The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | March 3, 2017 • 4 min read

Insured-Vs.-Insured Exclusion Cited in Dismissal

Cheryl Sullivan became a member of the JEI board of directors in April 2013, upon the death of her father, Jerry Paulson, who had expanded a small butcher shop into JEI, a retail and grocery store chain in Minnesota, Wisconsin and Florida. Sullivan redeemed her 28 percent of all company shares a few months later, after which she and her daughters sued the company, saying that JEI’s directors “designed to lower the value of their shares.”

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Sullivan and her daughters reached a confidential settlement with JEI. The company sought coverage for the payment under a directors and officers policy issued by U.S. Specialty Insurance Co.

The insurer rejected the claim and JEI filed suit. After the U.S. District Court for the District of Minnesota ruled against JEI, it appealed to the U.S. 8th Circuit Court of Appeals.

On Jan. 11, the appeals court agreed with U.S. Specialty. The two main issues related to the policy’s insured-versus-insured exclusion and its allocation clause. The insured-versus-insured exclusion barred coverage for any suit brought by a former director of the company.

But Sullivan’s daughters were not former directors, and the allocation clause provided that losses should be allocated between covered and uncovered claims. The appeals court ruled that Sullivan was “an active participant” in the lawsuit as well as its “driving force.” Because of that, the policy’s allocation provision for coverage as long as a director or officer “did not solicit, assist or actively participate in the lawsuit” did not apply to Sullivan or her daughters.

Scorecard: The insurance company does not need to indemnify JEI for the settlement payment.

Takeaway: The allocation clause “does not restore coverage for a suit brought with the active participation of an insured person,” the court ruled.

Bird Flu Transmission is Crucial to Case

Farms in minnesota from eight to 20 miles away from rembrandt Enterprises’ egg-producing facilities euthanized their chickens due to avian bird flu in 2015. In April and May of that year, Rembrandt’s flock was infected and a month later, more than 9 million birds were euthanized.

Rembrandt filed a claim with Illinois Union Insurance Co., which had issued a premises pollution liability insurance policy. The policy insured Rembrandt’s farms from the “discharge, dispersal, release, escape, migration or seepage of any … irritant, contaminant, or pollutant … on, in, into, or upon [covered] land and structures.”

The carrier denied the claim, saying the flu was not a contaminant and that coverage excluded losses relating to “naturally occurring materials” unless they were present because of human activities. Illinois Union Insurance later conceded the flu was a contaminant, but said there was no proof that human activities led to the bird flu being transmitted to Rembrandt’s farms. Rembrandt filed suit, claiming the carrier breached its policy. The carrier sought to dismiss the case.

An infectious diseases expert on behalf of Rembrandt said the bird flu was “detected in air samples taken inside and outside infected poultry houses,” and that the flock depopulations at nearby farms created a “virus cloud” that carried the flu to Rembrandt’s farms.

On Jan. 12, the U.S. District Court for the District of Minnesota refused to dismiss the case, ruling further hearings were needed.

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“Despite extensive briefing, on this record, the Court is simply not in a position to determine as a matter of law how the bird flu spread to Rembrandt’s farms and, accordingly, neither party is entitled to summary judgment,” the court ruled.

Scorecard: No decision was issued on whether the farms will collect for the loss of more than 9 million birds.

Takeaway: While the disease may be spread by air, it is not clear whether it was aided by human activity.

Court: Policy Excludes $64 Million Claim

Imprudent loans, resulting in more than $64 million in losses, caused the California Department of Financial Institutions to close Security Pacific Bank.

The Federal Deposit Insurance Corp. (FDIC), which was named receiver, filed suit against BancInsure Inc., seeking coverage for losses “arising from the negligence, gross negligence and breach of fiduciary duty allegedly committed by” the failed bank’s former directors and officers.

The U.S. District Court for the Central District of California concluded that the D&O policy issued by BancInsure covered the FDIC’s claims. The U.S. 9th Circuit Court of Appeals reversed that decision on Jan. 10.

The D&O policy excluded coverage for losses arising from legal actions brought by “any successor, trustee, assignee or receiver” of the bank. The FDIC argued that it is “not a ‘receiver’ within the meaning of the insured-versus-insured exclusion because, by statute, it has a ‘unique role’ representing ‘multiple interests,’ ”including shareholders and depositors. It pointed to an exception to the exclusion for “a shareholder’s derivative action,” which could be filed against the failed bank by shareholders who are not insureds under the D&O policy.

The appeals court rejected that argument. “We think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific,” it ruled, ordering the lower court to dismiss the case.

Scorecard: The FDIC will not be able to collect more than $64 million in losses from BancInsure.

Takeaway: The right of the FDIC to bring a shareholder derivative action was secondary to the FDIC’s right to bring the same claims directly as the failed bank’s receiver.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]