Financial Stimulus?August 13th, 2020
Late last week, Congress adjourned without reaching a deal on the next pandemic stimulus package. Over the weekend, President Trump took matters into his own hands and issued four separate executive orders (only one is technically an order, the other three are memoranda) designed to boost the economy and help unemployed individuals whose federal unemployment benefits expired at the end of July. The legality of the orders immediately came into question by both Republicans and Democrats alike, as the “power of the purse” is in the hands of Congress, not the President. Upon review, however, it appears as if the federal unemployment benefits are legal in that there is no new money apportioned for the relief, but rather money was redirected from left-over CARES Act funds as well as from disaster relief funds. Some commentators argue that the executive orders serve as a way of forcing Congress back to the table to hammer out a stimulus package that works for both parties. There have been no signs of movement on this front. This is not a political blog, so we will leave it at that.
Motion to Dismiss Denied—Point Scored for Insureds:
A Missouri federal court denied a property insurer’s motion to dismiss a purported class action brought by property policyholders. The policyholders, businesses including restaurants and hair salons, were forced to close or significantly reduce their operations as a result of the pandemic and sought coverage under the policies for the business losses they sustained. Claims submitted by the business owners to the insurers were denied, and the businesses sued the insurer for coverage.
The facts behind this lawsuit are similar to those we have seen in hundreds of these COVID-19-related filings. Plaintiffs started with the fact that they purchased “all-risk” property policies from the insurer, Cincinnati Insurance Company. The businesses “allege(d) that the presence of COVID-19 and the (c)losure (o)rders caused a direct physical loss or direct physical damage to their premises ‘by denying use of and damaging the covered property, and by causing a necessary suspension of operation during a period of restoration.’” The insurer filed a motion to dismiss arguing that their policies “provide coverage ‘only for income losses tied to physical damage to property, not for economic loss caused by governmental or other efforts to protect the public from disease…(Further,) the same direct physical loss requirement applies to all…”insuring agreements under which the businesses are seeking coverage.
The court found that the policies “expressly cover ‘physical loss or physical damage.’…This ‘necessarily means that either a ‘loss’ or ‘damage’ is required, and that ‘loss’ is distinct from ‘damage’…As such, Plaintiffs argued that Defendant’s focus on an actual physical alteration ignores the coverage for a ‘physical loss.’ Plaintiffs further argue that Defendant could have defined ‘physical’ loss and ‘physical damage’ but failed to do so.” The court went on to look at the plain meaning of the words at issue, pointing out that the word “’Loss’ is ‘the act of losing possession’ and ‘deprivation.’” As such, the court found that businesses’ reading of the policy is reasonable, and that ‘(p)laintiffs have adequately alleged a direct physical loss.” The court walked through the insuring agreements at issue, and ultimately held that the case could proceed to discovery.
As with all of these cases, the policy wording and the facts of the case are very important. That noted, however, this is a win for insureds in their search for property coverage in the wake of the pandemic.
McDonald’s Sues its Former CEO:
Yesterday, the Board of Directors of McDonald’s sued Steve Easterbrook, its former CEO. Yes, you heard right. In public. Out in the open. For all the world to see. This case brings up so many issues…#metoo, reputation, the responsibilities of the board of directors, indemnification and, of course, insurance (we love the insurance part, don’t we?).
Let’s start with the facts. Last fall, after an investigation into the former CEO’s alleged relationship with a McDonald’s employee, the company fired its CEO without cause. The “without cause” piece was the key, as it meant that Mr. Easterbrook walked away with a very large severance package. Had he been fired “for cause”, he likely would not have been entitled to the package.
As part of the company’s original investigation into the CEO’s conduct, Easterbrook admitted to having “a single, consensual, nonphysical relationship”. In July, however, a tip from an anonymous source “revealed that Easterbrook was involved in a sexual relationship with a second employee. The tip set in motion a second probe that revealed affairs with two other employees and dozens of photos of nude or explicit photos of women—including the employees—that Easterbrook forwarded to his personal account from his company email.” The investigation further uncovered that Easterbrook had “approved a special discretionary grant of restricted stock units—worth hundreds of thousands of dollars (to one of the employees)…shortly after their first sexual encounter and within days of their second.” Uh-oh.
The Board alleges in its complaint that had it been aware of these additional indiscretions, Easterbrook would have been fired for cause, and would have forfeited any severance. Among other things, the Board is demanding the return of the large severance package which included not only cash payments but stock awards totaling in excess of $12M.
This a very public matter. McDonald’s not only dismissed it’s former CEO last fall for inappropriate sexual behavior, but this lawsuit is saying to its shareholders and customers, “we relied on information that has turned out to be false and we are going to make it right. We do not condone this type of behavior and we are going to make sure that the company is made whole.” (My quotation marks.) McDonald’s was quick to point out in its complaint that the original separation “received a relatively positive market reception”. On the day the complaint was filed, early trading was down slightly but recovered. Maybe doing the right thing is the right thing and is appreciated by shareholders?
From an indemnity and insurance perspective, there is a lot to think about here. First, is the CEO entitled to indemnity from the company for his defense of this claim brought by the company against him? If he is, will he ask for it? Next, how will D&O insurance respond? First, if McDonalds buys balance sheet protection (Side B and Side C coverage), how will the policy respond? Most ABC D&O policies have an entity versus insured exclusion which prohibits coverage for claims brought by the entity against insured persons (which includes past, present and future executives). (Although this exclusion is designed to prevent collusion between insureds, here we truly have two adverse parties.) There are, of course, carvebacks to the exclusion that can help with defense costs at a minimum. Additionally, A Side DIC policies do not contain entity versus insured exclusions, and could respond if indemnity is not available. Finally, on its face, it appears as if the vast majority of relief sought by McDonald’s is the return of the severance package. One would assume that the insurers will take the position that this relief is disgorgement and therefore not covered under a standard D&O policy.
This one is interesting, and we will keep you posted.
Barbara McQuade, Trump’s COVID-19 Executive Actions Are Likely Legal…, Intelligencer, August 11, 2020.
Jeff Sistrunk, Mo. Restaurants Can Pursue COVID-19 Coverage Suit, Law360, August 12, 2020
Studio 417 Inc. et al. v. The Cincinnati Insurance Co. case number 6:20-cv-03127, US District Court for the Western District of Missouri.
Jeff Montgomery, McDonald’s Sues Ex-CEO Over Alleged Workplace Affairs, Law360, August 10. 2020.