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
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
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.

Originally posted on 12/28/2012 @ 10:15 pm

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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