Ninth Circuit Finds No Coverage for TCPA Claim Under D&O Policy Per Privacy Exclusion

On August 23, the Ninth Circuit Court of Appeals affirmed a decision by Judge Dolly M. Gee of the United States District Court for the Central District of California holding that the Los Angeles Lakers were not entitled to insurance coverage under their D&O Policy for a class action alleging the team sent unsolicited text messages to fans in violation of the Telephone Consumer Protection Act (TCPA). Upholding the district court’s decision, the court concluded that the TCPA claims fell within the invasion of privacy exclusion in the Lakers’ D&O Policy, which excluded coverage for claims “based upon, arising from, or in consequence of libel, slander, oral or written publication of defamatory or disparaging materials, invasion of privacy…”

The underlying suit against the Lakers was brought by a fan who alleged he had received unwanted promotional text messages from a Lakers’ automated system after attending a game at the Staples Center. The class action suit alleged that the unsolicited messages violated the TCPA and cost the fan and other class members in text-message charges. The fan’s suit was dismissed after a court found that by sending an initial message to the team, the fan had consented to the promotional text messages.

The Lakers sought coverage for their defense expenses incurred in defending the fan’s suit under their D&O policy. The insurer denied coverage pursuant to the “invasion of privacy” language in the policy’s personal injury exclusion. Litigation ensued over coverage for the Lakers’ defense costs.

Agreeing with the insurer, Judge Gee granted the insurer’s motion to dismiss the Lakers’ suit, finding that the policy’s invasion of privacy exclusion precluded coverage for the suit because the allegations of TCPA violations were, at their heart, a claim for a privacy breach. In reaching this decision, Judge Gee relied on prior case law interpreting coverage provisions in commercial general liability policies to include coverage for TCPA Claims as “invasion of privacy” claims within the advertising injury coverage. The Lakers appealed.

In a split-panel 2 to 1 decision, the Ninth Circuit affirmed the district court’s judgment, reasoning that “the purpose of the TCPA is to protect privacy rights and privacy rights alone” such that the invasion of privacy exclusion properly precluded coverage. Finding that “a plaintiff asserts an invasion of privacy claim when he or she asserts a TCPA claim”, the Ninth Circuit court determined that the insurer had correctly identified the TCPA claims as claims for invasion of privacy, which were clearly excluded under the Policy.

The Ninth Circuit’s holding sets an important limitation on coverage for TCPA claims, which have been increasing in recent years, and clarifies the scope of the “invasion of privacy” language in a private company D&O policy’s personal injury exclusion. The case is Los Angeles Lakers Inc. v. Federal Insurance Co., United States Court of Appeals for the Ninth Circuit Case No. 15-55777. However, given the lack of consensus among the judges on the panel, the case could be a candidate for en banc review by the entire Ninth Circuit.

The Latest Alleged Wells Fargo Scandal – Imposing Unnecessary Auto Insurance on 800,000 Unsuspecting Customers

On July 30, 2017, Wells Fargo & Co. customers filed a putative class action lawsuit alleging the bank forced them to pay for unnecessary auto insurance, which resulted in some members of the purported class having their vehicles repossessed. The lawsuit, Hancock v. Wells Fargo & Co., et al., 17-cv-04324, U.S. District Court, Northern District of California (San Francisco), alleges that Wells Fargo partnered with an insurance company in a scheme that caused over 800,000 auto loan customers to pay for unnecessary insurance policies. The complaint further alleges that the scheme forced 250,000 customers into delinquency and led to nearly 25,000 unlawful vehicle repossessions. Under the alleged scheme, Wells Fargo and the insurer either failed to check whether the customers already had insurance, or chose to ignore the information, and automatically imposed auto policies on them. Wells Fargo then automatically deducted the policies’ premium costs from their customers’ bank accounts. Even when customers protested and alerted Wells Fargo of the unnecessary coverage, the bank allegedly refused to take any corrective actions. As a result of the foregoing, the suit seeks compensatory damages, restitution, disgorgement, and treble damages, among other forms of relief.

According to Bloomberg, Wells Fargo admits that it may have pushed car buyers into unwanted insurance, and that its own internal review found that over 500,000 customers may have been paying for such coverage, even though they already had their own policies in place. Bloomberg also reports that Wells Fargo said it may pay as much as $80 million to affected customers, with extra money being paid to the 20,000 individuals who lost their cars to repossessions “as an expression of our regret”. According to the Hancock complaint, the lawsuit is aimed at testing the truth of Wells Fargo’s statements about being sorry for the harm it caused and the depth of its commitment to its customers.

Recently, Wells Fargo has been no stranger to scandals. Hancock contends that the bank’s customers are still reeling from its earlier scandal, in which it was uncovered that the bank opened millions of credit card and bank accounts that customers never requested and resulted in a $185 million settlement last year with regulators.

Laura J. Keller and Margaret Cronin Fisk, “Wells Fargo Customers Sue Claiming Insurance Scheme Was Scam”, (July 31, 2017), available at:

As Trump Declares “We Are Out” of the Paris Accord, Investors Demand More Climate Change Risk Disclosure from Within

Investors from around the world have spoken. For the first time in history, they have publicly demanded more transparent and complete corporate financial risk disclosures related to climate change. While climate change risk disclosures are nothing new, the current position of many investors on the issue surely is. Some of the world’s largest asset management firms and top investors are now publicly supporting improved disclosures.

These recent demands from investors beg two questions: why should we care about corporate climate change disclosures, and why the sudden shift by investors on the issue? To answer the first question, corporate climate change disclosures supply critical information to investors. Particularly, they provide statistics and other information that allow investors to analyze the risks and opportunities facing a company because of climate change. This in turn allows investors to make more informed decisions about how and where they should invest their money. Nevertheless, many corporations have reportedly failed to properly disclose such information to investors for years.

Recognizing this, organizations like CDP (formerly the Carbon Disclosure Project) have worked with investors and corporations for over 15 years to ensure that climate change financial risks are accurately disclosed. In 2010, the Securities and Exchange Commission also addressed the issue by providing companies with guidance on corporate climate change disclosure rules. Most recently, the Financial Stability Board commissioned the Task Force on Climate-related Disclosures. The purpose of the Task Force is to develop voluntary, consistent climate-related financial disclosures so that corporations can supply useful statistics to lenders, investors, and other stakeholders.

So, what caused investors’ shift on the disclosure issue? It certainly comes at an unusual time, following President Trump’s decision to withdraw the United States from the Paris Accord and other regulatory decisions that seemingly devalued the impact of climate change. As reported by commentators, the shift was likely the result of intense and highly publicized governmental investigations into certain corporations’ business practices. Those investigations reportedly revealed deficient and misleading corporate disclosures about the impact of climate change on the companies’ businesses.

Commentators believe investors recognized the risk of those misleading disclosures and the governmental investigations. Indeed, the consequences of failing to properly disclosure such information could be severe. Corporations and their Directors and Officers could face liability for deceptive disclosures. This would likely lead to bad publicity, lower stock prices, and lower investment returns for stakeholders in the company, as well as potential securities class actions and derivative actions.  In any event, for now we wait to see if corporations comply with investors’ demands and provide improved climate change risk disclosures in the future.

U.K’s Financial Conduct Authority to Examine Investment Platform Service Providers

On July 17, 2017, the Financial Conduct Authority (FCA) announced that it will explore whether investing platforms help investors make good investment decisions, and whether their investment products offer investors value for their money. The FCA is a financial regulatory body in the United Kingdom that regulates financial firms providing services to consumers. The FCA defines a platform service as a service which offers access to third-party investment products.

The new investigation was announced last month alongside the FCA’s review of the fund management industry, which called for firms to start publishing a “single, all-in-fee,” including transaction costs so investors can see exactly what they are paying.

The FCA’s probe will focus on five broad areas: (1) Barriers to entry and expansion: Do large platforms benefit from economies of scale that smaller firms and new entrants struggle to match?; (2) Commercial relationships: Are platforms willing to negotiate a competitive price on investment charges, do commercial relationships drive investment choices, and what are the implications for investors?; (3) Business models and platform profitability: Do the drivers of profitability affect firm incentives and the factors over which they compete, and if so how does it affect investors?; (4) The impact of financial adviser platforms: Do these compete in the interests of the end investor, and are any benefits passed through to investors?; and (5) Customer preferences and behavior: Do platforms enable consumers and advisers to assess and choose services and products that offer value for money, and do new challengers struggle to compete as customers face barriers to switching?

The Investment Platforms Market Study Terms of Reference is available at  The FCA plans to publish an interim report on its findings by summer 2018.

CFPB Issues New Arbitration Rule – Are the Flood Gates Opening for Consumer Class Actions against Financial Institutions?

On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued a rule (full text here), which prohibits many financial institutions from including mandatory arbitration provisions that limit their customers’ ability to join class action litigation. The rule, which may become effective as early as 2018 and only applies to new accounts opened after the effective date, appears to apply to a broad range of financial institutions, including banks, credit card and consumer financing companies, debt management and collections operations, auto leasing companies, and other entities that provide fund transfers and money exchanges (i.e., check cashing services). However, there may be opposition in Congress, as well as by the current administration, to the rule’s ultimate implementation.

The rule further requires impacted financial institutions using arbitration clauses in consumer disputes to submit records relating to arbitration and court proceedings to the CFPB. The CFPB intends to review the collected information to monitor the proceedings to determine whether additional consumer protections are warranted, or if further CFPB action is required.

The enactment of the rule stemmed from the Dodd-Frank Act and instructions from Congress in 2010, which led the CFPB to conduct a study of pre-dispute arbitration agreements between consumers and financial institutions. The study found that in addition to many consumers opting to forgo a formal dispute process with financial service providers, many contracts for consumer financial products and services included mandatory arbitration clauses, which blocked the customers’ ability to join related class action proceedings. The CFPB concluded that class actions provide a more effective means for consumers to challenge potentially problematic and abusive practices by financial service providers than arbitration clauses. Additionally, the agency determined that the arbitration clauses effectively blocked similarly situated consumers from collectively pursuing common disputes in court. The CFPB also found that the use of the arbitration clauses insulated financial institutions from significant consumer-related awards and judgments, which failed to discourage harmful practices from continuing.

If the rule becomes effective, it is likely to impact a wide-array of both small and large financial institutions. By forcibly removing the ability of the financial institutions to arbitrate customer claims, it is foreseeable that the frequency and severity of consumer-oriented class actions faced by these financial institutions will sharply increase. Such an increase in consumer-oriented litigation against effected financial institutions may have a significant impact on those entities’ respective FI, E&O and D&O insurers, who may see an influx of larger claims stemming from class action litigation, instead of smaller and less costly individual arbitrations.

No Coverage for Multi-Million Dollar False Claims Act Settlement Due to Insured’s Failure to Provide Sufficient Details in Notice to Insurers

On June 23, 2017, Judge Lipman ruled in First Horizon National Corp., et al. v. Houston Casualty Co., United States District Court for the Western District of Tennessee Case No. 2:15-cv-2235 that First Tennessee Bank’s (Bank) primary insurer, Houston Casualty Company, and seven excess insurers did not have to pay their combined $75 million limits for the Bank’s $212.5 million settlement of claims alleging the Bank violated the False Claims Act. Specifically, the Western District of Tennessee Court (Court) held that the Bank had not provided sufficient notice to the insurers of the circumstances leading up to the deal. In affirming the primary and excess insurers’ denial of coverage for the Bank’s settlement, the Court reasoned that although the claim first arose during the relevant policy period, the Bank failed to provide sufficient details and adequate notice of the claim as required under the primary policy’s notice of circumstances (NOC) provision.

The Bank’s coverage was in effect from August 2013 through July 2014. Although the underlying Department of Justice (DOJ) investigation began in 2012, the DOJ did not share with the Bank its view that the Bank was in violation of the False Claims Act until a May 2013 meeting. Then, in April 2014, the DOJ offered to settle its claims against the Bank for a $610 million payment. The following month, in May 2014, the Bank sent a NOC to its insurers, stating:

“Since second quarter 2012 FHN has been cooperating with the U.S. Department of Justice (DOJ) and the Office of the Inspector General for the Department of Housing and Urban Development (HUD) in a civil investigation regarding compliance with requirements relating to certain Federal Housing Administration (FHA)-insured loans. During second quarter 2013, DOJ and HUD provided FHN with preliminary findings of the investigation, which focused on a small sample of loans and remained incomplete. FHN prepared its own analysis of the sample and has provided certain information to DOJ and HUD. Discussions between the parties are continuing as to various matters, including certain factual information. The investigation could lead to a demand or claim under the federal False Claims Act and the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allow treble and other special damages substantially in excess of actual losses. Currently FHN is not able to predict the eventual outcome of this matter. FHN has established no liability for this matter and is not able to estimate a range of reasonably possible loss due to significant uncertainties regarding: the potential remedies, including any amount of enhanced damages that might be available or awarded…”

Significantly absent from the Bank’s notice to the insurers was any reference to the DOJ’s $610 million settlement demand.  The following year, in June 2015, the Bank agreed to settle the DOJ’s claims for $212.5 million. The insurers denied coverage for the Bank’s settlement on the grounds that the Bank had not provided timely or adequate notice as required under the primary policy. The Bank then sued its insurers in an effort to obtain the collective $75 million limits from the policies.

Agreeing with the insurers, the Court concluded that the April 2014 settlement offer was a Claim for which the Bank failed to give appropriate notice under the primary policy. The Court reasoned that by not mentioning the DOJ’s $610 million settlement demand, the Bank’s notice did not include sufficient information to alert the insurers of the significance of the claim and failed to comply with the primary policy’s NOC provision requiring “full particulars as to dates, persons and entities involved, potential claimants, and the consequences which have resulted or may result therefrom.” In reaching the holding, Judge Lipman stated “[t]he general, boiler-plate type language contained in the NOC was not sufficient notice of this Claim…To permit Plaintiffs to rely on the NOC submitted in May 2014 as notice of the April 2014 Claim defeats the purpose behind a claims-made policy, wherein the purpose of the notice requirement is to inform the insurer of its exposure to coverage.” The Court further opined that the Bank’s statements in the NOC were “not reflective of the state of affairs at the time” and dismissed all of the Bank’s bad faith claims against the insurers, finding that there was a reasonable dispute among the parties about the timing and coverage for the underlying claim.

This case serves as an important reminder that insureds must provide specific details about claims and potential claims as soon as they become aware of them and not to omit vital information relative to exposure. It also highlights some of the coverage issues that can arise from False Claims Act Litigation. Sedgwick attorneys Kimberly Forrester (SF) and Matthew Ferguson (NY) previously addressed some of these coverage issues, including claims made and reported defenses, that can arise with False Claims Act litigation in their article titled “False Claims Act Litigation and Implications for D&O and Professional Liability Insurers”, which can be found here. As the exposure and frequency of these claims continue to rise for these suits, there is likely to be further court analysis of coverage implications under various provisions of corporate policies.

SEC Disgorgement Constitutes a Penalty – How Far Will the Argument Go?

On June 5, 2017, Justice Sotomayor delivered the unanimous opinion in Kokesh v. SEC, 2017 U.S. LEXIS 3557 (June 5, 2017), holding that disgorgement collected by the Securities and Exchange Commission (SEC) constitutes a “penalty” under 28 U.S.C. §2462,[1] and thus subject to a five-year statute of limitations. In a relatively short, but thorough opinion, the Court overturned a Tenth Circuit decision finding that disgorgement was not properly characterized as a penalty within the federal statute and therefore not subject to the limitation period.

In the underlying case, the SEC sought civil monetary penalties, disgorgement, and an injunction barring Charles Kokesh, the owner of two investment-adviser firms, from violating securities laws in the future. After a 5-day trial, a jury found that Kokesh’s actions violated various securities laws. As to civil penalties, the district court determined that the 5-year limitations period precluded any penalties for misappropriation of funds prior to October 27, 2004 (i.e., prior to the date the Commission filed the complaint), but ordered a civil penalty of $2.3 million for the amounts Kokesh received during the limitations period. Regarding the Commission’s request for a $34.9 million disgorgement judgement ($29.9 million of which resulted from violations outside the limitations period) the court agreed with the Commission that because disgorgement was not a “penalty ” within the meaning of §2462, no limitation period applied. The court thereafter entered a disgorgement judgment in the amount of $34.9 million. On appeal, the Tenth Circuit affirmed, agreeing with the district court that disgorgement was not a penalty or a forfeiture, and therefore, the statute of limitations did not apply to the SEC’s disgorgement claims.

Thereafter, the Supreme Court granted certiorari to resolve disagreement among the Circuits regarding whether disgorgement claims in SEC proceedings were subject to the 5-year limitations period.  Applying legal principles governing the interpretation and meaning of a “penalty,” the court articulated three reasons why it concluded that SEC disgorgement constituted a penalty within the meaning of §2462. First, SEC disgorgement is imposed by the courts as a consequence for violating “public laws.” Second, SEC disgorgement is imposed for punitive purposes. Third, in many cases SEC disgorgement is not compensatory. Thus, the Court reasoned that SEC disgorgement “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”

Since the Kokesh decision arose out of an SEC enforcement action, its impact will likely be seen in how the SEC chooses its targets for future enforcement actions. It remains to be seen, however, whether similar arguments that disgorgement is a penalty will be raised in other contexts. For example, the issue is often raised in insurance coverage disputes between insurers and insureds, as claims seeking disgorgement are generally not covered. Whether courts will be receptive to similar arguments in other contexts is an area insurers and their counsel should continue to monitor.

[1] 28 U.S.C. §2462, applies to “any action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary of otherwise.”

What is the Impact of the Financial Choice Act on Small Business? It depends on who you ask.

The House of Representatives passed legislation this month aimed at erasing several key provisions of the 2010 Dodd-Frank Act. The Financial Choice Act (the Act), if enacted, would bring vast changes to the financial regulatory system. Proponents of the Act claim it will benefit small businesses, resulting in job growth. On its website, the Financial Services Committee cites President Obama’s Small Business Administration Director as stating that Dodd-Frank’s regulations hurt small business lending because “[s]mall banks have been laden with excessive costs and confusion from overlapping regulations…”[1]

The Act seeks to increase lending to small businesses by exempting smaller financial institutions from a number of regulatory requirements. Under one component of the Act, banks with a leverage ratio of 10% or more would be exempt from a number of regulatory requirements. However, critics of the Act are concerned that a 10% leverage ratio may be insufficient to avert another financial crisis.

Critics further point out that much of the regulation targeted by the Act is inapplicable to community banks. Of the 5,000 small banks classified as “community banks” by the FDIC, only six are subject to the Dodd-Frank stress tests that apply to banks with over $10 billion in consolidated assets. As such, the Act may not do enough to alleviate the pressures from regulatory requirements felt by small banks.

Further, Dodd-Frank may have little or nothing to do with the trend of small banks closing or being acquired by larger banks.[2] Instead, this is a trend that has been ongoing for decades and is likely the result of broad macroeconomic trends rather than government regulation.

Nonetheless, small banks appear to be strong proponents of the Financial Choice Act. Many have vehemently complained that Dodd-Frank has “strangled their business with needless paperwork and data collection.”[3] In a New York Times article discussing the impact of the Act, John M. Barrett, Chief Executive Officer of Citrus Bank in Tampa, is quoted as saying that the Dodd-Frank “[r]ules were meant to placate some bureaucrat in an ivory tower in Washington, D.C.” The general consensus among small banks, then, is that the Financial Choice Act would provide some relief from the current regulations.

If smaller banks believe that the Financial Choice Act would be beneficial for their business, then perhaps this is the strongest indicator that enactment of the Act would provide benefits to all small business.

[1] A small or community bank is generally defined as one with less than $1 billion in total assets.
[2] Akshat Tewary, The Choice Act is Not a Community Banking Bill, American Banker, June 15, 2017.
[3] Alan Rappeport, Bill to Erase Some Dodd-Frank Banking Rules Passes in House, The New York Times, June 8, 2017.

Literal Interpretation – Not Always Black and White?

In Atlasnavios-v-Navigators Insurance, the Court of Appeal (the highest court within the Senior Courts of England and Wales) found that Insurers were entitled to rely on a literal interpretation of a standard war risks exclusion to deny coverage for the detainment of a vessel, despite the fact that the detainment was caused by a “malicious act,” which was itself a covered peril.

In August 2007 a routine underwater inspection by divers discovered 132 kg of cocaine strapped to the hull of the vessel “B Atlantic” in Venezuela. The vessel was detained by the Venezuelan authorities, and ultimately abandoned to the Court.

The ship owners presented a claim to their Insurers for the total constructive loss of the vessel on the basis that the detainment constituted a malicious act. Insurers declined cover, relying on the standard war risk exclusion in the ship owner’s policy to exclude losses from “arrest restraint detainment confiscation…by reason of infringement of any customs or trading regulations.”

The Court at first instance found in favour of the ship owners. Insurers appealed.

The Court of Appeal overturned the lower Court’s decision, holding that the loss suffered by the ship owners was caused by a combination of two separate proximate causes, one that was covered (the concealment of drugs on the vessel by a third party) and one that was excluded (the detainment of the vessel by reason of infringement of any customs or trading regulations).

It was common ground that the act of concealing the drugs constituted a malicious act. However, this act alone would not have caused the ship owners to suffer a loss had the ship not then been detained. Although the concealment was a covered peril, the subsequent detention was not. Therefore Insurers were not liable to pay for the loss of the vessel.

The Court of Appeal commented that the war risk exclusion should not be read as being subject to any “implied limitation” as had been imposed by the lower Court; to do that would be writing words into the policy that were not there. Exclusions must, the Court of Appeal held, be given a ‘business-like’ interpretation, and Insurers’ literal interpretation of the exclusion was not sufficiently unbusiness-like for the Court to resile from it.

UK Conservative Party Pledges to Abolish Serious Fraud Office if Re-elected on 8 June 2017

In my C-Suite Risk Report posting in March, I discussed the UK’s Serious Fraud Office’s (SFO) investigation into Rolls-Royce (RR) and the UK Court’s approval of a Deferred Prosecution Agreement (DPA). As a result of that DPA, RR avoided prosecution, but paid £671m (approximately US $800m) to UK, US and Brazilian authorities in order to settle bribery and corruption allegations. The RR DPA was followed by another DPA in April involving supermarket/grocery giant Tesco who paid £129m (approximately US $165m) in what was the fourth DPA to be concluded since 2014. Because of reporting restrictions, the details of the Tesco DPA are not yet known. However, the investigation was connected to a well-publicised accounting scandal in 2014.

My March posting about the RR DPA concluded with a warning to the D&O insurance community that the number of DPAs was likely to carry on increasing at a quickening pace – the Tesco DPA is further evidence supporting this prediction. Further, I predicted that the implications of this trend for insurers was likely to include more investigations and related civil actions against the individuals involved.

However, the UK Conservative Party’s policy manifesto (a listing of its policies to be implemented if elected), published in May 2017, means this anticipated trend may not, in fact, emerge or at least not to the extent previously anticipated. If elected, the Conservative party has promised to bring the SFO under the remit of a newly established National Crime Agency (NCA). Commentators in the UK are noting that, if this occurs, it is reasonable to expect that the NCA will not demonstrate the same appetite, as the SFO has, for undertaking complex, multi-jurisdictional and often extremely expensive investigations like the ones involving RR and Tesco. The new agency would be operating with a much wider remit and may, instead, choose to focus its resources on other types of financial criminal activity where prosecutions are more easily achieved.

This issue is of course unlikely to be a relevant factor for the vast majority of the British electorate when it makes its final decision on 8 June 2017. For insurance market participants, however, the election result may potentially halt the anticipated trend for more DPAs in the future. Moreover, it is possible the ancillary and subsequent regulatory investigations and civil actions into individuals may not be the emerging trend that many in the industry had previously predicted.