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2010 Professional Risk Symposium: EPL, E&O and Fiduciary Chicago, IL ~ March 18 & 19, 2010 What Does 2010 Hold for Fiduciaries and Their Insurers?
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2010 Professional Risk Symposium: EPL, E&O and Fiduciary What Does 2010 Hold for Fiduciaries and Their Insurers? Moderator: Alison L. Martin, Esq., Assistant Vice President, Chubb & Son Panelists: Cathy Cummins, Managing Director, Fiduciary Liability National Practice Leader, Marsh USA INC. Charles C. Jackson, Esq., Partner, Morgan, Lewis & Bockius LLP Kimberly M. Melvin, Esq., Partner, Wiley Rein LLP Harold Neher, JD, Assistant Vice President, AXIS Capital
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Agenda I.Key ERISA Trends and Legal Developments II.Indemnification and Common Coverage Issues III.Defense and Settlement Strategies IV.Best Practices for Managing and Underwriting Fiduciary Risks
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Key ERISA Trends and Legal Developments
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Key ERISA Trends ERISA Employer Stock Litigation For the first time since 2005, settlements of ERISA security holder claims have increased ERISA Fee Litigation Walmart and recent settlement activity suggest tide may be turning Everyone is watching the ABB, Inc. trial
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Key ERISA Trends Funding of Defined Benefit Plans The funded status for most pension plans is anticipated to decline significantly for 2010 ESOPs ESOPs of privately held companies have continued to be a source of significant losses Retiree Medical Benefits Litigation There has been an increase in litigation involving reduced benefits for retirees
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Key ERISA Trends Alternative Investments The Pension Protection Act of 2006 afforded pension plans a greater opportunity to allocate plan assets into alternative investments, which may raise issues regarding valuation, liquidity, opaque reporting, and the potential for fraud- related losses Department of Labor Investigations Investigations by DOL’s Employee Benefits Security Administration (EBSA) expected to increase
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Key ERISA Trends HIPAA Amendments Amendments expand the obligations of covered entities and their business associates (not covered by the Fiduciary Liability policy) and the penalties for violations COBRA Amendments Employers need to update their COBRA practices and disclose those changes as a result of new COBRA eligibility and notice requirements
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Update on the Employer Stock Cases Many are filed, but few go the distance How are fiduciaries faring? Motions to dismiss Motions for summary judgment Class certification A credible threat of trial exists: See, e.g., Brieger v. Tellabs, 629 F. Supp. 2d 848 (N.D. Ill. 2009) Yet, settlements on the rise
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ERISA Fee Litigation: Tallying the Score Defendants have scored significant victories, for example: Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. Feb. 12, 2009) (reh’g denied; cert. denied) – affirmed dismissal of claims at pleadings stage Kanawi v. Bechtel Corp., 590 F.Supp.2d 1213 (N.D. Cal. 2008), appeal pending (9th Cir.) – granted summary judgment for plan sponsor/fiduciaries Taylor v. United Technologies Corp., slip op. (2d Cir. Dec. 1, 2009) – affirmed summary judgment for plan sponsor/fiduciaries Dupree v. Prudential Ins. Co. of America, 2007 WL 2263892 (S.D. Fla. Aug. 7, 2007) – Defense Verdict
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ERISA Fee Litigation: Tallying the Score The story is not all good Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009) – reversed dismissal of claims against plan sponsor and service provider Court makes very expansive statements regarding plaintiffs’ need to get discovery that may lead to more cases surviving motions to dismiss
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ERISA Fee Litigation: Tallying the Score Cases to watch Tussey v. ABB, Inc. (trial concluded January 28, 2010) Tibble v. Edison (trial concluded October 22, 2009; post-trial briefing on-going) Jones v. Harris (Supreme Court granted certiorari in March 2009)
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Indemnification and Coverage Issues
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Fiduciary Liability Insurance ERISA allows the plan, the employer, or the fiduciary to purchase insurance to protect against fiduciary breaches If fiduciaries do not maintain fiduciary liability insurance, but rely on corporate indemnification as their sole source of financial protection, their personal assets may be at risk
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Availability of Indemnification Generally corporate sponsor – but not plan – is permitted to indemnify fiduciaries under ERISA and applicable state law Although plan fiduciaries generally have broad indemnification rights, some issues that may affect their ability to be indemnified: ERISA Section 410 exculpatory provisions Insolvency risk
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Availability of Indemnification Challenges often arise in ESOP context where plan owns all or a significant part of the company See Johnson v. Couturier (9th Cir. 2009); Fernandez v. K-M Industries Holding Co. (N.D. Cal. 2009) Uncertainty underscores need for adequate fiduciary liability insurance Possible retention issues
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Common Coverage Issues Who is an Insured What is an insured plan Third party fiduciaries Definition of “Wrongful Act” / capacity / settlor function issue Definition of “Loss” (e.g., plaintiffs’ attorney fee awards) Exclusion for “benefits due” Limit of liability tie-in provisions
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Defense and Settlement Strategy
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Settlements of ERISA Security Holder Claims 2003 Settlements 2004 Settlements 2005 Settlements 2006 Settlements 2007 Settlements 2008 Settlements 2009 Settlements Total: $150.5 Million Total: $208.2 Million Total: $711.7 Million Total: $294.4 Million Total: $161.2 Million Total: $150.7 Million Total: $330.4 Million
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Defense & Settlement Strategies Review of recent history of fiduciary class action settlements ERISA stock drop litigation has evolved into a stand alone, significant exposure Uncertainty in the law often leads to settlements based on largely hypothetical litigation risk Disconnect between settlements and defense successes – incentivizes plaintiffs’ bar
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Settlements v. Litigation Results Total Settlements of Employer Stock Litigation in 2009 = $330.4 Million Recent Defense Successes Through Motions Practice & At Trial in Employer Stock Litigation Merrill Lynch - $75 million Tellabs (N.D. Ill 2009) – defense verdict at trial Tyco - $70.5 million W.R. Grace (1st Cir. 2009) – affirming SJ for defendant Countrywide - $55 million Lehman Brothers (S.D.N.Y. 2010) – granting MTD Xerox - $51 million Huntington Bancshares (S.D. Ohio 2009) – granting MTD GE - $40 million Computer Sciences Corporation (C.C. Cal. 2009) – granting SJ for defendant
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Defense & Settlement Strategies – Are they Working? Typical settlement signal events Motion to Dismiss Motion for Class Certification Motion for Summary Judgment Trial Best practices for case and settlement evaluation
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Key Take-aways For The Management & Settlement of Claims Selection of counsel is key – important to choose experienced ERISA litigators Coordination between insured, defense counsel and insurer is key Present a united front ready and willing to go to trial Jointly develop settlement strategies Balance insured’s and insurer’s sometimes differing motivations
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Best Practices for Managing and Underwriting Fiduciary Risks
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Managing The Underwriting Process – The Broker’s Perspective Underwriters are differentiating Insureds with significant fiduciary exposure from others Consider dedicated meetings with fiduciary underwriters that include participation of the benefits managers and in-house ERISA attorneys Communicate to the marketplace: Management’s clear understanding of the exposures Corporate and plan governance is taken seriously Plan fiduciaries follow the basic standards of conduct to limit potential liability
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Evaluating Fiduciary Risks – General Underwriting Considerations Consider the industry segment & financial strength of the company; plans, types of plans offered, asset size & participant count (larger plans = bigger targets) Have any plans have been terminated or assets have been distributed or merged into another plan? Assess funding levels of DB plans, ability to meet the required contributions under the PPA, and whether there have been any changes in the discount rate, the rate of return or compensation increase rate and the reasons behind the changes
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Evaluating Fiduciary Risks – General Underwriting Considerations Have there been mergers or acquisitions or layoffs/downsizing/plant closings and any history of claims/litigation? What are the investment options and overall investment results along with changes in any asset allocation or investment policy? Is company stock held by the plan & if so, how much? Examine reputation and utilization of outside service providers
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Evaluating Fiduciary Risks – Plan Design Considerations There is no one “best” plan design. The goal is that the plan structure is: thoughtfully and intentionally designed well-administered and consistently followed The plan should avoid naming the plan sponsor or key corporate officers as fiduciaries Examine how fiduciary duties have been delegated
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Evaluating Fiduciary Risks – Plan Design Considerations Are the roles of plan sponsor and fiduciaries clearly defined? Do fiduciaries have discretion to construe the terms of the plan, make benefit eligibility determinations, and make factual findings? Does the plan comply with 404(c)? Are any employer stock investments hard-wired into the plan?
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Evaluating Fiduciary Risks – Procedural Prudence Considerations Do fiduciaries have regular, structured meetings with each other and service providers? Do fiduciaries understand their duties, read the plan documents and may even have training? Where duties have been delegated, are fiduciaries are kept informed & at arm’s length for decisions? Is the performance of all investments (including company stock) regularly reviewed? Has sponsor hired or considered hiring an outside investment consultant?
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Questions Cathy Cummins Managing Director Marsh/FINPRO Laura Coppola Vice President Arch Insurance Charles Jackson, Esq. Partner Morgan Lewis & Bockius LLP Kimberly Melvin, Esq. Partner Wiley Rein LLP Harold Neher Vice President AXIS Capital Alison Martin, Esq. Senior Zone Technician Chubb & Sons Group of Insurance Cos.
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