Some Relevant Insurance Contracts of Dewey's

COMPANY	COVERAGE
CNA (and various insurers at Lloyds)*	Professional Indemnity
XL Insurance- Hartford	Management Liability
OneBeacon	Excess Management Liability
Iron-Starr	Excess Management Liability
Great Northern Insurance Company	General Liability Employee Benefits Liability Stop Gap Liability
Federal Insurance Company	Primary Property
XL Insurance	Excess Property
Insurance Company of the West	Excess California Earthquake
Great Northern Insurance Company	Foreign Package General Liability Employee Benefits Liability Property Automobile Employer's Liability Employee Repatriation Expense
Pacific Indemnity Company	Workers Compensation Statutory Benefits as per State
Vigilant Insurance Company	Umbrella
Nation Surety Corporation (Fireman's Fund) Navigator's Management Company, Inc.	Excess Liability
Dewey & LeBoeuf LLP	Business Travel Accident
Traveler's Casualty & Surety Company of America (St. Paul Travelers)	Primary Fiduciary
Federal Insurance Company	Excess Fiduciary
Twin City Fire Insurance Company	Excess Fiduciary
Federal Insurance Company	Fidelity (Crime)
XL Insurance	Employment Practices Liability Insurance
Alterra Insurance	Excess Employment Practices Liability Insurance
XL Insurance	Outside Directors & Officers

*There are 7 excess layers of professional indemnity coverage.

Dewey, the "Defunct" & Management Liability Insurance

Michael Sean Quinn, Ph.D, J.D., C.P.C.U., Etc.
Law Office of Michael Sean Quinn
+
Quinn and Quinn

1300 West Lynn #208

Austin, Texas 78703

(o) 512-296-2594

(c) 512-656-9759

mquinn@msqlaw.com

(Resumes found at

www.michaelseanquinn.com)

There has been lots of news coverage regarding the collapse of Dewey & LaBoeuf, including the why, the who is responsible, the who is getting hurt (both outsiders and insiders), the how’s of senior management, and the questionable activities of a slew of lawyers. There is not much being said, however, about insurance aspects of the demise and thereafter. The serious (or advanced) press has not gotten there yet, and the popular press is not fit for the job.

 Even the American Lawyer is publishing only skimpy and superficial pieces. At least it noted, however, that the primary insurer for the management coverage, has indicated coverage problems in the  bankruptcy.

It appears that the judge has permitted the unsecured creditors to sue the insurer or insurers. He noted, however, that providing a right to sue is not a right to judgment.  Maybe the creditors are trying to put money in the hands of the Firm or someone else with liability so that they can get it from there.  This is extremely unlikely it seems to me.  And the carrier, XL Speciality Insurance Company has tried to avoid coverage by arguing that since the Firm is the policyholder, it is suing itself.   I have no idea what is being said here.

There are lots of important questions that need attention. One might wonder, for example: how many policies were there, what all do they cover, what is not covered, what are the policy limits, who made the decisions about buying what policies, who advised Dewey about this, what did the intermediaries say, to what extent did Dewey listen to its agent-brokers, who did risk management at or for Dewey, what did it advise, and so forth. One would expect the insurance press to be "all over" these questions. One would also expect to see references to who is adjusting the claims, and those are likely to be or include specialized, independent adjustment firms, as well as "forensic accountants.” (This often used phrase is simple minded, misleading, and damn near tasteless.)

In addition, the insurers—and there are more than a few of them—will be represented by counsel. One would think that the insurance press would be interested in profiling these lawyers.

Thus, except that which can be derived from this sliver of a remark, there is not much for the insurance junky. Of course, there is more in the bankruptcy court records. Most of the interesting policies are there—as one might expect, there are a lot of them. There are also argumentative discussions of large parts of them. 

Still, even given what all I have just said, it is still mysterious that it is not discussed further, in either the newspaper-press or the industry-press.

Consider the following as a conjectural (or guesswork) introduction. I will probably follow-up in one or more blogs to come. Here is the partial hypo, which is certainly a variation on the whole story.

There were three people in charge of managing the Dewey-show. from the top of the pyramid. One of them had general authority, Steven David, and he is said to have exercised it widely and rigidly. Two of them were probably a little more specialized, e.g., one maybe with more or less daily financial matters, etc., the other with large-scale financial matters, perhaps. The former may have been Stephen DiCarmine, while the latter would have been Joel Sanders. There will be no further reference to these "gentlemen" by name. Probably, their responsibilities overlapped.

I speculate that one of the minions might have been in charge of collecting  unpaid fees,   routine billing problems, and  handling some parts of dealing with bonuses for incoming "rain makers," partners, and others. It should be kept in mind that the "Senior Executive Group" repeatedly arranged shocking and insolvency-producing, salary-bonus, entry arrangements for some new partners, over what appears to be a considerable time. There will be insurance coverage problems here. The relevant policies will almost certainly be "claims made" policies and probably "pure claims made" contracts and they will also involve the definition of "wrongful acts," which will (and would have anyway) reeked havoc on the effects  a whole pattern of idiotic decisions.

(One of the newspaper articles states that the committee in the bankruptcy says that King-Pin and his two minions have "'over-distributed the Firm's available cash to select partners; abusively relied on guarantee agreements that bore no economic rationality; and concealed the Firm's true financial condition from its partners, employees and creditors,' for selfish reasons motivated by greed[.]" Apparently, the bankruptcy judge has noted this passage or part of it in one of its orders, according to the same source.

One of the jobs that one of the minions might have performed included the purchase, maintenance, and replacement of the $1.2M worth of artwork, hanging within Dewey's easy client-visible pleasing places.  

One of them might have also been in charge of how to avoid paying various retired partners at all. (Of course, if the firm owed these folks fiduciaries, cutting them off is probably a breach of fiduciary duties. Interestingly, there is a speculative insurance policy for this sort of thing.)

I will name these three dedicated destructioners "Head Knocker," or just "Knocker," "Designer Minion," or just "Md," and "Florida Minion," or just "Mf.” The minion names are motivated by the fact that, one of them entered a prominent New York school of design upon being humiliated out of Dewey, while the other moved to Florida to be a financial something for another law firm. One wonders if that firm, the Greenspoon Firm, will praise itself for its foresight and wisdom in taking on Mf?

In any case, these three whip-men, for what may be the greedy-leopards at the circus, are covered by $50M, or so, of Management Polic[ies?]. (Of course, so might others in the firm with coverage.  D & O policies usually have broad reaching conceptualizations of covered people.) Apparently, one primary and other excess policy or policies. (That is perfectly customary, depending on the size of the primary policy, and those excess policies may be umbrella policies.)

The primary policies are, no doubt, attached to more than a few filings in the bankruptcy court, even though there is something like 1000 of them. I have not yet seen the excess policies at all; indeed, I have not seen any, even remote, descriptions of them. As indicated, all of the excess policies are, almost certainly, attached to some pleading or brief in the bankruptcy court. However, I am not aware of serious discussions of meaning there, although I am certain there are "advocacy discussions"; alas, they are often distorted. (Some might say that they are always distorted.)

Of course, there are probably other forms of unusual insurance. One of them will cover the artwork, whether purchased or rented. This will be a form of property insurance. Another might cover Dewey's liability for banquets and the like. Often, the latter is bought on an event-by-event basis. Likely, there will be insurance covering ransom demands connected to kidnappings—a very secret form of insurance, for obvious reasons. No doubt, there will be "Errors & Omissions" insurance, which used to be called malpractice insurance, and there may be a separate policy covering nothing but breaches of fiduciary duties. Later there will be a brief blog covering at least some of the relevant policies.

Therefore, I will begin by guessing. Management policies, as they are sometimes called, are probably E&O ("Errors and Omissions") policies for a variety of different "professionals.” There is no reason why management teams for large firms could not have such a thing. The premiums would be enormous. 

In addition, D & O policies cover not only directors but officers as well, and both Knocker and the Minions were officers. Hence, management liability policies, as these certainly are, will cover these three "terds" for unintentional management misconduct, often designated in contracts as "wrongful conduct.” Given the names of the policies, they will probably not cover the firm.

It is likely that the excess policy or policies will either be or be like "follow form" policies. This means that the upper echelon contracts will be identical (or close to it) in important ways to the primary policy. In addition, it or they may be umbrella policies, covering some unusual activities, etc., the primary does not.

So what kinds of wrongful acts or omissions might be covered and which ones not? The primary policy, at least, will contain a definition of "wrongful act.” D&O policies always have them or their equivalent. This definition is of crucial importance. It may be that the nearly “follow form” policies will vary their definitions slightly, often expanding coverage a bit. Excess policies usually make it clear that they really are excess. Such carriers always try an make sure that readers of all sorts know that they are nothing but excess insurers.

All these facts leave a huge number of questions on the table. Here are statements, which will generate some of them.

• Fifty million is a lot of money. Why so much? What was said to the underwriters to get them to issue that much? These questions must certainly be asked, explored, and answered.
• The amount of coverage is so high, that one would expect there to be more than one excess policy.
• One fact that would explain the size of the coverage would be that a lot of lawyers in the firm are also covered under the policies.
• Whether the insureds committed actual  separate wrongful acts or were trying to protect themselves from liability for a string  deliberate acts, may be partially determined by answering these questions.
• Who were the intermediaries; what was said to them by people at the firm; and what did they say to the underwriters? Policies may be canceled if there are the "right" sorts of misrepre-sentations in the applications for insurance. Some managers at the Firm may have dreamed false answers up and made them to the underwriters.
•  If the Firm's agent made them up, without the firms consent, mattes are quite different.
• How could a ultra-sophisticated company, like the Firm, not realize that the intermediary was engineering  lies, supposedly on the Firm's behalf and certainly to feather his own nest? 
• The period of coverage (the policy period) of D & O policies, among others, are rather short lived, subject to renewal often enough and subject to very expensive extension periods that function to report claims after the end of the policy period.
• Usually, the same sorts of representations made in the first application have to be made in renewal applications. So what did Knocker and the Minions tell the insurer and/or the intermediaries? What did they know when they spoke? It seems almost certain to me that there were misrepresentations involved and maybe fraud.
• What was said to the reinsurers about the applications and who said it? This question may be less relevant.
• How long did the cursing sins at Dewey continue? When was the beginning? The middle is probably relevant to renewal applications, and the end is perfectly obvious.
• Most D & O policies pay for defense and indemnity, but not always, just as most routine liabilities do. Sometimes D&O policies permit the insured’s to run their own defenses. In that situation, the insured may pick its own lawyer from an approved list, and the insurer pays a reasonable fee to the firm or attorneys defending the case directly . In addition, in these policies—like other professional malpractice policies—defense expenses are often deducted from policy limits. 
• Granted, $50M is a lot of money, but so will the defense costs of      Knocker and his minions, Md and Mf. And, of course, the amount of fees will go up depending on how many other insureds there are who get sued.  This is especially true since each of them will need separate counsel.  In any case, the members of the Triumverate have just started getting sued. So it must be impossible now to know how defense expenses work, or how much they will be. 
• Usually, an ordinary liability insurer must defend a whole case, if it has to defend any of it. This proposition is not always true for D & O policies, so it will be interesting to see how that is handled in the coming suits.
• One popular source says that policy proceeds are some how  being diverted into the bankruptcy court for paying unsecured creditors. I am not sure I understand why this wouldor could be true.   
• D & O policies are sometimes geared to cover directors. An analogy might be involved here. That might make retired innocent partners prime "beneficiaries" under the policy. 
• Most D & O liability policies cover officers, only if the companies they work for have not indemnified them. That will almost certainly be true in the case of a "Management Liability Policy," since they are likely  pieces of D&O contracts of insurance, lifted out and treated by them selves. I am not sure what is true if the company has indemnified them, but the company has gone belly up. I could guess that this is not usually a situation in which the officers are cut off from coverage.

There is much more to be said, but that will have to wait for a further blog. The next one will simply be a list of what may be all or close to the entire Dewey contracts of insurance, plus a few "footnotes," maybe. 

Keep The Following In Mind

Michael Sean Quinn, Ph.D, J.D., C.P.C.U., Etc.

2630 Exposition Blvd  #115

Austin, Texas 78703

(o) 512-296-2594

(c) 512-656-9759

mquinn@msqlaw.com

(Resumes found at

www.michaelseanquinn.com)

When reading my stuff, keep in mind at least the following "Eleven Commandments":

1. No proposition that is not a tautology or an analytic truth is probably always true. 

2. In different situations, even propositions which appear undeniable may not be true in all situations.

3.  General assertions are like that.  Even specific assertions can be like that.  Situations change.  (Is this propositions true of the following: Reservation of right letters are never denials.  Or is this an analytic truth?)

4. Analyses of law, in general and in particular, are like the assertions in #3, excluding the example. This is true of case analyses, just as it is for statutes, constitutions, administrative rules, and everything else in the law.

5. Reasonable minds almost certainly adapt to, or change, in some strikingly different situations.  When advocates argue different positions at different times, they have not necessarily changed their minds about anything.  

6. Asserting a proposition one believes in a certain situation and asserting its opposition in a substantively different situation, is not necessarily inconsistent.  Neither one, taken alone or together, entails advocacy.

7. A good expert witness conforms to the last two sentences.   The good expert witness must believe what s/he asserts while a witness and not thereby be advocating, the way a lawyer may. However, good expert witnesses can be effective.  Effective formulation and methods of assertion do not entail advocacy.  The good expert witness must also either have or believe s/he has justification for is being asserted.  (Sometimes "justification" is called "basis.")

8. Mistakes always involve being wrong in some way.  (This proposition may be an analytic truth.)  A mistake is not always a bad thing.  A mistake is often a better learning tool than getting something right.  Some mistakes, properly appreciated, are very educational.  (It is hard to see how this idea "works" in representing a client.) 

9.  A variation is never identical to that which is being varied.  Both of them can be true at the same time.  Then again sometimes they are something like contradictory, though probably not completely, given the meaning of "variation." 

10. Variations can be small, or they  can be large.  No total variation can be both small and large at the same time.  If one thing is totally a variation on another, then no part of the second will be something other than a variation on the first.  (This is probably an analytic truth, even in the post modern age, though the classical easy example, "All bachelors are unmarried male adults," may not be.)

11. Remember, all propositions asserted herein, especially #3 & #7, apply to all elements of this list, except #1 and maybe #5 (depending on the unspecified definition of "expert witness.")

In fact, keep these 11 Commandment whens reading any lawyer writing about anything related to the law.



ABOUT INSURERS REACHING TOO FAR: SOME FUNDAMENTALS-- LECTURE NOTES & EXHIBITS

Michael Sean Quinn, Ph.D, J.D., C.P.C.U., Etc.

2630 Exposition Blvd  #115

Austin, Texas 78703

(o) 512-296-2594

(c) 512-656-9759

mquinn@msqlaw.com

(Resumes found at

www.michaelseanquinn.com)

 

THESE "LECTURE NOTES" ARE MOSTLY ABOUT PRACTICAL MATTERS PERTAINING TO CONCEPTUALIZING, THINKING, PLANNING, AND EXECUTING.

Insurers can "reach too far," of course. This is a nice pithy way to talk about bad faith.  What the phrase is really trying to do is to indicate that insurers can reach too far by reaching too far inward toward their own interests and also by reaching out too far (trying, for example) to eliminate a right to coverage. 

To put it better, insurers can reach out in two senses, broadly conceived. One of those senses, in which he who reaches, is when trying to establish a more intimate or more charitable relationship. Obviously, insurers can do this, and it is a good thing. The other sense, however, involves "reaching" to push away, to make things crash, or to strangle the one reached for, and those are paradigms of bad faith.  These two forms of reaching are hardly ever confused. Imagine this testimony:

Question: Isn't it a fact that you, as an adjuster, went out of your way to find a way to deny this claim?

Answer: No. It is quite the opposite. I was trying to reach out and help the insured.

Question: Really? Tell the ladies and gentlemen of the jury, how you were doing that?

The function of this CLE report is to provide a set of fundamental principles regarding the matter of the "negative reach." In doing so, it is necessary to sketch some fundamental principles of insurance. It is there that this "essay" will stop. There are lots of related topics, e.g., how to conduct discovery in litigation where bad faith is an issue, especially when expert witnesses are proffered, but enough is almost enough.

• Insurance is insurance.
  • This "axiom" is intended to be a thought generating metaphor.
  • This is not intended to be a mere tautology.
• All insurance adjustment is similar and even identical in some ways.

• Insurers have a special relationship with their insureds. In the context of the insurer-insured relationship, this means that insurers must treat the interests of its insured as at least equal to its own.
  • This does not mean that insurer may not enforce exclusions when they are correctly understood, reasonably interpreted, and understood in context.
  • The same rule applies to all sections of a contract of insurance:
    • Insuring Agreement
    • Conditions
    • Definitions
    • Declaration Section (aka "dec sheet")
      
      
• The absolutely key factor.
  • The fiduciary relationship is a special relationship. The duty there is much higher than that found between insurers and insureds.
  • Some special relations
    probably lower, e.g., someone who has a duty to take care of another. Insurance works this way: insurers must treat the interests of insureds as at least equal to their own. No principle is more important that this one.
  • In Texas, the duty of good faith and fair dealing is generated by the special relationship.
  • Maybe, just maybe, the duty of good faith and fair dealing is a way to talk about the duties inherent in the special relationship found in the context of insurance.
    
    
• The duty of good faith and fair dealing that insurers owe their insureds has many components and dimensions.
  
  
• Under Texas law, the duty of good faith and fair dealing is not a general duty to be found in all or most types of contracts and therefore contracts of insurance.
  • Other bodies of law are different, including the RESTATEMENT (Second) of CONTRACTS, §240.
  • Also including the UCC.
  • The Restatement (Third) of Agency §7.05.
  • The Restatement (Third) of Torts §7.41.    
  • Also including many states.
  • So much for the idea in Texas that the duty of good faith and fair dealing is restricted to insurance situations.
    
    
• All adjustment must be based on investigations which are thorough, objective, rational, empirical, and other similar features regarding maximizing truth and reason. (Really an activity that does not conform to these requirements is not really an investigation at all.)
  
  
• Under the special relationship
  all adjustments must be reasonable at all times and in all ways with respect to every claim.
  • The bar for what counts as reasonable is higher under the special relationship than it is for ordinary negligence.
  • Still, there can be negligent conduct considered within the context of the special relationship.
    • It just occurs for the actor where it would not arise for the salesperson or the mechanic, or others in similar situations.
    • Or it might classify some activities as negligent that would not be counted as negligent in other contexts.
      
      
• The requirements of sound adjustment are the same for all contracts (policies) of insurance, except in minor ways situationally generated.
  
  
  • Though sometimes adjustment must proceed more quickly than in others. Catastrophes are one thing; the minor damage to a small machine might be another, where there are two of them.
    
    
    • Still, unfairness is never permitted.
  
  
• No adjustment is ever perfect. Reasonable errors do not general guilt as to principles of insurer bad faith.
  
   
  • Actually reasonable debate over coverage issues does not involve bad faith, even if the insurer is the looser. There is nothing making the debate just appear to look reasonable, when it is not.
    
    
  • Reasonableness is partly determined by the informational context. Inadequate information may make a debate unreasonable.
    
    
• Insurers, and hence their adjusters, are expected to know many fundamental principles of insurance adjusting, such as, genuine ambiguities, in all relevant writings of insurers, are construed in favor of the insured and/or late notice from a policyholder is not a sound reason for denying a claim, unless the insurer was prejudiced. 
  
  
  • Should statutes that are ambiguous be treated in the same way?
  
  
• Insurers, and hence their adjusters, are expected to know that insurers bear the burden of proof as to exclusions. 
  
  
  • What counts as an exclusion is not always clear. Everything in the "Exclusion Section" is an exclusion, but that may not be the only place they are to be found.
  
  
  • Exclusions may be found in the "Conditions Section," and—conceivably—they may even be found in the "Insuring Agreement," though the second of these two is likely to be rare.
  
  
• Insurers and therefore their adjusters are expected to have reasonably extensive knowledge of the applicable insurance law.
  
  
• The interests of an insured must be treated by an insurer as at least equal to its own. 

• A fundamental principle of all adjusting is LOOK FOR COVERAGE!
       

• All adjusters are expected to have reasonably extensive knowledge of the applicable insurance law.  

• There is no law the violation of which establishes that an insured is guilty of bad faith with respect to an insurer. The same idea is contained in the common law. Thus, insureds cannot commit the "sin" of bad faith.
  
  
• If there is no coverage, there can be no bad faith, or so the courts say, although Texas courts have said or implied that there may be exceptions.
  
  
  • Here is a significant exception: misrepresentations—relevant ones anyway. This could happen either in sale or in adjustments.
  
  
  • An act of waiver or estoppel could do roughly the same thing, although courts agree that these situations cannot create coverage. To be sure, this is true, but they can bar and insurer from contesting coverage issues.
  
  
  • The no bad faith without coverage can and usually will permit an insurer to treat an insured very badly. . . so badly, in fact, that if there were coverage, there would be bad faith. 

• Though under some circumstances that kind of conduct can lead to liability on other grounds.

• Insurers have specified obligations to perform various tasks related to claims handling, including the timing of paying claims. Failures of this sort are often classified as an instance of bad faith. Such failures are difficult to prove in ordinary contexts, since an insurer will focus on whether the insured has dragged "his" feet, as they say.

• A key bad faith concept is "prompt, fair and equitable." This phrase is always used in bad faith cases. This marvelous, even poetically rhythmic, phrase has problems.
  
  
  • How does the "and" work? Does it make all three a requirement for any finding of bad faith?
  
  
  • What is the meaning of "fair"? Probably as between the insurer and the insured.
    
    
  • What does the term "equitable" mean in this context, especially since the term "fair" is present already?
  
  
  • The term "prompt" is vague and flexible, but is it factual? The terms "fair" and "equitable" are not. What bearing does this have on jury questions? Does it create an argument for specific definitions when no such thing is found in the current PJCs?
  
  
• Other "tensions" amongst terms and concepts also involved problems, but not all have yet been recognized. "Settlement process" and other processes, like a claims adjustment process or the process of denying claims, diverge. This makes §541.060 very confusing but also opening up wonderful, heretofore unpursued ideas used as central arguments.

• It is contested whether acts of bad faith can occur once actual litigation has begun.

• It is easily argued that the answer is "Yes." Consider the claim that has been denied for outrageously bad reasons. Or consider the claim that has been miserably investigated, and that situation continues during litigation.
  
  
• The other side has arguments. Perhaps the principal ones are that (1) the process of litigation is different, slower, and more contested by its nature and that (2) attorneys have the obligation to defend their clients vigorously.

Of course, there's a lot more to talk about, that's enough for not just now but a short future at least.

 

_________________________________________________________________________________ 

1   Law Offices of Michael Sean Quinn, 230 North Main St., Salado, Texas. (o) 254-947-0221. (c) 512-656-0503. See
Ex. 1a: "Long and Oppressive Resume" and Ex. 1b "Short and Sweet Resume." Both are to be found at this website: www.MichaelSeanQuinn.com.

Does this sound familiar?:

"Insurance business could be encouraged by offices maintaining a good relationship with the building industry....Most fire offices had surveyors on their staff, either a permanent salarymen, or employed on a casual basis....It was important for insurers to obtain the services of competent and knowledgeable men, for the accuracy of valuations and loss adjustments, and ultimately the level of underwriting profits, could depend upon their reports. Most offices contracted out the work of rebuilding insured houses destroyed by fire, and thus had to maintain a reliable pool of builders. Classifying insured property by type of construction was also a task for which expertise was sought from the building trades. Another area of cooperation related to building regulations. Insurance offices were troubled by the shoddy work of speculative builders who failed to comply with the London building acts. As early as 1763 London insurers combined to promote  regulation to prevent the spread of fires in the metropolis....For most of the eighteenth century such cooperation remained feasible because the number of competing insurance offices remained limited , and some overview was possible of the quality of new building, and the virtues and vices of different building contractors....Fewer damaged houses were rebuilt by the fire offices, and fewer common residential properties were subjected to inspection."

Robin Pearson, INSURING THE INDUSTRIAL REVOLUTION: FIRE INSURANCE IN GREAT BRITAIN, 1700-1850, p. 38 (Ashgate Publishing Company, 2004).

In my view, the answer is Yes and No, at the same time.  The close connection between insurers and the building trade is not exactly right in organizational terms, but the the substance might be right. Still, it seems odd to me that there is no explicit reference to adjusters. They must have existed. My bet is that the insurer got all sorts of recommendations of builders, etc., and then worked within its self determine coverage.

As with many volumes of insurance history, where the authors are not interested in the policies, whether their language, the various types of attitudes toward them, and how insurers handled the contracts, particularly the exclusions, Pearson falls in line.  They--including he--are principally interested in finance, and how insurance companies fit into the financial structures of the times.

Here is something else Pearson says:  "For most of the eighteenth century such cooperation [the cooperation of the sort just mentioned] remained feasible because the number of competing insurance offices [i.e., companies or "syndicate-centers"] remained limited, and some overview was possible of the quality of new buildings, and the virtues and vices of different building contractors. . . . Fewer damages houses were rebuilt by fire offices, and fewer common residential properties were subjected to inspection." p. 39.

I am not sure what all this means. First, the insurer may not themselves have rebuilt burned-out structures, but they still may have insured them, and--second--they may have used builders to help them determine the worth of buildings that had been destroyed. Third, it is difficult to see why as an economy grows and there are more wealthy people, there would be less insurance of residences. Fourth, everything Pearson says about the change from the 18th to the 19th century in fire insurance, turns on what the policies looked like, how revenues were dealt with, how reserves (or their predecessors) were set, and how revenue worked.  Fifth, a lot of this turns on how the claims process worked, how doctrines of moral hazard were used, the dedication of insurer to enforce their contracts as written, and how devoted they were to avoid using their power to inflict injuries on insureds. Professor Pearson discusses none of this, nor are their authoritative citations. (Professor Pearson is scornful of company history, and it is easy to see why.  It seems likely to me that the topics I just laid out having to do with the history of claims performance and management are not topics insurer would want to talk about unless their performances are sterling all the way through.)

STOP LOSS INSURANCE

Michael Sean Quinn, Ph.D, J.D., C.P.C.U., Etc.2630 Exposition Blvd  #115Austin, Texas 78703(o) 512-296-2594(c) 512-656-9759mquinn@msqlaw.com(Resumes found atwww.michaelseanquinn.com)

Consider the following dialogue.  It is more of less based upon variations of recent Opinion set forth by the Supreme Court of Texas.

The people having this discussion are Quink and Malvinio.  Noticing the tilting, even, and retilting, and even wobbling  playing field.

Q.  There is a lot about insurance I think I know.  To be sure
that is open to dispute.  However, something came up recently which I knew immediately I did not know, or even understand.

M.  Astounding.  What is it?  As ignorant as I am, maybe I can help.

Q.  It pertains to "Stop Loss Insurance."  I can guess what it might mean.  I am tempted to conjecture that the phrase is just another name for insurance. Insurance pays for losses, and policy limits put a stop to the insurers losses.  Still, I know that I cannot be right.  Hence, that can't be right.  My intuitions shout it out at me.

M. So you want me to explain it?

Q. Yes, if you know about it, give it a whack.

M. Ok, let's give it a "good college try."  Let's adopt a lawyerely convention.  This is the first thing we'll do.  As you know--you especially, since you follow the over-abbreviation-group-habit most of the time--I'm surprised that your wife can even understand you. 

Q.  Stop it.  You know that I am not married anymore.  One of the guys in your office did the work.  I would have handed it to you, if you had not been making yourself out to be a legend of the insurance law.

M.  True.  But you've had at least one girlfriend for a long time.  I assure that neither of these "problems" has anything to do with SLAs.

Q. True.  But please get back to work.

M.  The first thing to remember is that SLA is a special category of insurance, and it has its origins in certain arrangements which can be made in the financial world.

Q. Good Lord!

M.  In lots of non-insurance deals, stop-loss agreements involve shifting losses from one person to another.

Q. But isn't that insurance writ large?  Doesn't that make it just like all other types of insurance?

M. Stay with me about the financial world.  A stop-loss agreement is a device, shifting financial losses from one person to another.
Co-signing is like that.  Some types of lending are like that.  Some types of securities speculation involve this.

Q.  Isn't that pretty much like a hedge fund?

M.  Under most circumstances, yes.

Q. Are 't we back to SLA really being insurance?  Go back to the financial stop-loss arrangement  suppose "Tiger Lilly, owns $1000 of stock in ABC Corporation, and she wants to avoid the situation of losing everything, so she has an automatic number where if the value drops below that--say $754--the stock is sold at the price, or as close as possible.  Isn't that a stop-loss arrangement?

M.  Funny, under the stances that you would pick that name.  Never mind. Consider a somewhat related case.  Consider an insurance company, Reciprocal Red Inc., that had insured the law firm of Alan, Wetford & Valentine for legal malpractice, fiduciary duty violations, and so forth; then further suppose that both the policy limits were $28.4M, and that policy limits were not reduced by defense costs. 

Q.  Well, forgive me for interrupting. Valentine surely has some sort of stop-loss agreement.

M. It looks like it, but not all of its losses are covered.  The insurer will not cover absolutely anything for ever.  The pay-on-behalf-of limits plus defense costs, stop the insurer's losses, but not Valentine's.

Q. Why do you always insist on the phrase pay-on-behalf-of when everybody else calls it "indemnify"?

M.  Because the term "indemnity" has several meanings.  A century ago, or so, the word "indemnity" meant that the insured would pay for his own losses and then the insurer would reimburse the insured. That was the meaning of "indemnity" in the insurance trade.  There are a few parts of a few policies that work that way, but almost all do not.  For this reason, the word "indemnity" should be driven from the trade.

Q. Bullshit, Malvinio.  But I have led you into a digression.

M. Do we now see that the insurer is the one in need of a stop-loss agreement, and that agreement is built into some sort of contract with another insurer?

Q.  Granted.  But in the words of Professor Higgins, "this hardly ever happens." Ever! This point entails that SLI would be very rare. So what's to talk about?

M. Well, "rarity" does not mean "never," and we both know that very odd and unusual things get insured--sometimes for a lot of money.  Various body parts of champion dogs, crucial professional athletes, and various features of the bodies of various Hollywood stars are insured.

Q.  First party or third party?  By the way, what is second party insurance?

M. I've wondered about that.  It seems to me that some life insurance should bear that name.  So should the continued existence of some marriages.  Suppose the husband is a real tiger and the wife is a sweet, loving cat.

Q. Enough!  Back to the topic. So, what if we were not concerned about the Valentine Firm, but about "Red Ink."  Everyone knows that it hates loses and tries to avoid paying anything on all of them.

M. You're wrong about Red Ink.  It's actually pretty good.  AIG used to have this reputation.  It doesn't much anymore I think.  Even if its Head Knocker once remarked that so far as he was concerned the real value in business life was to have a deal pending in which he has an unfair advantage.  Another insurer that had this problem was "Stonewall Insurance."  Or, what about this one, "Dead Body Insurance Company"?  It offered coverage to funeral companies when they fouled up.

Q. But the dead guy can't sue.  He's not going to be an injured party.  Who would be the plaintiff?  Aha.  I see.  It would the family.

M. Among others.  But let's go back.  I have only the rest of the day.  Besides, you took most of this from me in law school.

Q.  True.  But I was stoned or drunk or both most of the time.
You don't remember, do you.

M.  Sort of, but keep in mind I am your sponsor in both AA & NA.

Q.  Aren't you also one of my "retired" sponsors in SA?

M.  Of course not, that's my twin brother Mark Angelo.

Q.  Back to discussion.  Doesn't a stop-loss agreement become a kind of reinsurance?  Insurance on insurance?  Or, insurance, upon insurance, upon insurance?

M.  Yes, sort of, I think.  But I have one back up point to make.   A while back, I said some point came first.  Now for the second.  SLI
might not cover just one loss.  It might cover a whole array of losses all at the same time. 

Q. Sure.  But doesn't that keep it as a kind of reinsurance?

M. Again, yes, sort of.

Q.  So, what's the difference.

M.  Well, for one thing, most SLI is tied to health insurance, especially large policies.  They may cover hundreds or thousands of people.

Q. All I can think of that would do that would be United or Blue Cross.

M. Or companies like that.  Still, I know what your going to say next.  Your going to say, "Isn't really just a type of  reinsurance?"

Q. True.  So I'll skip that question and ask this one:  Why is that so?

M. Now things get interesting.  The answer is "Yes. Sort of."

Q. Why "Sort of"?

M. I don't know.  I suspect it's simply a fact of business history.  As you know, in the law, and anything related to the law, we are often blocked into "vocabulary history."

Q. I remember, just  barely, back in the "Stoned Ages," you're losing--no using--that phrase.   I have used it too.  I remember using it in an argument before the Supreme Court.  I got a very peculiar reaction.  One judge said.  "Ah yes.  One of Melvinio's phrases.  Watch out for him. He's a loose canon."  All the while, he was smiling.  I checked up on him.  I think he was in your insurance class a while back.

M.  Yes.  The same one you were in.  Now back to business.  Health insurance comes in two forms:  individual and group.  SLIs come most often--almost always in group policies.

Q. Why?

M. Because that's where the great huge losses can occur.  Think what would happen if some sort of plague hit a city. . ., even just one.  Small pox maybe in the old days.  Newly discovered, easily transmittable HIV; no physical contact necessary.  Or lethal bird droppings which carried a deadly virus.

Q.  I'm still just hearing about reinsurance.  So, what's interesting about this?

M.  Here it is.  Suppose we were not talking about United, or the like.  Suppose we're talking about gigantic employers who provide health insurance to thousands of employees.

Q. Don't they usually have other companies administering them?

M.  Yes. But the policies are theirs, and they will owe the money to pay the benefits.  The losses can become astronomical, very quickly.

Q. So what?  Other carriers can get SLIs, so why couldn't the employer which is doing the heavy lifting?

M.  What about the fact that the premiums are actually deductions from wages?

Q.  You're asking the questions now?  Who do you think you are?  A law professor reincarnate?  Do you see yourself as a salvationistic figure of some sort?

M.  This was where the fun was supposed to begin.  Fat chance.  Of course, premiums can, and usually do come from wages.  There is at least one exception.

Q. And that would be when some employees can buy a higher level of coverage and pay for it themselves.

M. And when they can buy coverages the employer will not provide.  Until recently, maybe, that might include preventative care, care for children with preexisting conditions, and for "children" up to the age of 25.

Q.  Out of college, unemployed, and living at home?

M. I don't know.  I wonder what the politics of that would look like.  I wonder if public policy would like that?

Q. Me too.  Can groups of employers all buy the same insurance policy?

M.  In theory I suppose so, but some obscure statute I haven't read, much less studied , may have something to say about that.

Q. ERISA?

M. Yes. I should think so.

Q. If that statute is to be the model for "O'bomb-a Care."  No wonder people hate that statute.   So how are employers handled?   How does SLI work for them?

M. Best question yet.  The standard view just now is that it does not.

Q. Why not?

M. Two reasons, I think.  First, employers who are covering their employees are not in the business of insurance--that is the business of selling insurance, and insurance can only be sold by an entity that is in the business of insurance.  Second, many of the places SLI is needed are in the level of self-insured retentions.  The idea is  that reinsurance coverage doesn't make any sense in that context since SLIs are for dangerous losses, not just losses within the self-insured retention.

*****************************

Q.  Does this really make sense?  Take the second point first.  If the ABC company has an employee health plan and has an insurer over a certain level, say $5M, might it not want coverage for some of the first $5M, say, the amount between $4M and $5M?

M.  Sure. but why does it not just buy primary coverage?  Why SLI?  Surely its more sensible simply to call it what it is: limitation on the self-insured retention?  The loss is already stopped by the presence of the insurance over $5M.  Besides, isn't SLI more extensive than primary, self-insured retention?

Q.  There are several reasons.  First, self-insured retention is not insurance, it is more like a savings account.  Second, if the "over $5M" policy is as low as that insurer will go, ABC can just buy regular old insurance under it, and call the other insurer and excess insurer.  That insurance could even be for the $$4-5M gap with a deductable of $4M.  Third, to the extent that the self-insured retention is what it appears to be, then how can there be reinsurance.

M.  You miss my point.  Isn't a self-insured retention really self-insurance.

Q.  But there is no such thing as self insurance.  Insurance, by definition, requires the transfer of risk.

M. So what.  There are stop-loss agreements in the financial world.  Why couldn't an SLI be thought of that way?  Surely it can be.

Q. Of course, it can be, but that does not make it insurance because of the definition of the term insurance.

M. Okay, let's look at the second point.  I'm begining to think you know more about this than I thought--more than you thought, too.

Q. Let's go on.  Grant me--please, just for the sake of argument--

that the SLI is not for the self-insured retention, but but for the up-top, after all the retention is exceeded, the outside insurance has been exceeded, and ABC is paying its own tab.  Is that SLI given how the idea works in the financial world?

M. I understand. Go on.

Q. Isn't ABC insuring itself where ever the SLI applies?

M. Can't be because of the definition.

Q. What if ABC is a wholly owned subsidiary of XYZ?

M. Don't know.  Probably depend on the relationship between the two.  The same would be true if a real person owned ABC.

Q. Forget that then.  What if both of them--the insurer and ABC called it SLI and thought about it that way?

M.  The altered vocabularies of miscreants, the ignorant, the mad,  and even sane, informed and honorable individuals or organizations do not change reality.

Q. But why shouldn't reality here reflect semantics, rather that the other way around?  These are social relationships we are talking about--even if they are business relationships--not physics.

M.  Semantic changes do not change relativity.  They only change how we talk about it.

Q. And to some degree how we think about it.

M. Let's look at the other point.

Q. I can't remember what it was.  Please remind me.

M.  Maybe we've already discussed it.  The point was that since ABC is not in the business of insuance, it cannot provide insurance.

Q. Haven't we exhausted that one?  We've been discussing if not arguing about language and semantics versus reality and perceived reality for some time now.

M. Surely, Quink,  it would be significant to you, devious, though playful fox that you have proved yourself to be, if a major court reasoned, as I have, and to the conclusion I have. 

Q. Malvinio, you are such a hedgehog.  You won't even admit the power of language over thinking or the power of conceptual analyses over mere habits of thought.

M. Maybe, but what do you say about the authority of courts?  Surely they too have tremendous influence over how social relationships--including business relationships--should be or must be conceived.

Q. Granted, I guess, though it should not be worshiped.  I remember what you taught about the fundamentals of common law jurisprudence: "the historical lock up,"  "precedent, precedent, over all." "formalism," and (what you taught) "pragmatic realistic realism."  I remember your saying, "Inflexible, pointless social habits are distilled dangers impeding real progress."  I remember that you further said that "The flow of jurisprudence is a social habit."

M. I said that? Remarkable fellow was I.

Q. Certainly.  No question about it.  I've got to go for right now, but I'll be back in a couple of days.

M. Welcome back. Good to see you.  Now, let's look a little--talk a bit--at the case which I am trying  to get you to focus on.

Q. Certainly.  Please proceed.  I may even let you finish a thought.

M. Consider a business, say a large one, and it had set a self-insured system with stop-loss insurance.  Now, stop-loss insurance
. . . .

Q. Let me, interrupt, I know we haven't talked in a couple of days, but haven't we talked about this stuff before?

M. To be sure, but I am about to come to the point.  Suppose that stop-loss insurance is sold to the business and its having been called "reinsurance" every time for a long time.  Suppose it is called that in virtually all contexts. The insured does it. Intermediaries do it.   Even state insurance auditors did do it, when they by the insurer for an audit.

Q. So what?  We've already established that ordinary usage does not establish truth just by itself.

M. Just as you say. Well, now suppose that the governing government realized that there is not a formal definition in any statute or any case.  And it also realizes that it has the authority to tax and otherwise obtain revenue from  insurers but not reinsurers. 

Q.  This makes absolutely no sense.  How could that happen?  Reinsurance is a form of insurance.  But the states desire for money determine "truth" even less than established usage.

M.  Here's the state's response.  There is nothing about this arrangement that requires us to "lie down" with ordinary usage.  The health insurance trust fund of the insured is not an insurer and it is not itself really insurance.  Consequently, the stop-loss insurer is not really reinsurance.  There has to anecedently be insurance in existent  for the entity calling itself a stop-loss insurer, of any kind, to really  be an actual insurer.  Trust funds, or the like, to pay future medicals are not insurance, and orginary usage does not entail that they are, no matter how the relevant language in other contexts works.

Q.  Jesu-Marie.  Now you can figure out why I never took any courses from you after elementary insurance.  In any case, do we have anything here more than--and more interesting and enlightening then a linguistic stand off?  And if that's true, should the state always win simply because it wants tax revenues?  What kinds of tax revenues are we talking about, anyway?  Surely there are isn't that much stop-loss insurance on the market.

M.  Your not right about that.  In this light, you might want to know that the state has the authority to tax insurers but not reinsurers.

Q.  That doesn't seem quite fair either.  One whole "level" of insurer and not another?  What about taxing primary insurers but not excess insurers?  Umbrella carriers but not purely excess carriers?  One whole type of insurane but not another? Wedding insurance but not burial insurance?  Livestock health insurance but not canine life insurance?  Aren't we still just talking about nickels and dimes?

M. Skipping your diatribe, of course, money is a good thing, as can be seen by the amount the "reinsurers" are spending nationwide to insure that stop-loss insurance policies are called "reinsurance," until the fires of hell drop to beach temperatures.  We're not talking about nickels and dimes.  Using your image we are talkig about dollar bills, for sure.  Lots of these companies will owe fines for having refused to pay the state after having been "asked" to pay up.  And they may owe money reaching further back.  After all, these companies have been selling insurance here for many years.

Q.  Still, this becomes a fight over money, and not much more.  Does the state have any other real reasons?

M. Just this one. The department of insurance regulation and administration has written its insurance regulations for a half century classifying by, in effect, defining "insurance" so that it would include the insurers selling the stop-loss product.  No one has even challenged its view, either in the legislature, before the department, in mags or journals. The state argues that administrative regulations in the absence of statutes are a primary course of authority, so far as the law is concerned.

Q,  But isn't the 50 year argument undercut itself?  First, the fact that no one has bitched about the regs all these years and the fact that it has just "sat" there suggests that it was for a bygone season.

Surely its easier to apply pragmatic and moderate legal realism to evaluating this situation? 

M.  No question about it.  They have less authority than statutes.  But flexible they are not.  They are far more detailed that most statutes really are, and groups of very competent people have spent at least months devising them

Q. They are much more competent at this sort of thing than elected legislators. Much more deeply knowledge about insurance law.

M. I certainly didn't say that.

Q.  Might that have anything to do with the fact that you are now a state senator?

M. [Smiling] Get out.


This dialogue is based variations taken from Texas Department of Insurance v. American National Insurance Company, ___  S.W.3d ___  (Tex. 2012)