already struggling to rebuild from the storm.

Fortunately, commercial property insurance can help companies mitigate the expense of complying with wage and hour law in difficult times.  Most first-party commercial property insurance policies provide coverage for the increased expense to a business in compensating employees in the days and weeks following covered property damage.  This coverage is usually called “extra expense” coverage.  The purpose of extra expense coverage is to compensate businesses for the reasonable and necessary expenses that they incur after a loss to help minimize the business interruption caused by the loss.  The costs include expenses that companies incur to continue operations or to resume operations more quickly than they would have otherwise.  In this way, it benefits both the company, by allowing it to resume operations more quickly, and the insurer that would otherwise be responsible for the business interruption loss. 

Overtime pay for employees that are required to work additional time due to a covered loss is exactly the type of extra expense that often is covered by these policies.  Therefore, companies should analyze their policies, potentially with the help of an insurance professional, and keep careful records of wage expenses incurred that are related to getting the business back on its feet.  These expenses should be submitted to the insurer for payment.

Sometimes, however, even with the best intentions and efforts, wage and hour violations still can occur.  Fortunately, in the event that wage and hour litigation and/or a government investigation nevertheless develops, companies may find coverage for such claims under their employment practices liability coverage, or under their directors and officers insurance policies that include an employment practices liability coverage component.  For a more detailed discussion of insurance coverage for wage and hour claims, please see our prior article on the topic, Rethinking Common Wisdom of ‘Wage And Hour’ Insurance, Law360, May 2012.

Hurricane Sandy – How Insurance Can Help Cover Businesses’ Costs To Rebuild

By Jonathan M. Cohen and Barry I. Buchman

With Hurricane Sandy only days in the past, many businesses already are beginning to rebuild and start the process of recouping the losses they sustained.  Many of these businesses will find that insurance that they already own may pay for some or all of their losses.

Hurricane Sandy no doubt will go down in history as one of the Nation’s most costly natural disasters.  Some experts already have estimated that property damage alone could be measured in the tens of billions of dollars.  News reports show that companies across New York, New Jersey, and other affected states suffered severe property damage and lost profits from interruptions in their businesses.  The ripple effects could cost businesses billions of dollars more.  Companies all around the country and the world could be affected as their critical supply chains are cut off or disrupted.

Depending on the circumstances and the insurance those companies purchased, insurance may help businesses nationwide to recover hurricane-related losses.  For companies directly affected by the storm, first-party property policies might cover losses resulting from damaged buildings, vehicles equipment, inventory, records, and other property.  Typically, first-party property policies provide broad coverage for damaged or lost property so long as the cause of damage is a “covered cause of loss.”  And, typically, modern first-party property policies include all risks of loss as covered causes, absent express policy language to the contrary.  Although some businesses’ property policies may exclude or limit coverage for damage caused by floods, many policies contain broad flood coverage.  Moreover, even if policies exclude coverage for floods, losses resulting from wind damage or other storm-related harms (such as a resulting fire or power interruption) still may be covered.

Affected companies also may be covered for lost profits that result from damage to covered property.  For companies directly affected by the hurricane, business interruptions may result as the companies attempt to rebuild or reopen.  “Business interruption” coverage provides protection against these types of losses by paying for lost profits resulting from damage to a company’s own facilities.  Policies also may cover the extra expenses that a company sustains in addressing the impact of the Hurricane, such as the costs of shifting production away from a damaged plant to other facilities.  Many policies also cover interruptions caused by:  (a) government-ordered closures, (b) blockages that prevent ingress or egress to a company’s facilities, and (c) damage to other entities that supply critical services to a company, such as electricity, gas, or water.

Because Hurricane Sandy affected some of the country’s most significant economic and manufacturing centers, closed important sea ports and airports, and disrupted important highways and seaways over a broad swath of the Northeast, businesses well outside of the hurricane’s path could sustain losses.  For instance, thousands of companies rely on other companies in the directly affected area for supplies of parts, ingredients, or services.  Because the hurricane may disrupt those supplies, companies outside of the affected area could be unable to produce their own products or services or might incur extra expenses to find alternative suppliers or supply routes.

Some of these companies that sustain losses because of supply chain disruptions also may have coverage to help pay for these losses.  Many first-party property policies contain coverage for “contingent business interruptions” – that is, lost profits resulting from the inability to get materials from a supplier or to sell its products to a customer due to property damage sustained by that supplier or customer.  Many such policies also pay for extra expenses to defray the increase in costs sustained to replace an affected supplier or circumvent a blocked supply route.  Some of these contingent business interruption provisions may even provide coverage based on damage to indirect suppliers and customers.

Regardless of which type of loss and coverage a company may need to address, there are four simple steps that most companies can take to maximize their insurance recoveries.

  • First, businesses should collect, organize, and review their insurance policies.  This process should include an effort to identify and obtain policies issued to other businesses, such as current and former affiliates, that also may provide coverage.
  • Second, most property policies require policyholders to provide notice of potential claims and to submit “proofs of loss” quickly, and these policies also often have express deadlines for when any lawsuit against the insurer must be brought if there is a dispute.  These deadlines can be very tight, often requiring businesses to take significant actions within as little as 30 days or less.   It therefore is critical that businesses promptly give at least precautionary notice, absent contrary business reasons, to all of their insurers under all potentially triggered policies.  Then, businesses should consider approaching their insurers about postponing or tolling any other deadlines by agreement.  Insurers in these circumstances often are willing to agree to extensions of these types of deadlines.
  • Third, businesses should carefully document their damages and losses, including property damage, lost revenues, and additional expenses.  If they do not already have protocols in place for tracking this information, companies immediately should put them into place and follow their protocols carefully.  Because the way that a company characterizes these damages and losses can matter if an insurance dispute arises, companies should consider involving their legal departments and insurance counsel in preparing and implementing appropriate protocols.
  • Fourth, because of the complicated coverage questions and potential procedural traps in successfully making insurance claims, businesses should consider consulting with experienced professionals early in the process, including insurance brokers, accounting consultants, and coverage counsel.  By doing so, companies can avoid common pitfalls in preparing a potential coverage claim and can be prepared to respond to insurer inquiries or coverage denials.

The coverage provided by a business’s insurance policies can be an important and valuable tool in paying for the losses and costs resulting from Hurricane Sandy.  Companies can maximize the benefits of their insurance, and minimize the likelihood of protracted disputes later, by acting proactively now to assess and preserve their rights.

Food Companies May Have Insurance Coverage For Lost Profits Due To Hurricane Sandy, Even If They Are Well Outside Of The Directly Affected Area

By Jonathan M. Cohen

Hurricane Sandy was a major event that caused companies in all sectors to incur direct property damage and massive losses because of interrupted business operations.  The direct costs of the storm have been estimated at as much as $20 billion for property damage and $10-30 billion more for lost profits deriving from business interruptions.  What has been less widely discussed, though, is that companies well outside of the directly affected areas may lose millions of dollars in profits because they cannot deliver their products to customers in the affected area.  This problem is particularly acute for food companies, where products may have short shelf lives and regular delivery schedules.

For example, media articles have stated that supermarkets in affected areas now are reopening, but that deliveries of food supplies have been interrupted and many consumers have been unable to get to supermarkets that are open. Still, many other stores remain without power and thus remain closed.  While some supermarket chains have limited supplies of back-up generators, large supermarket chains have had to make choices about which of their many stores that remain without power should receive generators.  Meanwhile, food manufacturers have had to hold products that otherwise would have been delivered and sold.

Most food companies have insurance coverage that may protect against some of the lost profits or spoiled inventory due to property damage or business interruptions of their customers, or even to the ultimate consumers.  Many property policies, which most food companies maintain, cover “contingent business interruptions.”  This coverage pays for lost profits and extra expenses incurred due to property damage sustained by a company’s customers.  Many policies limit contingent business interruption coverage to situations where the customer’s property damage or business interruption would itself trigger the policy’s property damage or business interruption coverage.  This condition may not significantly limit coverage, though, because many business property policies provide coverage for disruptions caused by both floods and wind.  Many of these policies cover contingent business interruptions even where the contingent business interruption resulted from disruptions at an indirect customer, potentially including retailers and even consumers.

A related problem for food companies is that many ingredients are manufactured in affected areas.  If a food company cannot obtain ingredients, or must pay more to get alternative supplies of that ingredient, that too may be covered under contingent business interruption and related coverages.  Indeed, even if a food company incurs increased shipping costs because of the storm (such as needing to circumvent closed ports or snowed-under roads), there may be coverage under the property policy’s extra expenses provisions.

Food companies that do business in the directly affected area should pay careful attention to whether they incur lost profits due to storm damage to their customers.  If they have such losses, food companies should review their policies carefully and take all necessary steps to preserve and pursue their coverage.

For more information, click here for our alert on Sandy-related coverage issues, or contact Jonathan Cohen at cohenj@gotofirm.com or at (202) 772-2259.

What Gilbert LLP Wants You To Know About Insurance Coverage For Superstorm Sandy

Insurance coverage may be available for companies both within and outside of the directly-affected area.

Superstorm Sandy no doubt will go down in history as one of the Nation’s most costly natural disasters.  Some experts already have estimated that property damage alone could be measured in the tens of billions of dollars, and companies both inside and outside of the directly affected area may sustain costly business interruptions or may be unable to obtain the supplies they need to keep their businesses operating.  Many companies, both in the directly-affected area and those whose supply chains or customers have been disrupted, may be able to recover insurance to help them rebuild, even if those companies have not actually sustained any property damage.

If you have sustained direct property damage, Gilbert LLP wants you to know . . . click here for more.

Protecting Your Bottom Line from the Cost of National Association of Securities Dealers and FINRA Investigations

By Rachel Kronowitz and Adrian Azer

When self-regulatory organizations (“SRO”), such as the Financial Industry Regulatory Authority (“FINRA”), commence an investigation or proceeding, member firms are typically concerned with the financial impact that both the defense costs and any ultimate payment obligation will have on their bottom line.  With the United States Second Circuit Court of Appeal’s decision in Fiero v. Financial Industry Regulatory Authority, Inc., 660 F.3d 569 (2d Cir. 2011) that SRO fines are not judicially enforceable, member firms may be able to obtain balance sheet protection from these proceedings through insurance coverage. 

Historically, Errors & Omissions (“E&O”) or Director & Officer (“D&O”) insurance policies excluded coverage for “fines or penalties imposed by law.”  Since Fiero precludes SROs from judicially enforcing their fines, these fines can no longer be “imposed by law” and member firms have strong arguments that insurers must provide indemnity and reimburse them for any defense costs incurred.  

This access to insurance coverage is significant for multiple reasons:  it not only reduces the financial impact of SRO investigations and proceedings, but also negates a significant point of leverage that SROs have when negotiating settlements with member firms.

I.  Overview of Fiero and Its Progeny

In Fiero, the Second Circuit faced the question of whether SROs, such as FINRA, can judicially enforce the collection of fines against member firms.  SeeFiero, 660 F.3d at 574.  The Second Circuit ruled that SROs do not have the ability to judicially enforce their fines under the Securities Exchange Act of 1934 (the “Exchange Act”).  Id. In reaching this conclusion,the Second Circuit noted that Congress intentionally did not provide SROs access to the judicial system to enforce their fines:  Congress “was well aware of how to grant an agency access to the courts to seek judicial enforcement of specific sanctions, including monetary penalties.”  Id. at 575.[1]

Since Fiero, at least one other court has extended the holding in Fiero to preclude an SRO from judicially enforcing its disciplinary fines.  See generallyNasdaq OMX PHLX, Inc. v. Pennmont Securities, 2012 WL 2877607 (Pa. Sup. Ct. July 16, 2012) (“Pennmont”).  In Pennmont, Nasdaq OMX PHLX, Inc. (“Nasdaq”) sought to judicially enforce a fine imposed under Exchange Rule 651 that its member firm – Pennmont Securities – refused to pay.  Id. at 2-4.  In ruling that Nasdaq could not commence a private action to collect on its disciplinary fine, the Pennsylvania Superior Court performed an analysis similar to that of the Second Circuit.  Id. at *16. 

Notably, the court held that Congress “was aware it could authorize judicial enforcement of monetary penalties imposed via disciplinary rules and regulations, including Rule 651,” but Congress “opted to remain silent about whether courts could enforce such monetary penalties.”  Id.  Thus, the court concluded that “we will not imply a private right of action to other sections of the Exchange Act that are silent.”  Id.

II.  Impact of Fiero on Insurance Coverage for SRO Investigations

A significant number of articles have been written about Fiero, noting that the decision “will not have a significant impact on member firms because the prospect of expulsion from the industry provides sufficient incentive to pay monetary penalties imposed by FINRA.”  See Second Circuit Rules FINRA Has No Power to Enforce Disciplinary Fines in Court, Nader H. Salehi (Oct. 6, 2011); see also Second Circuit Court of Appeals Rules FINRA Lacks Authority to Sue to Collect Fines, Joseph D. Simone (Oct. 17, 2011).  Fiero does, however, provide member firms an opportunity to access insurance coverage to protect against the costs of SRO investigations and proceedings.

D&O and E&O policies typically provide coverage for a “claim” (a “written notice, including service of suit or demand for arbitration, received by one or more insureds asking for money or services”) arising out of a “wrongful act” (“any negligent act, error, or negligent omission to which this insurance applies”).  Further, D&O and E&O policies typically provide a duty to defend if the suit seeks damages for loss “to which this insurance applies”: 

We will pay those sums that the insured becomes legally obligated to pay as damages . . . because of negligent acts or omissions committed in the scope of duties as a director or officer . . . which [occur] during the policy period to which this insurance applies. We will have the . . . duty to defend any ‘suit’ seeking those damages.

D&O and E&O policies, however, typically carve out fines from coverage:  “‘Loss’ shall not include . . . Fines or penalties imposed by law.” 

Insurers have argued that they have no obligation to indemnify their insureds for SRO fines and defense costs because any “fines or penalties” would be “imposed by law.”  However, with the issuance of Fiero and Pennmont, member firms have strong arguments that such “fines or penalties” cannot be “imposed by law.”  SeeFiero, 660 F.3d at 574; Pennmont, 2012 WL 2877607, at *16-17.  Moreover, member firms are in a much better position to argue that insurers are obligated to reimburse the member firms for defense costs until such time as a court concludes that SRO fines may be “imposed by law.”  See Fed. Ins. Co. v.Kozlowski, 18 A.D.3d 33 (N.Y. App. Div. 2005); Am. Home Assur. Co. v. Port Auth. of N.Y. & N.J., 66 A.D.2d 269, 278 (N.Y. App. Div. 1979). 

 III.  Member Firms Should Be Proactive In Determining Whether Insurance Coverage is Available To Avoid Out-of-Pocket Expenses

Given Fiero and Pennmont, member firms (especially in-house counsel) should act proactively to determine whether their current E&O or D&O insurance policies provide indemnity for SRO fines and reimbursement of defense costs.  In the event they do not, consider obtaining such coverage when renewing insurance policies.

In addition, if an SRO commences an investigation or proceeding, member firms should promptly provide notice of a potential claim to their insurers.  Failure to provide prompt notice may jeopardize a member firm’s insurance recovery.  Additionally, member firms should notify the insurer regarding the identity of the lawyers who will represent them in the underlying SRO investigation or proceeding.  Member firms should also provide regular updates of the activity in the underlying claim. 

Member firms need to be aware that the wheels of insurance are often slow to turn, and if an insurer denies coverage, that is not the last word.  Member firms should be ready to retain insurance coverage counsel to help guide them through the insurance process.


[1]              For a more detailed discussion of Fiero, please refer to FINRA and the Role of SROs in Enforcing the Securities Laws, 26A Sec. Lit. Damages § 26A:2.