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P ROFESSIONAL L IABILITY U NDERWRITING S OCIETY

INSIDE THIS ISSUE

Director Liability . . . . . . . . . . . . . 2 Minding Your Ps and Qs . . . . . . . 3 Inquiry Notice Standard . . . . . . . 5 RPLU Corporate Testing Sites . . . 6 Mixed Motives . . . . . . . . . . . . . . 7 PLUS Foundation ­ Women's Leadership Initiative . . . . . . . . . . 8 Conference . . . . . . . . . . . . . . . . 11 Calendar of Events . . . . . . . . Back

COVERAGE UNDER A D&O POLICY FOR COSTS RELATED TO A SUBPOENA ISSUED BY A GOVERNMENT AGENCY

by Michael R. Sarner, JD

Michael R. Sarner is an attorney and a Vice President with Hays Companies, one of the largest privately held insurance brokerages in the country. Michael assists clients with executive liability claims, litigation and general insurance coverage issues. He can be reached at [email protected] or 414-290-3582.

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The quintessential source of information and education on professional liability

September 2009 Volume XXII Number 9

(which will typically include defense costs) from a "Claim" for a "Wrongful Act."1 This article will focus on some of the specific cases that have addressed whether a subpoena issued by a government agency constitutes a Claim under the policy.

DOES THE SERVICE OF A SUBPOENA BY A GOVERNMENT AGENCY CONSTITUTE A CLAIM UNDER A D&O INSURANCE POLICY?

When considering whether there is coverage under a D&O policy for the costs related to a subpoena issued by a government agency, a potentially determinative factor is whether the subpoena constitutes a Claim as that term is defined by the policy. While the courts have not been united in their interpretations and coverage remains largely dependent on the facts and circumstances surrounding the subpoena in question, the rationale set forth in the following cases is instructive. In ACE American Ins. Co. v. Ascend One Corp., 570 F.Supp.2d 789 (D.Md. 2008), the Attorney General of Maryland served an administrative subpoena upon Amerix Corporation pursuant to a state consumer protection act. The subpoena requested a myriad of information, including documents related to Amerix's corporate relationships with certain entities, its marketing and advertising to consumers, its customers residing in specific states and information related to consumer complaints, regulatory actions and other governmental investigations. Shortly thereafter, the Texas Attorney General's office served a civil investigative

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In the wake of the economic downturn, the public outcry demanding tighter regulation has been deafening. Federal and state government agencies have responded by heightening their sensitivity and lengthening their reach. This has resulted in an unprecedented number of formal and informal investigations brought against both companies and individuals.

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Investigations by government agencies such as the Securities and Exchange Commission (the "SEC"), a U.S. Attorney or a state attorney general's office can be initiated by the service of a subpoena. Even if there are no formal charges filed or a finding of any wrongdoing, a company may incur significant costs related to the subpoena. While few companies consider that the costs related to the subpoena may be insurable, a small but growing body of case law indicates that a company in receipt of a subpoena from a government agency may have coverage for the associated costs under its directors & officers ("D&O") insurance program. In order for coverage to apply under a D&O policy, there generally has to be a "Loss"

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THE GATHERING STORM OF DIRECTOR LIABILITY

by Christopher Duca

Christopher Duca is president of Navigators Pro, a division of Navigators Management Company, as well as a director of Navigators Insurance Company and Navigators Underwriting Agency Limited. He can be reached at [email protected]

burst and the corporate scandals behind Enron, WorldCom, Global Crossing, Tyco, and Adelphia. Now the intensity of director scrutiny has heightened beyond investors, which may result in increased director liability that will not likely fade in the near future. The global financial crisis has triggered extreme stock market volatility and a loss of investor confidence. The stock market has experienced declines reaching 40% over just the past year. Treasury Secretary Timothy Geithner stated to The Economic Club of Washington on April 22, 2009, "The world economy is going through the most severe crisis in generations. We each face somewhat different challenges and thus are not all in the same boat. But we are all in the same storm." He added, "Never before in modern times has so much of the world been simultaneously hit by a confluence of economic and financial turmoil such as we are now living through." Not surprisingly, securities class action filings that name publicly traded corporations and their directors and officers increased 30% in 2008 to a 6-year high, and those filings are on track in 2009 to increase to even higher levels. During the first quarter of 2009, the Securities and Exchange Commission (SEC) reached 16% more financial settlement cases than during the same period in 2008. SEC Commissioner Luis Aguilar gave a speech at the 2009 Independent Director Conference on April 17, 2009, stating, "I've been very vocal about a number of changes the SEC should make and about the Congressional action needed to address gaps in the SEC authority, and the actions needed to provide the SEC with the teeth and resources it needs to aggressively fulfill its mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." The article "SOX May Temper Call for New Legislation," published in the December/January 2009 issue of Directorship, still applies on a macro basis,

but we are now seeing lawmakers anxiously reacting to recent public sentiment. In May of 2009, the Senate is expected to consider introducing a corporate governance bill dubbed "Say on Pay," a similar bill to one that was passed in the House of Representatives in 2007 but was stalled in the Senate. If passed as proposed in the current draft form, this bill would provide shareholders with a non-binding vote on executive compensation, would require annual election of directors, and would provide greater proxy access to shareholders. Despite expanded SEC disclosure with respect to executive compensation and SOX regulations, lawmakers are considering still broader disclosure requirements which may spark historic levels of shareholder litigation, clogging the U.S. court system and burdening U.S. corporations with additional legal cost. As these costs would disproportionately affect U.S. corporations as compared to other corporations trading in world markets, the result may be that U.S. corporations become less competitive on a relative basis. Such litigation would therefore be actually detrimental to the intended beneficiaries, the corporation's shareholders. The legal landscape for directors is concerning on multiple levels as they face higher levels of liability resulting from the global financial crisis, increased stock market volatility, activist shareholders, an emboldened plaintiffs' bar, active regulatory oversight and strict securities laws enforcement. Additionally, if new legislation that broadens disclosure laws is implemented without thoughtful and robust analysis, it may create the appearance of legislative grand-standing and could result in unintended consequences. This kind of response to the gathering storm of public sentiment could result in higher compliance and litigation costs to corporations rather than meaningful corporate governance reform. This article originally appeared in the June/ July 2009 Directorship magazine and is reprinted here with permission.

The global financial crisis has triggered a series of events that will impact the legal landscape, regulatory reform, the global financial system and capital markets for the next decade. Directors are suddenly faced with expanding exposure due to the financial crisis, which has resulted in a broader governmental role and oversight, shareholder activism and a revitalized plaintiffs' bar. The landscape is rapidly evolving with media scrutiny of corporate boards going beyond financial journalists and CNBC to front page news and highauthority blogs. Director liability forecast is severe thunderstorms with gale force wind gusts. The public is demanding that our elected officials hold responsible those at fault for their losses in real estate value, 401(k) retirement funds and jobs. The difficulty is in identifying who is at fault since it is not clear who is to blame, due primarily to the interconnectivity of the world economies coupled with systemic market risk. The U.S. government has provided financial assistance to private corporations that it believes pose systemic risk to the financial system and, in return for the taxpayer funded bailouts, the public has demanded more than equity stakes or a path to repayment of loans. As we have seen, the public has expressed its outrage towards a few of these corporations through demonstrations, demanding that the U.S. government be intimately involved with the decision-making of specific executives' compensation, pay bonuses and businessplanning conferences. And while this level of anger is not directed at most companies, it is a new phenomenon that is different than prior years after the dot-com bubble 2 September 2009 PLUS Journal

MINDING YOUR Ps AND Qs WHEN DEALING WITH PEOs ­ INSURANCE IMPLICATIONS FOR CLIENTS OF PROFESSIONAL EMPLOYER ORGANIZATIONS

by William Dougherty, CIC, RPLU and Katherine S. Catlos, Esq. With all the headaches associated with staying on top of changing labor and employment laws, it is no surprise that employers of all sizes are outsourcing their Human Resources functions to Professional Employer Organizations or "PEOs." A PEO is a third-party company that enters into a co-employer relationship with a client-employer. In creating a co-employer relationship, both the PEO and the clientemployer share and manage many employerrelated liabilities and responsibilities. Typically, the co-employment relationship is based on a contract between the PEO and the company outlining the PEO's responsibilities (e.g., payroll, benefits administration, leave administration and other HR functions) and the company's responsibilities (e.g., day-to-day supervision of workers, control over hiring, firing, and terms and conditions of employment). PEOs come in all sizes and shapes, from payroll-only services to an off-site, full service Human Resources department. PEOs often market their services to clientemployers as means to cut costs, improve efficiency, and ensure compliance with state and federal workplace legislation. Client-employers also benefit from entering into a PEO relationship because PEOs have the ability to spread costs of employee benefits among all of its clients and offer a wider selection of benefits. In contrast to temporary staffing firms which place their own employees at a customer's place of business to perform services for the client-employer's place of business, PEOs do not have their own workforce and ostensibly assume only administrative functions for its clientemployers such as payroll and benefits coverage and administration, e.g., workers' compensation and health insurance. PEOs typically have no direct responsibility over the employees of its clients, including hiring, training, supervision, evaluation, discipline or discharge, among other critical employer functions. This distinction became significant on January 16, 2009, when the United States Department of Labor implemented specific changes to the Family and Medical Leave Act ("FMLA") affecting employers in a PEO relationship. Employers with 50 or more employees are covered by the FMLA. If two entities are considered "joint employers," each employer must include the employees of both entities in determining whether the 50-employee threshold has been met. Previously, PEOs were considered "joint employers" of the client's workers and were counted towards the 50-employee minimum for the FMLA. As the primary employer, the PEO was required to provide required FMLA notices to its employees, providing FMLA leave, maintaining group health insurance benefits during the leave, and restoring the employee to the same or equivalent job upon return from leave. As the secondary employer, the clientemployer would be responsible for accepting the employee returning from FMLA leave if the PEO chose to place the employee with the client-employer. See Wage and Hour Opinion Letter FMLA111 (September 11, 2000). The new DOL regulation now provides that employees of a PEO are not considered in the 50-employee count if the PEO merely performs administrative functions such as payroll, benefits administration, and the like. 29 CFR § 825.106(b)(2). The determination of whether the PEO is a "joint employer" is based on the economic realities and specific facts and circumstances of the relationship. If the PEO has the right to hire, fire, assign or direct and control the client employer's employees, it would be considered a "joint employer" with the client-employer. In circumstances where there is "joint employer" status, the client-employer will generally be regarded as the primary employer. This change is significant as the primary employer is responsible for giving employees the required FMLA notices providing FMLA

William Dougherty, CIC, RPLU is an Assistant Vice President of Hays Companies where he consults with clients in structuring D&O, Employment Practices Liability, Fiduciary Liability, Professional Liability and related management liability exposures. Katherine S. Catlos, Esq. is the Managing Partner of the San Francisco Office of Kaufman Dolowich Voluck & Gonzo, LLP, where she regularly handles EPL, D&O, and E&O matters. Mr. Dougherty and Ms. Catlos may be reached at [email protected] and [email protected], respectively.

leave and maintaining any health benefits. Until this change, the primary employer was considered to be the PEO. Notwithstanding this newly forged distinction, employees will sue both the PEO and the client-employer as "joint employers" for, e.g., wrongful termination, violation of anti-discrimination laws, breach of fiduciary duty owed in implementing 401(k)s or health benefit programs, and so on. In such circumstances, the PEO will contend it was not the plaintiff's "employer" because it did not exercise sufficient right of control over the worksite employees to be deemed an employer. Nationwide Mutual Ins. Co. v. Darden, 531 U.S. 318 (1992). Indeed, courts in various situations have found that PEOs and staffing agencies are not common-law employers of their client's employees. Takacs v. Fiore, 473 F.Supp.2d 647 (D.Md.2007) (sexual harassment); Salley v. PBS of Central Florida, Inc., 2007 U.S. Dist. LEXIS 91212 (M.D. Fla. 2007) (FLSA); Boston Old Colony Ins. Co. v. Tiner Assoc., Inc., 288 F.3d 222 (5th Cir. 2002) (negligence). Thus, in line with the new FMLA regulations, PEOs will not be considered "joint employers" if they did not supervise

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Minding Your Ps and Qs continued from page 3

client's employees or control their day-today activities. In defending against employee-lawsuits, a PEO will also rely upon the indemnification provision contained in the PEO/client services contract to shift responsibility to the client-employer. In this fashion, it is important for the client-employer to understand the rights and duties contained in the PEO/client services agreement, the scope of services to be offered by the PEO, and importantly, the insurance implications when contracting with a PEO. Some PEOs will purchase Employment Practices Liability Insurance ("EPL") protecting themselves and the clientemployer as insureds under the policy. This insurance provides defense and indemnity for employment-related lawsuits alleging wrongful termination, sexual harassment, discrimination and other such actions. While a desirable feature, there are potential pitfalls to relying solely upon the PEO-provided Employment Practices Liability Insurance including the following: · Inadequate Limits. With the average defense costs of employment-related claims in the tens of thousands and the average EEOC settlement exceeding $200,000, the typical limits of the PEOprovided EPL insurance may prove insufficient to deal with larger claims or multiple claims during the course of the year. · Lack of Control of the Policy. Unlike an employer's Property, General Liability and related insurance over which they have control of the placement and claims process, in the case of PEO-provided EPL coverage, companies have no control over the policy. This can create significant issues including: - Policy Definitions and Exclusions. The inability of the PEO to negotiate terms specific to the client-employer may result in some entities or persons without coverage. For example, some EPL forms may not include noncompensated officers as insured persons or natural persons who are working for the employer but not paid through the PEO's payroll system. Lacking such coverage, these persons 4 September 2009 PLUS Journal

and the employer itself could find themselves without coverage. And many PEO-provided EPL forms do not include subsidiaries in the definition of entities insured under the policy which likewise may create a coverage gap for subsidiary operations of PEO Clients. - The Claims Process. Claims generally must be submitted to the PEO who will in turn submit these claims to the insurer. The client-employer generally would not have the right to consent to the law firm representing the claim but would use the firm selected by the PEO and the insurer. And some PEOemployer EPL forms have included exclusions related to failure to comply with policies and procedures in the employee manual which could eliminate coverage for allegations of intentional acts (e.g., allegations of sexual harassment would be considered intentional acts; were an EPL policy to preclude coverage for failure to comply with promulgated policies and procedures, including policies related to harassment and discrimination, coverage could be denied for such claims). - Policy Termination. As the EPL coverage is placed through the PEO as part of their service contract, termination of the PEO/client service agreement with the PEO will likely result in loss of EPL coverage thereby leaving the client-employer uninsured unless other EPL insurance has been secured prior to the termination of the PEO contract. Similarly the PEO or the insurer may elect to terminate or restrict coverage and, further, under the terms of the policy may not be required to advise the client of the changes in terms or cancellation of coverage. · Emerging Exposures. Defense coverage for wage and hour related action and immigration has been difficult to obtain in recent years but such is becoming much more readily available in the insurance market. However, underwriters are generally not providing these extensions on a blanket basis but subject to individual account underwriting. PEO-provided EPL insurance may lack

this important coverage. · Lack of Third-Party EPL Coverage. Coverage for non-employee third parties for claims alleging discrimination or harassment has become fairly common in the broader EPL Insurance market but such coverage may not be included via the PEO-provided EPL coverage. In addition to presenting challenges in insurance policy administration as respects EPL insurance coverage, the PEO relationship may arguably create additional duties related to compliance with laws and regulations for the client-employers. For example, under California Government Code section 12950.1, an employer with fewer than 50 employees in California would not be required to provide sexualharassment prevention training to its staff as required by statute. But as a member of a PEO who employs hundreds if not thousands of individuals, such training may be necessary to comply with the law given the ambiguity of the "joint employer"-- unlike the recent "carve out" described above under the FMLA. Therefore, the "joint employer" relationship between PEOs and their client-employers may be obligating employers to comply with regulations principally intended for larger companies. In order to best manage these exposures, clients of PEOs should carefully review the scope of services to be provided by the PEO and indemnification provisions in their PEO contract and may wish to engage outside counsel to ensure that any such indemnification is appropriate to the needs of the client-employer. Additionally, client-employers should review and understand their duties and obligations related to any EPL coverage in place through the PEO to ensure that they protect coverage by complying with any claims notice and related provisions of the policy. And rather than solely relying upon Employment Practices Liability Insurance afforded via the PEO (assuming such is in effect), employers should work with their insurance representative to secure their own EPL coverage, either on a stand-alone basis, or as part of a broader Management Liability program.

SUPREME COURT TO ADDRESS INQUIRY NOTICE STANDARD FOR SECURITIES FRAUD CLAIMS

by Paul T. Curley and Daniel A. Green On May 26, 2009, the United States Supreme Court granted certiorari in Merck & Co. v. Reynolds, No. 08-905, a case involving "inquiry notice" and the statute of limitations ("SOL") applicable to claims brought under section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). It appears that the Court will address the related issues of what constitutes inquiry notice, what is a potential plaintiff 's duty to investigate following inquiry notice and when does the SOL begin to run following inquiry notice. Although the Courts of Appeals that have addressed these issues agree that the limitations period may commence prior to plaintiff 's actual (as opposed to constructive) discovery of all the facts underlying the alleged wrongdoing, they resolve these issues in inconsistent ways, resulting in unpredictable and conflicting decisions. The Supreme Court appears set to resolve the differences among the circuits in an opinion that may have a great deal of practical significance for securities cases. storm warnings of possible wrongdoing that would prompt a reasonable investor to investigate. For example, if a shareholder becomes aware that a company has announced an intention to restate its financial results, that shareholder is on inquiry notice of possible wrongdoing and the two-year SOL begins to run immediately. The running of the two-year SOL does not require that the shareholder have all the facts or details of the possible wrongdoing. This approach is the most defendant-friendly. Under a second approach, an investor is on inquiry notice when it becomes aware of possible wrongdoing, but the SOL does not begin to run until the date the plaintiff, exercising reasonable diligence, could have discovered the facts underlying the alleged wrongdoing. In the restatement example, the shareholder is on inquiry notice and under a duty to investigate when he or she becomes aware of the company's announcement that it intends to restate, but the two-year SOL does not begin to run until the shareholder could have discovered facts sufficient to bring a claim, e.g., the who, what, where, when, and how of the possible wrongdoing. Once a shareholder has or should have had this basic information, the two-year SOL begins to run. Under a third approach, an investor arguably is not on inquiry notice or under a duty to investigate, and the two-year SOL does not begin to run, unless and until the investor becomes aware of the basic facts of a potential claim, as well as facts suggesting a defendant acted with scienter. The Ninth Circuit first articulated this pro-plaintiff approach in Trainer Wortham & Co. v. Betz, 519 F.3d 863 (9th Cir. 2008), holding that a plaintiff is not on inquiry notice until he or she is aware of facts suggesting that a defendant acted with scienter in committing possible wrongdoing. In other words, the storm warnings must alert a reasonable investor not only of some possible misrepresentation, but also that the defendant might have been aware of that misrepresentation.

Paul T. Curley is a senior associate with Kaufman Borgeest & Ryan LLP, a national insurance defense and coverage firm. He represents insurers in coverage matters, including in the areas of D&O Liability and Fiduciary Liability. He can be reached at [email protected] Daniel A. Green is an associate with Kaufman Borgeest & Ryan LLP. He represents insurers in coverage matters, including in the areas of D&O Liability and Employment Practices Liability. He can be reached at [email protected]

Subsequently, the Third Circuit, in the case at issue here, In re Merck & Co. Securities, Derivative & "ERISA" Litigation, 543 F.3d 150 (3d. Cir. 2008), joined the Ninth Circuit in requiring storm warnings indicating that defendants acted with scienter in order to establish inquiry notice.

THE CIRCUIT SPLIT

Under section 804(a) of the SarbanesOxley Act of 2002, a private action claiming fraud under section 10(b) of the Exchange Act must be brought "not later than the earlier of: (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." In general, the Courts of Appeals agree that the twoyear SOL commences after either actual discovery of the facts underlying the wrongdoing or the existence of sufficient "storm warnings" suggesting the possibility of wrongdoing and prompting investigation by an investor. The courts disagree, however, on the following issues: (1) do the storm warnings that place an investor on inquiry notice of a potential claim need to suggest that defendants acted with scienter, and (2) once an investor is on inquiry notice, when does the two-year SOL begin to run? Under one approach, the two-year SOL begins to run from the moment there exist

THE MERCK DECISIONS

Plaintiffs in Merck allege that the company and certain of its officers and directors violated the securities laws by misrepresenting the safety profile and commercial viability of the pain-reliever Vioxx. Merck argued in the district court that "storm warnings" sufficient to alert a reasonable investor of possible wrongdoing had existed more than two years prior to the filing of plaintiffs' complaint. In particular, Merck argued that the following circumstances constituted storm warnings sufficient to trigger the two-year SOL: (1) the issuance of an FDA warning letter stating that Merck had misrepresented the safety profile of the drug; (2) the resulting decline in the company's stock price; (3) the widespread negative media coverage regarding Vioxx; and (4) the numerous consumer-fraud, product-liability, and personal-injury lawsuits alleging that Vioxx was harmful. Based on the above, the

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RPLU EXAMS NOW AVAILABLE AT CORPORATE ON-SITE LOCATIONS

by Deb Ropelewski, PLUS Director of Education In 2008, PLUS partnered with AICPCU as our primary vendor to deliver the RPLU exams based on the new PLUS curriculum. Our agreement with AICPCU gives RPLU students two options for taking their exams: 1. Students may still sit for RPLU exams year-round at local Prometric testing locations, or 2. IF their specific corporate location is approved by PLUS and the AICPCU, students may sit for their exams at their own company location. Seven Corporate sites, including the Bermuda Insurance Institute, recently took part in a two-month pilot phase of this new program, and administered almost 80 RPLU exams. We have received positive feedback due to the ease of access for the students and the elimination of travel time to Prometric centers that would otherwise be required. There are approximately 130 company locations that are approved to provide on-site CPCU/IIA exams that are currently eligible to offer RPLU exams. Since these locations have already been reviewed and approved by AICPCU, they need only opt in to offer RPLU exams on-site. If your company location is already approved by AICPCU, please contact the Director of Education, Deb Ropelewski at [email protected] to opt-in to provide RPLU exams. If your location is not already approved, the criteria to deliver exams on-site through AICPCU's Internet-Based Software include: A secure, quiet testing environment with separate workstations that meet specified criteria (that are delineated on the application). Appropriate Staffing, including an Exam Supervisor to oversee the program, Test Administrators to proctor the exams, and IT support.

Technical Criteria for the PCs and printers that will be utilized. To request an application and begin the process to become an approved site for RPLU exams, please send an email to [email protected] We are excited to be able to offer this program to our corporate locations. While it is "new" to PLUS, AICPCU has delivered many thousands of exams this way, and the companies who already participate in the program are delighted with this new enhancement to the RPLU Program. Thank you for your continued interest in and support of the RPLU program.

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district court agreed and held that the twoyear SOL barred the plaintiffs' claims. Over a vigorous dissent, the Third Circuit reversed, holding that the two-year SOL did not begin to run until the plaintiffs were confronted with facts suggesting that the defendants acted with scienter, i.e., that the defendants not only made misrepresentations but that such misrepresentations were intentional and therefore actionable. The Third Circuit held that it was unlikely that plaintiffs were on notice that defendants made intentional misstatements since: (1) defendants continually issued reassuring statements that minimized various negative public disclosures; (2) Merck's stock price dipped only slightly following the FDA warning letter; and (3) securities analysts following Merck did not change their ratings in 6 September 2009 PLUS Journal

response to the various negative disclosures. Accordingly, the Third Circuit held that the publicly available information was insufficient to trigger the duty to inquire because it did not suggest that defendants knew that their statements regarding Vioxx were false. Consequently, the Third Circuit held that the plaintiffs' claims were not time-barred.

IMPORTANCE OF THE GRANT OF CERT IN MERCK

Merck presents an opportunity for the Supreme Court to resolve the very important issue of when the statute of limitations begins to run for claims under section 10(b) of the Exchange Act. Currently, there is no uniform answer. In articulating a national standard, the Supreme Court will have to consider many factors, including a potential defendant's desire for closure of an aging potential

claim, as well as an investor's need for time to develop a well-pled, particularized complaint, as required by the federal securities laws. Whatever standard the Court adopts or articulates, it should have significant implications for both plaintiffs and defendants. For example, a decision by the Supreme Court holding that inquiry notice requires that an investor be on notice of facts supporting an inference of scienter would make it more difficult for defendants to obtain dismissals of claims as time-barred, impairing an important tool in the defensive arsenal. Additionally, such a decision would significantly benefit plaintiffs, as it would keep open longer the window during which they may file suit and allow plaintiff 's firms to build inventories of potential claims to file during slow times. Given the importance of the issues at stake, the Supreme Court proceedings and its decision are sure to be closely followed.

'MIXED-MOTIVES' CLAIMS ELIMINATED UNDER THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT

by Kelly A. Lavelle, Esq. and Thomas Paschos The mixed motive theory applies when an employer has legitimate as well as discriminatory reasons for the employment decision. A recent Supreme Court decision distinguishes between disparate-treatment claims brought under the Civil Rights Act of 1964 Title VII in which "mixedmotives" claims are permitted and the Federal Age Discrimination in Employment Act (ADEA) in which they are not. In Gross v. FBL Financial Services, Inc., Jack Gross was employed as the claims administration director at FBL Financial Group, Inc. (FBL). When he was 54 years old, Gross was reassigned to the position of claims project coordinator. At that same time, FBL transferred many of Gross' job responsibilities to a newly created position: claims administration manager. That position was given to a younger colleague. Although Gross and his replacement received the same compensation, Gross considered the reassignment a demotion because of FBL's reallocation of his former job responsibilities. Gross filed suit alleging that his reassignment to the position of claims project coordinator violated the ADEA. At trial, Gross introduced evidence suggesting that his reassignment was based at least in part on his age. FBL defended its decision on the grounds that Gross' reassignment was part of a corporate restructuring and that Gross' new position was better suited to his skills. At the close of trial, and over FBL's objections, the court instructed the jury to enter a verdict for Gross if he proved, by a preponderance of the evidence, that he was demoted and his age was a motivating factor in the demotion decision, and told the jury that age was a motivating factor if it played a part in the demotion. It also instructed the jury to return a verdict for FBL if it proved that it would have demoted Gross regardless of age. The jury returned a verdict for Gross. The Court of Appeals reversed and remanded for a new trial, holding that the jury had been incorrectly instructed under the standard established in the Supreme Court decision, Price Waterhouse v. Hopkins, a mixed motive Title VII case. Under Price Waterhouse, if a Title VII plaintiff shows that discrimination was a "motivating" factor in the employer's action, the burden of persuasion shifts to the employer to show that it would have taken the same action regardless of that impermissible consideration. To shift the burden of persuasion to the employer, the employee must present direct evidence that an illegitimate criterion was a substantial factor in the decision. Because Gross conceded that he had not presented direct evidence of discrimination, the Court of Appeals held that the mixed-motive instruction should not have been given. On certiorari, the Supreme Court was presented with the question of whether a plaintiff must present direct evidence of discrimination in order to obtain a mixedmotive instruction in a non-Title VII discrimination case. However, the Supreme Court answered a different question and held that a plaintiff bringing an ADEA disparate-treatment claim must prove, by a preponderance of the evidence, that age was the "but-for" cause of the challenged adverse employment action. The burden of persuasion does not shift to the employer to show that it would have taken the action regardless of age, even when a plaintiff has produced some evidence that age was one motivating factor in that decision. The formal issue before the Court was never addressed because the Court held that "such a jury instruction is never proper in an ADEA case." Up to this point, every court of appeals had held that an ADEA plaintiff could proceed under some version of Price Waterhouse. However, here the Supreme Court refused to rely on the Court's decision in Price Waterhouse. The Court cited the 1991 Civil Rights Act where Congress amended Title VII with 42 U.S.C. § 2000e-2(m) and -5(g)(2)(B) to selectively supercede Price Waterhouse, noting that it did not contemporaneously amend the ADEA to do the same. The Court held that because Title VII is materially different with respect to the

Kelly A. Lavelle is an associate with the law firm of Thomas Paschos & Associates, P.C. and concentrates in representing insurers in complex insurance coverage matters, and represents insureds in employment, D&O, and legal malpractice matters. She can be reached at [email protected] or 856-354-1900. Thomas Paschos, Esq. is the founder and managing attorney of the PA/NJ law firm of Thomas Paschos & Associates, P.C., and represents and counsels clients in the defense of professional liability and employment matters, and concentrates in representing insurers in complex coverage matters. He can be reached at [email protected] or 215-636-0555.

relevant burden of persuasion, Price Waterhouse does not control the construction of the ADEA. The Court then turned its inquiry to the text of the ADEA to decide whether it authorized a mixed-motives age discrimination claim. In previous decisions, the Supreme Court held that the ordinary meaning of the ADEA's requirement that an employer took adverse action "because of" age is that age was the "reason" that the employer decided to act. Here, the Court provided that to establish a disparate-treatment claim under this plain language, a plaintiff must prove that age was the "but-for" cause of the employer's adverse decision. The result: the burden of persuasion necessary to establish employer liability is the same in alleged mixed-motives cases as in any other ADEA disparate-treatment action. The Court's decision eliminates the ability of plaintiffs to bring a "mixedmotives" claim under the ADEA. Plaintiffs will now have an even greater degree of difficulty in proving causation in age discrimination actions making it more difficult for employees to withstand a summary judgment motion by the employer. Many in the legal community believe it is likely that Congress will amend the ADEA to overcome the effect the holding in this case will produce. 7

Professional Liability Underwriting Society

PLUS FOUNDATION LAUNCHES WOMEN'S LEADERSHIP INITIATIVE AT ANNUAL CONFERENCE

A primary goal of PLUS Foundation's mission is Diversity and Outreach. Toward that mission, one of our 2009 objectives is to begin offering opportunities to women for career development, education and networking in the Professional Liability industry. These Foundation opportunities will help prepare women for leadership roles by building relationships and expanding networks of professional contacts. Through ongoing participation, this initiative will also provide a means for women leaders to share their roadmap to success and to support and mentor other women. Look for the Women's Leadership Initiative to continue to create opportunities to learn from the experience of women who are leaders by virtue of their achievements. We also plan to raise corporate awareness of the value of developing and diversifying leadership. Proactive companies that encourage female employees to participate in these PLUS Foundation events will help realize the overall industry goal of increasing the percentage of women in leadership roles. The PLUS Foundation looks forward to hosting PLUS Conference attendees at this event. The Foundation would especially like to reach out to female PLUS members who would greatly benefit from attending the Women's Leadership event by hearing

FEATURING: Ms. Christa Davies

CFO ­ Aon Corporation

Christa Davies serves as Executive Vice President, Global Finance, and Chief Financial Officer. She joined Aon in November 2007 as Executive Vice President, Global Finance, and became Chief Financial Officer in March 2008. Before joining Aon, Davies worked for Microsoft and held a series of positions with increasing responsibility from 2002 to 2007, including her last role as Chief Financial Officer of the Platform and Services Division, the largest and most profitable division within the company. Davies is a graduate in Aerospace Engineering from the University of Queensland in Australia, and as a Fulbright Scholar, she earned a masters degree in business administration from the Harvard Business School.

PLUS Foundation Women's Leadership Initiative: Inaugural Event

November 12, 2009 PLUS International Conference ­ Chicago Ballroom Sheraton III 7:15-8:15 a.m. Seating will be limited. Interested attendees and those wanting ongoing information on the Women's Leadership Initiative should send name, e-mail and phone to [email protected]

a highly successful business woman speak about her experiences and leadership qualities. All members will appreciate Ms. Davies' leadership counsel on how her background across a wide range of industries has contributed to her success.

REMEMBER TO CAST YOUR VOTE IN SEPTEMBER!

At the September meeting of the PLUS Board of Trustees, the Nominations and Leadership Committee will submit a list of candidates for the annual election of Trustees. Trustees are elected to the Board for a term of three years and terms are staggered so that one-third of Trustee positions shall conclude each year.

CAST YOUR OTE!

8 September 2009 PLUS Journal

Voting will be available through our website, so watch for your notice. By going to the PLUS website and logging in as a member, you will have the opportunity to cast your vote for the next members of the PLUS Board online. We will also mail out ballots to those who do not vote online. Whether you vote online or wait for the mailed ballot, we need to hear from you, so remember to...Cast Your Vote!

Costs Related to a Subpoena continued from cover

demand on Amerix which sought the same documents as the Maryland subpoena. Amerix incurred significant costs in responding to the subpoena and the demand, and submitted a claim to their insurer requesting coverage.2 The insurer subsequently denied coverage for these costs on the grounds that the Maryland subpoena and Texas demand did not constitute a Claim as that term was defined under the insurance policy. Amerix immediately sought a declaration of coverage from the Court. The question before the Court was whether the Maryland subpoena and Texas demand constitute "a civil, administrative or regulatory investigation against any insured commenced by the filing of a notice of charges, investigative order or similar document" which was the relevant portion of the definition of Claim under the insurance policy. The Court noted that while the case law is not settled, subpoenas or investigative demands have been found to constitute a Claim where the insured was required to produce testimony and documents pursuant to an ongoing investigation of its activities. ACE citing Richardson Electronics, Ltd. v. Federal Ins. Co., 120 F.Supp.2d 698 (N.D.Ill 2000). The Court ultimately held that the Maryland subpoena and the Texas demand are at least equivalent to the filing of an investigative order or similar document, and thus constitute a Claim under the policy. ACE at 796-797. Notably, the ACE Court seemed to imply that a subpoena or demand would be more likely to be considered a Claim under these policies if the insured was a target of the investigation as opposed to simply a source for information. The Court also made a sharp distinction between subpoenas served by government agencies and subpoenas served in the general civil litigation process by private parties. The Court perhaps best summarized its opinion of prior case law (as well as its own position) when it stated, "Thus, the case law suggests that subpoenas and investigative demands may constitute claims where they are issued by government investigative agencies related to an investigation of the insured." ACE at 796. In Onvoy, Inc. v. Carolina Casualty Ins. Co., 2006 WL 1966757 (D.Minn.), Onvoy

was served with a grand jury subpoena from the U.S. Attorney for the Southern District of New York. Onvoy then submitted that subpoena to its insurer seeking coverage under its D&O policy. The insurer denied coverage, and based its denial upon the fact that the subpoena did not constitute a Claim as that term was defined under the insurance policy. However, the insurer requested that Onvoy give immediate notification if the matter did become a Claim, which the insurer believed would require the return of an indictment by the U.S. Attorney. Although Onvoy incurred costs in connection with the subpoena, no indictment was ever returned against Onvoy. Onvoy commenced an action against its insurer seeking a declaration that the D&O policy provides coverage for the costs associated with the subpoena. Onvoy's D&O policy defined a Claim as i) a written demand for monetary or nonmonetary relief; or ii) a civil, criminal, administrative or arbitration proceeding for monetary or non-monetary relief which is commenced by the service of a complaint or similar pleading; or the return of an indictment (in the case of a criminal proceeding); or receipt or filing of a notice of charges; or iii) any proceeding brought by or initiated by a federal, state or local government agency. Carolina Casualty contended that the inclusion within the definition of Claim of "return of an indictment (in the case of a criminal proceeding)" makes the return of an indictment a precondition to coverage for any criminal proceeding. The Court disagreed and held that the use of the conjunction "or" between the various subsections within the definition of Claim signified that each of those sections provided an alternative definition of Claim. As such, the Court stated that if the subpoena falls within any one of the subsections within the definition of Claim, that definition of Claim would be satisfied. Onvoy at *6. The Court then focused on the subsections stating "any proceeding brought by or initiated by a federal, state or local government agency." The Court concluded that the U.S. Attorney serving Onvoy with the subpoena constituted a proceeding brought by a government agency, and thus was a Claim under Onvoy's D&O policy.

Onvoy at *7. While the conclusion that the subpoena satisfied that particular definition of Claim is instructive, its significance is mitigated by the fact that the relevant portion of the definition of Claim is somewhat unusual (more common is "a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document"). Perhaps the more important finding by the Onvoy Court is that the insureds can avail themselves of each and every subsection of the definition of Claim, even if, as in Onvoy, the subpoena appears intended to investigate potential criminal wrongdoing. In Minuteman International v. Great American Ins. Co., 2004 WL 603482 (N.D.Ill 2004), as part of an order commencing a private investigation against Minuteman, the SEC served a subpoena on Minuteman and certain of its directors and officers requiring appearances for depositions and the production of documents. Minuteman incurred costs in excess of $475,000 in responding to the subpoena, a sum for which it sought reimbursement from its D&O insurer. The insurer took the position that the subpoena did not constitute a Claim under Minuteman's D&O policy and denied the request for reimbursement. The definition of Claim within Minuteman's D&O policy included, in pertinent part, both "a written demand for monetary or non-monetary relief" and "a civil, criminal, administrative or arbitration proceeding made against any insured seeking nonmonetary relief." The insurer did not dispute that the SEC subpoena constituted a written demand and/or an administrative proceeding; rather, it based its coverage denial on its assertion that the subpoena did not seek "relief" as is required to constitute a Claim under Minuteman's D&O policy. The Court disagreed, and found that the subpoena did in fact constitute a Claim under Minuteman's D&O policy. As support for its finding, the Court noted that "just as being required to produce documents or provide testimony would be relief in a court proceeding seeking enforcement of an SEC subpoena, the

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Professional Liability Underwriting Society

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Costs Related to a Subpoena continued from page 9

relief sought by the subpoena itself is the production of documents or testimony." Minuteman at *7. The Court went on to state that a demand for "relief" is broad, and should include simply a demand for something that is due. Id. The Court concluded by stating that an SEC subpoena is not a mere request for information, but a demand by a government agency with the ability to enforce its demand. Id. The Minuteman decision is notable not only because of its broad interpretation of the term "relief" under the D&O policy, but also because of its implication (similar to that of the ACE Court) that there is a sharp distinction to be drawn between a subpoena which is simply a benign request for information and a subpoena served upon the target of an investigation being conducted by a government agency. Courts around the country are not entirely united in their position that a subpoena served by a government agency constitutes a Claim under a D&O policy. In Diamond Glass Companies v. Twin City Fire Ins. Co., 2008 WL 4613170 (S.D.N.Y.), the U.S. District Court for the Middle District of Pennsylvania began an investigation into Diamond Glass Company's ("Diamond") business practices by issuing multiple subpoenas to Diamond's custodian of records and a number of current and former employees commanding them to produce documents and appear before the grand jury. The FBI also served and executed a search warrant upon Diamond. Diamond provided its D&O insurer with copies of the grand jury subpoenas served upon its custodian of records and its employees, and requested coverage under its D&O policy. Diamond's insurer denied coverage because the subpoenas did not constitute a Claim under the D&O policy. The definition of Claim under Diamond's D&O policy included, in pertinent part, "a written demand for monetary or nonmonetary relief commenced by the receipt

of such demand and a criminal proceeding, or formal administrative or regulatory proceeding commenced by the return of an indictment, filing of notice of charges, or similar document." Diamond first argued that a federal grand jury investigation was a criminal proceeding and thus a Claim under the policy. The Court quickly dismissed this argument, stating that the policy unambiguously requires the return of an indictment, filing of a notice of charges or similar document as a precondition to coverage for a criminal proceeding and that because there was no return of a charging instrument in this matter, it did not satisfy that portion of the definition of Claim. Diamond at *3. Diamond next argued, relying primarily on the Minuteman decision, that the grand jury subpoenas were a demand for nonmonetary relief, and thus a Claim under the D&O policy. The Court acknowledged the Minuteman decision, but disagreed with its holding. Rather, the Court said, "based on the ordinary and accepted meaning of the word `relief' and the context in which it is used in the Policy it is clear that investigative subpoenas and search warrants are not 'demands for nonmonetary relief.'" Diamond at *4.

As we have seen from the cases cited in this article, in the case of a subpoena issued by the government, the breadth of the definition of Claim can be a determining factor as to whether or not the D&O policy provides coverage for the costs associated with responding to that subpoena. However, the receipt of a subpoena is not the time for the insured to first contemplate the breadth and scope of its D&O policy's definition of Claim. Rather, the appropriate time to address this matter is when the policy terms and conditions are negotiated prior to that policy's inception. It is also important for an insured to recognize the importance of reporting in a timely fashion. Once a situation satisfies the definition of Claim under a D&O policy, failure to report it in a timely fashion can potentially void coverage under that policy. Even if an insurer doesn't challenge the timeliness of the reporting of a claim, the insurer will typically not reimburse any costs incurred prior to the date of reporting. Educating the appropriate people in an organization regarding what constitutes a Claim under their D&O policy, and the risks of not reporting it in a timely fashion, can ultimately be the difference between having a potential claim covered or denied.

FOOTNOTES

1 The capitalized terms in quotes are usually defined terms under a D&O policy. It should be noted that these definitions, along with most other terms and conditions of a D&O policy, can vary depending on the insurer's form and the enhancements to coverage which have been negotiated onto the policy. Further, there can be significant differences between the coverage provided by public company D&O policies and private company D&O policies. 2 Amerix gave notice under both its D&O and E&O policies. The coverage litigation only addressed the definition of claim under the E&O policy. Because the language considered by the Court is generally included within the definition of claim under D&O insurance policies, the Court's ruling is applicable to coverage provided under most D&O insurance policies as well.

CONCLUSION

While the case law is relatively limited and the courts having addressed the issue are not united, there are certainly a number of cases where a court found coverage under a D&O policy for certain costs related to a subpoena issued by a government agency. However, the coverage analysis remains fact intensive, with the outcome depending on the issuer of the subpoena, the circumstances surrounding the issuance of the subpoena, the insurer involved and the specific language of the insured's D&O policy. From a policyholder perspective, the importance of the definition of Claim under a D&O policy cannot be overstated.

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September 2009 PLUS Journal

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OFFICERS

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President, David A. Bell · Allied World Assurance Company, Ltd · Pembroke, Bermuda President-Elect, Daniel Auslander, RPLU · CNA Pro Commercial · Cranbury, NJ Vice President, Daniel J. Standish · Wiley Rein, LLP Washington, DC Secretary-Treasurer, Jeffrey R. Lattmann · Beecher Carlson New York, NY Immediate Past President, Stephen J. Sills · Farmington, CT

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TRUSTEES

Chris Christian, RPLU · U.S. Risk Financial Services, Inc. Nashville, TN Matthew J. Deneen, RPLU · Hudson Financial Products Farmington, CT Christopher Duca · Navigators Pro · New York, NY Steven D. Dyson · E-Risk Services · Simsbury, CT Irwin F. Giles, RPLU · Administrators for the Professions of Delaware, Inc. · Lake Success, NY Karen P. Gordon · XL Insurance · Philadelphia, PA Walter E. Grote · Travelers Bond & Financial Products Hartford, CT John A. Kuhn · Axis Professional Lines · Berkeley Heights, NJ David M. Weller · AmWins Insurance Brokerage of California Los Angeles, CA David B. Williams · Chubb Insurance Company of Canada Toronto, Canada

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FOUNDER

Angelo J. Gioia · Chicago, IL

PLUS JOURNAL EDITORIAL BOARD

Chair, Eugene M. Dominique · Chubb & Son · San Francisco, CA Daniel Aronowitz · Ulico Insurance Group · Washington, DC Bruce A. Campbell · Campbell & Chadwick, P.C. · Dallas, TX Lauren Clausen · Chubb · Pittsburgh, PA David R. Dwares · CNA · Chevy Chase, MD Anthony J. Fowler · Hartford Financial Products · New York, NY Paul A. Greve, Jr., RPLU · Willis Healthcare Practice · Fort Wayne, IN David Grossbaum · Hinshaw & Culbertson, LLP · Boston, MA Editor, Kim Holland · PLUS Communications Director

PLUS HEADQUARTERS

Please see our staff listing at www.plusweb.org/staff Professional Liability Underwriting Society 5353 Wayzata Blvd., Suite 600 Minneapolis, MN 55416 952-746-2580 or 800-845-0778 · Fax: 952-746-2599 www.plusweb.org

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5353 Wayzata Blvd., Suite 600 Minneapolis, MN 55416

September 2009 PLUS Journal

l d Calendar off Events

CHAPTER EVENTS*

EASTERN CHAPTER

October 8, 2009 · Educational Seminar · New York, NY December 2009 · Holiday Party · New York, NY

NORTH CENTRAL CHAPTER

October 7, 2009 · Cyber Liability Seminar · Minneapolis, MN October 1, 2009 · Miscellaneous Professional Liability San Francisco, CA December 3, 2009 · Non-Profit D&O and EPL Seattle, WA September 22, 2009 · Wage & Happy Hour Birmingham, AL September 24, 2009 · Wage & Happy Hour Nashville, TN December 2009 · Holiday Party · Miami, FL December 2009 · Holiday Party · Atlanta, GA

SOUTHERN CALIFORNIA CHAPTER

EUROPE CHAPTER

NORTHERN CALIFORNIA CHAPTER

September 17, 2009 · Educational Event · Los Angeles, CA December 3, 2009 · Holiday Party · Los Angeles, CA October 1, 2009 · Educational Seminar · Phoenix, AZ

October 1, 2009 · Educational Seminar · London, England October 7, 2009 · Educational Seminar · Philadelphia, PA December 2009 · Networking Social October 7, 2009 · Bankruptcy Coverage · Cincinnati, OH December 2009 · Holiday Party · Chicago, IL October 1, 2009 · Educational Seminar · Boston, MA

SOUTHWEST CHAPTER TEXAS CHAPTER

MID-ATLANTIC CHAPTER

NORTHWEST CHAPTER SOUTHEAST CHAPTER

MIDWEST CHAPTER

September 23, 2009 · EPL Under the Obama Administration · Dallas, TX September, 24 2009 · EPL Under the Obama Administration · Houston, TX

NEW ENGLAND CHAPTER

*Many of these dates will be finalized and reported in future issues. You can also go to the PLUS web site to view the most up-to-date information.

INTERNATIONAL EVENTS

22ND ANNUAL INTERNATIONAL CONFERENCE

November 11-13, 2009 · Sheraton Chicago Hotel & Towers Chicago, IL

MEDICAL PROFESSIONAL LIABILITY SYMPOSIUM

March 18 & 19, 2010 · Sheraton Chicago Hotel & Towers Chicago, IL

D&O SYMPOSIUM

February 3 & 4, 2010 · Marriott Marquis, New York, NY

reu s e

The mission of the Professional Liability Underwriting Society is to enhance the professionalism of its members through education and other activities and to responsibly address issues related to professional liability. PLUS was established in 1986 as a nonprofit association with membership open to anyone interested in the promotion and development of the professional liability industry. As a nonprofit organization that provides industry information, it is the policy of PLUS to strictly adhere to all applicable laws and regulations, including antitrust laws. The PLUS Journal is available free of charge to members of the Professional Liability Underwriting Society. Statements of fact and opinion in this publication are the responsibility of the authors alone and do not imply an opinion on the part of the members, trustees, or staff of PLUS. The PLUS Journal is protected by state and federal copyright law and its contents may not be reproduced without written permission.

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