horizon issues
Insurance
Who can blame insurers for wanting to turn
back the clock? From the catastrophic events
of September 11 to the 2004 quartet of
hurricanes that struck the southeastern
United States, immense catastrophes
continue to wreak havoc with performance.
External risks such as rising tort costs and
the failure of medical malpractice reforms
create the same sort of daily chaos for
corporate counsel. For companies seeking to
withstand the legal and business gale winds,
here are five critical issues to take into
account as they plan for the months ahead.
22 www.martindale.com
RESPONDING TO REGULATORY RAISING THE STAKES ON REFORM BID-RIGGING AND CONTINGENT
SUBPOENAS U.S. businesses are suffering from an
COMMISSIONS: THE REGULATORY
As the insurance industry responds to fast- explosion of mass tort litigation. The RESPONSE
changing corporate governance and regulatory asbestos litigation onslaught—generated In October 2004, the New York attorney
demands, almost equally quickly, regulatory by creative plaintiffs’ lawyers and supported general filed a complaint against Marsh
subpoenas are being served on some of the by broken liability regimes—exemplifies & McLennan Companies, Inc. The
industry’s leading companies. In-house counsel litigation which has needlessly harmed complaint charged MMC with fraudulent
should follow these five “C’s” to help their businesses and has damaged the U.S. market conduct involving so-called bid-
clients respond to a regulatory subpoena: economy. Asbestos litigation alone has cost rigging and contingent commissions. Less
over $70 billion, has bankrupted 70 than two months later, the National
Clarify the scope of the subpoena. If you companies, has vitiated 70,000 jobs and Association of Insurance Commissioners
believe it’s too broad or exceeds applicable has enriched hundreds of thousands of (NAIC) adopted a regulatory model to
regulatory authority, discuss a possible unimpaired claimants. Add the $200 billion address the issue.
narrowing. Suggest specific, less burdensome annual cost of the U.S. tort system and
alternatives. Discuss timing of the response, you have a litigation environment which is So, what are bid-rigging and contingent
including a possible extension. Agree in out of control, is pushing the bounds of commissions, and why all this attention?
advance about the form of production. insurability and which must be reformed. Bid-rigging is a deception by brokers who
conspire to organize and submit multiple
Communicate and explain what the The defective system results from several bids to influence a potential insured to
regulator wants. Draft a memo explaining causes, most notably the emergence of pick the “lowest” bid. The potential insured
what people need to produce, when the a compensation culture which rewards believes the bids represent competitive
information must be produced and to plaintiffs even when there is no damage, offers, rather than an orchestrated sham
whom questions should be directed. Identify no breach of duty and no fault. The system coordinated by dishonest brokers.
who must produce documents and be has morphed from a liability process in Contingent commissions are the amounts
prepared to explain why these individuals which the entity which causes the damage paid by insurers to brokers for placing
were selected. Specify search terms to be owes compensation to a system committed business—but the potential insured hired
used in searching for electronic documents. to wealth transfer. These deficiencies present the broker and is also paying him to place
Coordinate document production. complex risk management challenges as the business.
Understand your company’s information traditional risk transfer mechanisms do not
respond to wealth transfer schemes. Deceptive practices such as bid-rigging
system(s) and the kinds of documents
are already illegal. The NAIC model
that it has. Questions to ask: Does your President Bush is pressing Congress to calls for open disclosures to consumers
company regularly back up/purge files? pass legislation that will reform asbestos about compensation, including contingent
How often? What is the document litigation and limit monetary awards for commissions. But the model would affect
retention policy? What are the applicable medical malpractice. While momentum is agents and brokers. Agent and insurer
regulatory requirements? building, broader reform—including the groups are calling for limitations on these
Confirm that complete responses were institution of a “loser-pays” system—is disclosures so that agents who receive
received. If not, why not? It’s better to necessary to eliminate the enormous compensation only from the insurer they
tackle potential problems (like document burden that tort litigation places on the U.S. represent—and not from the insured—are
destruction) early. Understand the scope economy. Business leaders need to elevate not lumped in with brokers who may
of any problems and develop solutions that the importance of tort reform, to raise the receive compensation from the insurer and
can be suggested to the regulator. quality of the public debate and to commit the insured. Affected agents and insurers
the necessary resources to ensure that worked with the National Conference of
Copy everything that’s produced. This meaningful reform is enacted. Insurance Legislators to develop a new
may save time/expense if your company
model law that reflects these limitations.
later faces another subpoena and may Michael P. Murphy When considering these models, each
avoid problems if questions arise regarding Partner, Insurance
state will need to carefully review which
the production. Consider “Bates stamping” mmurphy@nixonpeabody.com
regulatory response, if any, is appropriate.
all documents for future reference.
Nixon Peabody LLP
Kurt D. Gallinger
Lewis S. Wiener Member, Government Policy and Insurance
Partner
kgallinger@dykema.com
lewis.wiener@sablaw.com
Dykema Gossett PLLC
W. Thomas Conner
Partner
thomas.conner@sablaw.com
Sutherland Asbill & Brennan LLP
MAY 2005 23
MARSH SETTLEMENT DESERVES CYBER-RISK COVERAGE
SCRUTINY Today, access to a computer and the
On January 31, Marsh & McLennan Internet is as critical to business
Companies, Inc. announced that it had communication as was a pen and paper
entered into a settlement agreement historically. But with this new digital
era has come new risk. Cyber threats,
In response to these resolving claims made by the New York
attorney general relating to contingent including business interruption, computer
commissions and bid-rigging. As a result of viruses, information penetration and
new risks, policyholders the agreement, certain Marsh clients will identity theft, as well as destruction of
be able to recoup from an $850 million data, can cause significant financial loss.
settlement fund contingent commissions In response to these new risks, policyholders
are increasingly turning received by Marsh with respect to their are increasingly turning to their insurers to
insurance placements. find coverage for destruction of computer
data. Yet, coverage for cyber-risks was
to their insurers to find Companies in line for settlements will clearly not anticipated in the actuarial
receive their notification from Marsh calculation of insurance premiums.
on or by May 20. At press time, it was
coverage for destruction unclear exactly what will be included in The first question insurers must ask is
the communication from Marsh. Savvy whether existing policies provide coverage
of computer data. Yet, corporate counsel will carefully review for such a loss. The key issue is whether
their company’s notification for both what lost or damaged computer data is a physical
it does and doesn’t contain. Companies injury to “tangible” property within the
coverage for cyber-risks should require a complete accounting for meaning of comprehensive general liability
the contingent commissions they paid so (CGL) or first-party property policies.
they can calculate whether the compensation Most courts faced with this question find
was clearly not offered equals what the company is that CGL and first-party property policies
due. Companies may want to request this do not cover cyber-loss, reasoning that
anticipated in the information regarding the commissions computer data, software and other online
paid over the years so that they can fully systems are not “tangible” since they are
evaluate the relief offered by Marsh. not material items possessing a physical
actuarial calculation form. This trend should continue.
At face value, the Marsh settlement focuses
on the contingent commission question. The second cyber-risk question is
of insurance premiums. Still unresolved and unaddressed are whether insurers will respond and offer
the allegations that insurance companies coverage to meet this need. After courts
participated in bid-rigging. Corporate determined that CGL policies and workers’
counsel should be wary of any requests compensation/employers’ liability policies
by Marsh in its settlement communications failed to cover the unanticipated business
to release all claims in order to obtain the risks of sexual harassment and wrongful
compensation. Resist the idea of a general termination, Employment Practices Liability
release until a thorough evaluation of both Insurance became a standard business
contingent commissions and potential bid- coverage. Now certain insurers have begun
rigging has been completed. to market policies covering the intangible
risk of destruction of computer data. There
Moving forward, companies also may want is significant opportunity here for the
to take this opportunity to re-evaluate their industry which would mirror its success
insurance procurement procedures. with Employment Practices policies.
Lorelie S. Masters Paul E.B. Glad
Partner, Insurance Litigation and Counseling Chair, Insurance Practice
lmasters@jenner.com pglad@sonnenschein.com
John H. Mathias, Jr. Sonnenschein Nath & Rosenthal LLP
Chair, Insurance Litigation and Counseling
jmathias@jenner.com
Jenner & Block LLP
For more information about these
lawyers and their firms, please visit
www.martindale.com.
24 www.martindale.com