Financial Services Industry Session (IND 007)

1. Wednesday, April 30, 2014, 9:00-11:00 David Goodwin Allan Harris Tracy Jurusik Barbara Miller Financial Services Industry Session (IND 007)

2. Introduction • Meet the panelists • Key events in the past year • What we’re going to discuss • Lines of coverage • Key issues • Two case studies

3. What is a claim? • Ordinary meaning – demand for money • Common definitions of “claim” • Lawsuit • Written demand for money • Tolling agreement request? • Investigation? • Subpoena?

4. Number of claims/interrelatedness • More than one “Claim” treated as one “Claim” • Spanning policy periods • Deemed one “Claim” = one retention, but one limit • Notice issues • When do two “Claims” involve “interrelated wrongful acts”?

5. Providing notice of claim • Know your policy’s definition of “Claim” • Claims made nature of policies – timely reporting critical • Pay attention to any reporting thresholds • Should you report everything? • Reporting via a bordereau report

6. Professional services – what are they? • Traditional policies – limited to “professions” • Financial services – broader scope • “For or on behalf of a customer or client” • Who is a customer or client? • Third party beneficiaries • For a fee? • Must the claim be brought by the customer or client?

7. Defense obligation • Duty to defend vs. duty to indemnify defense costs • When is a defense owing? • Choice of counsel • Reasonable defense costs • Scope of defense • Allocation

8. Communication with Insurers • Frequency depends on program, size of the retention and quantum of projected Loss • Balance communication with insurers with burden of providing such information • Cooperation clauses, sharing information with awareness of privilege issues • Periodic conference calls on big claims with big towers

9. Covered damages • Tort damages • Consumer torts • Negligence vs. recklessness vs. willful misconduct • Fraud? • Contract damages • Benefits owing • Consequential damages • Non-monetary remedies • Fee award

10. Settlement/consent to settle • When do you need insurers’ consent? • Request insurers to waive lack of consent as coverage issue • Timely and robust information provided to insurers in real time = faster consent should settlement opportunity arise • Settlement without consent – is insurer prejudiced?

11. Choice of law/choice of forum • Choice of law clauses • Types • Enforceability • Choice of forum • Location • Litigation or arbitration • Enforceability • Preferences

12. Follow form policies • Insured’s goal of obtaining a seamless insurance program • Excess insurer’s goal of making sure that preferred limiting provisions are included • Binders and insurer forms • Policy issuance/policy review • Dangers if program is not congruent

13. Two Case Studies • Professional liability issues Director and officer issues

14. Case Study #1 (See Handout) • Issues • (1) Must Investment Advisor hold Bank harmless against the class actions? What duty does Investment Advisor have to pay Bank’s defense costs? • (2) Would Investment Advisor’s professional liability insurer cover Investment Advisor for its obligations under the hold harmless?

15. Case Study #1 (See Handout) • Issues • (3) What about Bank’s coverage as an “additional insured” on Investment Advisor’s professional liability policy? Assuming that the investors’ losses were caused by Bank’s negligence in underwriting the loans that went into the Super Portfolio; and assuming also that Investment Advisor was negligent in allowing the class members to invest, would Bank have coverage as an “additional insured”?

16. Case Study #1 (See Handout) • Issues • (4) Assume that both Investment Advisor and Bank are insureds under the professional liability policy, and assume further that the cost of defending and settling the class actions exceeds the limits of liability of the insurance policy. Who gets the money first – Investment Advisor (the named insured) or Bank (the additional insured)?

17. Case Study #1 (See Handout) • Issues • (5) What if the contract between Investment Advisor and Bank includes both the hold harmless and the agreement to name Bank as an “additional insured” in the same (lengthy) sentence? Does that matter? • (6) Assume that both Investment Advisor and Bank are entitled to coverage and that defense costs are outside of limits. What class action costs would the Investment Advisor’s professional liability insurer owe?

18. Case Study #1 (See Handout) • Issues • (7) Would a disgorgement remedy be covered by (a) the hold harmless; or (b) the professional liability insurance policy? • (8) What about Bank’s own professional liability program? If defense costs are $35 million, when would Bank’s insurer start to pay? Would Investment Advisor’s insurer be entitled to seek contribution from Bank’s professional liability insurer?

19. Case Study #2 (See Handout) • Issues • (1) When was a Claim made? Was it timely reported? What about the fact that the privacy class action had been filed prior to the policy period? • (2) Was notice timely? What about the fact that the privacy class action had been filed prior to the policy period? If you were advising the client on insurance issues when the consumer class actions were filed, what would you have advised regarding notice to the D&O insurers?

20. Case Study #2 (See Handout) • Issues • How many claims have been made? Are the securities class actions part of the same “Claim” as the privacy class action? • Which defense counsel should ABC select? What happens if the insurer sends “billing guidelines” to defense counsel and ABC thinks that would hurt the quality of the defense? What happens if there is a conflict between the interests of ABC and that of the insurer?

21. Case Study #2 (See Handout) • Issues • (5) The D&O policy has an exclusion for “personal profit gained by an insured to which the insured was not legally entitled.” Would the exclusion apply, since the data breach may have been the result of a cost-avoidance measure designed to maximize ABC’s profits? What if ABC’s Chief Technology Officer received a bonus for 2012 based upon the cost savings that the bank’s technology group achieved?

22. Case Study #2 (See Handout) • Issues • (6) Assume that the personal profit exclusion only applies “if a judgment or other final adjudication adverse to such insured establishes such personal profit or advantage.” Assume further that the class actions settle. Could the exclusion still apply? What if the insurer then files a declaratory relief action against the insureds. Could the exclusion apply?

23. Case Study #2 (See Handout) • Issues • (7) Assume the D&O policy had an exclusion for “liability arising out of or based upon any prior or pending litigation as of the inception date or alleging or derived from essentially the same facts as alleged in such prior or pending litigation.” Does that exclusion bar coverage for the derivative actions?

24. Questions, Final Comments and Contact Information