Page 6 - 2015_0908Litigation

S6 | Tuesday, sepTember 8, 2015 | Litigation
| nylj.com

Insurance Allocation
Solving the Certainly, the insurer holds the upper

hand in making temporary allocation deci-
sions as to the amounts to advance initially,
Dilemma
yet the policy states that this decision is
good “until determined otherwise pursuant
to ... applicable law.” Yet, as will be shown,
“applicable law” is very unclear as to how
allocation decisions are reached.
a typical example may be a lawsuit in
a directors and officers case involving

breach of fiduciary duty (covered); neg- N.Y. courts offer few decisions as guidance.
ligent mismanagement (covered); fraud
(not covered); defamation (perhaps not
covered); wrongfully gaining profit for
certain directors (not covered); negligent
infliction of emotional distress (covered);
intentional infliction of emotional distress
(not covered). as is apparent, the alloca-
tion dilemma arises immediately upon a

review of the complaint by the insurer and
the insured.
the new York courts have a scant num-
ber of decisions dealing with how to solve
the problem. In a decision in supreme
Court, new York County, Justice herman
Cahn was faced with the issue of a law firm
representing both the officers and directors

of a corporation and the corporation itself.1
the directors and officers were covered by
the insurance policy but the corporation
was not. the court ruled that allocation
is permitted “if factually possible.”2 the
court held that once it is shown by the
plaintiff that expenses (i.e., lawyers’ billable
time) were incurred for the benefit of an
insured party, then the burden shifts and

the insurance company must show that a
part of the expense is for work done on
behalf of a non-covered party.
following up on this, a u.s. district Court
in the southern district of new York3 found,
some years later:
when a party incurs expenses in the Ck
to
defense of covered and non-covered Igs
claims, it may allocate the legal expens- B
es incurred if there is a factual basis
for the allocation. once such proof is
introduced, the burden of showing
that all or a specific portion of it was
incurred in defense of a non-covered
[claim] is on [the] defendant.4
arises in a directors and officers case. In entered into by, or (iii) any judgment
a dilemma that arises frequently in By Mark J. BuniM
the latter situation, the insurer will likely of joint and several liability against the

allocation cases is whether the focus is Mdeny reimbursement of defense expenses Company and any Individual Insured in
on which “claims” are covered based on any financial sector insurance poli- for legal work done on behalf of the non- connection with any Claim, there shall
the end-result of the litigation, or wheth- cies that do not contain “duty to covered persons or entities. these situ- be a fair and equitable allocation as
er the focus is on the amount of attorney defend” obligations on the part of ations result in an “allocation dilemma.”
between the Company and any such
hours spent in defending covered versus an insurer, have “allocation” clauses. In an a typical example of insurance policy Individual Insured, taking into account
non-covered claims. for example, the end allocation agreement, the insurer “makes language that triggers the “allocation the relative legal and financial expo-
result of a litigation may be that all of the a deal” with the insured at the time the dilemma” is:
sures and the relative benefits obtained
potentially covered claims are dismissed policy is purchased. this agreement pro- When the Insurer has not assumed the by any such Individual Insured and the
and only the non-covered claims are the vides that if a claim (lawsuit) arises that has defense of a Claim pursuant to this Clause Company, without any presumption that

subject of a judgment. If so, are the attorney covered and non-covered aspects within the Insurer shall advance nevertheless, the coverage afforded to the Individual
hours spent subject to a reimbursement it, the insurer will reimburse the insured at the written request of the Insured, Insured shall in any way reduce the
claim against the insurer? In a u.s. dis- for legal fees for only the covered claims, Defense Costs prior to the final disposi- allocation to the Company which shall
trict Court review of a Bankruptcy Court’s not for the non-covered ones. also, a single tion of a Claim. Such advanced payments not be insured for such allocation. In
decision, the court favored the look-back lawsuit may name individual and entity by the Insurer shall be repaid to the the event that a determination as to the
approach. In Kenai v. National Union Fire defendants who wind up using the same Insurer by the Insureds or the Company, amount of Defense Costs to be advanced
Insurance, the court held: “[I]n the absence law firm to represent them, yet they are severally according to their respective under the policy cannot be agreed to,
of a specific provision regarding the tim- not all covered by the policy. this typically
interests, in the event and to the extent then the Insurer shall advance Defense

ing of defense cost reimbursement, d&o that the Insureds or the Company shall Costs excess of any applicable Retention
policy language defining losses in terms of not be entitled under the terms and con- amount which the Insurer states to be fair
wrongful acts suggests that the reimburse- Mark J. BuniM is a member of NAM’s (National ditions of this policy to payment of such and equitable until a different amount
ment should occur only after the losses Arbitration and Mediation) Hearing Officer Panel. Loss.
shall be agreed upon or determined pur-
have been determined to be covered by He specializes in insurance-related disputes and With respect to: (i) Defense Costs jointly suant to the provisions of this policy and
the contract.”5 this approach is not in line
general commercial matters.
incurred by, (ii) any joint settlement
applicable law.