On November 29, 2021, a jury in Nevada found United Healthcare liable for underpaying TeamHealth, a nationwide provider of emergency medical services, by millions of dollars. The case, Fremont Emergency Services vs. UnitedHealth Group1, tells us more about the American healthcare system—both how it works and what is wrong with it—than a decade’s worth of governmental reports and hearings. Plaintiff’s central allegation was that United Healthcare, the nation’s largest health insurer and plan administrator, engaged in a multi-pronged scheme to dramatically reduce emergency reimbursement rates and artificially generate profits for itself. The case offers a revealing window into the “black box” process by which reimbursement rates are set and the enormous power of United Healthcare.
In lawsuits over contracts, parties sometimes assert defenses that contracts are voidable or void. A voidable contract is one as to which the party should have a choice as to whether it is enforceable or not; for example, when a 17-year-old (a legal minor) buys a car, he may have the option to choose whether to abide by the deal. By contrast, a void contract is one that is illegal because it violates the law or public policy. No one—neither hit man nor jilted spouse—can enforce a contract to commit murder.
The doctrine of void contracts arose recently in an employment case in Florida, Griffin v. ARX Holding Corporation. The plaintiff in the case was Nicholas Griffin. Griffin had a blemish on his resume: in 1998, he had pleaded guilty to extortion.
Earlier this month, we posted about the U.S. District Court for the Northern District of Ohio’s decision that a credit union’s insurance policy was not invalid from the start because of its employee’s misrepresentations on the application. The decision, National Credit Union Administration Board, as Liquidating Agent of St. Paul Croatian Federal Credit Union v. CUMIS Insurance Society, Inc., also illustrates other arguments that insurers may make in denying coverage for claims under D&O policies or reserving their rights to litigate later. In this post, we explore how the court determined whether St. Paul “discovered” the loss more than two years before it filed suit against its insured, in which case its lawsuit would have been barred by a suit limitations period.
To briefly recap the facts of the case, St. Paul Croatian Federal Credit Union (“St. Paul”) and its insurer, CUMIS, agreed that a St. Paul bank manager, Mr. Raguz, had engaged in fraud by creating fake loans and accepting bribes. St. Paul eventually collapsed and was taken over by regulators. The liquidator appointed to administer St. Paul’s assets made a claim for its losses against CUMIS under a bond policy it had issued in favor of St. Paul. CUMIS responded not only by claiming that the bond policy was invalid from its inception because Mr. Raguz made material misrepresentations in obtaining and renewing it, but also because the policy stated that “legal proceedings” to recover loss from CUMIS had to be “brought within two years of Discovery of Loss.” Under the policy, “Discovery occur[ed] when [St. Paul] first become aware of facts which would cause a reasonable person to assume that a loss of a type covered under this Bond has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred.”
To support its contention that St. Paul was aware of the loss long before it brought suit, CUMIS argued that the St. Paul board of directors were aware of two “critical facts” about the fraud, which would have led a reasonable person to assume a loss. First, CUMIS claimed that the delinquency rate of zero for the loan portfolio was unreasonable given its size, and that the directors should have known this fact more than two years before the lawsuit. In addition, CUMIS claimed that the directors should have known of the fraud more than two years in advance because the loan portfolio included $131.2 million of loans that were purportedly secured by deposits, even though in fact there were only $122.5 million of deposits securing the loans.
The recent decision in National Credit Union Administration Board, as Liquidating Agent of St. Paul Croatian Federal Credit Union v. CUMIS Insurance Society, Inc., from the U.S. District Court for the Northern District of Ohio, is yet another case illustrating how important the precise terms of a policy can be in determining the coverage. As we’ve previously discussed on this blog (here and here), a D&O insurance policy is reliable protection for the indemnification rights of the officers and directors in times of financial distress. Many policies also offer coverage to the entity for injuries caused by misdeeds of its employees. The St. Paul case illustrates what can happen when the employee charged with procuring the insurance policy on behalf of the entity is also the party engaging in fraudulent conduct.
St. Paul Croatian Federal Credit Union (“St. Paul”) was established in 1943 to serve members of St. Paul Croatian parish in Cleveland, Ohio. For more than 53 years it operated from a single branch with about 3 employees. In 1996, a manager retired and one of the tellers, Anthony Raguz, was promoted to fill his position. The credit union grew tremendously over the next fifteen years, and by March 31, 2010, St. Paul had total assets of $250 Million and a loan portfolio of $240 Million.
Companies buy directors & officers (“D&O”) insurance policies with the intention of providing protection for key individuals in a corporate structure. The recent decision BioChemics, Inc. v. AXIS Reinsurance Co., from the U.S. District Court for the District of Massachusetts, illustrates the importance of the terms of the policy in determining what is covered, what is not, and when you should notify the insurer of a potential claim.
As we’ve previously discussed, an insurance policy can provide more reliable protection for the indemnification rights of the directors and officers in times of financial distress, because corporations plagued by regulatory or other legal problems frequently suffer financial setbacks. However, when a corporation is the subject of an official investigation, determining exactly what constitutes the start of a covered “claim” may be a matter of some delicacy.
For my first foray into blog-writing, allow me to tell a cautionary tale intersecting two of my favorite topics: defending companies and individuals in government investigations and Directors and Officers (D&O) Liability Coverage. As a contract junkie who enjoys reading, interpreting, and arguing contract language, parsing through various interrelated D&O policy provisions to glean favorable language for my white collar clients offers hours of amusement (lest ye be worried about me, I do have other hobbies). D&O policies can be effectively used to defray defense costs incurred due to a government investigation. The trick is keeping the money.
The recent suit between Protection Strategies, Inc. (PSI) and Starr Indemnity & Liability Co. in the Eastern District of Virginia, case 1:13-cv-00763-LO-IDD, illustrates how difficult keeping the money can be. PSI is an Arlington, Va.-based defense contractor. In January 2012, PSI received a subpoena from the NASA Office of the Inspector General and a search warrant issued by the United States District Court for the Eastern District of Virginia. On February 1, 2012, the NASA OIG executed the search warrant at PSI’s headquarters. In addition to the company itself, several of PSI’s current and former officers were informed that they were also targets of the NASA OIG investigation. PSI retained Dickstein Shapiro to represent it and hired separate counsel to represent the individual targets and other company employees.
The answer to that question, at least according to the Ninth Circuit Court of Appeals, is “no.”
It seems straightforward, but getting to that “no” requires a little bit of an understanding of insurance – in this case, directors’ and officers’ (“D&O”) insurance. A D&O policy was at issue in this case, Forest Meadows Owners Assoc. v. State Farm Ins. Co., in which the policyholder – a condominium association – was sued by an employee it had fired, and sought coverage from its insurer.
When the dog bites
When the bee stings
When I'm feeling sad
I simply remember my favorite things
And then I don't feel so bad.
Just from looking at the lyrics, your mind will automatically add in the tune. Rodgers & Hammerstein wrote it, Mary Martin, Julie Andrews, and even Carrie Underwood have performed it: the classic song “My Favorite Things” from The Sound of Music (which for mysterious reasons is now associated with Christmas, even though the musical isn’t about Christmas at all).
But I bet few people know how I interpret the song. I’m an insurance coverage lawyer – so my favorite things aren’t brown paper packages tied up with string or schnitzel or bright copper kettles. My favorite things (or, at least, the things I use every day) include principles that – if some thought is given to them before a claim comes about, or in presenting the claim when it happens – can help executives and the companies that hire and fire them have access to the right insurance for the disputes that develop between them. So, in that spirit, this post looks at some of those executive-employment-related insurance issues that we’ve reviewed throughout this year. They’re all things that business leaders should think on as they consider a company’s insurance strategy. You could think of it as a cream-colored pony with an insurance treatise on its back. But I’ll make it much more appealing than some book – more like a crisp apple streudel.
We write frequently about severance pay for executives – a subject near and dear to the hearts, and wallets, of executives and the companies that hire and fire them. Today, we’re going to take this a step further – beyond the severance agreement itself – and look at an interesting case that raises the question of whether a company’s severance payments to an executive are covered losses under that company’s fiduciary liability insurance if the company becomes unable to make those payments.
It’s a neat case from a lot of perspectives, even if there aren’t too many clear answers. It’s an interesting issue for companies that enter into severance agreements and then can’t follow through with the money due to a bankruptcy. Today’s case is especially relevant for us at Suits by Suits because the policyholder is a law firm that – gasp! – went into liquidation, and the executive claiming the severance benefits is a former partner at the firm. Personally, I like it because the focus of my work is insurance coverage disputes like this – figuring out what’s covered (or not) under insurance policies.
“Everything has its limit - iron ore cannot be educated into gold,” Mark Twain famously said. In this two-part series, we’re going to explore one limit on protection from risk using insurance.
We’ve written frequently about the need for companies and their executives to protect themselves from lawsuits using insurance and indemnification. In our writing on SuitsbySuits, the most common types of insurance we discuss are directors’ and officers’ insurance (which protects directors, officers, and sometimes companies against litigation arising out of the directors’ and officers’ work on behalf of the company) and employment practices liability insurance (which defends companies and executives against litigation arising from employment discrimination, wrongful termination, and other types of claims).
Insurance is a good way to transfer the risk of certain types of claims to an insurer, and it’s something company executives need to consider. But, as Twain reminded us, everything has its limit. This series of posts is about an executive at a charitable foundation, who found one limit of the foundation’s directors and officers’ (D&O) and employment practices liability insurance last week – when a court held that the insurer didn’t have to pay his legal bills in cases against him, because those cases arose out of actions he took outside of his role as an executive. Technically speaking, he was not an “insured person” under the policies.
Sounds generic, right? What’s so interesting about this?
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.