Claims and Bad Faith Law Blog

CLAWBACKS AND THE LAW OF LIABILITY FOR BREACH OF DUTY.

Part Two.

Want to change the "clawback" policies of corporations in which you or your clients hold shares?

This year, both Verizon and Caterpillar are putting shareholder proxy proposals to a vote that would write new rules.  Apparently many corporate executives and their boards of directors have had a problem writing rules on this subject for at least the past 7 years.  This year, many shareholders at many corporations again take the rule-writing pens into their own hands, so to speak.  This year's shareholder proposals at Verizon and Caterpillar, for example, would expand the potential for recovering money back from executives who allegedly cost the company money or weaken the value of your shares.

Want to know when and why the boards of directors at corporations in which you or your clients hold shares, either pursue recoupment or decline to get the corporation's money back from executives?

This year, shareholders have proposed that Verizon "must disclose details of any clawbacks to shareholders as well as decisions not to pursue recoveries."

Want to make your views known even if you hold stocks only through mutual funds who vote your shares?

[W]rite to the fund's executives and tell them how you want them to vote your shares.  They may not do as you say, but at least they'll know where you stand.

 Gretchen Morgenson, "Fair Game / Shareholder Proxies Could be the New Regulators" (New York Times Online, posted on Friday, March 24, 2017) (online at www.nytimes.com, subscription may be required).

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Insurance Claims and Bad Faith Law Blog: CLAWBACKS AND THE LAW OF LIABILITY FOR BREACH OF DUTY.

CLAWBACKS AND THE LAW OF LIABILITY FOR BREACH OF DUTY.

PART ONE.

"Clawbacks" is another word to describe recouping executive pay.  The ability to take some of the executives' pay package back to the bank accounts of the corporation and its shareholders is very limited, however.  Basically clawbacks are only possible because of misuse of corporate funds or other improper activities of corporate executives that hurt the bottom line and so reduce shareholder value.

As anyone knows who follows excuses for corporate behavior in the 21st Century, the bottom line and shareholder value are the only goals corporate executives say they pursue.

Except when they don't.  When corporate executives act for their own interests at the expense of the corporation and the corporation's shareholders, then and only then do clawbacks become possible.

At one large company, shareholders want to change the current recoupment standard from just "'willful misconduct' that causes significant financial or reputational harm to the company."  They want to "also cover wrongdoing that arose because of negligence or a supervisory failure."  See Gretchen Morgenson, "Fair Game / Shareholder Proxies Could be the New Regulators" (New York Times Online, posted on Friday, March 24, 2017), available through www.nytimes.com (subscription may be required).

So, the key is tangible, real damage to the corporation's coffers and to the value of its shares.  Yet, companies reportedly oppose shareholder proxies like this one as a general rule.  Presumably, when it is reported that "companies" generally oppose these shareholder proxies, the reporting really means the boards of directors or perhaps smaller units of the boards such as compensation committees.

Yet directors have fiduciary duties toward the corporation and arguably to the corporation's shareholders.  Their duties include a duty of loyalty and a duty to avoid self-dealing, among other duties.  If it is a fiduciary breach or other breach of duty for a director to oppose shareholder proxies like these, is the directors' opposition covered by insurance?

We are talking after all about shareholder proxies that are proposed to make it easier to recoup money for the corporation and its shareholders.  It may be inconvenient for wayward directors or officers to pay money for their alleged breaches of duties, but would any such alleged breaches be covered by insurance?  D&O coverages, paid for by the shareholders, perhaps?

It seems that there is a pretty clear argument that it is a breach of duty to oppose shareholder proxies which, if adopted, could only benefit the corporations and their shareholders while at the same time adversely affecting only the directors and officers themselves.

Do you think differently?

To be continued ....

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"ACA JUDGE" WRITES PRESCRIPTIONS FOR FLORIDA BAD FAITH LAW.

Senior U.S. District Judge Roger Vinson recently wrote a decision which illuminates two parts of Florida's bad faith law.

First, he wrote that the duty to investigate is a part of the insurance company's good faith duty and not an independent duty standing by itself apart from the duty of good faith:

An insurer's “duty to investigate” does not exist in a vacuum; rather; it is part and parcel of the overall duty to settle a claim within policy limits wherever possible, thereby protecting the insured from a potential excess judgment. 

Welford v. Liberty Ins. Corp., 190 F. Supp. 3d 1085, 1095 (N.D. Fla. 2016), appeal docketed, No. 16-14054 (11th Cir. June 24, 2016).

Second, he ruled that when a liability carrier has a duty to initiate settlement negotiations even without a settlement demand from the injured claimant, it is when the insured's liability is reasonably clear:

    It is true, of course, that Powell [Powell v. Prudential Prop. & Cas. Ins. Co., 544 So. 2d 12 (Fla. 3d DCA 1991), review denied, 598 So. 2d 77 (Fla. 1992)] holds that an insurer does not have to sit back and wait for a formal demand (“the lack of a formal offer to settle does not preclude a finding of bad faith”), and, consequently, bad faith can exist if the insurer does not attempt settlement on its own (“an insurer has an affirmative duty to initiate settlement negotiations”). However, Powell itself cautions that the insurer's affirmative duty to initiate settlement negotiations will exist only “where liability is clear.” 584 So.2d at 14 (emphasis added).

* * *

          On its face, Powell does not obligate insurers to initiate settlement negotiations whenever an insured is involved in a crash and has some potential liability. Indeed, if that were the law, insurers would have that obligation in virtually every accident case as it is almost always possible that an insured may be found at least partially liable for an injury.  But that is not what the Powell Court said. Rather, at the risk of repetition, Powell speaks specifically about an insurer's responsibility when its insured's liability is clear, which generally means: “Free from doubt; sure. Unambiguous.” See Black's Law Dictionary (10th ed. 2014); (further citation omitted).

Welford v. Liberty Ins. Corp., 190 F. Supp. 3d 1085, 1095-96 (N.D. Fla. 2016), appeal docketed, No. 16-14054 (11th Cir. June 24, 2016).

Legal junkies may remember Judge Vinson's lengthy opinion stimulated by the issue of constitutionality of the Affordable Care Act.  (The U.S. Supreme Court ultimately disagreed with his holding that the ACA was unconstitutional.)  However, Judge Vinson's decision in Welford v. Liberty Insurance stands on firmer ground and it is supported by other authorities, which are cited in the opinion.

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FLORIDA STANDARD BAD FAITH JURY INSTRUCTIONS TRUMP SPECIAL REQUEST.

On St. Patrick's Day in 2017, in an officially unreported and virtually uncitable decision, In re Hintz (Stalley v. Allstate Ins. Co.), No. 16-14816, 2017 WL 1033670 (11th Cir. March 17, 2017), a plaintiff-appellant argued that the District Court committed reversible error in giving Florida Standard Jury Instructions on Bad Faith.

In particular, the plaintiff-appellant argued in this third-party bad faith case that the insurance carrier bears the burden of proving that there was no realistic possibility of settlement within policy limits when the same carrier rejected a settlement demand in the underlying case.

An Eleventh Circuit panel affirmed the District Court in this case.

Arguing that the giving of Standard Jury Instructions is reversible error is all but an insurmountable hurdle.  And so it was here.

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NINTH CIRCUIT REVERSES COVERAGE UNDER BANK D&O FOR FIDUCIARY BREACHES.

In a 2-to-1 unsigned decision which was not released for publication nor for citation within the Ninth Circuit, a panel of the Ninth Circuit¹ reversed a District Court's declaratory judgment that a failed bank's D&O policy covered the bank's directors' and officers' alleged fiduciary breaches that allegedly caused the alleged bank to fail.  FDIC v. Bancinsure, Inc., ___ F. App'x ___, No. 14-56132, 2017 WL 83489 (9th Cir. January 10, 2017).  Chief Judge Rawlinson dissented.

In a fairly unique opinion, in which the two judges in the unsigned majority included one Judge from the Court of International Trade where apparently insurance issues are not often found, the appellate panel held, in dicta and in effect, that well, no, the D&O policy's "insured-to-insured" exclusion preempted Federal law and would bar the Federal Deposit Insurance Corporation from suing the banks' directors and officers for their alleged breaches of fiduciary duties even if the bank's board of directors had authorized a direct action.  Here, the bank's board of directors had not authorized a direct action against the alleged perpetrators, but even if that fact existed (which, again, it did not) it would not have made any difference, the two judges wrote, because the insured-to-insured exclusion would have barred the FDIC's lawsuit in this case.

Since the insured-to-insured exclusion is universally found in D&O policies, future cases may see this decision cited for its eye-opening dicta, even in cases filed in courts outside of the Ninth Circuit's boundaries.

In addition, the appellate panel deciding this insurance question offered their opinion on banking and finance law that, although this case did not present the fact of a shareholder resolution authorizing a derivative action to sue the alleged perpetrators, either, i.e., there was no shareholder resolution to sue the former directors and officers of the corporation, that even if there was such a corporate resolution that it would not have made any difference.

¹It may be of interest to readers that none of the three judges on this panel decided the recent case involving immigration and refugees.

Please Read The Disclaimer.  ©2017 by Dennis J. Wall.  All Rights Reserved.

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AUTOMOBILE FORFEITURE IN MINNESOTA DOES NOT INCLUDE INSURANCE PROCEEDS.

In Briles v. 2013 GMC Terrain, MN License Number: 168KSE, VIN: 2GKFLZE3XD6336507, No. A16-0768, 2017 WL 957691 (Minn. Ct. App. March 13, 2017), a son stole a father's car and crashed it.  The local police arrested the son and sent the father a notice that the police intended to subject the wrecked vehicle to forfeiture proceedings, meaning of course that the police (or the state of Minnesota, more accurately probably) would own the wrecked vehicle.

This may not have been enough for the police department's attorney, however.  Unbeknownst to the father, the attorney contacted the father's insurance company and apparently asked the carrier to hold the insurance proceeds payable for the crash damage, implying that the police had a right to the insurance proceeds.  Or, to put it in the Court's own words: 

But unbeknownst to Briles [the father], the police department's attorney told his insurer to hold any insurance proceeds and implied that the department had the right to them.

Briles v. 2013 GMC Terrain, MN License Number: 168KSE, VIN: 2GKFLZE3XD6336507, No. A16-0768, 2017 WL 957691, at *1 (Minn. Ct. App. March 13, 2017).

The father objected to this secret claim once he found out that the government had made it.  The Minnesota Court of Appeals agreed with the father in this case.

In Minnesota at least, the state's forfeiture rights under the forfeiture statute invoked by the police in this case extend to the thing forfeited, and not to insurance proceeds paid from the insurance policies that cover it.

This may have been a forfeiture too far, similar in good intentions perhaps to "A Bridge Too Far" in World War Two.

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CONSENT JUDGMENT BINDING OR NOT? INSURANCE FOLLOWS INDEMNITY CASES.

In Penn-Am. Ins. Co. v. Osborne, ___ S.E.2d ___, No. 15-1018, 2017 WL 878716, at *4 (W. Va. March 1, 2017), the Supreme Court of Appeals of West Virginia reaffirmed this long-standing rule: “A consent or confessed judgment against an insured party is not binding on that party's insurer in subsequent litigation against the insurer where the insurer was not a party to the proceeding in which the consent or confessed judgment was entered, unless the insurer expressly agreed to be bound by the judgment. Therefore, an attack on the consent or confessed judgment in the subsequent litigation by an insurer who did not expressly agree to such judgment is a permissible direct, not collateral, attack on the consent or confessed judgment.”

This holding by West Virginia's highest court expresses the rule followed throughout the United States in cases of indemnity.  Where one party now seeks to enforce a previous consent or confessed judgment against another party by demanding that it pay indemnity, the rule holds that the consent or confessed judgment is simply not binding where the party from which indemnity is sought was not a party to the previous proceeding.

Shh!  Insurance lawyers and insurance companies like to think that they are unique.

And so we usually are unique, but in a case like this the rules of indemnity apply and the rules of insurance are only an example of how the ancient rules of indemnity apply.

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FEDS IN FLORIDA ABATE STATUTORY UM BAD FAITH CLAIMS ...

 ... where UM coverage has not yet been decided.

Another Federal case has lined up in favor of abating and not dismissing a statutory bad faith claim in Florida in a case for UM coverage, where coverage has not yet been determined:  "The Court, consistent with its past rulings on this issue, considers abatement of the bad faith claim to be the appropriate remedy."   Cooper v. Progressive Am. Ins. Co., No: 5:17–cv–70–Oc–30PRL, 2017 WL 784816, at *2 (M.D. Fla. March 1, 2017).

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COLORADO REASONABLENESS MEANS MORE THAN FAIRLY DEBATING LIABILITY OR DAMAGES.

In Nibert v. GEICO Casualty Co., ___ P.3d ___, No. 16CA0322, 2017 WL 710504, 2017 COA 23 (Colo. Ct. App. Div. V February 23, 2017) (STATED NOT RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS UNTIL AFTER REHEARING OR CERTIORARI REVIEW, IF ANY), a policyholder sued her underinsured motorist (UIM) carrier on both a common law bad faith claim, and on a statutory claim of delayed payment of policy benefits.  Both claims required proof on the issue of "reasonableness" of the carrier's behavior.

However, more than proof that the UIM claim was "fairly debatable" was required to prove "reasonableness":

Contrary to Geico Casualty's argument, the tendered instruction went beyond the reasonableness of a challenge to a claim that is fairly debatable. Instead, the instruction, as tendered, misstated the law by effectively conflating the reasonableness elements of the common law bad faith claim and the statutory delay claim by inquiring only into whether Nibert's claim was fairly debatable. Colorado law is clear that whether a claim is fairly debatable is not the sole inquiry in a reasonableness analysis. 

Nibert v. GEICO Casualty Co., ___ P.3d ___, No. 16CA0322, 2017 WL 710504, AT *2 ¶ 12, 2017 COA 23 (Colo. Ct. App. Div. V February 23, 2017) (STATED NOT FINAL).

The Colorado appellate court affirmed a trial court's judgment entered on jury verdicts in favor of the policyholder on both of her claims against the UIM carrier in this case.

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