On October 9, 2019, Series 1 of Oxford Insurance Company NC, LLC (“Oxford’) filed a complaint in the US District Court for the Western District of North Carolina against Buckley, LLP seeking a judgement on whether or not Oxford has any obligation to indemnify Buckley under an insurance policy issued to Buckley on a key individual at its law firm. Series 1 of Oxford Insurance Co. N.C. LLC v. Buckley LLP (Case No. 3:19-cv-00522)
In 2017, Buckley LLP obtained a package of coverages, including Loss of Key Employee coverage on certain partners of the firm. Buckley sought payment ($6 million claim) under the Loss of Key Employee for the departure of one of the co-founders of the firm, Andy Sandler.
Oxford argued that it was not required to provide coverage due to Buckley’s failure to disclose on its application that Andy Sandler, was under investigation by the firm for misconduct shortly before Sandler’s retirement.
Generally, key employee insurance policy affirmatively states that the insurer may rescind or deny coverage based on misrepresentations or failures to disclose material information in the application materials. However, many key employee insurance policies also include severability clauses that generally state insurer cannot rescind or deny coverage for any individuals who had no knowledge of the misrepresentations. Severability clauses in these cases are designed to protect coverage for directors and officers who were unaware of the misrepresentations.
In the case at hand, Oxford argued that it had no obligation to indemnify Buckley because Sandler’s leave was involuntary as three Buckley partners were aware of allegations of misconduct against Sandler “from years earlier,” “which could lead to Mr. Sandler being terminated by Buckley”.
Besides denying coverage on multiple grounds (including that Buckley is not seeking coverage for losses resulting from the voluntary departure of a key employee) and multiple policy exclusions (including one for losses that are “expected or intended” by Buckley), Oxford claimed that it had no duty to pay Buckley because when applying for the insurance policy neither Sandler nor any of his colleagues disclosed anything regarding the allegations of Sandler’s misconduct despite having knowledge of them.
As a way of background: One major strategy law firms may protect against damage from key employees, or rainmakers, moving to other law firms is by taking out “key employee” insurance. Key employee insurance is a precautionary measure that minimizes the impact of a loss of a partner, management team member, majority stockholder or someone with unique expertise or a business-critical skillset. Key employee insurance allows law firms to survive the blow of partners. Law firms may use the insurance payout for expenses until the firm can find a replacement person or new clients. It may also be used if necessary to pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner.
But law firms need to be careful; a key point that we learn from this case is: A “key employee insurance policy” like a legal malpractice insurance policy can be voided by failure to disclose material information on an insurance application or a renewal.
For more information, contact Nathan M. Crystal
