THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

MODERATOR: JOSEPH P. MONTELEONEDUANE MORRIS, LLP

PANELISTS:HARVEY WEINERPEABODY & ARNOLD, LLP

JANICE RIZZOST. PAUL TRAVELERS, INC.

R. DAMIAN BREWMARSH FINPRO

KIERAN MURRAYLEXINGTON INSURANCE

Finally – A successful rescission litigation

victory after 86 years!!

There is a material misrepresentation in this application for the insurance policy.

Things Boston Fans Would Things Boston Fans Would Like to See RescindedLike to See Rescinded

ThingsThings BostonBoston FansFans Would Like Would Like to See Rescindedto See Rescinded

Things Boston Fans Would Things Boston Fans Would Like to See RescindedLike to See Rescinded

Things Boston Fans Would Things Boston Fans Would Like to See Rescinded Like to See Rescinded

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

1.1. The BrokerThe Broker

2.2. The UnderwriterThe Underwriter

3.3. The Claims The Claims HandlerHandler

4.4. The LitigatorThe Litigator

RESCISSIONRESCISSION Elements Vary From State To State Can Be Either Statutory Or Common

Law Usually Governed By Law Of State

Where Policy Is Issued Policy Is Void (ab initio) And Not

Voidable

LEGAL ELEMENTSLEGAL ELEMENTSOF RESCISSIONOF RESCISSION

There Must Be A Representation. The Representation Must Be False. The Misrepresentation Must Be Material. The Insurer Must Have Relied On The

Misrepresentation. In Some Jurisdictions, The Insured Must

Know The Falsity Of The Representation.

SEVERABILITYSEVERABILITY Full Severability

In Re Healthsouth Corporation Insurance Litigation,

308 Supp. 2d 1253 (N.D. Ala. 2004)

Limited SeverabilityCutter & Buck, Inc. v. Genesis Insurance Company,

306 F. Supp. 2d 988 (W.D. WA 2004), aff’d 2005 WL1799397 (9th Cir.)

Understanding Rescission and the Application of Rescission from a

Claims Prospective

Janice M. Rizzo, Esq.St. Paul Travelers, Inc.

Director of Field OperationsProfessional E&O Claims

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

WHEN TO RESCIND

• Material Misrepresentation/Fraud In The Application

• Inaccurate Financials

• Failure To Cooperate

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

STEPS TO TAKE WHEN CONSIDERING RESCISSION

• Conduct A Prompt And Appropriate Investigation• Review All Controlling Statutes Regarding Duties

And Chance of Prevailing• Preserve The Right to Rescind / Avoid Exposing

Your Company To Extra-Contractual Liability• Issue A Reservation of Rights Letter / Enter Into A

Negotiated Non-Waiver Agreement Regarding Rights And Duties Of All

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

THE APPLICATION AND WARRANTY

• Concurrent Submission Of Application And Policy• Fact-Based Response (Affirmative Information) To

A Given Question• Has The Warranty Been Breached?• Update Of Material Information Between Application

Submission And Policy Issuance• Severability Clause• Renewal Applications And/Or Proving Actual Fraud

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

CLAIMS PERSONNEL

• Upon Initial Indication Of A Potential For Rescission, Act Immediately

• Appropriately Reserve All Rights Or Obtain A Non-Waiver Agreement

• Alert Underwriting And All Involved Regarding Renewals And/Or Confirming Validity Of Policy

• Review And Analyze All Discovery Material That May Impact Rescission Rights

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

UNDERWRITING

• Do Not Renew Potentially Invalid Policy Without Properly Protecting Rescission Rights

• Duty Of Inquiry Rests With the Underwriter• When In Receipt of Information That May Raise A

Concern, Underwriter Has The Duty Of Further Inquiry

• Underwriter Should Be Able To Testify That, Had He/She Known The Truth, The Policy Would Not Have Been Issued As Written Or At All

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

INVESTIGATION

• Insurer Must Act Timely And Appropriately In its Investigation

• Make A Material Determination Whether It Was Underwriting Intent To Issue Policy

• Commence An Underwriting Investigation Confirming Rescission Rights While Investigating Underlying Claim

• Delay In Declaring Rescission Based On Evidentiary Information Could Serve To Defeat Your Rescission Rights

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

DEFENSES TO RESCISSION

Even If The Right To Rescind Appears To Be Valid, There Are Certain Defenses That Could Apply

Ratification: Rescission is an equitable remedy meaning that one who seeks equity must do equity. Do not take any action that may indicate to the policyholder that the policy is viewed as valid.

Waiver: Dependent upon evidence of the intentional relinquishment of a known right (did the insurer know of facts giving rise to the right to rescind, yet did not properly rescind?)

Estoppel: Insured must prove prejudice since estoppel requires proof that the insured relied to its detriment upon either the insurer’s actions or failure to act

THE FOUR HORSEMEN OF THE FOUR HORSEMEN OF RESCISSIONRESCISSION

OTHER REMEDIES

• Policy’s Prior Knowledge Exclusion

• Policy’s Warranty Language

• Misrepresentation

• Common Law Fortuity

• Known Loss Doctrine

Client Perspective on Client Perspective on RescissionRescission

• R. Damian Brew/Managing Director/FINPRO Claims

ENRON AND WORLDCOM ENRON AND WORLDCOM OUTSIDE DIRECTOR OUTSIDE DIRECTOR

SETTLEMENTSSETTLEMENTS

• Enron: $168 M

$145 M - Insurance

$13 M - Personal Assets

• WorldCom: $55 M

$36 M - Insurance

$19 M - Personal Assets

$5.5 M - Bert Roberts

FACTORS LEADING TO FACTORS LEADING TO PERSONAL LIABILITYPERSONAL LIABILITY

• Dearth of insurance limits• Bankrupt issuers• Egregious fraud• Liability under Section 11• Coverage issues• Regulatory considerations• High-profile defendants• Outside analysis

Challenges for Challenges for Clients/Brokers on Clients/Brokers on

Rescission Rescission

• Renewal Strategy/Pre-Renewal Meetings

• Late Breaking Information

• Application Questions

• Warranty Letters

• Subjectivities to Binding

• Renewals/Run-Off Coverage

D&O INSURANCE D&O INSURANCE PROGRAM — COVERAGE PROGRAM — COVERAGE

CONSIDERATIONSCONSIDERATIONS

• Order of payments

• Severability of the “Application” for

insurance

• Conduct exclusions

When do they apply?

Are they severable?

• Program limits / structure

Traditional D&O Program Traditional D&O Program Structure — How It Structure — How It

Works…Works…

Nil Retention Retention ($) Retention ($)

Coverage APersonal Asset Protection for

Directors & Officers

Insurance for covered

Non-IndemnifiableClaims

• Statute• Bankruptcy• Company’s

refusal

Coverage BCorporate Asset

Protection

Insurance Reimbursement

forcovered

IndemnifiableClaims

Coverage CCorporate Asset

Protection

Insurance for Corporate Liability when Company is a

defendant in covered Securities

Claims

Single Aggregate Limit

Excess Limits:• Underlying limits are eroded / exhausted

Difference in Conditions (“DIC”) Limits:• Insurer of Underlying:

– Wrongfully refuses– Is financially unable– Rescinds

• Underlying insurers are not liable• Bankruptcy; proceeds of underlying insurance are stayed

Traditional D&O Program Structure Plus Side A Traditional D&O Program Structure Plus Side A Only Coverage — How It Works…Only Coverage — How It Works…

Nil Retention Retention ($) Retention ($)

Coverage APersonal Asset Protection for

Directors & Officers

Insurance for coveredNon-Indemnifiable

Claims

• Statute• Bankruptcy• Company’s refusal

Coverage BCorporate Asset

Protection

Insurance Reimbursement for

covered IndemnifiableClaims

Coverage CCorporate Asset

Protection

Insurance for Corporate Liability when Company is a

defendant in covered Securities Claims

Coverage A Excess / DIC

Additional Personal Asset Protection for

Directors & Officers

Single Aggregate Limit

Traditional D&O Program Structure Plus Side A Traditional D&O Program Structure Plus Side A Only & IDL Coverage — How It Works…Only & IDL Coverage — How It Works…

Nil Retention Retention ($) Retention ($)

Coverage APersonal Asset Protection for

Directors & Officers

Insurance for coveredNon-Indemnifiable

Claims

• Statute• Bankruptcy• Company’s refusal

Coverage BCorporate Asset

Protection

Insurance Reimbursement for

covered IndemnifiableClaims

Coverage CCorporate Asset

Protection

Insurance for Corporate Liability when Company is a

defendant in covered Securities Claims

Coverage A Excess / DICAdditional Personal Asset

Protection for Directors & Officers

Single Aggregate Limit

Excess Limits:• Underlying limits are eroded / exhausted

Difference in Conditions (“DIC”) Limits:• Insurer of Underlying:

– Wrongfully refuses– Is financially unable– Rescinds

• Underlying insurers are not liable• Bankruptcy; proceeds of underlying insurance are stayed

IDL CoverageAdditional Personal Asset

Protection for onlyIndependent Directors

Similar policy features as Coverage A Excess / DIC policies

Underwriting PerspectiveUnderwriting Perspective

Kieran Murray

Lexington Insurance Company

National Branch

Manager- Employment Practices Liability

UNDERWRITING UNDERWRITING PERSPECTIVEPERSPECTIVE

• Obligatory Disclaimer- Views being expressed are my views and not the views of Lexington Insurance Company or AIG. In addition, as D&O coverage is not my expertise, EPLI is, I disclaim any knowledge in this area.

Underwriting ProcessUnderwriting Process

• Submission / Application Received From Broker

• Client Meeting

• Quote Presented

• Negotiation (could be before or after quoting)

• Subjectivities to Binding

• Policy Issuance

Submission / ApplicationSubmission / Application

• Application - Carrier or Market Application

• Loss Runs

• Financials

• Miscellaneous Information

• Missing Information Necessary to Quote

Client Meeting / Additional Client Meeting / Additional InformationInformation

• Additional Information Received Through Client Meeting or From Broker. Can be Verbal or in Writing.

• Late-Breaking Information Received.

• Underwriter Is Now Prepared to Analyze Complete Submission and Quote Based on All Information Received.

Quote PresentedQuote Presented

• Quote Based on and Relying On Information Received.

• All Coverages and Options Requested May or May Not be Offered in Quote.

• Subjectivities

NegotiationsNegotiations

• Terms and Conditions Including Severability

• Subjectivities Application

• Warranty Question• Other Subjectivities

SubjectivitiesSubjectivities

• Can be Received Prior to or After Binding.

• Are They What Were Expected?

• Never Want Surprises at This Stage.

Avoid Unwanted ResultsAvoid Unwanted Results

• Throughout Quoted / Underwriting Process Numerous Areas Where Process Can Head In the Wrong Direction. Important to:

Submit as Complete a Submission / Renewal Submission As Possible at Outset.

Be As Clear and Precise as Possible - Minimize Surprises.

Put In Writing if Possible. Satisfy Subjectivities ASAP.