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5 Changes Needed in Securities Litigation

I am committed to helping shape a system for securities litigation defense that helps directors and officers get through securities litigation safely and efficiently, without losing their serenity or dignity, or facing any real risk of paying any personal funds.

But we are actually moving in the opposite direction of this goal, and, unless some changes are made, securities litigation will pose greater and greater risk to individual directors and officers. It is time for the “repeat players” in securities litigation defense – D&O insurers and brokers, defense lawyers and economists – to make some fundamental changes to how we do things.

Although most cases still seem to turn out fine for the individual defendants, resolved by a dismissal or a settlement that is fully funded by D&O insurance, the bigger picture is not pretty. The law firms that have defended most cases since securities class actions gained footing through Basic v. Levinson – primarily “biglaw” firms based in the country’s several largest cities – are no longer suitable for many, or even most, securities class actions. Fueled by high billing rates and profit-focused staffing, those firms’ skyrocketing defense costs threaten to exhaust most or all of the D&O insurance towers in cases that are not ended on a motion to dismiss. Rarely can such firms defend cases vigorously through summary judgment and toward trial anymore.

Worse, these high prices too often do not yield strategic benefits. A strong motion to dismiss focuses on the truth of what the defendants said, with support from the context of the statements, as directed by the U.S. Supreme Court in Tellabs and Omnicare. Yet, far too often, the motion-to-dismiss briefs that come out of these large firms are little more than cookie-cutter arguments based on the structure of the Reform Act. And if a motion is lost, settlements are higher than necessary because the defendants often have no option but to settle to avoid an avalanche of defense costs that would exhaust their D&O insurance limits. On the other hand, if settlement occurs later, it can be difficult to keep settlement within D&O insurance limits – and defense counsel’s analysis of a “reasonable” settlement can influenced by a desire to justify the amount it has billed.

At the same time that defense costs are continuing to soar, securities class actions are becoming smaller and smaller, with two-thirds of cases brought against companies with market caps less than $2 billion, and almost half less than $750 million. Although catawampus securities litigation economics is a systemic problem, affecting cases of all sizes, the problem is especially acute in the smaller half of cases. Some of those cases simply cannot be defended both well and economically by typical defense firms. Either defense costs become ridiculously large for the size of the case and the amount of the D&O insurance limits, or firms try to reduce costs by cutting corners on staffing and projects – or both. We see large law firms routinely chase smaller and smaller cases. From a market perspective, it makes no sense at all.

So how do we achieve a better securities litigation system?  Five changes would have a profound impact:

  1. Require an interview process for the selection of defense counsel, to allow the defendants to understand their options; to evaluate conflicts of interest and the advantages and disadvantages of using their corporate firm to defend the litigation; and to achieve cost concessions that only a competitive interview process can yield.
  2. Move damages expert reports and discovery ahead of fact discovery, to allow the defendants and their D&O insurers to understand the real economics of cases that survive a motion to dismiss, and to make more informed litigation and settlement decisions.
  3. Increase the involvement of D&O insurers in defense-counsel selection and in other strategic defense decisions, to put those that have the greatest overall experience and economic stake in securities class action defense in a position to provide meaningful input.
  4. Increase the involvement of boards of directors in decisions concerning D&O insurance and the defense of securities litigation, including counsel selection, to ensure their personal protection and good oversight of the defense of the company and themselves.
  5. Make the Supreme Court’s Omnicare decision a primary tool in the defense of securities class actions. Obviously, Omnicare should be used to defend against challenges to all forms of opinions, including statements regarded as “puffery” and forward-looking statements protected by the Reform Act’s Safe Harbor. But defense counsel should also take advantage of the Supreme Court’s direction in Omnicare that courts evaluate challenged statements in their full factual context. Omnicare supplements the court’s previous direction in Tellabs that courts evaluate scienter by considering not just the complaint’s allegations, but also documents incorporated by reference and documents subject to judicial notice.  Together, Omnicare and Tellabs allow defense counsel to defend their clients’ honesty with a robust factual record at the motion to dismiss stage.

These five changes are among the top wishes I have to improve securities litigation defense, and to preserve the protections of directors and officers who face securities litigation.

Legislative Preview for Work Comp in 2016

Common wisdom suggests that major workers’ compensation legislative activity won’t take place during an election year. For 2016, that would seem to hold true.

That is not to say, however, that various interested parties will be sitting idly by, waiting for the clock to turn to 2017.

CENTERS FOR DISEASE CONTROL ADD TO THE LIST OF CHRONIC PAIN GUIDELINES

On Jan. 13, the Centers for Disease Control and Prevention (CDC) closed the public comment period for its proposed Guideline for Prescribing Opioids for Chronic Pain. According to the CDC, the guideline is being proposed to offer “… clarity on recommendations based on the most recent scientific evidence, informed by expert opinion, with stakeholder and constituent input considered.”

The guideline goes to great lengths to address two important issues. The first is that current guidelines in many states – both public and private – are based on dated information. The second, which is critical, adds to the growing number of voices to say that best practices for providers include accessing physician drug monitoring programs (PDMP) to reduce the risk of doctor shopping and toxic – and sometimes fatal – mixtures of prescription drugs when the patient provides incomplete histories or none at all of their drug use (both prescription and illicit).

This need to access a PDMP before, and during, treatment with opioids is echoed by the Medical Board of California (MBC) and the DWC. Their comments also underscore a considerable problem facing California policymakers when trying to create incentives for providers to use the Controlled Substance Utilization Review and Evaluation System (CURES) without directly mandating access.

This dilemma is best summed up by the analysis of Senate Bill 482 by Sen. Ricardo Lara (D – Bell Gardens) that is at the Assembly Desk pending referral to committee. The bill, which would mandate participation in the CURES system as well as other measures to curb the abuse of opioids, has garnered opposition from medical associations and one medical malpractice insurer. The opposition, according to analyses by legislative staff, is based on two issues – the first being whether the CURES system is capable of handling the volume of inquiries a mandate would engender, and the second being concern that requiring CURES access will become a standard of care that could subject providers to malpractice liability.

As to the former, this issue arose during the campaign waged against the 2014 ballot measure Proposition 46. According to the non-partisan Legislative Analyst’s Office (LAO), “Currently, CURES does not have sufficient capacity to handle the higher level of use that is expected to occur when providers are required to register beginning in 2016.” This raises an important question – does the CURES system now have the capability to meet the demand that a mandate would create? If it doesn’t, then the legislature needs to understand why.

As to the second issue, it is difficult to comprehend the level of distrust that is subsumed in the position that opposing a mandatory review of possible prescription drug abuse by a patient would establish more potential malpractice liability than knowing that the CURES database exists and not checking it. In time, perhaps, it will be the appellate courts that resolve that issue.

There is no shortage of guidelines that address the appropriate use and cessation of use of opioids for non-cancer chronic pain. The DWC is finalizing its latest iteration on this issue as part of the MTUS. It will differ from both the CDC and the MBC guidelines to some degree, but the overall treatment of this issue is very similar. In addition, the division will be implementing a prescription drug formulary as required by Assembly Bill 1124 by former Assembly member Henry Perea (D – Fresno). That, too, will likely provide opportunities to address the proper use of opioids in the workers’ compensation context, preferably after the chronic pain guidelines are completed.

As noted by the CDC and the MBC, and implicit in the DWC’s guidelines, this is not just a question of UR. If all the work by the division is simply viewed as a more effective way of saying “no” regardless of the circumstances, then the public health issues associated with the abuses of opioids will continue.

Workers’ Compensation Insights is a bi-monthly publication of Prop 23 Advisors. Subscribers will receive in-depth analyses of pending California legislation and regulations, review of important WCAB and appellate court decisions and commentary on trends within the system in California and nationally. To read the rest of this newsletter, click here.

20 Work Comp Issues to Watch in 2016

In an “Out Front Ideas with Kimberly and Mark” webinar broadcast on Jan. 12, 2016, we discussed our thoughts around the issues that the workers’ compensation industry should have on its radar for 2016. What follows is a summary of 20 issues that we expect to affect our industry this year.

  1. Election Cycle

Everyone knows that this is a presidential election year. But election time also means governor and insurance commissioner seats are available. State insurance commissioners are elected in 11 states and appointed in the other 39. In the coming election, there are 12 gubernatorial seats and five insurance commissioner positions to be decided. The workers’ compensation industry needs to be paying attention to these elections because the insurance commissioners can have significant influence over procedures, policies and enforcement in their states.

  1. Viability of Workers’ Compensation

It is important for all of us to consider the continuing viability of workers’ compensation. Is the grand bargain still doing what it was established to do? There is a growing debate around the gaps and shortcomings of workers’ compensation. Our industry needs to engage in a critical analysis of these issues.

  1. Federalization

In October 2015, 10 high-ranking Democrats on key Senate and House committees sent a letter to the Department of Labor asking it to conduct a critical review of state workers’ compensation systems. Some are concerned that this is a sign we could see federal government involvement in state workers’ compensation systems.

In some ways, the federal government is already involved in workers’ compensation. For instance, OSHA has a tremendous impact on workers’ compensation. Medicare Secondary Payer Compliance is another example of federal law affecting the system.

Recent criticisms of workers’ compensation have focused on the vast benefit differences between states. There is also growing concern that workers who are permanently disabled are pushed off workers’ compensation and onto Social Security disability. With Social Security raising solvency concern, lawmakers will be receptive to discussions on how to keep workers’ compensation from shifting long-term claims to the federal government.

This is a substantial issue to watch in the coming years, and there is a significant chance that the federal government will suggest minimum benefit recommendations to the states at some point. This could especially affect states that have hard caps on the total amount of indemnity benefits that an injured worker can receive.

  1. Affordable Care Act

The Affordable Care Act (ACA) will continue to be a subject of discussion in 2016.

The implementation date of the high-cost, employer-sponsored health plans tax, dubbed the “Cadillac tax,” was recently delayed from 2018 to 2020. It imposes an excise tax of 40% on health plans whose value is more than $10,200 for individual coverage and $27,500 for a family. Regardless of the delay, employer-sponsored benefit plans have evolved over the past five years in preparation to avoid the additional tax. The formerly rich benefit plans were dropped in an effort to provide benefit plans within ACA’s requirements and often replaced by higher-deducible plans with reduced benefits.

NCCI and WCRI have both conducted studies on how the ACA has affected workers’ compensation. Results have not conclusively tied treatment delays or actual cost shifting to workers’ compensation. We believe continuing studies by these organizations and others are important to evaluate the impact of ACA on workers’ compensation.

Other issues that should be monitored include consolidation of health systems, providers and insurers. In 2015, there was more than $700 billion of consolidation in the healthcare marketplace. This is driven, in part, by the ACA, because scale and size assist providers with efficiency, purchasing power and the need to provide a continuum of care.

Another issue where the ACA could affect workers’ compensation is changing reimbursement models. Medicare is looking to shift into a value-based reimbursement model, and many state fee schedules are based on Medicare rates.

Although not specifically related to ACA, a healthcare topic to keep an eye on is drug pricing. Drug pricing will continue to be a topic within the media, PBMs, employer benefit managers, health plan experts and the political arena. Prescription drug pricing increased more than 10% in 2015, and this trend is expected to continue. This has an impact on the cost of workers’ compensation claims.

  1. Holes in Workers’ Compensation

What many people do not realize is that workers’ compensation protections are not available to all workers within the U.S. In 14 states, smaller employers with five employees or fewer do not have to secure coverage. In 17 states, there is no legal requirement for coverage of agricultural workers. Half of the states do not require coverage for domestic workers, and five states specifically exclude coverage for these employees. There are also states that create exceptions for certain types of workers, such as state employees in Alabama. Finally, we have seen from court cases around the country that occupational diseases that take several years to develop are often barred by the statute of limitations, leaving workers with no recourse for benefits.

These holes are yet one more thing that critics point to when talking about the inadequacy of workers’ compensation. The occupational disease issue is particularly concerning because it is very easy to question the fairness of barring a claim under the statute of limitations and, at the same time, denying the injured worker the ability to pursue a claim in civil court under the exclusive remedy protections of workers’ compensation. This is another area where we will not be surprised to see the federal government give recommendations.

  1. Blurred Lines Between Workers’ Compensation and Group Health

The employee health model is evolving. Employers are finding the need to provide a consistent healthcare experience for their workforce and plan members. Employers would like to find a model that provides both quality care and consistency for their employees, regardless of whether the need for treatment arises from a work injury or at home. Because a healthy workforce is a productive workforce, employers also feel that there is a need to tie health and productivity together.

We will continue to see health systems build accountable care organizations (ACO) and enter the health plan, insurance and risk-bearing arena with the goal of directly selling to and partnering with employers. ACOs are an attractive model for employers supporting a healthier workforce by extending the culture of health philosophy from work to the home for their employees and their families.

Mental health is a top driver for absence across employers and not simply a health cost concern. Mental healthcare should be as important as physical healthcare and is currently a focus of population health and employer programs. Employers are looking for healthcare models, which consider the person as a whole and offer consistent, engaging behavioral health and wellbeing programs for the workforce.

Workers’ compensation key stakeholders should be a part of the evolving health model discussions and early stage planning so as not to be left in the dark as health models change.

  1. Options to Workers’ Compensation

We all know that Texas has a unique system that allows employers to completely opt out of workers’ compensation benefits. The term “opt-out” refers only to the Texas system. Employers in Oklahoma have an option to workers’ compensation that allows them to develop a private benefit plan that replaces state-mandated workers’ compensation. It is this concept of an option that is looking to spread to other states. Bills on this issue will be reintroduced in Tennessee and South Carolina this year, and other states have begun preliminary discussions.

Some employers feel that they can provide better benefits to their injured workers at a lower cost with these option programs. Others are concerned that these programs lack the controls and oversight of state workers’ compensation. One thing is certain: This issue is not going away any time soon. Perhaps these discussions around options to workers’ compensation can lead to discussions about workers’ compensation reform, including employer medical control, increasing thresholds of compensability and reducing the bureaucracy of the workers’ comp system.

  1. Evolving Claims Model

There are significant discussions around the evolving claims model. The industry realizes that we need to focus more on the injured worker as a consumer. The model needs to focus more on advocacy, but what does this really mean? Should there be a person who assists the injured worker in understanding the claims process, or is there a need to change the culture of our industry to be less adversarial?

Other parts of the evolving model involve who actually touches the claim. Are there elements that could be automated? Should there be more specialization with different individuals performing different tasks instead of the current model where the claims adjuster is a generalist performing multiple tasks across multiple jurisdictions?

The claim handling model also needs to adapt to new technology and the way in which different generations want communication. Some injured workers prefer text instead of e-mail or phone calls. Some like to access claims information in an app on their mobile device or simply, 24/7, as they want it that moment. The model must evolve to take full advantage of new technology and communication methods.

The March 15 “Out Front Ideas with Kimberly and Mark” webinar will focus on the evolving claims model and include guests who are passionate about an advocacy-based design.

  1. Florida Supreme Court

Over the last two years, four cases challenging the constitutionality of various aspects of the Florida workers’ compensation statutes have made it to the state’s Supreme Court. The first of those cases, Padgett, ended in late December when the Supreme Court declined to review it. That case had been thrown out on procedural grounds during the appeal process, so the Court of Appeals and Supreme Court never addressed the underlying constitutional challenge.

There are three cases still to be decided:

  • Westphal, which deals with caps on temporary disability benefits.
  • Castellanos, which addresses limitations on attorney fees.
  • Stahl, which focuses on post MMI medical co-payments and the elimination of permanent partial disability payments.

The expectation is that the Florida Supreme Court will address all of these cases in 2016, but nobody knows when that will occur.

  1. Bureaucracy

Workers’ compensation is one of the most highly regulated lines of insurance, and regulators are increasingly aggressive in pursuing fines and penalties. Every form filed and every payment transaction is an opportunity for a penalty. EDI allows regulators to automate the fines and penalties. Some states perform retrospective audits on activity five to 10 years in the past. The IMR process in California adds administrative cost to claims without necessarily improving outcomes, and states with self-imposed penalties may be driving up the cost of doing business beyond the benefit of the penalty payment. Lobbying is becoming an increasingly important area for payers and service providers to consider.

The significant costs associated with the bureaucracy of workers’ compensation regulations are not improving the outcomes on claims. Most of the money collected from the fines and penalties is paid to the states. The programs may cover the operating costs of state workers’ compensation division and not be paid to the injured worker or medical provider.

This topic is an important issue to watch in 2016 and will be the topic of our Feb. 9 “Out Front Ideas with Kimberly and Mark” webinar.

  1. Regulatory Change

There are four states in particular that we should be keeping an eye on in terms of potential regulatory reforms in 2016:

New York

Employers in New York are continuing to push for additional workers’ compensation reforms to reduce their costs because the savings projected with the last round of reforms never fully materialized. Whether there is enough momentum to get a bill through this year remains to be seen, but the efforts are there.

Florida

In Florida, the situation is going to depend on what the state Supreme Court does with the cases mentioned earlier. If any of those cases punch holes in the constitutionality of the workers’ compensation law, then the legislature is going to need to address this. Again, this is a waiting game.

Illinois

Illinois Gov. Rauner has made it a priority to enact workers’ compensation reforms to reduce employer costs. But his efforts have been blocked by the state legislature, and there is a budget stalemate in the state. There has been much political back-and-forth on this budget and the workers’ compensation reforms. It remains to be seen if the governor has the political muscle to get his legislation passed.

California

Ever since the Schwarzenegger workers’ compensation reforms in 2004, and continuing with SB 863 passed by Gov. Brown, the California legislature has been trying to undermine these workers’ compensation reforms. Every year, multiple bills are passed by the legislature, and every year both Gov. Schwarzenegger and Gov. Brown have vetoed those bills. Gov. Brown is committed to preserving his workers’ compensation reforms, and there are three years left on his term. Once he is gone, there is concern about what could happen with workers’ compensation in California. But, for now, significant change is not expected.

  1. Talent Acquisition

Talent acquisition and retention is probably the biggest issue facing the entire insurance industry. Consider:

  • 25% of insurance industry workforce will retire by 2018 (McKinsey)
  • There are 2.3 million workers in the insurance industry. More than 1 million will retire in the next 10 years, and 400,000 positions will be left open by 2020 (Deloitte and Jackson Group)
  • Workers over the age of 45 represent 48% of the insurance workforce

Are we doing enough with colleges to show the career opportunities in the insurance industry? Although more colleges and universities are offering risk management programs, the reality is that there are very few of these programs nationwide. Our industry needs to support these programs with both grants and internship opportunities.

In workers’ compensation, we need to be looking at the role of the examiner. Are there tasks that we could automate and reduce workload need? Millennials say they want to work with purpose. The role of the claims adjuster is to assist injured workers in their recovery. Could we be doing more to highlight the positive aspects of the claims adjuster role to make it more attractive to millennials?

We also need to be looking at ways to be flexible with work schedules and at whether someone is tied to the home office or able to work from a remote location. Finally, we need to continue to focus on promoting diversity and inclusion within our workforce.

In May, we will be doing an “Out Front Ideas with Kimberly and Mark” webinar devoted to this topic.

  1. Market Conditions

You cannot forecast the coming year for the workers’ compensation industry without talking about rates. Recently, for the first time in years, the Fed increased interest rates. This is good news, but the change is still insignificant and will not have a material impact on the workers’ comp industry. Because investment opportunities are limited for carriers, they continue to be very diligent with their underwriting. What does this mean for rates? Right now, the market is relatively stable. Accounts with good loss histories could see steady to slightly decreased rates, while accounts with poor loss histories will likely see slight increases. Overall, significant rate changes across the nation are not expected in the coming year.

  1. Predictive Analytics

Predictive analytics have been a buzz word in our industry for a number of years. Most data models identify at-risk claims, which may benefit from additional intervention in terms of nurse case management or a more skilled adjuster. The goal of the intervention(s) is to change the trajectory of the claim, to do something different than in similar prior claims, so the result is improved over the past experience. Although most payers reflect having predictive analytics and a variety of models available, there are limited published results on the outcome and effectiveness. Watch in 2016 to see if organizations begin sharing outcomes as a way to market their business or provide industry thought leadership on what is working and should be considered to drive success.

There is a need to evolve predictive analytics and big data models so that some human tasks are automated. Instead of just identifying cases where intervention is necessary, we should also identify claims where minimal intervention is needed. This approach frees resources and allows attention on claims, which will benefit from the touch. Future claims models will benefit from analytics using learning models similar to IBM Watson-type smart analytics.

  1. OSHA

OSHA continues to be a challenge for employers. Going into 2016, OSHA has increased reporting and recordkeeping requirements. It is also increasing its focus on certain industries, including healthcare, and employers are seeing a significant increase in fines. This is an area that is constantly evolving.

Our April 5 “Out Front Ideas with Kimberly and Mark” webinar will focus on these continuing developments and discuss the continuing issues that employers should track.

  1. Utilization Review

There is industry buzz and sidebar conversations around utilization review (UR) and the current approach deployed by employers, payers and service providers. Physicians are asking more than ever how they can help streamline treatment requests, obtain decision outcomes electronically and more quickly and provide timely, appropriate care for patients.

Utilization review should ensure that injured workers receive appropriate care within the right setting and for the correct duration. But what is the right UR model? Should all treatment be subject to UR or select treatment requests? Is UR a process strictly addressing the request for treatment and medical documentation submitted against guidelines of care or collaborative with adjusters, providers and the injured workers? Are denials of care driving up litigation unnecessarily? Do utilization review referral triggers change if the physician providing care is part of a high-performance network or known to be a top-performing physician? These are questions being raised by industry veterans and newcomers alike and are likely worthy of a review and further dialogue.

In the consumer-driven health world where we find ourselves, there is greater interest from injured workers to understand treatment options and outcomes. If not a part of UR, is your case management or claim model providing medical treatment option education, inclusive of outcomes awareness? Transparency is becoming increasingly important to consumers.

  1. Exclusive Remedy

Plaintiff attorneys are always trying to find ways around the exclusive remedy protections of workers’ compensation, and these efforts are becoming increasingly successful. In early January 2016, the District Court of Appeals in California allowed an injured worker to pursue a civil claim against a utilization review provider because the provider failed to warn him about the potential risks of medication withdrawal.

More and more, judges are allowing such litigation to survive a motion to dismiss on summary judgement because of workers’ compensation exclusive remedy protections. This creates enormous costs for employers and carriers, which then must spend hundreds of thousands of dollars or more defending such lawsuits and face the risk of a jury award that could be worth millions. In addition, an employer’s liability award based on the “intentional actions” of the employer may have issues with insurance coverage. The entire industry should be paying close attention to this area of increased litigation around exclusive remedy.

  1. ICD-10

The ICD-10 medical classification came along last year with a lot of hype and a significant amount of work effort to update systems and train teams. There was concern that the new diagnosis codes would result in slowed claims processes and treatment decisions. Thus far, workers’ compensation key stakeholders report little to no impact from the change. This may be because states did not mandate the use of ICD-10 for workers’ compensation and most organizations continue to accept ICD-9. Bill review receipt to pay timeframes have not lengthened, and e-billing rejections did not increase, which were two areas to watch after the ICD-10 go-live.

In 2019, Medicare plans to roll out an incentive-based reimbursement model tied to patient outcomes (MACRA). The American Medical Association believes this will be a significant reimbursement change for physicians. Changes to Medicare reimbursement could impact workers’ compensation because some state fee schedules are Medicare based.

History has proven Medicare does not always follow through with what it says it is going to do in terms of changing reimbursement models, but the MACRA implementation is an issue worth monitoring.

  1. Marijuana

Thus far, New Mexico has been the only state allowing medical marijuana for treatment under workers’ compensation. But as the use of medical marijuana spreads, it is inevitable that we will see other states take on this issue. The answer is simple –if states put something in their statutes barring medical marijuana under workers’ compensation, then that solves the problems. Some medical marijuana states have already indicated that insurance is not responsible covering medical marijuana. State legislators and regulators can stop this before it becomes a legitimate problem.

The bigger issue is employment practice concerns. Many expect the federal government to reclassify marijuana as a Schedule 2 drug, possibly by the end of this current administration. Once that happens, it will no longer be an “illegal” drug. Employers are going to need to adapt and drug test for impairment rather than just testing the presence of the drug. Standards are going to need to be developed on what constitutes “impairment” with marijuana. The science needs to catch up with the realities of this new normal when it comes to marijuana in the U.S.

  1. On-Demand Economy

The on demand economy is creating new concerns about what constitutes an employee/employer relationship. Is an Uber driver an employee of Uber or an independent contractor? What about a repair person you hire through Angie’s List?

While the on-demand economy is a newer dynamic, determining what constitutes independent contractor vs. an employee has been a challenge for the workers’ compensation industry for many years. In July 2015, the Department of Labor issued an interpretive memorandum indicating that the DOL feels “most workers classified as independent contractors are employees under the Fair Labor Standards Act’s broad definitions.”

So perhaps the issue to watch here is not so much the on-demand economy, but instead whether we are going to see the Department of Labor push for fewer and fewer workers to be classified as independent contractors. This could have a significant impact on many industries as well as significantly changing the business model of services like Uber and Lyft.

Untimely Notice Sustains Denial of Claim

The U.S. District Court for the Eastern District of Kentucky recently held that an insurer properly denied coverage to a hospital because the hospital gave untimely notice of the claim. In Ashland Hospital Corporation v. RLI Insurance Company, Civil Action No. 13-143-DLB-EBA (E.D. Ky. Mar. 17, 2015), the insurer avoided exposure on a $10 million directors and officers (D&O) excess policy claim by successfully arguing that the insured, a hospital association, failed to give timely notice of the claim as required under the terms of the policy.

Background
The hospital purchased $15 million in primary D&O liability insurance for Oct. 1, 2010, through Oct. 1, 2011. The hospital also purchased a $10 million excess policy from another insurer covering the same one-year period. Both policies were written on a “claims-made” as opposed to an “occurrence” basis. In July 2011, the U.S. Department of Justice issued a subpoena to the hospital as part of a Health Insurance Portability and Accountability Act (HIPAA) investigation into allegations that the hospital billed federal healthcare programs for heart procedures that were not medically necessary. Ultimately, the hospital agreed to pay $40.9 million to resolve the allegations.

The hospital notified the primary carrier of the HIPAA investigation in December 2011, which was within the 90-day notice period required by the primary policy. In June 2012, after being informed that the primary carrier’s policy covered the investigation, the hospital notified the excess insurer of the HIPAA investigation. The insurer denied coverage because the hospital failed to provide timely notice during the policy period or within the applicable 90-day extended reporting period after the policy terminated in October 2011. The insurer claimed that the notice requirement was a condition precedent to establishing coverage and that it did not have to show prejudice to deny coverage. The hospital sued for breach of the insurance contract.

Decision
The insurer argued that it correctly denied coverage because the hospital failed to provide notice within the 90-day extended reporting period after the excess policy expired. The insurer argued the excess policy followed form to the primary policy, thereby incorporating the notice provisions of the primary policy that required notice within 90 days of the end of the policy. The hospital admitted the excess policy did follow form to the primary policy but claimed that the presence of notice provisions in both policies made the primary policy’s notice provisions ambiguous.

The Ashland court rejected the hospital’s argument, holding that the notice provisions in the primary and excess policies did not conflict; to the contrary, they coexisted. Therefore, the insurer’s denial of coverage was proper because the hospital failed to provide timely notice as required by the terms of the primary policy.

The court also held that the hospital violated the notice provisions of the insurer’s excess policy, which required the insured to provide notice when specified events occurred. The hospital claimed that the notice provisions were ambiguous and did not require it to provide the insurer with notice every time an event specified in the notice provisions took place, but rather only when the most recent event occurred. The insurer countered that the terms of the policy were clear and that the hospital was required to provide notice when any event specified in the policy took place. The insurer contended that, because the hospital provided notice only when the most recent event occurred and not when previous events occurred, the hospital was not entitled to coverage. The Ashland court held that the provisions were not ambiguous and that adopting the hospital’s interpretation would effectively render the terms meaningless. The court agreed with the insurer that for coverage to exist, the hospital had to provide timely notice to the insurer when all of the events specified by the provision took place, not merely when the most recent event occurred. Because the hospital failed to do so, it forfeited its right to coverage under the terms of the excess policy.

The Ashland court also considered and rejected the hospital’s alternative argument that the insurer had to show substantial prejudice to deny coverage. In so arguing, the hospital relied on Jones v. Bituminous Casualty Corporation, 821 S.W.2d 798 (Ky. 1991), which held that absent a showing of substantial prejudice a workers’ compensation insurer could not deny coverage because of an insured’s untimely compliance with a notice provision. The Ashland court noted that Kentucky courts have not addressed whether Jones applied to claims-made insurance policies but predicted that the Kentucky Supreme Court would not extend Jones to a claims-made policy because to do so would effectively rewrite the policy without justification.

Takeaways
There are two principal takeaways from the Ashland decision:

  • First, in Kentucky, excess insurers desiring to “follow” a primary policy would be well-advised to use language that ensures neither policy conflicts. While not mentioned by the Ashland court, a simple way to accomplish this result would be for the excess policy to include language in the “following form” clause confirming that, in the event of any conflict between the primary and excess wording, the primary language should control. Failure to take these steps could render some terms of the policies ambiguous and unenforceable.
  • The second takeaway concerns the Ashland court’s sustaining the enforceability of the claims-made and reporting provisions of the policy. Earlier this year, the state supreme courts in Colorado and Wisconsin reaffirmed that the claims-made and reporting requirements in D&O and professional liability policies are conditions precedent to coverage that cannot be trumped by the notice prejudice rule applicable to occurrence-based policies. (See Craft v. Philadelphia Ins. Co., 2015 CO 11 (Colo. Feb. 17, 2015); Anderson, et al. v. Aul, et al., 2015 WI 19 (Feb. 25, 2015). Thus, Ashland is illustrative of a continuing trend of recent decisions that have reached this same conclusion.

Wilson Elser will continue to monitor this and other cases involving primary and excess policy coverage disputes.

NOTE: Patrick C. Walsh (Law Clerk-Louisville) assisted in researching and drafting this Alert.

The Hidden Traps in Same-Sex Ruling

Employers should move quickly to review and update as necessary their human resources and employee benefit policies and practices concerning when same-sex partners of employees are treated as the spouses of the employees in light of the U.S. Supreme Court’s June 26, 2015, decision in Obergefell v. Hodges.

Employer and employee benefit plan leaders and their consultants are cautioned that the decision requiring states to allow same-sex couples to marry does not eliminate ambiguities or differences in state laws and documentation of marriage. Consequently, policies, practices and programs for administering the employment and employee benefit rights of married employees need to be carefully tailored to identify and require proof of marriage evenhandedly. Administrators must take into account variances and potential biases in state documentation and practices that could create complications or even liabilities for employers and plans if not appropriately considered.

Since the Supreme Court ruled that the Equal Protection Clause of the U.S Constitution entitled same-sex couples to equal treatment with married heterosexual couples under federal law in U.S. v. Windsor, 133 S.Ct. 2675 (2013), employers have faced several challenges understanding and updating their policies and practices with respect to employees involved in same-sex relationships.

The Obama administration’s aggressive reinterpretation of federal employment, employee benefit, tax and other laws and regulations placed pressure on employers to update their policies and practices concerning when to recognize employees in same-sex relationships as marriages for employment, employee benefits and other purposes.

As the Windsor decision did not address whether the U.S. Constitution also guaranteed same-sex couples a right to marry under state law, disparities in the treatment of same-sex marriages between the states and rapid changes in the state statutory and judicial rules governing these determinations created significant challenges. Employers had to determine if a same-sex couple could marry in a particular state and the right and duty of the employer in response to such an arrangement.

Today’s Obergefell ruling will help to resolve some, but not all, of this uncertainty by answering the question whether states may refuse to allow same-sex partners to marry or refuse to recognize marriages of same-sex partners. The Obergefell decision settles this debate by holding that the U.S. Constitution requires all states to allow same-sex couples to marry on the same terms as apply to heterosexual couples.

Employers still face many challenges. While states must now treat same-sex and opposite-sex couples equally under marriage laws, determining consistently whether two individuals are legally married in any particular state remains anything but simple. Variations in the marriage laws of the states mean the requirements for and proof of marriage can vary significantly.

Care must also be taken to manage potential discrimination risks that might arise from the adoption of policies that treat same-sex vs. opposite-sex partners disparately. There could be administrative complications and compliance risks. There could also be sex discrimination liability exposures under the Civil Rights Act and other laws.

Parties should act promptly and carefully with the advice of counsel to evaluate and update their policies to respond to the new decisions and these other challenges and duties.