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Posts Tagged ‘insurance’

Cancelling a Financed Policy: Reliance on a Power of Attorney

Posted on: February 8th, 2019

By: Eric Benedict

When a prospective insured is applying for and obtaining coverage, no matter the type of risk, the cost of the premiums is likely to be a foremost concern. To cover the cost of the premium, an insured may choose to seek financing from third-party entities known as premium financing companies. In exchange for agreed upon terms, premium financing companies will pay all or part of the premium due, with expectation that the insured will pay back the loan over time. In an effort to reduce the risk that the premium finance company will suffer a loss as a result of the insured’s default, premium financing companies often require that the insured grant the company a power of attorney to cancel the policy on the insured’s behalf and collect any returned premium in the event of a default. Both the terms of a policy and relevant legal authorities may set forth different requirements for cancellation when the policy is cancelled by the insured than when it is cancelled by the insurer.

As a result of the relationship established between the premium finance company and the insured, an insurer is often placed in the position of receiving a notice of cancellation from the premium finance company on behalf of the insured. In many states, premium finance companies are subject to regulation and some states have set forth specific procedures that a premium finance company must follow when exercising a power of attorney to cancel a policy on the insured’s behalf. To provide certainty to the insurer regardless of whether the premium finance company has complied with statutory or regulatory requirements prior to cancellation, some statutory schemes also provide insurers the ability to rely on representations and cancellations from premium finance companies. Many of the states which have adopted such schemes provide specific conditions under which an insurer is entitled to rely on a notice of cancellation from a premium finance company, thereby shielding the insurer from liability after it cancels a financed policy at the direction of the premium finance company. While many of these schemes contain similar language, the circumstances and conditions under which an insurer may properly rely varies by jurisdiction.

Ultimately, although an insured’s ability to finance an insurance premium may have the effect of widening access to coverage to those who require financing, it is imperative that both the premium finance company and the insured understand their rights and obligations under the relevant statutory scheme. Similarly, it is critical that insurers understand the relevant legal authorities concerning its rights and responsibilities when dealing with an insurance premium finance company which exercises its right to cancel a party on behalf of the insured.

If you have any questions or would like more information, please contact Eric Benedict at [email protected].

Georgia Court of Appeals Concludes the Term “Affiliate” is Ambiguous

Posted on: February 4th, 2019

By: Jake Carroll

In Salinas v. Atlanta Gas Light Company,[1] the Georgia Court of Appeals’ recently examined whether Georgia Natural Gas (“GNG”) and Atlanta Gas Light Company (“AGLC”) were “affiliates.” Both AGLC and GNG were owned and controlled, either directly or through an intermediary, by a company named AGL Resources, Inc.

In Salinas, AGLC sought to dismiss Plaintiff’s claims and compel arbitration. In support of its argument, AGLC relied on a term in GNG’s service agreement that required the Plaintiff to arbitrate any disputes with GNG’s “affiliates.” However, since the term “affiliate” was not defined in GNG’s agreement, the Court of Appeals looked at how the term “affiliate” is defined in the Georgia Code, Black’s Law Dictionary, and other jurisdictions, and ultimately determined that the term is ambiguous. The Court of Appeals construed the agreement against GNG—the drafter of the contract—and as a result, AGLC could not demand arbitration of Plaintiff’s dispute.

While the Court of Appeals did not set-out a specific definition for “affiliate,” the Court’s analysis provides a couple of practice tips to anyone involved in drafting, reviewing, or enforcing contracts, including commercial agreements, government contracts, or insurance policies.

  1. Define Your Terms: The Salinas Court may not have had to address the meaning of “affiliates” if the Agreement had defined the term. But, since the term was not defined, the Court looked elsewhere, including other jurisdictions, the Georgia Code, and the dictionary to determine its meaning. Including a definitions section is an easy way to set out the agreed-upon meaning of a term throughout a contract, and should not be overlooked.
  2. Be Explicit: If there is a certain sibling or parent corporation that should be a beneficiary of a contract, consider listing the specific “affiliates” to which the contract or agreement should apply.
  3. Check Your State’s Code: The Court noted that the term “affiliate” is defined over 20 times in the Georgia Code, and the definitions vary. For example, in the context of financial institutions, an affiliate is an entity that controls the election of a majority of directors, trustees of a financial institution, or an entity that owns or controls 50 percent or more of the financial institution. O.C.G.A. § 7-1-4 (1). In Georgia’s Corporations Act, the definition of affiliate is broader: “a person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a specified person.” O.C.G.A. § 14-2-1110 (1).[2] Depending on the type of corporate entity, “affiliate” may not include every entity in a corporate structure, and certain rules regarding ownership and control may be relevant.

If you need help with this issue, or any other commercial law questions, Jake Carroll practices construction and commercial law, is licensed to practice in Georgia and Florida, and is a member of Freeman Mathis & Gary’s Construction Law and Tort and Catastrophic Loss practice groups. He represents corporations and manufacturers in a wide range of litigation and corporate matters involving breach of contract, business torts, and products liability claims. He can be reached at [email protected].

[1] 347 Ga. App. 480; 819 S.E.2d 903 (2018).
[2] See also O.C.G.A. § 18-2-71 (1) (B) (“Affiliate” has multiple definitions, including “[a] corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote by the debtor or a person who directly or indirectly owns, controls, or holds with power to vote 20 percent or more of the outstanding voting securities of the debtor[.] …”).

Federal Securities Laws: Has the 9th Circuit Gone Rogue Again?

Posted on: February 4th, 2019

By: John Goselin

On January 4, 2019, the United States Supreme Court decided to hear an appeal from the Ninth Circuit’s April 20, 2018 decision in Varjabedian v. Emulex Corporation, 888 F.3d 399 (9th Cir. 2018). The Supreme Court is hearing this case to resolve a circuit split regarding whether a claim under Section 14(e) of the Securities Exchange Act of 1934 requires the plaintiff to plead a strong inference that the defendants acted with scienter (i.e. intent to defraud) or whether Section 14(e) merely requires an allegation that the defendants were negligent. Section 14(e) is a provision of the Securities Exchange Act of 1934 that prohibits a company involved in a tender offer from making a material misstatement or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading or to engage in any fraudulent, deceptive or manipulative acts or practices in connection with a tender offer.

Prior to the 9th Circuit’s April 20, 2018 opinion, no Circuit split had existed. Over the course of the forty-five preceding years, the Second, Third, Fifth, Sixth and Eleventh Circuits had uniformly held that Section 14(e) required a plaintiff to plead scienter when stating a claim pursuant to Section 14(e). Despite four and half decades of consensus, the 9th Circuit concluded that every Circuit Court to address this particular issue previously had simply gotten it wrong and that if the Supreme Court considered the issue, the Supreme Court would conclude that Section 14(e) only required the plaintiff to plead negligence.

Until recently, plaintiffs had historically chosen to challenge tender offers in state court, most often Delaware state court, pursuant to state law disclosure obligations. Challenging tender offers is big business as almost every tender offer conducted results in multiple state court class action lawsuits seeking injunctions to halt the tender offers until so-called disclosure deficiencies are rectified. The cases are high profile, high risk and involve significant legal defense costs that D&O carriers often end up paying pursuant to the provisions of D&O insurance policies.  The plaintiff’s lawyers have historically been successful in playing the role of the troll under the bridge collecting hefty tolls (a.k.a legal fees) for “improving” disclosures in tender offers as the tender offer participants seek to avoid the risk of a potential injunction that could halt the tender offer.

Recently, however, the Delaware state courts where the majority of these cases have been pursued have been clamping down on these “disclosure claims” making the state court forum less lucrative for the plaintiff’s bar. Hence, the plaintiff’s bar has been turning increasingly to Section 14(e) of the Securities Exchange Act of 1934 as an alternative cause of action in a federal forum in an effort to continue collecting their attorney fee tolls. The problem, however, is that if Section 14(e) requires the plaintiff to plead “scienter” and the plaintiff wants to bring a class action to put maximum pressure on the company, the plaintiff would have to comply with the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 and plead facts, not conclusory statements, sufficient to support a “strong inference” of scienter. The plaintiff’s bar would very much like to avoid this particular pleading, and burden of proof, hurdle.

So, the 9th Circuit’s decision adopting a mere negligence standard is a very big deal creating a window through which the plaintiff’s bar hopes to continue their troll under the bridge strategy at least out West and provides the plaintiff’s bar a new opportunity to challenge the prior holdings in the other Circuit Courts. The Supreme Court, however, has taken the opportunity to decide the issue and will either shut this particular door quickly or swing it wide open by deciding the issue of negligence or scienter for Section 14(e) claims.  Every securities lawyer in America will be watching closely.

If you have any questions or would like more information, please contact John Goselin at [email protected].

A Holly(cal) Jolly (Almost) Christmas

Posted on: December 28th, 2018

By: Zach Moura

In what is sure to be the beginning of a slew of cases litigating coverage for injuries caused by drones, the U.S. District Court for the Central District of California recently issued an opinion denying coverage under an aircraft exclusion in the drone operator’s Commercial General Liability (CGL) policy. Philadelphia Indemnity Insurance Company v. Hollycal Production, Inc., et al., 5:18-cv-00768.

The accident at issue occurred when Hollycal Production (“Hollycal”) used a drone to photograph an event. The drone collided with one of the attendees, Darshan Kamboj, blinding her in one eye. Ms. Kamboj subsequently filed suit against Hollycal, its owner, and the Hollycal employee that operated the drone. Hollycal tendered the defense of the suit to Philadelphia Indemnity Insurance Company (“Philadelphia”) under the CGL policy on which Hollycal was an additional insured. Philadelphia agreed to defend Hollycal under a reservation of rights, and then filed a declaratory judgment action seeking a determination that it had no duty to defend or indemnify Hollycal for the Kamboj suit.

Philadelphia moved for summary judgment, in part on the basis that the Aircraft exclusion in the Policy excluded coverage in pertinent part for bodily injury or property damage “arising out of the ownership, maintenance, use or entrustment to others of any aircraft, ‘auto’ or watercraft owned or operated by or rented or loaned to any insured.” Because “aircraft” was not a defined term in the policy, the Court looked to the Merriam-Webster’s Collegiate Dictionary definition of the word, along with the definition included in 49 U.S.C. § 40102(a)(6) and 14 C.F.R. § 1.1. The Court concluded that a “drone … is an aircraft under the term’s ordinary and plain definition.” Accordingly, the Court found that the Kamboj suit was excluded from coverage and Philadelphia had no duty to defend or indemnify Hollycal.

Drone operators will need to carefully review their insurance and ensure that they have appropriate coverage in place for their drone operations. As this matter makes clear, and as reinforced by recent reports of a drone striking the nose of an Aeromexico plane, an October near-miss of a drone by a passenger plane near London Heathrow, and the shutdown of London Gatwick airport last week because of suspected drone activity, there is substantial exposure arising from drone operations. Without the right insurance, operators may be left disastrously exposed.

If you have any questions or would like more information, please contact Zach Moura at [email protected].

Limitations On Directors & Officers’ Liability Coverage

Posted on: December 20th, 2018

By: David Molinari

Directors and Officers (D&O) Liability Insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a Director or Officer of a business or other type of organization. Directors and Officers policies may also cover legal fees and other costs the organization may incur as a result of such a lawsuit. Directors and Officers Liability Insurance applies to anyone who serves as a Director or Officer of a for-profit business or a non-profit organization. D&O policies can take on different forms depending on the nature of the organization and the risk organizations face. D&O Insurance is a specialized form of coverage for claims based on acts committed in corporate capacities; and the corporation obligation to indemnify its Directors and Officers for such claims.

The availability of such insurance is an important factor recruiting or attracting persons to serve as Directors and Officers of corporations. So important that such insurance is provided by statute.  In California, California Corporation Code Section 317 allows for a corporation to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in their official capacity; or arising out of the agent’s status, whether or not the corporation would have the power to indemnify the agent against the liability. However, the existence of Directors and Officers coverage has limits. California Corporation Code permits a corporation to purchase Directors and Officers Insurance, it does not require an entity to do so.  The Corporation Code does not authorize an insurance company to cover a risk that it could not or does not lawfully cover. A Directors and Officers Liability policy is not an incentive for leaders of a business to increase risky behavior or an incentive to adopt aggressive negotiation strategies, policies or interpretations or their contracts and arrangements in the belief that if their actions are rejected by the courts, the insurance company will pick up the tab.

One distinction where coverage is unavailable; yet individuals in positions of management, decision and control mistakenly believe they are covered, is in situations where the loss arises from nothing more than a breach of contract the corporation entered. Directors and Officers liability policies are seen as safety nets affording management the ability to shift risk for unsuccessful business decisions and deals to an insurance carrier.

Directors and Officers policies typically exclude coverage for breach of contract. The policies generally limit coverage to liability that arises from errors committed in the officers’ or directors’ official capacity.  This limitation effectively excludes contract liability because an officer acting in their official capacity cannot be held individually liable for breach of a corporate contract. The limitation protects against making an insurer an unwitting investor in a corporation’s dealings.

Often directors or officers seek coverage of claims by focusing upon broad language in policies that define a “loss” but ignore the conditions on how that loss arose. Under Directors and Officers policies, the issue is whether the loss resulted from a wrongful act. Policies only cover losses resulting from wrongful acts, whether actually committed or merely alleged. Suffering a loss does not include judicial enforcement of contractual obligations. An officer or directors’ decision to refuse to make payments under a contract because of a dispute with the contracting party does not give rise to a loss caused by a wrongful act. Even though an officer or director’s actions in precipitating the breach may have been careless, such a loss is not covered by a policy. If that were the case, any default arising from a mistaken assumption regarding a company’s contractual liability could transform a contract debt into an insured event. Refusing to pay a debt, even in reliance upon erroneous advice of counsel, would convert a contractual obligation into damage arising from a negligent omission. That result would make the insurance company a defacto party to a corporate contract and potentially require a carrier to pay a full contract price, with interest while letting the corporation completely off the hook for its voluntarily assumed obligations.

No insurer reasonably expects the benefits of a professional liability policy are available to cover a contract price for a business deal gone wrong.  Such expectations would expand the scope of an insurer’s liability enormously and unpredictably, creating a moral hazard problem by encouraging corporations to risk breaching their contractual obligations believing in the event of a suit, the D&O carrier would ultimately be responsible for paying the debt.

Recruiting qualified individuals into directors and officers positions in for-profit and non-profit organizations often requires additional benefits to entice acceptance of added responsibilities in corporate governance and decision making. In the non-profit realm, often individuals are volunteers, so additional benefits are often thought to be needed to recruit and fill these positions.  Directors and Officers Liability policies offer enticement and protection for assuming increased responsibilities. Yet, the existence of director and officer liability policies and the protections they afford should not encourage the opportunity to take greater risks in negotiations or contracting. Adopting a risky business strategy should not be undertaken in the misbelief that if the business deal goes wrong, insurance benefits are available to protect against the loss.

If you have any questions or would like more information, please contact David Molinari at [email protected].