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PLUS Special Section Policy recission Discussion will examine impact of recent court decision
A 2004 federal district court decision is likely to have far-reaching implications for the way in which directors and officers liability policies are negotiated and underwritten, and this case is likely to be a subject of discussion at a special panel during the annual PLUS meeting in Boston next month.
The case was Cutter & Buck, Inc., vs. Genesis Insurance Company. In 2002, Cutter & Buck, a publicly traded sportswear retailer, was a defendant in a securities class action suit in which the plaintiffs alleged multiple violations of the federal securities laws. A settlement was reached for about $40 million. Cutter & Buck then submitted a claim under its D&O policy with Genesis, but Genesis denied coverage. Cutter & Buck then sued Genesis in federal district court for breach of good faith and breach of the insurance policy. Cutter & Buck did not dispute that its chief financial officer had falsified the financial statements that were ultimately included as part of the application that Cutter & Buck submitted to Genesis to obtain the D&O policy. Nor did Cutter & Buck dispute that its CFO had signed the policy application. Moreover, Genesis had made it clear that everything in the application was considered “material” to the underwriting process, including the financial statements that were attached to the application. Genesis argued that it had the right to rescind the entire D&O policy because of the fraud intentionally committed by Cutter & Buck’s CFO in the application process, and the court upheld that argument. But the court went a step further. It concluded that “the severability of application provision in the D&O policy did not prohibit Genesis from rescinding coverage for all directors and officers and the Cutter & Buck entity as a whole.” The court reasoned that the CFO’s “knowledge of the material misrepresentation in the renewal application is imputed to otherwise innocent directors and officers because the CFO signed the renewal application.” Despite Cutter & Buck’s discussing severability of the application in negotiations with Genesis, the court said, Cutter & Buck ultimately failed to obtain a modification of its D&O policy that would have prevented the signor’s knowledge from being imputed to otherwise innocent officers and directors.
At the PLUS panel titled “The Four Horsemen of Rescission,” Joseph P. Monteleone of Duane Morris, LLP, will head a panel that will discuss the practical business and legal ramifications of rescinding an insurance policy. Monteleone told Rough Notes that the issue is of particular importance in the current climate of Enron, HealthSouth, Tyco, and other big corporate names in the news. “The exposure and consequences for wrongful rescission can be enormous, and our panel will discuss how best to prevent adverse consequences,” he said. Monteleone also said that the Cutter & Buck decision will come up in discussion as an example of how the courts might side with an insurer in a rescission dispute, and that other cases that have been adverse to insurers’ interests will also be discussed. Monteleone’s panel will consist of Kieran Murray of Lexington Insurance; Janice Rizzo of St. Paul Travelers; Harvey Weiner of Peabody & Arnold, LLP; and Damian Brew of Marsh FINPRO. Said Monteleone: “That means we will have a panel that consists of a broker, an underwriter, a claims professional, and a litigator. We will discuss issues such as state law. Most states have laws that say an insurer only has to prove ‘material’ misrepresentation in order to rescind a policy, but a few states have laws that say an insurer must prove ‘intentional’ misrepresentation, which is more difficult. We will also discuss ‘severability’—when it might apply and when it might not. We will also emphasize the importance of writing clear policy language to make sure that all parties are on the same track. In addition, we will construct hypothetical situations so the audience will understand the pitfalls of policy rescission,” said Monteleone. * |
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