DATELINE: June 5, 2007, Chicago
We don't know exactly how much Princeton University has already spent or will ultimately spend in its ongoing battle with the heirs of Charles and Marie Robertson, but the litigation is costing everyone more than a few pennies. An April 23, 2007 decision coming out of the Supreme Court of the State of New York, County of New York, reports that Princeton has already incurred more than...
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$15 million in defense costs. See The Trustee of Princeton University v. National Union Fire Insurance Company, Index No. 650202/06. This particular case involves a suit by Princeton against American International Group (AIG) and a wholly-owned insurance policy over AIG's refusal to cover those legal fees under a directors' and officers' indemnification policy.
Judge Helen E. Freedman's opinion is difficult to follow, in large part because of the way the insurance issues intersect with the pleadings in the ongoing lawsuit against Princeton University, the Robertson Foundation, and the university-appointed trustees to the Robertson Foundation brought by members of the Robertson family and the family-appointed trustees to the Robertson Foundation. For those unfamiliar with the dispute, Charles and Marie Robertson established the Robertson Foundation in 1961 to fund and support the graduate program of the Woodrow Wilson School of Public and International Affairs. The initial $35 million endowment has grown to $600 million. The foundation has a seven member board of trustees, comprised of three members appointed by members of the Robertson family and four appointed by Princeton University.
At a June 2002 foundation meeting, the family-appointed trustees rejected proposed investment strategies and accused the university-appointed trustees of breaching their fiduciary duties. Then, on July 17, 2002, the family-appointed trustees and the Robertson's two surviving children filed suit against the Robertson Foundation and the university appointed trustees alleging that they had abused their majority interest, breached fiduciary duties, and misappropriated $100 million in foundation assets by using the foundation's assets for Princeton University's general interests rather than to advance the foundation's mission. The plaintiffs sought monetary damages, as well as equitable and injunctive relief.
That brings us to the D & O case, on which we offer the following observations, which are more in the nature of general observations for other nonprofits than on this particular insurance policy:
Notice: It is critical under any insurance policy that the insured timely notify the insurance carrier of any potential claims under the policy. The tendency of many nonprofit boards is to delay notification out of fear that notification, even if the potential claim never materializes, will adversely affect future insurance premiums. We do not know when the Robertson family representatives first started complaining about how the foundation was being operated, but it is relatively clear that Princeton University notified its insurance carrier early in the process and clearly before the lawsuit was filed. Judge Freedman's opinion notes that notice was given following the June 2002 meeting. This decision to file the claim early on should be viewed as a best practice, particularly given AIG's subsequent denial of coverage. No doubt that if Princeton University had been late in notifying AIG, AIG would have contested coverage on late notification grounds, too.
Policy Form: The D & O policy was a three-sided policy, with A-side coverage provided to the individual insureds, B-side coverage provided to Princeton University and the foundation should either be required to indemnify the individual board members, and C-side coverage provided to Princeton University and the foundation. This is the type of policy we like to see, because it is not just the individual insureds who may be sued when there are allegations that fiduciary duties have been breached.
Defense Costs: The policy issued to Princeton provided coverage for defense costs. The sizable defense costs in this suit demonstrate why a nonprofit and its directors should want defense costs covered. This particular policy required the insurance carrier to advance the costs even if it was subsequently determined that the costs were not covered—possibly if the defendants were found to have acted below a certain minimum level of required conduct.
Princeton is in a difficult situation if it loses the suit. It has exhausted its coverage just on defense costs. This serves as a lesson on the amount of insurance coverage that should be procured. That is not to suggest Princeton did anything wrong. They may have consciously chosen to self-insure amounts above $15 million. It does, however, demonstrate just how important insurance can be, given the costs of defending this sort of lawsuit.
Definition of Covered Loss: Another important lesson from this case is the importance of focusing on the definition of a covered loss. In this case, there was an endorsement to the policy that provided that covered defense costs covered legal fees incurred to dispute a claim for non-monetary damages (injunctive or equitable relief), but that the actual costs of providing any equitable relief (doing what the court eventually orders) were not covered. As Judge Freedman's opinion progresses, this endorsement proves to be very important from Princeton's viewpoint.
The specific coverage provided by this endorsement was limited to $5 million per year, meaning that if the defense costs for defending against requests for injunctive or equitable relief exceeded $5 million per year, the excess went uncovered. Claims for monetary damages and the associated defense costs were not subject to this $5 million annual cap. This is a bad provision, and both the insured and the insurance carrier should have eliminated it. When defending a lawsuit, it is often difficult to pinpoint whether defense costs relate to one claim or another. Yet, this policy set the parties up for a dispute over how defense costs were to be allocated between the overall $15 million coverage cap and the $5 million limited coverage cap. In our estimation, everyone would have been better off if what is likely an impossible determination had not been built into the policy. That might have meant Princeton had to pay a slightly higher premium, but we suspect in the long-run the additional cost would have been worth it.
Insured vs. Insured Clause: The policy contained a so-called insured vs. insured clause. Remember Mad Magazine and Spy vs. Spy? The insured vs. insured clause makes a little more sense that the relationship between the two spies did, but not much more. An insured vs. insured clause is designed to protect the insurance carrier from collusive lawsuits between two insiders. In a sense, the insurance carrier is saying, "We will protect you against claims between outsiders, but we are not in the business of financing disputes between two insureds who are unable to work out their differences in accordance with corporate procedures and who freely got into bed with each other. Moreover, an insurance carrier worries that a cash-strapped nonprofit will manufacturer a claim for breach in order to fund its treasury,
If at all possible, any nonprofit procuring D & O insurance should try to eliminate an insured vs. insured limitation from the policy, or at least try to obtain relevant exceptions to the provision. We can sympathize with the insurance carrier and for the most part agree with the carrier's concerns, but in some instances, this limitation can work an injustice. For example, suppose the state attorney general steps in, causing the nonprofit to sue several of its directors? Technically, such a suit is styled as an insured vs. insured suit, but it is really the attorney general versus the directors.
This particular policy contained an insured vs. insured clause which provided as follows:
The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against an Insured…which is brought by or on behalf of the Organization against any Individual Insured, provided, however, this exclusion shall not apply to any derivative Claim made on behalf of the Organization by a member or any other such representative party if such action is brought and maintained independently of and without the solicitation of or assistance of, or active participation of or intervention of any Individual Insured or the Organization or any Affiliate thereof.
The proviso would seem to address our concern regarding a suit brought on behalf of the foundation by an attorney general.
AIG argued that the insured vs. insured provision barred a claim under the policy because the derivative action was brought with the assistance of the family-appointed trustees. AIG also argued that to the extent the claims were brought by non-trustees, the $5 million sublimit applied because the claims are equitable in nature. The Princeton facts may be a bit unusual given the different relationships of the plaintiffs in the underlying lawsuit, but it demonstrates how what are often artificial distinctions between different types of claims arising from the same facts can create coverage problems. The lessons: Insureds should seek to eliminate distinctions between monetary and non-monetary awards, as well as distinctions between who brings the lawsuit.
The lesson for plaintiffs goes to strategy. If a plaintiff has the option to make multiple claims under differing legal theories, some of which are covered by a policy and others that are not, the plaintiff first should consider the defendant's insurance coverages in deciding whether to bring all the claims. For example, when suing a defendant who has suffificient assets in addition to the insurance coverage, the plaintiff might consider only asserting claims not covered by the policy as a means to speed settlement. That assumes all the options are equally viable.
The bulk of the court's opinion focuses on the meaning of the insured vs. insured clause. The court concludes that the proviso in the insured vs. insured clause is inapplicable because the derivative action was brought with the assistance and active participation of Individual Insureds—the family-appointed trustees. However, the court then goes on to conclude that the exclusion does not operate with respect to claims, including the associated legal fees, brought by the two surviving Robertson family members who are not trustees. That meant that the insured vs. insured exclusion only applied to two of twelve claims.
The court then focused on the issue of allocation of defense costs between covered and non-covered claims. The court concluded that because Princeton's costs far exceeded the $15 million policy limit, apportionment was unlikely to affect the insurer's ultimate financial obligation. It then goes on to permit limited apportionment, but that part of the opinion is not very clear. That is due to the Judge Freedman's writing style. She makes declarative statements, but is unclear whether these are statements of fact or rulings of law.
In any event, this is a very interesting and important court decision. It highlights a number of key issues that those buying nonprofit D & O policies should be focused on when reviewing the policy.
And thanks to Don Kramer, who publishes the excellent montly newsletter, Nonprofit Issues, for bringing the case to our attention.
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