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Case Studies

The 'Disgorgement Defense' Against D&O Coverage Fails to Fly

Policyholder Flashpoint: When a financial institution or other business settles a regulatory action or class action suit without admitting guilt, can the insurance company deny coverage on grounds that the settlement payment amounts to disgorgement of ill-gotten gains?

The Court's Answer: The disgorgement defense only negates coverage if there has been a final adjudication determining that the policyholder acted unlawfully and is disgorging funds to which it had no right. In this case, Anderson Kill represented a bank that settled a class action suit challenging its overdraft policies, which were common practice in the industry and had been green-lighted by regulatory authorities.  While the insurance company deemed the settlement “plainly restitutionary,” a U.S. District Court judge in Minnesota, applying Delaware law, granted summary judgment to the bank. The judge ruled that because the provision in question “excludes from coverage a payment for loss connected to a claim resulting from money to which [the bank] ‘is not legally entitled . . . as determined by a final adjudication in the underlying action,’” it follows that the exclusion does not apply to a payment made when there is no final adjudication – i.e., when a claim settles before trial.

Upshot for Policyholders: The case was resolved via settlement following oral argument before the Eighth Circuit.  Several subsequent decisions on the “disgorgement” defense have since cited the district court decision.

D&O Coverage to Full Policy Limits

Policyholder Flashpoint: In a D&O claim for coverage of alleged wrongdoing spread over multiple policy periods, can an insurance company unilaterally “allocate” coverage based on its own estimate of its share of total costs? Secondly, can an excess insurance company deny coverage on grounds that primary coverage is not exhausted if the policyholder settled with its primary insurance companies?

Court’s Answer: No and no. The Court rejected an excess insurance company’s bid for proportionate allocation of defense costs among multiple insurance companies and ruled that a D&O insurance company must pay defense costs on behalf of its policyholder to the full policy limits against a claim alleging many wrongful acts.

Upshot for Policyholders: In addition to joint and several liability, the decision affirmed a second key principle for D&O policyholders: that excess insurance policies can be triggered when the policyholder has spent to the limits of its primary policy, regardless of whether it collected the full amount from its primary insurer.  The decision made clear that a tower of $100 million in D&O insurance coverage must respond.

When Damage is Not Structural, but Physical

Policyholder Flashpoint: When a discharge of a toxic substance causes no structural damage, will a property policy cover resulting liabilities?

The Court's Answer: Yes, if the discharge makes the premises unusable for a period of time. In this case, an ammonia release at a manufacturing facility injured a contractor’s employee and caused the facility to be temporarily shut down. In a contract term later made famous by the COVID-19 pandemic, the manufacturer’s property policy required “direct physical loss or damage” to trigger coverage.  A federal judge in New Jersey, granting partial summary judgment to the policyholder, wrote that “the ammonia discharge inflicted 'direct physical loss of or damage to' [the] facility, as that phrase would be construed under New Jersey law by the New Jersey Supreme Court, because the ammonia physically rendered the facility unusable for a period of time."

Upshot for Policyholders: Under some circumstances, discharges that do not cause structural damage can nevertheless be held to cause “physical loss or damage” and so trigger property insurance coverage.

Pollution in Decades Past: To Whom Does an “Expected or Intended” Exclusion Apply?

Policyholder Flashpoint: When pollution on a site occurred long ago, does an insurance policy exclusion for “expected or intended” pollution apply to a policyholder that bought the property not knowing it was contaminated?

The Court's Answer: No. In an issue of first impression, the U.S. District Court of Oregon addressed in Siltronic Corporation v. Employers Insurance Company of Wausau et al. how the exclusion for "expected or intended" pollution was to be applied. Who had to expect or intend the release of contaminants -- the policyholder or the historic polluters decades earlier?  Siltronic moved for summary judgment that the exclusion applied only if the pollution was expected or intended by the policyholder -- i.e., Siltronic, which bought the property not knowing that it already was contaminated. AIG moved for summary judgment that the exclusion applies if the releases to the environment were expected or intended by anyone. On July 19, 2018, the Court granted Siltronic's summary judgment motion and denied AIG's.  Following the decision, Siltronic settled first with its primary insurance company and then with its excess insurance company, an AIG subsidiary.

Upshot for Policyholders: Historic insurance policies that either lack a pollution exclusion altogether or lack an “absolute” pollution exclusion may cover environmental cleanup for a successor corporation even if the original site owner might potentially have been subject to an “expected or intended” exclusion. Given the long tail of environmental liability, this question is of vital interest to policyholders.

Proactive Environmental Cleanup Does Not Preclude Insurance Coverage

Policyholder Flashpoint: Is there coverage for policyholders who initiate environmental cleanup as required by statute, rather than waiting for formal governmental action to compel such cleanup?

The Court's Answer: Yes. “The insurance contracts provide coverage when the policyholder becomes obligated to pay by reason of the liability 'imposed by law.' The policy language does not specify whether this liability must be imposed by formal legal action (or threat of such) or by a statute which imposes liability. In the case where there has been property damage and where a policyholder is liable pursuant to an environmental statute, a reasonable reading of the policy language is that coverage is available, if it is not otherwise excluded.” Anderson Kill represented the policyholder, which faced environmental liability at dozens of allegedly polluted sites in several states.

Upshot for Policyholders: The Washington Supreme Court ruled: “Comprehensive General Liability (CGL) insurance policies…may provide coverage when an insured engages in the cleanup of pollution damages in cooperation with an environmental agency. Such policies can reasonably be read to provide coverage for actions taken to cleanup pollution damages required under environmental statutes which impose strict liability for such cleanup.”

Establishing the Continuous Trigger of Coverage

Policyholder Flashpoint: When a company is faced with liability for damages that occurred gradually over a long period of time, is insurance coverage triggered when the damage first occurred, when it first became apparent, or when a suit claiming damages was first filed?

The Court Answer: All three. In Keene Corp. v. Ins.Co. of N. Am., 667 F.2d 1034 (D.C. Cir. 1981), Keene Corporation faced millions of dollars in liabilities stemming from personal injury claims from plaintiffs alleging that they had been exposed to asbestos over the course of many years. The company filed claims with three insurance companies that had insured it at different times. Each insurance company claimed that the others were responsible for coverage. One claimed that the insurance company covering Keene when the plaintiffs were first exposed to asbestos was liable. Another asserted that the insurance company of record when plaintiffs’ injuries first manifested was responsible. And the third alleged that responsibility lay with the insurance company on the risk when the first plaintiff filed suit against Keene.

Faced with these “three bears,” Anderson Kill’s founding partner, Eugene R. Anderson, came up with a reverse-Goldilocks solution. All three were “just right” — that is, right about the others. If an insurance company insured Keene at any time during the exposure, injury or claim, it was liable for the loss.  The D.C. Court of Appeals accepted that argument.

Upshot for Policyholders: Keene opened the door to pursuit of insurance coverage for long-tail claims at a time when asbestos and environmental liabilities were rocking corporate America. The case established the doctrine of the “continuous trigger” for insurance coverage: a claim can be triggered at the time damage occurs, at the time it manifests itself, or at the time when a plaintiff seeks redress. The principles articulated in the Keene decision were applied to environmental liabilities arising from the Superfund law passed in December 1980 as well as to a rising tide of asbestos liabilities. Keene can fairly be said to have launched insurance recovery as a distinct focus for legal practice.

The Duty to Defend is Expansive and Inexhaustible: The Port Authority of New York and New Jersey

Policyholder Flashpoint: In asbestos coverage cases involving coverage for thousands of claims spread over decades, how comprehensive is an insurance company’s duty to defend?

The Court’s Answer: On April 2, 2019, the Appellate Division, First Dept. of the New York Supreme Court reaffirmed its November 15, 2018 finding that American Home must defend The Port Authority of New York and New Jersey against asbestos claims dating to construction of the original World Trade Center. The decision in American Home Assurance Co. v. The Port Authority of New York and New Jersey et al., case number 651096/12, upheld rulings in trial and appellate court holding that AIG a) must defend the underlying action;  b) could not pro-rate defense costs on the basis that only certain claims were covered; c) that coverage was triggered if a plaintiff's asbestos-related injury occurred during the policy period, regardless of when it manifested itself; and d) that AIG’s duty to defend continued even after the policy exhausted. AIG dropped its final appeal in July 2021.

Upshot for Policyholders: The issues in this case  --  trigger of coverage, allocation of defense costs, and the inapplicability of policy limits in many policies to defense costs -- are all fundamental to long-tail claims and were all resolved in favor of the policyholder.

Will Settling with Your Primary Insurance Company Unsettle Your Excess Coverage? HLTH Court Says No

Policyholder Flashpoint: When a policyholder settles a claim with its primary insurance company, can excess insurance policies be triggered?

The Court's Answer: Yes. In HLTH Corporation and Emdeon Practice Services, Inc. v. Federal Insurance Company et. al., the court ruled that excess insurance policies can be triggered when the policyholder has spent to the limits of its primary policy, regardless of whether it collected the full amount from its primary insurance company.  The court also rejected the insurance company bid for proportionate allocation of defense costs among multiple insurance companies and ruled that a D&O insurance company must pay defense costs on behalf of its policyholder to the full policy limits against a claim alleging many wrongful acts.

Upshot for Policyholders: Recent decisions in Qualcomm and Comerica had unsettled policyholders by giving rise to insurance company arguments that if a policyholder settles with its primary insurance company, excess policies are not triggered.  The decision in HLTH made clear that a tower of $100 million in D&O insurance coverage for HLTH must respond.

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