Tag Archives: complex litigation

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.

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Commercial Insurance Policies Could Provide Protection for Businesses Facing Suits Under the Telephone Consumer Protection Act

By Barry Buchman

In one of the latest decisions to address the continuing debate over whether there is coverage under commercial general liability (CGL) insurance policies for so-called “blast fax” and “blast texting” lawsuits brought under the Telephone Consumer Protection Act (TCPA), a Wisconsin appellate court has ruled in favor of coverage.  See  Sawyer v. West Bend Mut. Ins. Co.,  2012 WL 2742291 (Wis. App. July 10, 2012).  In doing so, the court rejected the recurring insurance industry argument that CGL policies cover only invasion of privacy lawsuits that involve the alleged publication of the plaintiffs’ secrets; the court held that CGL policies also cover invasion of privacy lawsuits that allege a violation of the right to seclusion, i.e., the right to be left alone, which is typically the issue in “blast fax” and “blast texting” claims.

Although some commentators have suggested that decisions like this one likely will have no effect on disputes arising under newer CGL policies, which typically have TCPA exclusions, that is not necessarily so.

“Blast fax” and “blast texting” lawsuits frequently allege both statutory, TCPA claims and common law claims.  For the purpose of getting coverage at least for the costs of defending such lawsuits, as long as there is at least one covered claim or theory of liability, insurance companies often will have to pay all defense costs unless and until the policyholder is adjudicated liable only on the uncovered claims.  At least one court has issued exactly such a ruling in a dispute over coverage for blast fax claims in which the policies had a TCPA exclusion.  And, if the policyholder settles the lawsuit, there is, of course, never an adjudication of liability based only on the uncovered claims.  Thus, policyholders may be able to get coverage for such settlements, because it often will be difficult to establish that the policyholder settled the case solely due to concern about the uncovered claims.

Further, if an insurance company did not give proper notice to its policyholder of the addition of the TCPA exclusion to the CGL policy, that might provide a way around the exclusion as well.  And, other policies that an insured company may have, such as errors and omissions policies and directors and officers policies, may have exclusions that are narrower, i.e., that exclude less coverage, than the exclusions in CGL policies.

Thus, CGL and other commercial insurance policies continue to be a potentially very valuable source of protection for businesses facing TCPA lawsuits.  Businesses, therefore, should be willing to challenge coverage denials from their insurers if appropriate after an analysis of all of the circumstances, including the particular policy language and the particular underlying lawsuits.

Insurance Coverage for Wage and Hour Litigation Claims

By Barry Buchman, Kami Quinn, and Jason Rubinstein

There has been a surge in wage and hour litigation recently, and it has been getting a lot of attention.  See, e.g., M. Huisman, Seyfarth Shaw Study Shows Increase in Wage and Hour Labor Suits, Corporate Counselor (July 27, 2012); J. Segal, The New Workplace Revolution: Wage and Hour Lawsuits, CNNMoney (May 29, 2012).  This surge is due, in large part, both to the Great Recession and to technological advances allowing work from remote locations.  See P. Davidson, Overworked and Underpaid, USA Today (Apr. 16, 2012).

An often overlooked component of a company’s protection from the financial consequences of this type of litigation is its insurance policies.

Most employers, for example, routinely purchase employment practices liability (EPL) coverage.  This coverage typically exists either in separately-purchased EPL policies or, particularly with private companies, in directors and officers (D&O) insurance policies that include an EPL coverage component.

Yet, there is a common misperception that these policies do not cover wage and hour lawsuits.  Insurance companies have created this misimpression by relying on two principal arguments.  First, they assert that amounts expended in wage and hour claims do not constitute “loss” within the meaning of these policies because the claims seek only uninsurable restitution, and second, they argue that coverage is barred by the Fair Labor Standards Act (FLSA) exclusion often found in these policies.

Companies, however, should not accept these contentions at face value.

First, as with all coverage issues, the specific language of the policy matters. Some definitions of “loss” are broader than others, and some FLSA exclusions are narrower than others.

Second, the allegations of the particular wage and hour claims are important.  Plaintiff lawyers usually assert multiple claims and allege various theories of liability.  If even a single claim or theory is within the scope of coverage, the employer may be entitled at least to partial coverage.

Third, consistent with the two points above, several recent court decisions have cast doubt on the insurance industry’s principal arguments.  For example, in SWH Corp. v. Select Insurance Co., 2006 WL 2786930 (Cal. Ct. App. Oct. 19, 2006), the court denied the insurers’ request for summary judgment on whether the amounts sought in a wage and hour suit were “restitution,” and thus not “loss,” under the policy.  The court also found that the underlying allegations did not come within the policy’s FLSA exclusion.  Similarly, in California Dairies Inc. v. RSUI Indemnity Co., 617 F. Supp. 2d 1023 (E.D. Cal. 2009), the court found that the policy’s FLSA exclusion applied to some, but not all, of the allegations against the company.

Fourth, an insurance company’s duty to pay for its insured’s defense is broader than its duty to cover judgments or settlements.  So, even if it is ultimately determined that an insurer is not obligated to cover an underlying wage and hour settlement or judgment, the insurer may still be obligated to cover defense costs in the interim.  This “litigation insurance” can be very valuable, because wage and hour suits often proceed as class actions, and the costs of defending such actions can be very substantial.

Employers also should be aware that some insurers do offer specialty policies designed to cover wage and hour claims.  These policies, however, frequently cover only defense costs and contain low limits of liability.  Furthermore, insurance companies often erroneously market such products on the premise that there is never wage and hour coverage under EPL policies.  Thus, although employers should consider whether such specialty coverage makes sense for their business, they should still preserve and, when necessary, exercise their right to pursue coverage under their EPL policies, which typically have higher limits.  The specialty policies also can differ materially from each other, so a careful review of any proposed policy language is warranted.

Regardless of whether an employer is currently facing wage and hour claims, there are steps that all companies can take now to put themselves in the best position to potentially secure insurance coverage should the need arise.

First, collect, organize and safeguard all of the company’s policies.  This includes an effort to identify and obtain policies issued to other pertinent companies, such as predecessors and current or former affiliates of your company.

Second, consider having an insurance professional audit the organization’s insurance portfolio to confirm that the company has the most complete and cost-effective coverage available.

Third, if the company becomes aware of the possibility of a wage and hour lawsuit, or is actually served with one, it should, with rare exceptions, promptly notify its insurers.

In sum, the coverage provided by insurance policies for wage and hour lawsuits can be an extremely valuable corporate asset.  Companies can maximize the benefits of this asset by acting proactively now, and by being willing to question coverage denials from their insurers.

Counterintuitive Strategies in Mediation

By Richard Shore

In an article just published in the Forbes Leadership Forum, I outline four counterintuitive strategies that harness the strengths of mediation rather than treating it as litigation light:

1.  Let the other side pick the mediator – agreeing to a mediator the other side likes can work in your favor, and save time and money to boot.

2.  Don’t argue about who is right – exchange views on the merits, but don’t let substantive disagreements hijack the process; remember that your goal in mediating is to reach a favorable settlement, not to win an argument.

3.  Leave the litigators at home – many litigators are good at settlement, but settlement calls for a different skill set and mindset than litigation; a separate settlement track allows you to use a diplomat to negotiate peace while the generals continue to fight the war.

4.  Deal with hard issues last – lock in a deal on a key term, usually money, and build the rest of the agreement on that foundation; even hard issues tend to fall into place once the parties believe they have a deal.

 Read the article here:  http://onforb.es/O9ZxY2

Victory for Elderly Policyholders in Conseco Case

 In a case that Gilbert LLP has pursued for several years on behalf of a certified class of thousands of policyholders who purchased life insurance from Conseco Life Insurance Company, our clients have just won a significant victory in the U.S. District Court for the Northern District of California.

A U.S. district judge’s July 17 decision to grant a preliminary injunction against Conseco marked a major win for the class, who are contending that Conseco is imposing unaffordable charges on some members of the class.

The Court ordered that Conseco must take immediate action to stop imposing these charges, known as cost-of-insurance charges, on some members of the class pending the outcome of a trial. The Plaintiffs affected are largely elderly policyholders who own life insurance policies called Lifetrend policies and who will lose their life insurance coverage before the end of next year because the cost-of-insurance and expense charges will deplete their policy accumulation accounts.

The Court held that the class is likely to prevail in the case based on the merits of its breach of contract claims against Conseco. The Court also held that the policyholders whose accumulation accounts will be exhausted before the end of next year because of the charges face irreparable harm.

The Court found that the policyholders who are unable to make the payments to sustain their policies will lose the peace of mind that comes with life insurance and that loss, the Court found, “cannot be remedied by money damages after the fact.”

In its opinion, the Court noted the case of a 91-year-old policyholder who already paid hundreds of thousands of dollars for his policy and recently faced deductions of over $7,000 per month in new cost-of-insurance charges.

We believe that this ruling is correct on the law and is also a significant step toward providing fairness and justice to our clients, elderly people whose savings were being depleted by the excessive insurance charges. Partner Craig Litherland says the decision represents “an important milestone in this litigation, and demonstrates that the Judge found the merits of plaintiffs’ case to be compelling.”

Andrea Hopkins, Michelle Price, Emily Grim, and Daniel Wolf also are working on the case.

Welcome to “We’ve Got You Covered”

Welcome to the newly launched Gilbert LLP risk management and insurance recovery law blog, “We’ve Got You Covered.” In this blog, our attorneys will discuss new and interesting developments in the areas of strategic risk management and insurance coverage law, provide some insight into insurance-related issues behind the current headlines, and hopefully have some fun writing these posts.

As a firm that focuses on strategic liability and risk management and insurance  litigation and recovery for policyholders, we are not like other law firms — and this blog won’t be like other law blogs. If there’s a headline in the paper that may have hidden implications for insurance coverage or that might spark a high-stakes battle somewhere down the line, we’ll explain it.  It might involve unique issues in mass tort; it might involve a dispute over a failure to deliver products on time; it may involve a product recall; it could involve a bankruptcy restructuring; or it might involve issues that result from a breach of data privacy. We will look at each situation in a different way than you might expect.  The ideas we present will be unique and thought-provoking.

If a federal or state court interprets an insurance policy, either a standard clause or an unusual provision, in an interesting way, we will try to tell you what the decision means from a business perspective.

At Gilbert LLP, we are committed to solving our clients’ problems through negotiated settlement as often as possible. So occasionally we will write about the advantages of mediation or other forms of ADR and provide some tips for getting it done successfully.

We sometimes will talk about our own cases, but we don’t see promoting our wins as the primary purpose of this blog.  We enjoy helping our clients, who range from the largest companies in the world to individuals with a significant or complicated insurance problem, and we enjoy interpreting and writing about issues and interesting cases in the insurance world,  whether or not we’re directly involved in the case.

We view this blog as a way for us to communicate more directly with you — our clients, colleagues and friends.  We hope that through the articles we post you will get to know us better.  We hope that you will find our posts informative and entertaining.  We look forward to reading your comments on any of the articles we post.

Scott D. Gilbert
Chairman