September 15, 2008
Below are two recent cases impacting D&O coverage.
Schwartz v. Liberty Mutual Insurance Co. et al. – Consent To Settle
Schwartz v. Liberty Mutual Insurance Co. et al., No. 07-2794, 2008 WL 3850768 (2d Cir. Aug. 19, 2008) arose out of a $20 million settlement agreed to by Bernard L. Schwartz on the day before he was to testify as a defendant in a securities class action where he was facing liability for hundreds of millions of dollars in damages. Prior to the settlement, the insurers participated in three mediation sessions and a settlement conference, communicated amongst themselves about the value of the case and risks associated with failing to settle, and monitored the trial in the courtroom. After paying the settlement out of his own pocket, Schwartz brought suit against his companies’ four D&O carriers. Specifically, he sued the primary carrier for bad faith refusal to settle and breach of contract and he sued the excess carriers for breach of contract. While the primary carrier and the first level excess insurer settled with Schwartz, the remaining two excess carriers were ordered by the District Court to pay their full policy limits plus interest from the date that Schwartz wrote out his to settle the securities class action.
The Second Circuit affirmed, notwithstanding the fact that the excess policies at issue unambiguously required that Schwartz obtain the carriers’ consent before entering into a settlement, which was not given as Schwartz only gave them mere hours (over a Sunday night and Monday morning) to decide whether to consent. The court held that under California law, Schwartz did not forfeit his right of coverage by affording the insurers only mere hours to decide whether to consent to the mid trial settlement offer as the insurers were not blindsided by the request for consent, since they had participated in the mediation sessions and settlement conference, and had urged the primary carrier to settle, and continuously monitored the trial.
This case is important as it underscores an excess carriers obligations with respect to settlement when there is no duty to defend, but where the carrier nevertheless remains involved in the litigation process and stays abreast of the case progress and evolving value. Insurers will be hard pressed to rely on consent to settle clauses when settlement discussions lead to an impending settlement that appears reasonable under the circumstances, given its participation in the trial and settlement underlying process.
CNL Hotels & Resorts, Inc. v. Twin City Fire Ins. Co. / Section 11 and Ill Gotten Gains
On August 18, 2008, the Eleventh Circuit Court of Appeals, in an unpublished opinion, affirmed the district court’s holding that money paid by an entity to settle Section 11 claims did not constitute “loss” under the D&O policy at issue because the payment was restitutionary in nature. CNL Hotels & Resorts, Inc. v. Twin City Fire Ins. Co., 2008 WL 3823898 (11th Cir. 2008). Specifically, the court rejected the insured’s argument that, without a finding of fraud in the underlying action, it was impossible to conclude that the money was wrongly-acquired and thus excluded from coverage as not constituting “loss.” The court also rejected the insured’s argument that damages under Section 11 cannot be restitutionary because the amount of damages permitted by statute focuses on the loss suffered by the plaintiff instead of the gain of the defendant. The court observed that, while the insured was correct that the measure of damages under Section 11 is concerned with the loss to the plaintiff, the loss in question was equal to the gain of the defendant. Finally, the court rejected the insured’s argument that the payment to the underlying plaintiffs was not restitutionary because the settlement agreement stated that the payment was not “restitution or disgorgement," noting that the agreement between the insured and the underlying plaintiffs was not binding on any third party or the court.
This case is a good example of the ongoing trend in which courts refuse to award coverage for restitution of ill gotten gains, regardless of how the insured dresses up its claim. In this case, the court held that while the measure of damages under Section 11 is concerned with the loss to the plaintiff, in this case, the loss to the plaintiff was equal to the gain of the defendant and Section 11 does not preclude restitutionary relief which is not covered under D&O Policies.