March 6, 2017 Insurance Advocate

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Serving: New York, New Jersey, Connecticut, Eastern Pennsylvania and Washington D.C.

“Hope Springs Eternal” as Op mism Rises - Fishlinger Study

Vol. 128 No. 5 | March 6, 2017

Peter Bickford Bad Laws/Bad Actors PART II

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Contents

March 6, 2017 | Volume 128 Number 5 18

Feature: Effectively Defending Adversarial Actions Brought Against Former D&Os in Bankruptcy Court Eric A. Kuwana and Sarah Downey

24

On My Radar: Conviction for Health Care Fraud Upheld Barry Zalma

26

Looking Back: August, 1991

28

Courtside: Insurer Might Be Liable for Negligence of Contractors It Hires to Make Repairs; Two-Year Limitation Does Not Apply Lawrence Rogak

16 Bad Laws/Bad Actors - Part II

29

Classifieds

[FEATURES]

[A D F E ATUR E S ]

4

Foreword: Say It: Optimism Is Rising Steve Acunto, Publisher

6

On the Level: For Your Eyes Only Jamie Deapo

8

The Social Notebook: Four “Must-Haves” for Agency Websites Chris Paradiso

12

Guest Opinion: The Oath of Hypocrisy— and the Politicians’ “Disease” Marilyn M. Singleton, MD, JD

14

In the Associations: Largest Insurance Convention in the State on the Horizon PIANJ Presents $5K John Laux Memorial Scholarship to Member Agency Family

11

MSO: Electronic Cigarettes & Vape Shops

13

NAIFA-NYS: Still a Strong, Effective Voice in Albany for Life Agents and Insurance Industry

New York and New Jersey’s Leading Insurance Magazine Since 1889.

FOR ADVERTISING OR SUBSCRIPTION INFORMATION Call 914-966-3180 or email g@cinn.com info@insurance-advocate.com www.insurance-advocate.com INSURANCE ADVOCATE / March 6, 2017 3

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[ FOREWORD ]

STEVE ACUNTO

Say It: Optimism Is Rising “Hope Springs Eternal in the Human Breast; Man never is, but always to be blessed.” uAlexander Pope had it right, if you follow the results of a survey produced by a college survey institution whose Optimism Index™ shows that Americans are increasingly optimistic, amid concerns over leadership and progress. The Fishlinger Center for Public Policy Research at the College of Mount Saint Vincent—established through a grant from industry leader Bill Fishlinger and his wife, Joan—has launched a breakthrough measurement of public opinion: the Fishlinger Optimism Index™. The index helps to summarize and unpack the reasons for American confidence in the future.

According to the Center, the Fishlinger Optimism Index™ “measures the public’s expectations for the effectiveness of federal policy, the quality of national leadership, the prospect for social progress, personal prosperity, and U.S security and leadership in global affairs.”

The first Fishlinger Optimism Index™ report measures significant swings in public opinion since the presidential election in November.

Given public demonstrations or protests following Donald Trump’s election, it is striking that the Index powerfully demonstrates increased optimism in the days immediately following the inauguration. However, five weeks after the inauguration, public optimism has slumped slightly below pre-inauguration levels.

The Fishlinger Optimism Index™ includes five sub-scores enabling refined analysis of public sentiment.

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VOLUME 128 NUMBER 5 MARCH 6, 2017

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Kelly Donahue-Piro Michael Loguercio Christopher Paradiso Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Director of Operations and Creative Services Gina Marie Balog 914-966-3180, x113 g@cinn.com EDITORIAL ASSISTANT COPYEDITOR & PROOFREADER Maria Vano mariavano9@gmail.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x111 circulation@cinn.com PUBLISHED BY CINN Media, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 613-1595 www.cinn.com | info@cinn.com President and CEO Steve Acunto

Following the inauguration, public optimism deteriorated regarding national leadership and social progress. Optimism about the US’s security and role in world affairs stayed relatively high. Perhaps surprising given controversies about NATO, Russia, the Middle East and immigration. As the new administration continues to unfold, the Fishlinger Optimism Index™ will comprehensively measure public optimism and provide refined measures of consistent or shifting opinion. In this study, the Fishlinger Center conducted online national surveys focusing on political issues in the United States.

The Fishlinger Center for Public Policy Research opened in February 2015 at the College of Mount Saint Vincent over in Riverdale New York…optimistically.

Spring is the ideal time for such thinking and for a real look at the mood across the USA. Hopefully the last throes of a gentle winter are behind us as you read this.[IA] >

4 March 6, 2017 / INSURANCE ADVOCATE

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[ O N T H E L E VE L ]

JAMIE DEAPO

For Your Eyes Only uStrange title? Not really. This article isn’t for everybody.

If you don’t realize your business is in jeopardy or don’t care, this article isn’t for you. If you don’t see any reason to change the way you have been operating for the past 10 years, this article isn’t for you. If you think social media is just a passing fad and doesn’t really impact your business today and in future, this article isn’t for you. If you aren’t willing to do what it takes to convince consumers of the importance of having professional advice to properly protect themselves, their families and their business, then please don’t read any further.

But if you believe there is no better way of buying insurance protection than from a committed and professional independent agent—one who cares about making sure their clients are adequately and properly protected and advocates for them when they have a claim—then this article is meant for you!

I know I sound like a broken record, but what we believe in and how we do business is under attack. This new generation of competitors wants to turn this from a people business to a technology and artificial intelligence business. They want selecting coverage to be tied to cost instead of understanding how it works and buying the proper protection. They infer all coverage is the same even though we know it isn’t. We realize that even a few different words in an insurance contract can be the difference between being made whole or suffering an unreimbursed financial loss.

These new competitors are smart.

They spend millions on advertising and are very effective at using social media.

They are well versed in psychological marketing, preying on consumer biases with insurance companies and agents. They depict us as overcharging, profit mongers with no social conscience interested in lining our pockets with increased profits while screwing honest folks by undercutting or denying claims.

Besides preying on consumer biases, these new competitors have identified and capitalized on several serious weaknesses in the way we operate.

6 March 6, 2017 / INSURANCE ADVOCATE

We realize that even a few different words in an insurance contract can be the difference between being made whole or suffering an unreimbursed financial loss.

• Offering consumers a choice currently makes our process slower and more cumbersome.

• Our traditional carriers continue to use older legacy systems that don’t take advantage of today’s technology.

• Agents are also struggling with updating their technology to provide the same level of efficiency and service as these new competitors.

• Consumers, especially the younger ones, want to do business over the internet, usually through a mobile device.

• Consumers in general are pressed for time and want to take care of insurance when it is convenient for them and not during traditional 9-5 hours.

• Younger consumers, starting with Millennials, want to do business with firms that are socially conscious and care about people and the environment.

• The new competitors have bettertrained sales associates primarily because they sell on price, which is much easier than teaching how to sell the value of explaining coverage and providing proper protection.

• Because of their advanced technology, and in keeping with their psychological marketing, these new competitors are constantly in contact with customers and prospects, which affords them a stronger customer relationship.

So, what do dedicated and interested independent agents need to do to compete?

• Make every effort to automate and improve on your current sales process wherever possible.

Jamie Deapo is AVP of Membership & Member Programs for IIABNY and is an approved CE instructor in New York.

Prior to being with IIABNY, he was an independent agent in the Syracuse area for 15 years. Jamie started his career in 1972 working for insurance carriers, and he has held various underwriting and marketing positions with several national as well as regional companies. He is a past president of the Independent Insurance Agents of Central New York and served on the board of directors of IIABNY.

• Push your carrier partners to join in this effort and to make the connection between you and them seamless and effective.

• Wherever and whenever possible invest in new technology that will improve efficiency and the level of services. Start with reviewing and revising your procedures to immediately improve the process where possible.

• Make sure your agency website is updated, effective and mobile friendly. Purchase and provide your customers with a mobile app and the ability to transact via it wherever possible.

• Decide to offer service capabilities on a 24-7 basis or at the minimum from office closing time to 11PM on weekdays and from 8 AM to 11PM on weekends.

• Take the time to promote the social and charitable activities your agency and your employees are involved in.

I find many agencies do quite a bit; however they don’t publicize it because they aren’t doing it for that reason. You need to let people know.

• Invest in providing your sales team with effective sales training and hold regular sales meetings where ideas and issues are exchanged. Provide CONTINUED ON PAGE 10

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[ T H E SO C I A L N OT E B O OK ]

C H R I S PA R A D I S O

Four “Must-Haves” for Agency Websites uTime and time again, I see agents and brokers from all around the U.S. and Canada who have not spent quite enough time on their agency website. What do I mean exactly? Well, I do see the rare case where an agency doesn’t have a website at all, and believe me that’s a huge problem.

More often than not though, I see agency owners who may not want to spend a lot on their website and want to take the cheap route, or who simply think that having a website alone is enough, and they don’t take the time to frequently update it. Not to mention, some websites are missing a few key features that can help with converting visitors into leads or customers/clients. Let’s go over four things that are critical to your agency’s online success, which our marketing team has labeled as must-haves for every agency website.

1. Your Brand Whenever I take the time to discuss marketing, whether it’s traditional forms of marketing or digital, it all starts with your agency’s brand. Branding is a very powerful tool, whether it’s in the insurance space or not, and for many reasons. Your agency’s “brand” is how your customers, clients, and anyone else in your agency’s audience perceives you, your agency, your products, services, ideas, and your organization as a whole. Whether you realize it or not, your brand is carried across all points of your agency, including your marketing, your staff, your agency’s customer experience, and then some. Having a welldeveloped and consistent brand can make it powerful though, and here’s why.

When someone sits down to check out their social media that is connected with our agency, they’ll go through their normal routine of first clearing their notifications, then checking out what’s going on with their family and friends. After a small while, they’ll scroll past content that was produced and pushed out by our agency, and 99% of the time, if one of our customers or clients are looking at our content 8 March 6, 2017 / INSURANCE ADVOCATE

There is a mental stimulation associated with each and every brand, and how powerful that association is depends on the amount of time that you spent developing your brand, and how consistently you can maintain it.

then they will know immediately that it came from us. Not only that, but our brand’s mental connotations are positivity, family first, and giving back to local charities (just to name a few), so a majority of the time that our brand hits our audience, it puts a smile on their face. That’s powerful. There is a mental stimulation associated with each and every brand, and how powerful that association is depends on the amount of time that you spent developing your brand, and how consistently you can maintain it.

When it comes to branding, many pieces of your website should be “in brand.” This includes your visual content, message, tone of voice, and including things like your logo or branded design whenever you see fit. Remember, consistency is key with a brand, so make sure everything follows the same guidelines. If you need help crafting your agency’s brand and guidelines, I would certainly reach out to our friends at Agency Appeal, whom you can check out online at www.agencyperformancepartners.com/agencyappeal/.

2. Customer Testimonials What is the number one form of new business for our agencies, even to this day?

For most of us, we immediately know that the answer is word-of-mouth referrals, which is why it is critical to include testi-

Christopher Paradiso, CPIA , is President of Paradiso Financial & Insurance Service. He has been acknowledged by several insurance publications as a leader in the industry for his use of digital marketing and social media to help brand his agency and promote other small businesses within his community. Chris has also been recognized for his charity work with The Connecticut Children’s Medical Center.

In 2011, Chris introduced “Paradiso Presents LLC,” a social media program aimed at teaching small agencies to not only survive, but compete in today’s complex online marketing world.

Chris resides in Stafford Springs, CT with his wife and two children, Mia and Gianni.

monials on your website. When people visit your website, they are searching for cues that will allow them to develop trust in one way or another, to decide whether or not your agency is right for them. Let’s take a look at the customer experience journey to better understand this.

For this example let’s look at someone who is getting ready to purchase a new vehicle and needs to open up a new auto insurance policy. The first thing they’ll do is ask their family and friends to see what their best options are. If they are still undecided, or didn’t get the answer they were looking for, the next thing the prospect will do is check out Google, and type in something along the lines of “Auto Insurance Stafford CT,” and of course we are using our agency’s hometown as an example here. Once they did that, they’ll find our agency, and they’ll start getting an idea of what it’s like to do business with us. After perusing the website for a bit, CONTINUED ON PAGE 10

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they are still unsure of whether or not they’d like to commit to being a customer because they haven’t heard anything about the agency from their peers yet. This is where testimonials come into play, and can begin converting a wandering visitor into a long-term client of your agency.

Be sure that whenever you develop a “raving fan,” or someone who feels that your agency is simply the best one out there, always try to ask them for a review online. We have reviews set up on our website, Facebook, and Google+, so that way our customers can choose their platform to leave us a testimonial in whatever way is easiest to them. Over time, the more testimonials you receive, the better your agency will be perceived online.

Beyond testimonials, it’s important to include other “trust cues” as well. We include brief biographies of our staff, our agency’s promises that we stick to in all of our customers’ interactions, and pictures of agency and staff so that people can get an idea of what the customer experience is like with our agency before they even step foot in our doors. It’s important to use your website as a tool to develop trust, because you’ll have a much higher chance of earning a visitor’s business in the end.

3. Clear Contact Information for Your Agency This one should not be a surprise, but during any point that your customers are visiting your website, it should be very easy for them to come into contact with you.

There are times when people have very low attention spans, and if it takes them longer than three-to-five seconds to figure out how to get in touch with your agency, they may bounce off of your website back to Google to see what your competitors have in store.

Our suggestion is to keep your phone number listed in the upper righthand corner of every page of your website—this way you’re always just a phone call away.

To make things even easier on your customers, be sure to include the physical address at the very bottom of each page as well, all of your additional information, and your hours of operation, so that your audience knows when it’s a good time to call or stop in. To top it off, you can also include a “Contact Us” page as well, that has a form for your customers to fill out 10 March 6, 2017 / INSURANCE ADVOCATE

At the end of the day, it should be obvious that simply having an agency website is not enough, because it takes careful care, consistency, and key features—or “must-haves”— that will evolve a simple website into a digital marketing powerhouse.

At the end of the day, it should be obvious that simply having an agency website is not enough, because it takes careful care, consistency, and key features—or “musthaves”—that will evolve a simple website into a digital marketing powerhouse. I wish you the best of luck on your journey to building a profitable website, and to agents and brokers everywhere, happy marketing![IA]

ON THE LEVEL CONTINUED FROM PAGE 6

their information as well as why they are reaching out, and then submit it directly to your agency’s staff to get an answer for what they are looking for.

4. Calls-to-Action Finally, this is where we convert visitors into customers and clients for our agency, and start working on a long-term relationship with our audience online.

Calls-to-action are any time that you instruct your audience to take action, or basically how you get leads to convert to customers. We suggest including several calls-to-action throughout your agency website, but first and foremost, make sure it’s incredibly easy for your customers to request a quote from your agency online.

When someone visits our website at www.paradisoinsurance.com, after just a few seconds of scrolling, we have a popup form that comes up to let them know that they can get a free quote today. We also include a “Get a Quote” button right next to our agency’s phone number in the upper righthand corner of our website. As soon as they fill out our brief form, they are in our pipeline, and an agent from our office calls them the same day.

Beyond a quote request, there are other calls-to-action we like to include. One of our others is to request our customers download our agency’s mobile app. We heavily believe in having an app in place for every independent agency, because without one there’s no way you can provide service 24/7 around the clock. We also have calls-to-action to get our website visitors to check our social media, leave us a testimonial, and even fill out renewal questionnaires so we have better retention rates with our business overall.

your sales associates with coaching and mentoring to give them the guidance and confidence that will make them successful.

• Over the years agencies have grown and their ability to stay in touch with their clients has gotten lost. Now more than ever agencies need to have regular contact with clients using every technology and medium available.

Agencies need to create an optimum customer experience, starting with how the phone is answered and carried on through every interaction the customer has with the agency. Today’s consumer does business with—and remains loyal to—firms that work hard to earn and keep them as customers.

Remember: it’s the little unexpected things that make a difference.

It’s not always possible to do everything that needs to be done. Pick the most impactful and important changes and get them done first. Always be focused on implementing effective changes whenever and wherever possible. The competition isn’t going away, but you have something they don’t—a real compassion and commitment to do the right job for your client.

Show it by making the changes that will let you win in the end.[IA]

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889

www.insurance-advocate.com

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ADVERTORIAL

Electronic Cigarettes & Vape Shops THE SALE OF ELECTRONIC CIGARETTES and personal vaporizing devices, currently a $1.5 billion industry, is growing at a rapid rate, estimated to be 25% per year (www.fortune.com). Reuters reports that about 10% of adults now vape and that, in the United States, there are at least 15,000 vape shops, up from virtually none just a few years ago (www.reuters.com).

Touted as a safe alternative to smoking, the vaping practice and the e-cigarette devices themselves are not without risk of fire and explosion, in addition to health implications. E-cigarettes are available on the internet, and in a variety of retail outlets, including convenience stores, mall kiosks and specialized vape shops and lounges.

Product liability coverage is essential for anyone selling e-cigarettes. Helping clients understand the hazards of e-cigarettes, and insurance coverage needed for those who sell them, is another value-added service of the professional insurance agent.

The devices are tubes where nicotine and various flavors are added to liquid.

The liquid is heated by battery power and the vapor is inhaled. While the product and accessories increase in popularity, so does the conflict about safety. There is concern about undetermined effects of inhaling the nicotine and various chemicals, use by teens as a gateway to cigarette smoking, poisoning by accidental ingestion of the liquid by children, and injuries caused by exploding batteries.

There is a patchwork of regulations in the 50 states. The Public Health Law Center has prepared a PDF with a listing of the regulations in the various states and some municipalities (publichealthlawcenter.org). Some states and municipalities have banned sale of electronic cigarettes to those under 18 or 19. New York City bans sales under age 21, while in New York State the age limit is 18. There are also bans on indoor smoking in some places and requirements for packaging of liquid nicotine in childproof containers. In NJ, there is proposed legislation to ban the sale of flavored electronic cigarette devices, in flavors other than clove, menthol and tobacco. New Jersey already bars the sale of flavored cigarettes.

Explosions of e-cigarettes are rare, and are believed to be caused by the lithium battery. Of 25 incidents reported between 2009-2014, most occurred while the device was charging (usfa.fema.gov). Some were due to use of an alternate charger that was not originally sold with the device. There have also been recent cases of devices exploding while in someone’s pocket or purse, resulting in severe burns. Ecigone offers a list of all reported e-cigarette explosions on their website. Of 214 e-cigarette explosions: 57 happened during use, 79 during charging, 44 during transport, storage or unknown circumstances, and 34 involved spare batteries for removable battery mods (ecigone.com).

The Centers for Disease Control (CDC) (www.cdc.gov) reports an increase in poisoning cases from e-cigarettes’ liquid nicotine, averaging 215 calls per month by February 2014. More than half (51.1%) of the calls to poison centers due to e-cigarettes involved young children under age five.

In 2016, the U.S. Food and Drug Administration (FDA) extended its authority to all tobacco products, including e-cigarettes, cigars, hookah tobacco and pipe tobacco, among others (www.fda.gov).

These regulations were the first national requirements for electronic cigarette vendors, and include: banning sale to anyone under 18 (in person and online); requiring photo ID for age verification; barring sale of tobacco products in vending machines; no distribution of free samples.

The question arises of what steps insurers and agents can take to protect themselves, their clients and consumers.

Issues include safety of the liquids and batteries used, childproof packaging, age limits and even the additional liability exposure of the retailers whose shops include lounges and social events. The operations of the insured are important in determining the adequacy of coverages. Is this sales only, or is liquid mixing done? Is there a lounge and are social activities sponsored?

What steps are taken to comply with age restrictions, proper labeling, childproof packaging and state/municipal regulations?

In this rapidly changing field of e-cigarette sale and use, it is vital to be aware of research and federal, state and municipal regulations. The professional insurance agent can play a crucial role in educating clients and obtaining the proper coverage for the exposure. Providing information on the regulations for sale and proper use of e-cigarettes is another sign of the true insurance professional.

R

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[ G UEST O P I N I O N ]

M A R I LY N M . S I N G L E T O N , M D , J D

The Oath of Hypocrisy— and the Politicians’ “Disease” uAs a physician, I proudly recited and adhere to the Oath of Hippocrates, which commands physicians to “use treatment to help the sick according to [their] ability and judgment…and [to] abstain from all intentional wrong-doing and harm.”

Physicians don’t all think alike—medically or politically—but when a patient’s health is at stake, we find a way to work together for the patient’s best interest.

In 2016 a bipartisan Congress passed the 21st Century Cures Act, ostensibly designed to speed up research and drug approvals. They should have legislated a cure for a highly contagious disease that infects politicians in staggering numbers: chronic, relapsing, terminal hypocritical churlishness (the “Disease”).

The current acrimonious and vitriolic hyper-partisan rhetoric is making our country sick.

When the Republicans did not support the Affordable Care Act, they were heartless dunderheads who wanted to see women and children suffer. It was irrelevant that the law had serious flaws that have now fully manifested themselves. In a tit-for-tat fashion, the Democrats have made it clear that they will obstruct President Trump’s efforts, irrespective of whether doing so harms the American citizenry. There is no question that the value of a two-party system is exposure to a spectrum of ideas and opinions. However, dissent for the purpose of partisan posturing must not blind our legislators to novel solutions in America’s best interest.

In honor of Black History Month, let’s look at the different responses to racial insensitivity. Joe Biden was rewarded with the vice-presidency for his ringing endorsement of Obama: “I mean, you got the first mainstream African-American who is articulate and bright and clean and a nice-looking guy.” Part of former Senate majority leader Harry Reid’s assessment of candidate Barack Obama’s chances to win the presidency was that he was “light-skinned” and had “no Negro dialect.” Was he censured?

No. Did he have to resign? No. 12 March 6, 2017 / INSURANCE ADVOCATE

At the 100th birthday party for Strom Thurmond, a 1948 (anti-integration) Dixiecrat presidential candidate, former Senate Republican leader Trent Lott praised him, saying South Carolina proudly voted for him. He was forced to resign his position. However, Democrats heaped praise upon Hillary Clinton’s “friend and mentor,” Robert Byrd, who was unanimously elected the top officer in the local Ku Klux Klan unit. Bill Clinton dismissed the Klan membership, saying “he was only trying to get elected.” In December 1944, Byrd wrote to Senator Theodore G. Bilbo, “I shall never fight in the armed forces with a negro by my side...Rather I should die a thousand times…than to see this beloved land of ours become degraded by race mongrels.” Moreover, he launched a 14hour filibuster and voted against the Civil Rights Act of 1964. (Republican Senator Everett Dirksen is credited with rallying enough senators to allow the bill’s passage.)

The Democrats tout themselves as the advocates for black people, but have allowed politics to trump exploring new ideas.

Although the large majority of black parents support increased educational options, including traditional public, public charter, and opportunity scholarships to attend private schools, the Democrats thrashed Secretary of Education nominee Betsy DeVos for her support of school choice.

Senator Cory Booker, while Newark’s mayor, promoted Ms. DeVos’s ideas on school choice to improve Newark’s failing schools.

Stricken with the Disease, he conveniently had a change of heart.

In 2016, Senator Booker felt “blessed and honored to have partnered with Sen. Sessions” to pass legislation honoring those who participated in the 1965 Voting Rights March from Selma to Montgomery, Alabama, with the Congressional Gold Medal. But a year later, Booker chose to testify against Sessions’s nomination for Attorney General. Senator Tim Scott’s endorsement of Sessions netted him being called (among many other N-words) a “house negro” and “a big ‘Uncle Tom’ piece

Dr. Singleton is a board-certified anesthesiologist, professor and Association of American Physicians and Surgeons Board of Directors member.

She graduated from Stanford and earned her MD at UCSF Medical School. Dr. Singleton completed two years of Surgery residency at UCSF, then her Anesthesia residency at Harvard’s Beth Israel Hospital. While still working in the operating room, she attended UC Berkeley Law School, focusing on constitutional law and administrative law. She interned at the National Health Law Project and practiced insurance and health law.

She teaches classes in the recognition of elder abuse and constitutional law for non-lawyers.

Dr. Singleton can be contacted directly at marilynmsingleton@gmail.com, 510-421-5800 (reporters and journalists welcome!). For permission to republish this op-ed, contact AngelPublicity@aol.com.

of fertilizer,” and “a black man who is racist.”

Senator Elizabeth Warren expressed her peace, love, and teamwork by tweeting, “If Jeff Sessions makes even the tiniest attempt to bring his racism, sexism & bigotry into the Justice Department, he’ll hear from all of us.” Senator Charles Schumer ungraciously said that Sessions’s confirmation “turned my stomach.” Kerry Kennedy of the Robert Kennedy Center for Human Rights said that the Senators who voted for Jeff Sessions absolutely were racists.

It is unsettling that “racist” has become the new synonym for a political foe, or simply someone with whom one disagrees.

Derisive name-calling is an unprincipled substitute for honest discussion.

The apparent game plan to cut the new administration off at the knees may backfire.

We don’t want to discover that their operation was a success, but the patient died.[IA]

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NAIFA-NYS

By Mark Yavornitzki, NAIFA-NYS Legislative Director

Still a Strong, Effective Voice in Albany for Life Agents and Insurance Industry

Every man owes a part of his time and money to the business or industry in which he is engaged. No man has a moral right to withhold his support from an organization that is striving to improve conditions within his sphere.

- Theodore Roosevelt

NOT LONG AFTER TR SPOKE THOSE WORDS, The informal organization of the local associations continued a group of life insurance agents founded just such an organiza- as a legislative watchdog until 1919, when six locals gathered in tion—now known as the National Association of Insurance and Utica to formally organize the New York State Association of Life Financial Advisors-New York State (NAIFA-NYS).

Underwriters (NYSALU).

Professional associations, including In 2000, we became the New York State NAIFA-NYS, have been around doing good Association of Insurance and Financial Adwork for their members for a long time. Covisors (NYSAIFA), to better reflect what our As we face the operative efforts among tradesmen and mermembers do—advise consumers about their future, that strong, chants were common in colonial America, insurance and financial needs. In 2006, we and after the nation gained its independence, became NAIFA-New York State as part of effective voice first groups were formed to promote favorable our national association’s rebranding effort. business conditions in the face of rapid indusToday, NAIFA-NYS is the only organizaheard in Albany in trialization. tion exclusively representing and speaking 1906 is needed Why associations? Quite simply, they put for life insurance agents and financial advithe power of a group together in solving comsors in the state—encouraging a strong marmore than ever. mon problems and achieving common goals. ketplace, enhanced business and professional From its official beginning at the start of skills, and ethical conduct. The association the 20th century, NAIFA-NYS has been a continues in its role as an educator, motivastrong, effective voice in the halls of government, meeting a tor and, most importantly, an advocate for its members and their steady flow of challenges, including some that threatened the very profession. existence of the industry and our profession. The willingness of This year, our Legislative and Regulatory Committee, which our members to steadfastly stand together in the face of legisla- confers once a month with our government relations staff, aptive, regulatory, and media onslaughts—and their success in pre- proved the drafting of three NAIFA-NYS bills, already introventing destructive change—continues to this day, and is what duced, to establish an alternative to a New York State-sponsored has allowed NAIFA-NYS to achieve so many great things over retirement security program, grant CE credits for NAIFA-NYS its illustrious history. and other professional association members, and reform the antiThe “beginning” was in 1905, when public outrage over well- rebating law. publicized abuses by a few life insurance companies resulted in We are supporting bills regarding the Interstate Insurance the NYS Legislature forming a “Select Committee” to investigate Product Regulation Compact, long-term care insurance tax credthe life insurance business. its, and the definition of small businesses for the purpose of exKnown as the Armstrong Committee, it issued a report pro- emption from harmful state mandates. posing pervasive legislation, severely curtailing field compensaWe also are opposing a bill that would set up a costly and ultion and expense. timately consumer-unfriendly state-run pension program, and a There were, at that time, four local associations of what was bill that would mandate a CFP designation for anyone giving fithen the National Association of Life Underwriters: New York nancial counsel and advice to seniors.

City, Buffalo, Rochester, and Syracuse. Responding to the threat In addition to promoting our program in Albany, we have reof the proposed legislation, these associations organized a “grass sumed our annual Legislative Breakfasts that bring together roots” legislative contact campaign and successfully mounted a members and their state legislators. On May 17th, our grassroots mass demonstration and appearance of agents in Albany in involvement will continue, when we hold our Day on the Hill March 1906. in downtown Albany, in conjunction with the NAIFA-NYS AnThe reputation of the industry had been so blackened by the nual Conference. scandals and the resulting press coverage that the life underwriters While NAIFA-NYS has a frank and legitimate interest in proappearing in Albany constituted the only credible body to speak tecting and strengthening its members’ profession, history rein opposition to laws that would have eradicated the agency sys- minds us that what is not good for the life insurance public tem. Their testimony was effective, as legislation was enacted cor- cannot possibly be good for the agent. As we face the future, that recting abuses while preserving the agency system and other strong, effective voice first heard in Albany in 1906 is needed valuable aspects of New York’s life insurance business. more than ever.

INSURANCE ADVOCATE / March 6, 2017 13

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[ I N T H E A S S O C I AT I ON S ]

Largest Insurance Convention in the State on the Horizon uHARTFORD, Conn.—The Professional Insurance Agents of Connecticut’s Annual Convention, the largest industry networking and education event in the state of Connecticut, will be held at Foxwoods Resort Casino Mashantucket, March 9-10.

“The PIACT Annual Convention is the must-attend event of the year for all industry professionals throughout the region,” said PIACT President Loretta Lesko, CIC. “The convention offers attendees the opportunity to participate in educational seminars, network, and view the latest insurance products and services available to them and their clients during the trade show.”

In addition to the induction of PIACT’s 2017-18 slate of officers, the event will include an opening night banquet with Friars Club comedian Greg Aidala hosting an evening of comedy, and stand-up comedian Jon Fisch. Fisch has appeared on The Late Show with David Letterman, NBC’s Last Comic Standing and Comedy Central, and he has been featured in Maxim magazine. He also was the host of the widely popular podcast, In the Tank.

“The convention offers attendees the opportunity to participate in educational seminars, network, and view the latest insurance products and services available to them and their clients during the trade show.”

Agents will have ample opportunity to earn continuing education credits over two days. Four education sessions are available: E&O, the Next Generation presented by Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS; Insuring the Building Project: Builders Risk and Installation Floater, also taught by Trischan; Positioning Value in a PriceDriven Marketplace, taught by John Fear, CPIA, CISR, CPSR, and Planes, Trains and Automobiles: Managing Risk in the World of Drones, Uber and Driverless Cars, taught

by Fear.[IA]

PIANJ Presents $5K John Laux Memorial Scholarship to Member Agency Family John Laux Memorial scholarship will foster industry perpetuation uTrenton, N.J.—The Professional Insurance Agents of New Jersey, in conjunction with The Fore John Memorial Foundation, is announcing a new $5,000 scholarship in honor of the late John Laux to be presented to the child or grandchild of a PIA member agency entering college in 2017.

The inaugural John Laux Memorial Scholarship honors John Laux, a New 14 March 6, 2017 / INSURANCE ADVOCATE

Jersey native and graduate of Montclair State University. He was a highly competitive sportsman, supporter of Special Olympics New Jersey and career Young Insurance Professional. Laux’s decade-long work in the insurance industry was tragically cut short after a brief and hardfought battle with cancer in 1995. Funds for the scholarship are being provided by The Fore John Charitable Foundation.

“Through this scholarship, John is being honored posthumously for his significant impact on the industry.…We hope this scholarship will encourage incoming college students to consider a career in the industry.”

Since 1995, they have raised over $235,000 for scholarships and local charities in John Laux’s name.

“Through this scholarship, John is being honored posthumously for his significant impact on the industry,” said PIANJ President Donald F. LaPenna Jr. “As an active member of NJYIP, John was a supporter of the insurance industry, its future, and all that independent agents do for their communities. We hope this scholarship will encourage incoming college students to consider a career in the industry.”

To be eligible for the scholarship, applicants must be a child or grandchild of a PIANJ member or employee of a member agency, be planning to attend a two- or four-year college in the fall of 2017, and prepare a 500-word essay on the insurance industry. An application can be found on the PIANJ website. Submissions will be accepted from March 1 through May 1 of this year. The scholarship will be awarded in June, 2017.

PIANJ is a trade association representing professional, independent insurance agencies, brokerages and their employees throughout New Jersey.[IA]

Classified Opportunities Classified advertisements must be received by MONDAY NOON prior to publication date for inclusion in that week’s issue. Rate is $42 per inch, per insertion, payable in advance of publication date.

In addition, there is a $5 charge for advertisers requesting to assign box numbers forwarded via first class mail.

(Response forwarding expires 30 days issue date.)

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INA 3-6-17.qxp_INA 3-6-17 3/9/17 12:48 PM Page 15

One Singular College…

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No idle boast. It’s the real deal.

Read the UC Berkeley, US Treasury Department Report* that states:

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The College of Mount St. Vincent -Since 1847-

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Easy to reach. Make a date to visit. www.mountsaintvincent.edu *Mobility Report Cards: The Role of Colleges in Intergenerational Mobility, 2017

INA 3-6-17.qxp_INA 3-6-17 3/9/17 12:48 PM Page 16

Bad Laws/Bad Actors Part II uWhen a corporation doing business across many states runs into significant financial difficulty, it has two principal courses of action available under the US bankruptcy laws: reorganize or be liquidated. In either case, the Bankruptcy Court oversees the process with all affected parties being represented. Management itself may seek reorganization, but any plan has to be fully vetted with participation by representatives of creditors and other interested parties before approval by a specialized court. In a corporate liquidation, an independent trustee is appointed by the court to manage the marshalling of assets and payment of creditors, again with all interested parties being represented and having a voice in the proceedings with ultimate approval by a knowledgeable bankruptcy judge.

Compare the federal bankruptcy process to the strange world of insurance receivership starting with the appointment of an insolvent insurer’s regulator—not a specialized manager—as its receiver and purported protector of all interested parties, with oversight by a randomly selected, non-specialized judge. The inherent issues with the current insurance receivership process have been widely discussed by insurance professionals and educators for decades, and not limited to a few outliers.

For instance, in 2000 a task force of the Tort and Insurance Practice Section of the American Bar Association, whose members are experts in all aspects of the receivership process, identified three significant problems with the process: (a) failure to insure that qualified persons will be administering insurance receiverships; (b) inadequate accountability for and an oversight over their performance; and (c) a lack of incentives in statutory authority and procedures to bring estates to closure.

Many of the same conclusions were reached in a 2002 study by the Center for Risk Management and Insurance Research at Georgia State University, which concluded “[t]here is little transparency and accountability, and regulators and the courts do not exercise adequate oversight of receivers and receiverships.”

16 March 6, 2017 / INSURANCE ADVOCATE

Compare the federal bankruptcy process to the strange world of insurance receivership starting with the appointment of an insolvent insurer’s regulator—not a specialized manager—as its receiver and purported protector of all interested parties, with oversight by a randomly selected, nonspecialized judge.

Peter Bickford has over four decades of experience in the insurance and reinsurance business, with particular focus on regulatory, solvency, agency, alternative market and dispute resolution issues. In addition to his experience as a practicing attorney, he has been an executive officer of both a life insurance company and of a property/casualty insurance and reinsurance facility. A complete biography for Mr. Bickford may be accessed at www.pbnylaw.com.

While some states have since introduced a semblance of accountability in their receivership process (see, for example, Texas), little has been accomplished nationally over the years to improve the insurance receivership process or address its well-documented deficiencies—a lack of transparency, accountability and oversight.

And then there is New York!

In addition to the same deficiencies that most other states endure, New York has also developed a superfluous undefined appendage to the process: The New York Liquidation Bureau.

At the March 2012 hearing on the liquidation of Executive Life Insurance Company of New York (ELNY), the thenhead of the New York Liquidation Bureau described the Liquidation Bureau as follows: “As I said, we know we are not a State agency, on the basis of a Court of Appeals decision of several years ago; we are not a taxpayer-funded agency. We are a pass-through entity. But we are not specifically defined as to our legal form.”

He is right: there is no statute, charter, deed, royal grant, indenture or endowment defining or empowering the New York Liquidation Bureau. Although its website states that the liquidation bureau has been carrying out the responsibilities of the

superintendent as receiver since 1909, there was absolutely no mention of a liquidation bureau in the insurance law until 1993, and even today there are only two sections in the entirety of New York’s Consolidated Laws mentioning a liquidation bureau— neither of which include a definition or description of its duties.1* And because the NY Court of Appeals long ago determined that the liquidation bureau is not a state agency, it is not subject to audit by the attorney general’s office or any other government oversight mechanism, nor is it subject to public access to records under the Freedom of Information Law (FOIL).

All of which makes the liquidation bureau an “off the books” operation ripe for abuse and a potential home for “bad actors.” Not that there are any known bad actors in the bureau, but if there were, who would know?

When former Superintendent Lawsky was presented with the opportunity to unmask potential abuses, mismanagement and improper activity in the liquidation bureau with regard to the Executive Life liquidation back in 2011-12, he not only passed on the opportunity, he also blocked any attempts by others to do so. But the Lawsky administration has not been the only administration to protect the liquidation bureau from outside scrutiny. Its lack

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of statutory foundation, transparency and accountability has been recognized for decades, spanning numerous administrations from all ends of the political spectrum, yet no significant action has been taken by any administration or the legislature to address these issues. It is as if the liquidation bureau was some kind of politically protected enclave.

In apparent response to criticism of the lack of oversight in the receivership process, in 2008 the NY legislature added a statutory requirement for an annual audit of the liquidation bureau (again without providing any definition or authority for its existence) and each estate—regardless of size—in receivership. Rather than providing significant oversight as its proponents suggested, however, the requirement actually provides even greater cover for the liquidation bureau and unnecessary cost to the estates at the expense of claimants of each estate.

The audit reports do not have to be provided until August 1st each year, making them quite untimely to be of much use.

But of use to whom? The statute requires the reports be provided to the “department and the legislature” but without any directions or authority for reviewing or questioning the audits. There is not even a requirement that the audit reports be provided to the court “overseeing” each estate.

Then again, there is no requirement for any regular, periodic reporting to the court, no requirement for detailed plans of rehabilitation or liquidation, and no standard for policyholder or creditor participation in the receivership process except through the agents of the receiver, the unaccountable liquidation bureau.

Which brings us back to Health Republic Insurance Company!

The judge presiding over the Health Republic liquidation proceedings, NY Supreme Court Justice Carol Edmead, continues to require the receiver’s representatives to post all proceedings on the Health Republic website, press for more details on claims processing and expenses, and hold conferences and render rulings on proposals presented to her. But with all her handson efforts, major issues looming over the receivership proceeding have not been fully addressed and are more and more unlikely to ever be addressed, including the failure of the DFS, the superintendent as receiver, or the receiver’s agents (i.e., the liquidation bureau):

• To explain the gap between the consent to liquidation by Health Republic’s board in October 2015 and the petition to liquidate in March 2016; • To prepare or cause to be prepared complete and meaningful opening financial statements as of the date of liquidation as would be expected of any reasonable manager assuming responsibility for a business entity; • To provide details regarding the expenses incurred and paid out of the assets of Health Republic between the consent to liquidate in October 2015 and the issuance of the order of liquidation in May 2016; • To explain why these expenses were incurred at all before the liquidation order was entered, or why these expenses are not voidable preferences under the law; • To address conflicts of interest of and preferential status provided to carryover third party providers of operating, claim, web, legal and other services; • To explain paying close to $6 million in “administrative expenses” from the date of liquidation in May 2016 through year-end 2016 without obtaining court approval as required by statute; • To provide policyholders, providers and other creditors of Health Republic and the court, with a comprehensive plan for the liquidation of Health Republic as promised by the receiver in April 2016; or • To explain what ever happened to the purported “official investigation” announced by the DFS in November 2015, into “the causes of the inaccurate representations to NYDFS regarding the company’s financial condition.”

Why aren’t these issues being addressed by the court? Quite simply, it’s the system. Most NY judges have no idea that the liquidation bureau is not a state agency, or that the receiver is not acting as the superintendent of the DFS but as a private individual appointed to act as receiver under the court’s supervision. The result is an undue deference given to the receiver’s agents in proceedings like Health Republic, including a reluctance to allow third party representatives of policyholders or other creditors a seat at the table, or to hold the receiver’s agents accountable for their actions.2**

The receiver’s agents (i.e., the liquidation bureau) control the materials provided to the court, and because these agents oppose any challenge to their perceived sole and absolute authority to speak on behalf of policyholders or other creditors, the court either does not know there are unaddressed issues or the explanations provided by the receiver’s agents go unchallenged. The court will likely sign orders from time to time approving actions taken on behalf of the Health Republic estate, and may even get the receiver and her agents to do some things they might not have done if left entirely to their own devices, but those actions will not come close to true oversight.

Even if a court fully understood and wanted to exert control, its ability to do so is remarkably limited. And if the court should get too close to actual, consequential oversight, the superintendent holds the ultimate wild card—the ability to disappear in the middle of the night. Under a seldom discussed provision of the insurance law (Section 7421), the superintendent, on her own motion, without notice to anyone including policyholders or other creditors, can move the liquidation proceeding to another jurisdiction anywhere in the state. She can do this on application to any supreme court justice so that the judge previously handling the case need not even know the case has been moved until it is done.

Now that’s unbridled Power! (And, yes, it has been used in the past!)

If there is to be a serious dialogue about bad actors and accountability in the insurance business, the unaccountable, conflict-ridden multi-$billion receivership industry must be included in the conversation. *One of those references is in NY’s Retirement and Social Security Law underscoring the anomaly that although employees of the liquidation bureau are not state employees, they are included under the state’s pension system. **Another example: since about the time of the ELNY fiasco, superintendents have routinely inserted a judicial immunity provision in all proposed liquidation or rehabilitation orders for them and their representatives (i.e., the liquidation bureau). Although there is no statutory basis for such broad immunity, the courts seem to accept the provision as part of a “pro forma” order.

INSURANCE ADVOCATE / March 6, 2017 17

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[ F EAT URE ]

B Y E R I C A . K U WA N A A N D S A R A H D O W N E Y

Effectively Defending Adversarial Actions Brought Against Former D&Os in Bankruptcy Court

Eric A. Kuwana is a partner and cohead of the Securities Litigation and Enforcement practice at Katten Muchin Rosenman LLP. Sarah Downey is the Directors and Officers Liability Product Leader at Marsh USA Inc.

Reprinted with permission uFor many litigants, the decision whether to prosecute or defend a lawsuit vigorously boils down to a rather basic calculus: What are my chances of success?

What is the potential recovery or loss? Is this a “bet the company” litigation? And, how much will I have to pay the lawyers?

In many respects, it is not all that different from a poker player eyeing his chip stack and deciding whether the pot odds and implied odds warrant the call of a big bet.

In a traditional litigation, parties usually do not know the other party’s entire hand until discovery is conducted. Parties usually can estimate their chance of success at trial and calculate whether it makes financial sense to continue to invest in their hand. And the judge usually does not care who wins, as he or she should be interested only in seeing that the game is played fairly, in accordance with the rules.

These are some basic assumptions that often guide the way litigation plays out.

However, many of them—and sometimes all—get thrown out the window when defending a director or officer in an adversarial proceeding in a bankruptcy court.

As explained in detail below, the unique interplay between the bankruptcy court, a trustee for a bankruptcy estate, the bankruptcy estate itself, and a defendant who served as a director or officer of a nowbankrupt company requires a different approach to risk assessment.

A trustee is likely to already have the vast majority of a defendant’s responsive discovery—i.e., data owned by the estate.

Rarely do plaintiffs have many of the documents, access to former employees, outlines of likely testimony, and other evidence they need to prove their case prior to the start of litigation. They may have enough on “information and belief ” to 18 March 6, 2017 / INSURANCE ADVOCATE

Given that the adversary proceeding will likely be filed with the same judge overseeing the bankruptcy itself, the plaintiff-trustee will already have a good feel for how the bankruptcy judge may resolve an adversary proceeding.

assert the necessary allegations and elements in a complaint to survive a motion to dismiss, but until discovery runs its course, they rarely have the smoking gun or the chain of documents necessary from the defendant’s files to pull their case together. Instead, those documents sit in the possession of the defendant, in its files, data centers, and the memories of its employees—repositories to which plaintiffs rarely have access prior to the commencement of formal discovery.

But, in the bankruptcy context, the plaintiff-trustee does not need to wait for discovery because the trustee likely comes loaded for bear with documents, interviews with former employees, and a map of the case with key supporting evidence before the complaint is even drafted. If the defendant is a former officer or director, that defendant’s relevant acts and statements are likely already captured in files and documents owned and retained by the bankrupt company itself—e.g., board meeting minutes, emails housed on company servers, or company purchase or sale orders. There may still be some documents and data that the plaintiff-trustee lacks— maybe emails between board members

sent from their personal email accounts— but a lot of data that will be needed to substantiate a claim will already be in the plaintiff-trustee’s possession.

A trustee will have had the opportunity to fully analyze his position.

As discussed above, the plaintifftrustee will likely have a wealth of relevant data in his possession before he and his outside counsel even consider filing an adversary action. This often means that the plaintiff-trustee had the opportunity to review that data, interview employees and other individuals, and consult with his lawyers before bringing an adversary action. Given that the adversary proceeding will likely be filed with the same judge overseeing the bankruptcy itself, the plaintiff-trustee will already have a good feel for how the bankruptcy judge may resolve an adversary proceeding. And the plaintiff-trustee probably knows the personality of the company well enough to decide whether to go after an entire board of directors or instead take a divide and conquer strategy and target specific individual directors and officers; taking whichever approach is most likely to score a payout from the D&O insurance policy at risk in either scenario. After all, the plaintifftrustee views the D&O insurance policy as an asset of the estate and is just evaluating how best to unlock the policy limits.

The takeaway here is that, unlike many plaintiffs, a trustee often has an opportunity to review a significant amount of responsive material, consult his experts, and weigh his likelihood of success. He may have even reached settlements and entered cooperation agreements with other officers, directors, employees and/or third CONTINUED ON PAGE 20

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[ F EAT URE ] CONTINUED FROM PAGE 18

parties earlier in the proceedings in a manner that helps his pursuit of certain officers and/or directors. This means a trustee— and his counsel working on contingency— is unlikely to be firing blind or bluffing when filing an adversary action; to the contrary, there is a greater possibility that he has reason to hold a certain level of confidence in his case.

A trustee has personal incentives.

Trustees bring suits against former directors and officers in order to augment the assets in the bankruptcy estate. 1 However, trustees also have some incentives that influence their decision whether to pursue an adversary proceeding. Chapter 7 trustees receive a commission based on a sliding scale relative to the amount of money disbursed by the estate to professionals and creditors. Specifically, 11 U.S.C. § 326 allows a trustee to receive 25% of the first $5,000; 10% of amounts between $5,000 and $50,000; 5% of amounts between $50,000 and $1 million; and 3% of amounts over $1 million. Therefore, if a trustee can bring a profitable adversary proceeding against a former director or officer, the trustee himself profits. But, simultaneously, if funds are spent on what results in being an unsuccessful litigation, the trustee will have less to pay creditors and, therefore, less to pay himself.

Bankruptcy judges have connections to the local bankruptcy bar.

Unlike federal district court judges, bankruptcy judges are appointed and serve terms of fourteen years.2 These appointments are made by the courts of appeals for the circuit in which the bankruptcy

…in four of the busiest bankruptcy courts across the country, over 80% of the bankruptcy judges were in private practice immediately before taking the bench, many of them as active members of the local bankruptcy bar. court is found, meaning that bankruptcy judges are not subject to the same Congressional review and approval as other federal judges.3 Whether it is this hiring process or the fundamental nature of the position that causes it, bankruptcy judges often have a different background than other federal judges. For example, in four of the busiest bankruptcy courts across the country, over 80% of the bankruptcy judges were in private practice immediately before taking the bench, many of them as active members of the local bankruptcy bar. Compare this to the U.S. District Court for the District of Columbia, where only about half of the judges took their seats on the federal bench immediately after leaving private practice.

But this goes deeper than simply the number of judges who may have been in private practice before taking the bench.

In some bankruptcy courts, it is not unheard of that an attorney may be serving as a trustee in one matter and as counsel for the trustee in another; where counsel for the trustee in the first is the trustee in the second. This can create a heightened level of familiarity between members of this bar—and with the bankruptcy judges who preside over it. Further, when a bankruptcy case also requires counsel for vari-

ous individual creditors, for the unsecured creditors committee, and all the other various constituents and interests in a bankruptcy case, it potentially involves most local bankruptcy counsel in a larger matter.

There is no analogue in the courts of general jurisdiction. When individuals are elevated from this small pool to positions as bankruptcy judges, they may bring with them a higher degree of intimacy and collegiality with this local bar.

Bankruptcy judges emphasize maximizing the estate.

The fundamental goal of a bankruptcy trustee is to maximize the value of a bankrupt estate.4 Indeed, this is the very purpose of the bankruptcy code,5 and value maximization is thus simultaneously a prime concern for a bankruptcy judge.6 How is value created in a bankruptcy estate? If a company is liquidating, value often will be created by auctioning assets to the highest bidder. But value can also be created by obtaining judgments or settlements from defendants in adversary proceedings—especially if doing so triggers an otherwise dormant and tough-toreach D&O insurance policy. The presiding bankruptcy judge likely used this same strategy in private practice as a bankruptcy trustee at some point in his or her career.

Bankruptcy judges do not regularly work with the rules of civil procedure.

Bankruptcy judges primarily focus on the administration of bankruptcy estates, done by applying the Federal Rules of Bankruptcy Procedure. When that administration involves an adversary proceeding, the Federal Rules of Bankruptcy Procedure often incorporate the Federal Rules of Civil Procedure.7 The frequency with which

1 John Rapisardi & Mark Douglas, Looking Elsewhere for Creditor Recovery: Insurance Claims, D&O Actions, Reinsurance, American Bankruptcy Institute, May 6, 2001.

2 28 U.S. Code § 152.

3 Id. 4 See U.S. Department of Justice, Handbook for Chapter 7 Trustees, available here (“The trustee should administer the estate so as to maximize the distribution to the beneficiaries.”); In re Ames Dept. Stores, Inc., 136 B.R. 357, 359 (Bankr. S.D.N.Y. 1992) (“One of the policies fundamental to the bankruptcy process is that of the Trustee to marshal and maximize estate assets. Section 363(b) fosters that policy by allowing the sale of all, or substantially all, of the debtor’s assets outside the context of a plan of reorganization.”

5 See Commodity Futures Trading Comm’m v. Weintraub, 471 U.S. 343, 352 (1985). See also Toibb v. Radloff, 501 U.S. 157, 163 (1991) (noting that an underlying purpose of the Bankruptcy Code is to maximize the value of the estate).

6 In re Integrated Res., Inc., 135 B.R. 746, 750 (Bankr. S.D.N.Y. 1992) (“[W]hen a debtor desires to sell an asset, its main responsibility, and the primary concern of the Bankruptcy Court, is the maximization of the value of the asset sold . . . . In general, to receive approval of a proposed sale of assets, the debtor will need to demonstrate to the Bankruptcy Court that proffered purchase price is the highest and best offer. These tenets also apply to the outright purchase of a debtor or its primary assets, as well as the effective acquisition of a debtor through the funding of a plan of reorganization.”).

7 E.g., Fed. R. Bankr. P. 7026 (“Rule 26 F.R.Civ.P. applies in adversary proceedings.”).

20 March 6, 2017 / INSURANCE ADVOCATE

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[ F E AT URE ] bankruptcy judges have the opportunity to work with the Federal Rules of Civil Procedure is limited. For example: in the year ending March 31, 2015; 911,086 bankruptcy cases were filed.8 During that same time period, only 34,369 adversary proceedings were filed.9 Bankruptcy judges therefore have less experience with these rules that might be expected from a district judge. This creates yet another variable for the defense in an adversary proceeding. Practitioners defending directors and officers in adversary proceedings should not be surprised if the traditional limits of discovery expand and open the door to burdensome and sometimes invasive discovery.

Few cases get dismissed on the pleadings or by summary judgment.

A review by Katten of data available through LexisNexis concerning adversary proceedings brought by trustees against directors and officers demonstrated that these proceedings were rarely, if ever, dismissed by either a motion to dismiss or a motion for summary judgment prior to trial. Indeed, less than 10% of the adversary actions reviewed were dismissed upon a motion by the defendant at any point in time. Compare this to civil cases terminated by the U.S. District Courts, where in the 12 months ending June 30, 2015, 185,784 of the 273,312 cases pending— almost 68%—were terminated by court action before the pretrial conference.10 These trends continue when considering cases that reach trial, in that a higher percentage of adversary actions against directors and officers reach trial than general civil cases in the district courts. Using the same data sets as above, only 1.1% of civil cases in the U.S. District Courts made it to trial, whereas 17.5% of the cases in the survey of adversary proceedings made it to trial. And while every case may be different, these numbers suggest a higher likelihood exists for a director/officerdefendant in an adversary proceeding to be brought all the way to trial than the defendant in a standard civil litigation.

Given that claims brought by a plaintiff-trustee against a director or officer in bankruptcy court bring certain unique challenges, it is imperative that the defense team explore potential strategic opportunities to obtain a more level playing field.

Can directors and officers rely on their D&O insurance coverage?

When litigating a case in bankruptcy court, directors and officers of the bankrupt organization typically expect that their D&O insurers will help fund their defense and indemnity obligations. But bankruptcy proceedings can handicap D&O insurers’ ability to provide protection and can complicate the overall insurance process. And without planning ahead, directors and officers might be left without insurance to protect their interests when they need it most.

Understanding and addressing the potential insurance limitations before filing for bankruptcy is crucial to ensure that directors or officers are adequately protected. When considering how to structure insurance programs, be aware that: • Bankruptcy court limits a policyholder’s rights to negotiate and purchase insurance. All expenses and major decisions affecting a bankrupt company need to be approved by the bankruptcy court.

• Insurers’ actions may be limited.

Once a company enters bankruptcy, a D&O insurer is often unable to pay any of its limits without approval of the court. Also, when a director or officer is in the process of defending

a claim or is sued during the bankruptcy, D&O insurance may not be able to respond as expected.

• There may be competing interests on a finite amount of insurance. D&O insurance might be considered by some as one of the largest assets of the estate. A significant number of competing interests—whether from the bankruptcy trustee or from other directors and officers—may quickly erode the policy limits.

Increasing Your Odds Given that claims brought by a plaintiff-trustee against a director or officer in bankruptcy court bring certain unique challenges, it is imperative that the defense team explore potential strategic opportunities to obtain a more level playing field.

Further, if a business valuation is needed, the defense should waste no time engaging an expert to confidently understand the potential exposure and begin formulating litigation and possible settlement strategy.

As explained below, these efforts can help the defense better control the momentum of the litigation going forward.

Withdraw to district court if possible.

Even though a claim might be filed in the bankruptcy court, there is a chance that it can be withdrawn to the local district court. To initiate withdrawal, a party must timely file a motion with the applicable district court pursuant to 28 U.S.C. § 157(d). What is considered “timely” can vary between jurisdictions and circumstances, but such a motion may be due shortly after a defendant’s answer is filed.11 A recent empirical study reviewed all of the motions to withdraw the reference from a bankruptcy court to a district court filed in 2013 where a decision was issued and available: 253 motions in all.12 Of these 253, 153 had been filed solely by the defendant.13 Of the motions to withdraw filed by defendants in actions brought by trustees, debtors-in-possession, or debtors, CONTINUED ON PAGE 22

8 U.S. Courts, Statistics & Reports, Table F – Bankruptcy Filings (March 31, 2016), http://www.uscourts.gov/statistics/table/f/bankruptcy-filings/2016/03/31.

9 U.S. Courts, Statistics & Reports, Table F-8 – U.S. Bankruptcy Courts Federal Judicial Caseload Statistics (March 31, 2015).

10 U.S. Courts, Statistics & Reports, Table C-4 – U.S. District Courts-Civil Statistics Tables For The Federal Judiciary ( June 30, 2015).

11 Compare D. Md. Adm. R. 405(2)(c)(i) (motion to withdraw due within 21 days after last pleading) with Irwin v. Faller, 531 B.R. 704, 707 (W.D. Ky. 2015) (motion to withdraw was untimely when filed a year into litigation and subsequent to motions for summary judgment) and Michaelesco v. Shefts, 303 B.R. 249, 253 (D. Conn. 2004) (motion to withdraw based on Seventh Amendment grounds filed shortly before trial considered timely).

12 Laura B. Bartell, Motions to Withdraw the Reference - an Empirical Study, 89 Am. Bankr. L.J. 397, 411-12 (2015).

13 Id.

INSURANCE ADVOCATE / March 6, 2017 21

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[ F EAT URE ] CONTINUED FROM PAGE 21

approximately two-thirds were granted.14 However, approximately 58% of motions to withdraw (filed by any party) go unopposed.15 Consequently, whether a motion to withdraw is unopposed has a strong bearing on the likelihood that it will be granted,16 but there is still potential for an opposed motion to be granted, warranting an attempt.

Mandatory Withdrawals For some matters, withdrawal is statutorily mandated.17 Mandatory withdrawal is required for matters that involve substantial and material consideration of federal law beyond the bankruptcy code.18 Matters that require only a “straightforward” application of federal law will not trigger the mandatory withdrawal requirement,19 and the burden to demonstrate that a matter necessitates “substantial and material” consideration of federal law rests with the party seeking withdrawal.20 The final determination is a case-by-case analysis, but courts have generally been reluctant to broadly apply the mandatory withdrawal statute.21 Permissive Withdrawals If a matter does not qualify for mandatory withdrawal, it still may benefit from a permissive withdrawal to the district court “for cause shown.”22 Various factors are considered when analyzing whether cause

exists: judicial efficiency, potential delay, cost to the parties, uniformity of bankruptcy administration, forum shopping, etc.23 Traditionally, the most important factor was determining whether a claim was “core” or “non-core” to the bankruptcy. 2 4 Determining whether a matter is “core” is not always clear and can be a complex, factspecific analysis.25 “Core” claims are those that, generally speaking, could arise only in the context of a bankruptcy case.26 To be “non-core”: (1) a claim must not be specifically identified as “core” under 28 U.S.C. § 157(b)(2); (2) a claim must have existed prior to the filing of bankruptcy; (3) a claim must be based entirely on state law and independent from Title 11 of the U.S.C. (the bankruptcy code); and (4) the parties’ rights or obligations must not be significantly affected by the outcome of the underlying bankruptcy.27 In recent years, courts have also considered whether the bankruptcy court holds the constitutional authority to issue a final ruling on the claims at issue, but when finding such authority lacking, some district courts have found that the bankruptcy court nonetheless held the authority to issue a report and recommendation on the claims, thus keeping the proceedings before the bankruptcy court.28 Finally, though a jury demand can weigh in favor of withdrawing a matter from the bankruptcy court, district courts have held that withdrawal in such cases is premature until shortly before trial. 29 Accordingly, a defendant may still litigate

all discovery and dispositive motions before the bankruptcy judge until the matter is withdrawn to the district judge solely for the purpose of the jury trial.

Due to the fact-intensive nature of these determinations, coupled with the impact that their resolution will have throughout the life of the case, defense counsel should consider making a motion to withdraw an early priority. If an immediate withdrawal is granted, the defense will likely benefit from litigating discovery and substantive issues before a judge more familiar with such issues and the procedural rules and less concerned with increasing the value of the bankruptcy estate.

Engage experts early.

For certain claims brought against directors and officers, such as a claim for breach of fiduciary duty, it may be necessary to obtain an expert valuation of the debtor. 30 Such valuations have become heavily contested aspects of bankruptcy cases, especially as different experts employ various analytical approaches and rely on complex assumptions.31 Market turmoil will also complicate any potential analysis.32 Resultantly, valuations can be uncertain and wildly disparate. Indeed, it is not unusual for experts assisting different parties to offer valuations that are millions, tens of millions, or even hundreds of millions of dollars apart.33 To better prepare for what will be an inevitable battle over valuation, a prudent

14 Id. 15 Id. 16 Id. (finding 57 of 119—or 48%—of opposed motions to withdraw were granted in 2013, compared to 90% of unopposed motions) 17 28 U.S.C. § 157(d) (“The district court shall on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires a consideration of both Title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.”)

18 United States v. Delfasco, Inc., 409 B.R. 704, 707 (D. Del. 2009).

19 Id. 20 Id. 21 Bankruptcy Law Manual§ 2:11 (Reference and Withdrawal of Reference) (2016).

22 28 U.S.C. § 157(d) (“The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown.”).

23 In re Lehman Bros. Holdings Inc., 480 B.R. 179, 188 (S.D.N.Y. 2012).

24 The “core” or “non-core” determination goes further than just determining whether a matter will be withdrawn to the district court. It can impact the right to a jury trial and the standard applied during any potential review of the bankruptcy court’s finding by the district court. Thomas Salerno & Jordan Kroop, § 9.02 Impact of Core Versus Non-Core Designation in Bankruptcy Litigation andPractice: A Practitioner’s Guide (2016).

25 In re O’Brien, 414 B.R. 92, 98 (S.D.W. Va. 2009); Michael Cook, et al., § 14.03 Determining Whether A Matter Is A Core Proceeding in Bankruptcy Litigation Manual (2016).

26 In re O’Brien, 414 B.R. 92, 98 (S.D.W. Va. 2009).

27 Id. 28 In re Lehman Bros. Holdings Inc., 480 B.R. 179, 188, 194 (S.D.N.Y. 2012).

29 Michaelesco v. Shefts, 303 B.R. 249, 253 (D. Conn. 2004).

30 See Michael Cook & David Hillman, § 13.02 Context Of Common Valuation Disputes, Bankruptcy Litigation Manual(2016).

31 Stan Bernstein et. al., Squaring Bankruptcy Valuation Practice with Daubert Demands, 16 Am. Bankr. Inst. L. Rev. 161, 162, 239, 263 (2008).

32 2009 Ann. Surv. of Bankr. Law 9.

33 Stan Bernstein et. al., Squaring Bankruptcy Valuation Practice with Daubert Demands, 16 Am. Bankr. Inst. L. Rev. 161, 240-49 (2008) (summarizing valuations from multiple bankruptcy matters).

22 March 6, 2017 / INSURANCE ADVOCATE

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[ F E AT URE ] defendant will retain an expert early, especially given the likelihood that a case will survive to trial if being litigated before a bankruptcy judge. The expert can then work with counsel to not only develop defendant’s valuation, but also help counsel understand the likely flaws in plaintiff ’s valuation. This will help prepare for the inevitable battle over valuation while immediately informing any potential settlement strategy, hopefully providing the defense with tangible evidence to drive down the settlement value of the case.

Protect directors and officers: address insurance needs in advance.

Beyond understanding the ramifications of litigating in bankruptcy court, directors, officers and the companies they serve need to take all necessary steps to ensure that sufficient and accessible insurance coverage is in place to protect an officer or director during the bankruptcy process. Make sure to: Negotiate the terms of your D&O runoff policy before bankruptcy proceedings. Runoff occurs when there is a change in control of the company or where the company ceases to exist. Runoff insurance provides coverage for claims that arise out of wrongful acts that allegedly occurred prior to the date of the change in control.

Policyholders can negotiate and purchase runoff coverage before the bankruptcy filing when the company still has control over its expenditures and the ability to negotiate policy terms. Depending on the terms of the policy, runoff is triggered either when the company emerges from bankruptcy or when the company enters bankruptcy. To obtain the most competitive policy terms, companies should try to purchase runoff coverage before filing for bankruptcy protection.

Understand how your policy terms will play out in bankruptcy. To the extent possible, negotiate favorable policy terms that allow for the payment of insurance proceeds during the pendency of a bankruptcy—often known in an insurance policy as waiver of stay terms. If unable to obtain this language, most D&O insurers will agree to seek a comfort order from the bankruptcy court that will enable the insurer to pay the defense costs of a direc

Bankruptcy litigation can be complex and time consuming for organizations and their directors and officers. tor or officer while the bankruptcy remains pending. Be aware that comfort orders can be limited; for example, the court might allow only a certain monetary amount to be paid or it might only allow payments to be made for a set period of time.

Purchase Side-A difference-in-conditions (DIC) insurance. Standalone Side-A DIC coverage could help avoid conflicts with the bankruptcy trustee as to who is entitled to the insurance proceeds—the trustee on behalf of the bankrupt entity or the individual directors and officers.

Because Side-A DIC insurance is dedicated to providing coverage to the directors and officers—and not the bankrupt company—limits for this coverage are rarely viewed as an asset of the estate.

Ensure sufficient D&O insurance limits. Policyholders should plan appropriately to ensure that there are sufficient limits in place to protect their interests. In particular, the costly nature of litigating in bankruptcy court highlights the need for sufficient D&O insurance limits. This need should be carefully considered due, in part, to the fact that a bankruptcy trustee typically considers the D&O policy proceeds to be a significant asset of the estate; the larger the limits the more appealing litigation looks to the trustee. Side-A DIC limits are potentially one solution—as mentioned above—and are a critical component to ensure directors and officers are protected during a bankruptcy.

Review all policy terms and consider how a bankruptcy filing will impact the application of the policy terms.

Organizations should work with their insurance advisor to determine, for example, whether the policy’s insured versus insured exclusion has a broad bankruptcy carve-back, how the conduct exclusions— the fraud and personal profit exclusions— might be triggered, and how the exclusions may apply should the case go to verdict in a potentially unfavorable venue. If the pol-

icy also provides entity coverage—known as Side-C coverage—determine whether there is favorable pre-set allocation wording in the policy.

Bankruptcy litigation can be complex and time consuming for organizations and their directors and officers. Make sure D&O insurance will appropriately respond when coverage is needed. Organizations should spend time reviewing their policies with an insurance professional in advance of a bankruptcy filing to best maximize insurance protection.

Conclusion A successful poker player understands his opponents and the odds of winning a head-to-head battle. The same is true for a successful litigator. Because the bankruptcy backdrop affords a plaintiff-trustee a different position than a plaintiff in a traditional litigation scenario, litigators defending directors or officers in adversary proceedings need to alter their approach to risk assessment. The defense needs to consider variables that rarely appear in other cases but are more likely in the bankruptcy scenario. For example, the heightened possibility that the plaintiff-trustee already possesses the vast bulk of material it would otherwise receive through discovery, that the plaintiff already has sufficient documentary (and potentially testimonial) evidence to survive any motion for summary judgment, that the plaintiff-trustee is familiar with the judge and vice-versa, and that the plaintiff-trustee and her outside counsel, working on contingency, would be less likely to bring a potentially risky claim for fear of putting themselves at risk.

The defense needs to quickly and thoroughly understand the case: to get deep into the documents, to reach out to the available principals and witnesses and get the story from their points of view, and to explore and test the theories asserted by the trustee. Once all this is done, the defense must take the most difficult step and, considering all the aspects discussed above, explore and identify the most efficient paths to resolution. Importantly, in our view, the defense must take all steps necessary to get the claims against former officers and directors out of the bankruptcy court.[IA]

©2017 Katten Muchin Rosenman LLP. All rights reserved.

Katten refers to Katten Muchin Rosenman LLP and the affiliated partnership as explained at kattenlaw.com/disclaimer.Attorney advertising. Published as a source of information only. The material contained herein is not to be construed as legal advice or opinion.

INSURANCE ADVOCATE / March 6, 2017 23

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[ O N M Y R A DA R ]

BA R RY Z A L M A

Conviction for Health Care Fraud Upheld It is a Crime to Cheat Insurers uThe government’s case against Theresa Fisher was strong, predicated in part on the following evidence: • testimony by five witnesses who claimed to have been coached by Fisher; • testimony by a co-conspirator that both she and Fisher were pressured to bring in patients for insurancecovered procedures; • forged doctors’ notes with Fisher’s handwriting; • text messages between Fisher and patients regarding insurance coverage for cosmetic procedures; and • recordings of Fisher on the phone with one of the patients discussing insurance coverage.

This evidence overwhelmingly implicated Fisher in a mail fraud scheme. She was convicted and now contends that the district court committed several errors that individually and cumulatively created sufficient prejudice to warrant a new trial.

The videotape of Fisher’s meeting with the undercover agent was admissible, notwithstanding the government’s erroneous hearsay objection.

In United States of America v Theresa Fisher, United States Court of Appeals, Ninth Circuit, — Fed.Appx. — 2016 WL 4784046 (9/14/16), Fisher claimed the court erred by allowing a co-conspirator’s confession that added to the evidence of Fisher’s guilt.

THE ERROR CLAIMED The district court admitted the portion of Lindsay Hardgraves’ (Hardgraves) confession that inculpated Fisher. Because Hardgraves did not testify at trial, admission of that portion of her confession violated Fisher’s Confrontation Clause rights. See Bruton v. United States, 391 U.S. 123, 126 (1968). Fisher did not object to the admission of this evidence at trial. Even assuming that the error was clear and obvious, Fisher cannot show that admission of this evidence affected her substantial rights.

24 March 6, 2017 / INSURANCE ADVOCATE

In order to find an intent to defraud, the jury must have found that Fisher intended to defraud someone or something, and in this case that was the insurance companies.

Nonetheless, the Ninth Circuit concluded that exclusion of the tape was harmless error given the government’s strong case against Fisher.

Even when combined with the Bruton error mentioned above, the error in excluding the videotape does not warrant a new trial. The government has shown, based on the strength of the evidence presented at trial, that it is more probable than not that these two errors “did not materially affect the verdict.” See United States v.

Gonzalez-Flores, 418 F.3d 1093, 1099 (9th Cir. 2005).

Fisher argues that the jury might have convicted her merely upon finding that she deliberately avoided learning that the procedures were not medically necessary, without also finding that she knew the procedures were fraudulently billed to insurance companies. This argument ignores the fact that the jury was required to find that Fisher acted with an “intent to defraud,” in addition to finding that she acted knowingly. In order to find an intent to defraud, the jury must have found that Fisher intended to defraud someone or something, and in this case that was the insurance companies.

Fisher contends the jury was required to find the facts that form the basis for the restitution determination. This argument is foreclosed by our decision in United States v. Eyraud, 809 F.3d 462, 471 (9th Cir. 2015) and she must therefore pay restitution to the insurers.

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide.

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http:// shop.americanbar.org/eBus/Store/Pro ductDetails.aspx?productId=214624, or 800-285-2221 which is presently available.

Legal Disclaimer: The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

INA 3-6-17.qxp_INA 3-6-17 3/9/17 12:48 PM Page 25

[ O N M Y R A DA R ] A party may have perfectly valid reasons for declining to object to evidence that is technically objectionable, but that causes no harm in the context of the facts and the theory of the defense.

It would have been error for the district court to have admitted Hardgraves’s statement over a Bruton objection. But there wasn’t any Bruton objection or any other objection.

A party may have perfectly valid reasons for declining to object to evidence that is technically objectionable, but that causes no harm in the context of the facts and the theory of the defense. Just as an appellate lawyer chooses which rulings to challenge on appeal and which ones to let go, the same is true of trial lawyers and objections. Not every witness has to be cross-examined; not every evidentiary objection has to be made. Good lawyers pick their fights.

Why didn’t defense counsel raise a Bruton objection here? The answer is: the court doesn’t know. Counsel may have had a strategic reason for his decision, or he may have been asleep at the switch. It was not error per se for the judge to have admitted testimony that wasn’t objected to, even if it could have been. The conviction stands, as does the restitution order.

ZALMA OPINION Defrauding an insurer is a crime. The United States caught Fisher and others cheating insurers with false medical claims.

The evidence against Fisher was damning.

Without objection, a confession of a coconspirator was admitted even though a valid objection existed. Because the evidence was damning, the error was not sufficient to require a new trial.

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[ COURTSIDE ]

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J U S T

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[ COURTSIDE ] In connection with the May 2011 oil contamination incident, State Farm provided coverage pursuant to the third-party liability provision, to the extent of remediating the property as directed by the New York State Department of Environmental Conservation, as a thirdparty claimant.

the property caused by “contamination,” and for damage to the “land.” The policy contained a third-party liability provision, which provided coverage for, inter alia, certain liability claims asserted against the plaintiffs. In connection with the May 2011 oil contamination incident, State Farm provided coverage pursuant to the thirdparty liability provision, to the extent of remediating the property as directed by the New York State Department of Environmental Conservation, as a thirdparty claimant.

The plaintiffs commenced this action to recover damages relating to the oil remediation process at their property.

Named as defendants were, among others, State Farm, Holzmacher, McLendon & Murrell, P.C. (hereinafter H2M), an engineering and architectural firm retained by State Farm in connection with this project, and Milro Associates, Inc. (hereinafter Milro), a remediation contractor engaged by the plaintiffs and paid by State Farm.

As against State Farm, the complaint alleges, inter alia, that State Farm and its agent, H2M, supervised all remediation work at the property. The complaint further alleges that State Farm and H2M, along with Milro, caused additional damage to the property, beyond that incurred in the initial oil contamination incident.

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this action is untimely. However, in its motion papers, State Farm argued only that certain causes of action were timebarred. Therefore, its contention with respect to most of the plaintiffs’ claims is not properly before this Court (see Wells Fargo Bank, N.A. v Erobobo, 127 AD3d 1176, 1178; Williams v Yang Qi Nail Salon, Inc., 113 AD3d 843, 845). With respect to State Farm’s contentions that are properly before this Court, the action is not untimely. The applicable insurance policy provides that “no action shall be brought against State Farm unless there has been compliance with the policy provisions and the action is started within two years after the occurrence causing loss or damage.”

However, construing that ambiguous provision against the insurer (see White v Continental Cas. Co., 9 NY3d 264, 267; Yeshiva Viznitz v Church Mut. Ins. Co., 132 AD3d 853), the provision applies only to suits alleging breach of the “policy provisions.” In this action, the plaintiffs do not allege a breach of the “policy provisions,” as they do not allege that State Farm failed to pay for damages in violation of the insurance policy. Rather, the plaintiffs essentially allege that State Farm engaged in negligence and fraud, in connection with its supervision of the remediation and repair work at their property. Under these circumstances, the provision of the policy that sets forth a two-year limitations period is inapplicable (see generally Executive Plaza, LLC v Peerless Ins. Co., 22 NY3d 511, 518; 5 Awnings Plus, Inc. v Moses Ins. Group, Inc., 108 AD3d 1198, 1200).

The Supreme Court properly granted that branch of State Farm’s motion which was to dismiss so much of the complaint as alleged that the plaintiffs were thirdparty beneficiaries of contracts between State Farm and Milro, and State Farm and H2M, and that State Farm breached such contracts. On a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), the court must liberally construe the complaint, accept all facts as alleged in the pleading to be true, accord the plaintiff the benefit of every favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory (see Leon v Martinez, 84 NY2d 83, 87-88).

Here, however, the complaint fails to allege, inter alia, the terms of the agreements between State Farm and H2M and Milro, 30 March 6, 2017 / INSURANCE ADVOCATE

Further, to the extent that the plaintiffs argue that they stated a viable cause of action based on a theory of tortious interference with contract by State Farm, the complaint fails to plead the terms of the alleged underlying contract between the plaintiffs and Milro and any specific breach thereof. respectively. Therefore, the complaint fails to state a viable claim for relief based on a third-party contract beneficiary theory. Further, to the extent that the plaintiffs argue that they stated a viable cause of action based on a theory of tortious interference with contract by State Farm, the complaint fails to plead the terms of the alleged underlying contract between the plaintiffs and Milro and any specific breach thereof.

As the Supreme Court properly found, the complaint fails to plead with the requisite specificity a cause of action to recover damages for fraud against State Farm.

The complaint also fails to state a cause of action against State Farm to recover damages for aiding and abetting a breach of fiduciary duty. Although the complaint alleges that State Farm aided a breach of fiduciary duty running from H2M and Milro to the plaintiffs, it fails to plead facts that would give rise to the existence of a fiduciary duty.

However, the complaint states a viable negligence cause of action against State Farm. In general, “a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated” (Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382, 389; see Countrywide Home Loans, Inc. v United Gen. Tit. Ins. Co., 109 AD3d 953, 954). A legal duty that forms the breach of a tort claim “must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract” (Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d at 389).

Here, the plaintiffs do not allege that State Farm breached the insurance policy

by failing to pay for damages as required by the policy. Rather, the plaintiffs allege that State Farm affirmatively undertook to supervise, direct, and perform the remediation and repair of their property.

Specifically, the complaint alleges, inter alia, that State Farm and H2M, acting as State Farm’s agent, failed to exercise reasonable care in the course of supervising remediation and repair, and that such failure caused additional damage to the property. The complaint also alleges that State Farm supervised and directed the work of H2M, potentially giving rise to vicarious liability on the part of State Farm for negligence, if any, of that contractor (see Kleeman v Rheingold, 81 NY2d 270, 274; Willis v City of New York, 266 AD2d 208). Under these circumstances, the complaint states a cause of action for negligence against State Farm.

The complaint fails to plead conduct potentially warranting punitive damages, based on a “showing of reckless disregard for the rights of others, bordering on intentional wrongdoing’” that affects the public generally.

In opposition to State Farm’s motion to dismiss the complaint, the plaintiffs did not seek leave to amend their complaint.

Thus, they may not now properly seek such relief (see generally DiLacio v New York City Dist. Counsel of United Bhd. of Carpenters & Joiners of Am., 80 AD3d 553, 554).[IA] 2016 NY Slip Op 01453 Decided on March 2, 2016 Appellate Division, Second Department

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