In an opinion that provides an interesting glimpse of a
complex D&O insurance program, on August 24, 2011, Central District of
California Judge R.
Gary Klausner granted the motions to dismiss of the insurance company
defendants in an action that had been brought by a subsidiary of IndyMac bank,
which was trying to establish its rights to coverage under the failed bank's
D&O insurance policies. A copy of the August 24 opinion can be found here.
IndyMac failed on July
11, 2008. The bank's closure represented the second largest bank failure
during the current banking crisis, behind only the massive WaMu failure.
(IndyMac has assets of about $32 billion at the time of its closure).
As I detailed in a prior post (here),
the bank's collapse triggered a wave of litigation. The lawsuits include
a securities class action
lawsuit against certain former directors and officers of the bank; lawsuits
the FDIC and by the SEC
against the bank's former President; and a
separate FDIC lawsuit against four former officers of Indy Mac's
homebuilders division. According to Judge Klausner's August 24 opinion,
there are a total of twelve separate lawsuits pending (referred to in the
opinion as the "underlying actions"). Judge Klausner describes the litigation
generally as alleging "various improprieties, mostly centering around mortgage
IndyMac MBS was a subsidiary of IndyMac Bank, and is now
wholly owned by the IndyMac federal receivership. IndyMac MBS is a defendant in
a number of the lawsuits that have been filed in the wake of the bank's
collapse. Earlier this year, IndyMac MBS filed an action seeking a judicial
declaration of coverage on its behalf under the bank's D&O insurance
The insurance policies at issue represent a total of $160
million of insurance coverage spread across two policy years. (Judge Klausner's
opinion does not explain why two policy year's policies are potentially
implicated, rather than only one.) The coverage in the 2007-2008 policy year,
providing coverage during the year from March 1, 2007 to March 1, 2008,
consists of eight layers of insurance. Each layer has a $10 million limit of
liability. The eight layers consist of a primary policy providing traditional
ABC coverage, with three layers of excess insurance providing follow form ABC
coverage, followed by four layers of Excess Side A insurance.
The coverage for the policy year March 1, 2008 to March
1, 2009 is arranged similarly, except that the lineup of insurer involved
changed slightly in the 2008-2009 program. Judge Klausner's opinion names all
of the carriers involved and their respective roles in the two programs.
In its declaratory judgment action, IndyMac MBS sought to
have the court determine that each of the underlying actions is covered under
one or the other of the two insurance coverage towers. Moreover, because the
two programs are each subject to a "priority of payments" provision giving the
individual defendants in the underlying actions priority to coverage under the
policies, IndyMac MBS sought to have the court make a determination of coverage
for the individual defendants in the underlying actions, so as to allow the
court to ascertain whether IndyMac MBS may be eligible to receive
coverage under the policies. The defendant insurance companies moved to
In his August 24 order, Judge Klausner granted the
insurance companies' motions to dismiss, holding that IndyMac MBS's request for
declaratory relief is "too remote to constitute a case or controversy" because
any insurance coverage that may ultimately be owed "can only be determined
after the underlying actions involving the Individual Defendants have been
concluded." Accordingly, IndyMac MBS "does not yet have an adequate injury that
would make this case justiciable."
In addition, Judge Klausner found with respect to the
excess layers of insurance had not even been triggered because the underlying
insurance has not yet been exhausted, and whether the excess layers "will ever
be triggered in the underlying action is too speculative to give rise to a
valid request for standing in the current case." Indeed, even under the primary
policy, IndyMac's alleged injury is "too speculative" as IndyMac MBS has not
yet met the $2.5 million deductible.
Finally, Judge Klausner separately granted the Excess
Side A insurers' motion to dismiss. Because the insurance coverage under the
Excess Side A policies is only available, if at all, for the benefit of the
individual defendants, IndyMac "lacks standing to request declaratory relief"
because it "cannot adequately allege that it has a legal interest" in the
Excess Side A policies, given that the Excess Side A policies "provide coverage
only for the Individual Insured Defendants."
There is nothing surprising about the outcome of this
ruling. It clearly is too early for the court or anyone else to try to sort out
who is going to be entitled to what under the various policies. Nevertheless,
it certainly is understandable that IndyMac MBS would want to know how much
insurance it is going to have as it faces the various lawsuits in which it is
This is a classic situation of too many claims, too many
defendants and possibly not enough insurance. Even though IndyMac carried
annual limits of liability of $80 million (and I note as an aside, there is
nothing that says that both of the two $80 million towers of insurance will
actually be available; it is entirely possible that all claims will relate back
to the date of the initial filing of the first claim, in which case only a
single $80 million tower would actually be available to pay the various
insured persons' losses), that may prove to be an insufficient amount to pay
the defense fees and to pay settlements and judgments in order to resolve all
of the various underlying actions.
The larger concern for IndyMac MBS is that owing to the
priority of payments provision in the traditional ABC policies, and owing to
the limitation of coverage in the Excess Side A policies to the individuals
only, it is entirely possible that payment of the individual insureds' defense
expenses and settlement amounts will entirely exhaust all insurance. The Excess
Side A insurance of course is not available at all for IndyMac MBS. IndyMac's
declaratory judgment action seems like an attempt to try to do something before
all of the insurance is gone.
Of course, I am assuming for the sake of argument that
there actually is coverage available under these policies for the benefit of
the individual insured persons. Whether or to what extent there are policy
terms and conditions that preclude coverage in whole or in part for the
individual insureds is another question. That is of course one of the questions
that IndyMac MBS wanted answered in the declaratory judgment action, because
knowing the answer to the question of how much insurance is available to the
individuals is a necessary predicate to knowing the answer to how much
insurance might be available to IndyMac MBS.
The structure of IndyMac's insurance was somewhat
unusual, as it is not common for companies to carry equal amounts of
traditional ABC insurance and of Excess Side A insurance, or to carry $40
million of Excess Side A, as IndyMac did here. However, from the perspective of
the individuals, the unusually large amount of Excess Side A insurance that the
bank carried is turning out to be a good thing from there perspective, as it is
looking like they are going to need it, and it is only going to be available to
them and for their benefit, without having to share with other entities.
Anyway, while I don't think the outcome of this decision
is particularly surprising, it is still an interesting situation. The
circumstances provide insight into the ways that the various parts of a D&O
insurance program operate, particularly the priority of payments provision and
the Excess Side A insurance structure.
One final observation has to do with the fact that a lot
of insureds, like IndyMac MBS, become frustrated when they are unable to find
out with clarity at the outset of a claim how much insurance is going to be
available. The problem is, as this case demonstrates, until the underlying
litigation has played itself out, it is not possible to know how all of the
various rights and interests under the policy are going to be addressed. When
this type of frustration arises in the course of a claim, the insured persons
often translate their frustration into anger at the carriers involved. But as
this case also shows, even taking as active a step as suing the carriers to try
to force a determination of coverage cannot eliminate the unavoidable
constraint that requires the underlying claim to be resolved (or at least
sufficiently advanced) before coverage can finally be determined.
I do wonder sometimes whether it is a sad commentary that
I find all of this interesting.
Special thanks to a dedicated reader for sending me a
copy of the IndyMac order.
Las Vegas Sands Credit Crisis-Related
Securities Suit Survives Dismissal Motion: Like a lot of
companies during the economic turmoil in late 2008, the Las Vegas Sands Corp.
experienced serious liquidity problems that put it in breach of various
covenants it has with its lenders. These disruptions affected the company's
ability to proceed with expansion plans in Las Vegas and Macao. As these events
unfolded the company's share price lost much of its value.
As I discussed in an
earlier post, somewhat belatedly, in May 2010, a plaintiff shareholder
filed a securities class action lawsuit in the District of Nevada, alleging
that the company and certain of its directors and officers had made misleading
statements about the company, its development plans, its liquidity and its
financial condition. The defendants moved to dismiss.
In an August 24, 2011 order (here),
District of Nevada Judge Kent
Dawson denied the defendants' motion to dismiss. He concluded that the
plaintiffs "have adequately pled facts asserting that investors were misled by
statements that liquidity was not an issue and that development was steadily
progressing." He also concluded that the plaintiffs have "adequately pled that
Defendants knew that the statements they were making were false." He also
found that the allegations in the complaint "show a series of public statements
on material issues that were inconsistent with what was known internally." He
did conclude that certain forward-looking statements were not actionable,
because they came within the safe harbor for forward looking statements.
I have added the Las Vegas Sands case to my running tally
of credit crisis-related dismissal motion rulings, which can be accessed here.
Here's A Real Shocker: Merger Objection
Lawsuits Are Worthless: If the hurricane blew away your
Saturday newspapers, you may not have seen the August 27, 2011 article in the Wall
Street Journal entitled "Why Merger Lawsuits Don't Pay" (here).
According to the article, "legal experts" warn prospective claimants with
respect to merger objection lawsuits that "the chances that you will succeed in
stopping a deal or receiving a payday are minimal."
The article reports data from Advisen that in 2010, there
were 353 merger objection lawsuits, which represents a 58% increase from 2009.
There have already been 352 merger objection lawsuits so far this year. The
number of these lawsuits keeps increasing even though these suits "rarely
result in a tangible award," and the best outcomes are usually limited to "a
delay in the merger or slightly improved disclosures about the deal's terms."
The answer to the question about why these cases are
filed if they produce so little is that they make money for the lawyers. As the
article puts it, "in many cases the biggest beneficiaries are the law firms,"
which collect fees "from roughly $400,000 for typical cases to several million
for bigger cases." The article quotes a statement from Delaware Chancellor
J. Travis Laster that the specific merger objection case before him was "a
bunch of movement for nothing."
Yes, it's a great country, isn't it?
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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