Identity Theft and Insurance Coverage
By William M. Savino
Identity theft has begun to raise some important insurance coverage issues, as illustrated in New Hampshire Indemnity Co. v. Chevere. In this case, an insurance company issued an automobile insurance policy to "Robinson Jeannot" covering a Ford Granada that was rear-ended by another vehicle. The passengers in the Ford allegedly all were injured.

The court found that the evidence "clearly indicate[d]" that the person who had applied for and had obtained the policy was not Robinson Jeannot, but rather, was an imposter - an identity thief - who had used Jeannot's name to purchase insurance. The court observed that a "minimal inquiry" by the insurer would have revealed that the applicant for the insurance was not who he held himself out to be. Accordingly, the court ruled, the insurer could not invoke "its own careless conduct - issuance of an insurance policy to an imposter - to avoid liability to innocent third parties." The court added that if the insurer had performed "an adequate, basic investigation," it would have learned that Jeannot was not the applicant and properly would have refused to insure the car.

As the court suggested, insurers should investigate and verify information supplied by applicants before issuing insurance policies. Indeed, the New York Court of Appeals has recognized that insurers are obligated "to discover fraud at the earliest possible moment, before an accident occurs and the rights of innocent injured third parties have intervened."

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The Shock of Electronic Evidence and the Duty of Preservation
By John W. Allen
Whenever a claim is threatened or actually filed against a client, it is critical to advise the client to locate, preserve and produce all relevant documents that are material to the issues in the claim. This allows objective evaluation of the claim, and, more importantly, compliance with the client's duty to preserve evidence (both physical and electronic) relevant in the dispute resolution process.

Recent court decisions often deal out severe consequences for failure to discharge that duty; thus, it is critical that you and your client develop an understanding of your responsibilities in preserving and producing electronic evidence. A. The duty to preserve evidence generally.

• The duty to preserve evidence arises even before litigation begins. The duty to preserve evidence begins when (a) your client has notice that the evidence is relevant to litigation; or (b) when your client should have known that the evidence may be relevant to future litigation.
  
  
• The scope of this duty to preserve is broad. Your client has a duty to preserve evidence that it knows, or reasonably should know, is relevant to the claim. The duty to preserve also extends to evidence reasonably calculated to lead to the discovery of admissible evidence, as well as evidence reasonably likely to be requested.

B. Steps that should be taken to protect your client.

• Create a retention system. The first step that should be taken to ensure compliance is for your client to formulate a document retention system and policy. Having a preexisting system in place will solve many problems that may arise later on.
  
  Identify the key personnel involved in the matter. It is imperative that the client identify the key personnel involved in the matter. Each of these individuals should be contacted and asked to identify and locate all documents, including electronic documents such as e-mails, that relate to the facts underlying the litigation.
  
  Institute a "litigation hold" order and monitor compliance. When a claim appears likely, it is advisable that your client issue a "litigation hold" to ensure that relevant documents are preserved. While this hold does not apply to inaccessible backup tapes (those maintained for disaster recovery purposes), which a client may continue to recycle according to the schedule in a policy, the "hold" does apply to accessible backup tapes, or those actively used for information retrieval.
  
  Continue to communicate with key personnel. Ensuring continuing compliance also requires continuing communication with the key individuals involved, who need an awareness of their duty to retain relevant documents. It is not enough simply to discuss the issue with these individuals at the outset of litigation.
  
  Continue preservation efforts. In litigation, it is important to produce non-privileged information responsive to requests from the opposing party, and to supplement properly any earlier disclosure with any information later obtained. To comply with this duty to supplement, your client and you can work together in canvassing new information, and ensuring that no information is lost or destroyed. As part of this process, your client should work to ensure that employees produce electronic copies of their relevant active files and that backup media is stored in a safe place.
  
  
• Produce all relevant documents to you, as its lawyer. Copies of all relevant documents, in either paper or electronic form, should be produced by the client to you, as its lawyer. This will allow determination of whether certain documents, such as attorney-client privileged documents or confidential business information, require protection against public disclosure.

C. Consequences for failure to properly preserve evidence.

• Even negligent conduct can result in sanctions. Destruction of relevant evidence may subject the client to sanctions, including monetary penalties, regardless of the outcome of the underlying litigation. When the destruction of evidence is deemed to be intentional or willful, some courts have made adverse findings of liability based solely on the failure to produce relevant information. Even if the destruction of evidence results from only negligent conduct, nevertheless, many courts have imposed other, less onerous sanctions.
  
  
• Sanctions are potentially very costly. In a recent Florida case involving Ronald Perelman's suit against Morgan Stanley, Morgan Stanley repeatedly failed to turn over relevant e-mails. Many electronic documents were destroyed, because no effective "litigation hold" was implemented to stop the destruction (done by regular overwriting of email archives). The judge instructed the jury that it had to presume that Morgan Stanley had engaged in fraud, leaving the jury to decide only the appropriate amount of damages. The jury ultimately awarded Perelman $1.45 billion dollars in damages.

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"Pretexting"
By Alan S. Rutkin
Hewlett Packard's botched internal investigation into news leaks has done more than ruin a few careers. The company recently agreed to pay $14.5 million to resolve allegations contained in a civil complaint, filed by the California Attorney General, that it used false and fraudulent pretenses (generally referred to as "pretexting") to unlawfully access phone records of board members and reporters. This incident helped push pretexting to the top of the news.

The U.S. Senate passed legislation, by unanimous consent, that criminalizes the use of deceptive tactics to obtain or sell the phone records of private individuals. We may see further federal legislative developments, additional regulatory action by the Federal Trade Commission possible, and state statutes.

This incident also raises criminal issues, liability issues, and insurance coverage issues.

Criminal complaints are pending against individual HP executives (including the former chairperson of the company's board of directors), and complaints may also be filed against others. Civil litigation stemming from HP's actions, including derivative or shareholder actions or class actions - and suits by those whose information was allegedly obtained inappropriately.

The insurance coverage questions are many. Are fines and penalties excluded? If a member of a corporate board were to sue other board members because of pretexting, can the plaintiff board member overcome the usual policy exclusion for one insured suing another insured? Do the policies cover officers when the charges are criminal? Do exceptions for intentional acts or intentional fraudulent acts apply to actions taken in corporate investigations?.

Pretexting is an emerging issue on several levels.

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Global Warming, Front And Center
Whether the Al Gore movie "An Inconvenient Truth" is leading the national debate or merely reflecting concerns about climate change, it seems clear that the issue is not just going to go away on its own. In fact, more and more businesses are recognizing that taking the initiative to cut greenhouse gas emissions may be both a responsible step to take as well as a fiscally prudent action.

Recent studies make it quite clear that we have a problem. A February 2007 United Nations report, "Confronting Climate Change: Avoiding The Unmanageable And Managing The Unavoidable," targets carbon dioxide emissions and concentrations as a primary cause of global warming. Perhaps as a result, United Nations Secretary General Ban Ki-moon says that climate change is one of his top priorities. Indeed, the UN, which is sponsoring a climate change conference scheduled for Bali, Indonesia, in December, has just announced that it is partnering with San Francisco, the Bay Area Council, and more than 20 businesses in the area to share best practices to reduce greenhouse gas emissions through, for example, setting company-wide emission reduction goals and providing transportation alternatives for employees.

The efforts to combat global warming are national and international. For instance, seeking to move toward a more sustainable energy system, the European Union recently established targets for energy efficiency and the use of renewable energy sources. Incandescent bulbs may have a limited future, as an EU trade group of lighting manufacturers proposes to phase them out over time; a growing number of U.S. businesses are adopting that position.

Nevertheless, government officials are coming to a realization that voluntary action cannot necessarily be a substitute for effective regulation. Thus, government officials from California to Australia are seeking to enact rules banning incandescent bulbs. New Jersey's governor has just signed an executive order requiring a 20 percent reduction in greenhouse gas emissions, while California's "Global Warming Solutions Act of 2006" has just taken effect. The new Congress is considering whether to impose federal caps on U.S. global-warming emissions. Interestingly, a growing number of U.S. businesses and trade groups are dropping their opposition to such caps - and some are even actively supporting mandatory curbs on greenhouse gases.

One reason may be the prospect of litigation. Already, state governments and interest groups have brought suit against the federal government under the Clean Air Act and the National Environmental Policy Act. A challenge to a public utility's greenhouse gas offset program landed in the Supreme Court of Washington (where it was struck down earlier this year). Other power companies and businesses such as automobile manufacturers also have been named in environmental lawsuits in efforts to require them to cut emissions. These suits have not even needed to rely on creative or novel legal theories, because advocates contend that they should be allowed to proceed on the basis of the seemingly age-old nuisance doctrine. Locally, environmental groups and others are working on a project by project basis, often examining Draft Environmental Impact Statements to require them to address carbon dioxide emissions, with litigation a potential consequence. Of course, from a litigation perspective, common environmental litigation issues of standing and causation will need to be considered, as well as preemption where state or local actions are involved and, in certain cases, issues of justiciability.
Although some still continue to dispute whether global warming is fact or theory, one thing is clear: businesses and individuals must regularly monitor developments in this topical, timely, and fast moving area.

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Katrina's Insurance Coverage Issues Continue To Vex
by Alan S. Rutkin
Insurance companies, insured's, attorneys, and federal and state regulators and legislators continue to struggle in and out of court with the insurance coverage issues raised by Hurricane Katrina.

Through the end of February 2007, insurance companies paid $40.6 billion on about 1.7 million Katrina claims, making this the most expensive disaster in insurance history, according to the Insurance Information Institute. Fewer than two percent of claims from homeowners in Louisiana and Mississippi were in mediation or litigation as of that date, although that amounted to thousands of cases. Some court actions had been settled before then; earlier this year, for example, one insurer agreed to resolve more than 600 lawsuits - including one filed by Mississippi Republican Senator Trent Lott following the loss of his home - for $80 million. Other lawsuits have continued to settle since then, including a case that was resolved early in March after a Mississippi federal district court judge found that the homeowner/plaintiffs were not entitled to punitive damages from their insurer under applicable state law (although in January in another case, a jury awarded $2.5 million in punitive damages, an amount reduced post-verdict to $1 million). Then, following a Mississippi federal judge's decision to reject efforts by homeowners to have a proposed class action certified, an insurer was able to move forward with a plan to work with Mississippi regulators to reopen and resolve more than 36,000 other claims.

A number of government officials from the affected region have accused insurance companies of fraud and have brought suit against the carriers for deceiving insured's; the attorney general of Mississippi began (and subsequently terminated) a criminal investigation. A lawsuit filed by a Democratic member of the House of Representatives from Mississippi against his insurance company for allegedly denying a Katrina-related wind claim for damage to his house is still pending as of this writing. Congress is considering whether to alter how insurers determine the amount of claims to pay and even whether to repeal the McCarran-Ferguson Act. A number of individuals have asked if some portion of the $16 billion in flood insurance claims paid by the Federal Emergency Management Agency after Katrina should have been covered by private insurers. At least one major insurer has announced that it will stop writing new homeowner's and commercial policies in Mississippi.

Of course, the insurance coverage issues that remain to be resolved are complex. For example, with respect to first-party insurance policies, there have been battles over causation and whether damages were due to wind or flood damage - more particularly, whether the wind or the flood proximately caused the claimed damages. Does "storm surge" change that analysis? (No, it does not, according to at least one Mississippi federal court decision; see Buente v. Allstate Property (S.D. Miss. Apr. 12, 2006).) And how does "concurrent causation" alter the mix, if at all?

In any event, exclusions play an important role in Katrina coverage analysis, where property policies were "all-risk" subject to exclusions. One key exclusion is the flood exclusion, though it should be noted that the Mississippi Attorney General is contending that the flood exclusion was ambiguous, unconscionable, and violative of both state public policy and the consumer protection law, even though the state had previously approved that exclusion.

There also is another insurance coverage issue of note that has received less publicity and analysis: business interruption coverage. Business life was interrupted, certainly, and policyholders have filed claims. There are numerous issues to consider, such as whether there was a covered peril that damaged covered property and caused a covered loss. There also are significant questions as to how to measure an insured's loss, including where a particular insured attempts to demonstrate that its business would have increased because of the economic situation following Katrina.

Undoubtedly, it is frustrating to all parties that nearly two years following Katrina, there are coverage questions and claims that remain unresolved. Efforts continue, and there is progress on literally a weekly basis. Stay tuned.

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Class Action Fairness Act of 2005 Gives Federal Courts Jurisdiction over Most Nationwide Class Actions
by Robert D. Phillips, Jr.
On February 18, President Bush signed the Class Action Fairness Act of 2005, a key component of the President's litigation reform agenda. The Act applies only to cases filed on or after the date of enactment, so any cases that were pending before February 18, 2005 will not be subject to removal pursuant to the new jurisdictional provisions.

Federal Courts Now Have Jurisdiction over Most Interstate Class Actions The Act expands federal diversity jurisdiction to include most class actions involving more than 100 class members, in which the alleged combined value of the class members' claims exceeds $5 million, and in which any plaintiff class member and any defendant are residents of different states. This standard is more liberal than traditional diversity jurisdiction, as the federal courts have jurisdiction over class actions if some but not all plaintiffs and defendants are residents of the same state. The Act also facilitates removal of class actions. Unlike traditional diversity cases, a class action defendant may remove a class action to federal court without the consent of other defendants.

The Act provides some exceptions for cases involving claims and parties that are concentrated in a single state. The court must decline jurisdiction in most cases where more than two-thirds of the class and all "primary defendants" are citizens of the state in which the case was filed. The court must also decline jurisdiction if more than two-thirds of the class are citizens of the forum state and at least one defendant from whom substantial relief is sought is a citizen of the forum state, if the principal injuries resulting from each defendant's conduct occurred in the forum state, and no other class action has been filed in the previous three years asserting the same or similar allegations.

The court also has discretion to decline to exercise jurisdiction in cases where one-third to two-thirds of all class members and the "primary defendants" reside in the same state as the court in which the case was originally filed. In deciding whether to retain or decline jurisdiction, the court must consider the following factors:

• Whether the claims involve national or interstate interest; Whether the laws of the forum state law will apply to the claims, or whether the laws of other states will apply; Whether the action has been pleaded to avoid federal jurisdiction; Whether the forum state has a distinct nexus with the class members, the alleged injuries or the defendants; Whether the number of class members from the forum state is substantially larger than the number of members from any other state, and whether the class is dispersed among a substantial number of States; and
• Whether during the three years before filing, one or more other class actions "asserting the same or similar claims on behalf of the same or other persons have been filed."

s Orders either granting or denying motions to remand a class action are subject to discretionary review by the Courts of Appeal, provided a notice of appeal is filed within seven days of the order.

Class Action Settlements are Subject to Increased Scrutiny and Notice Requirements

The Act also imposes heightened review and notice requirements on class settlements, particularly coupon settlements, in which coupons have previously been used to justify a large attorneys' fee award.

Under the Act, if class counsel seeks an award of fees based on a percentage of the total settlement, any coupons shall be valued based on the coupons actually redeemed. Otherwise, the amount of fee recovery shall be based on time reasonably expended. The Act also permits courts to order that the value of unredeemed coupons be donated to charity, but this donation is not counted toward the value of the settlement for purposes of calculating fees.

The Act requires increased scrutiny of settlements that result in a monetary net loss to class members, to ensure that any non-monetary benefits substantially outweigh the monetary loss. The Act also prohibits settlements that favor class members who reside near the court.

The Act imposes additional notice requirements for proposed class settlements. Every defendant who is a party to a proposed class action settlement must provide a detailed notice of the proposed settlement to a designated federal and state official for each state in which class members reside. No settlement may be approved until 90 days after the appropriate officials have been served with notices, and in the event notice is not served, class members may choose not to be bound by the settlement. While the Act does not impose any obligations on any state or federal officials, it provides regulators the opportunity to monitor settlements as they see fit.

The Class Action Fairness Act is intended to promote uniformity by moving most large class action litigation into the Federal Courts. The Act will also likely result in increased scrutiny of class action settlements-particularly coupon settlements and settlements consisting primarily of injunctive or other non-monetary relief.

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Class Action Reform
by Robert D. Phillips, Jr.
Congress and various state legislatures continue to consider and debate various measures which would mandate venue and jurisdiction for certain class actions and which are intended to curb perceived abuses in the current state court administration of class action litigation. Mandatory federal jurisdiction , tighter class certification guidelines and curbs on attorneys' fees are among the measures being considered at this time.

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Class Action Legislation
by Leo J. Jordan

Background: The class action allows individuals to sue for injury done not only to themselves but also for other persons similarly situated. Class actions have a benefit in that it is not necessary to try the same issues again and again in separate cases. Still, there is criticism of class action litigation. Judicial commissions have been studying class actions for many years. Amendments to the federal procedural rules that took effect in December address class actions as to the adequacy of notice, appointment of counsel, attorney's fees, and settlements.

Status: On October 22, 2003, the Senate failed by a vote of 59-39 to garner the 60 votes needed to end debate and proceed to a vote on S. 1751, legislation that would make it easier to shift certain class action lawsuits from state to federal courts. Subsequent to the October 22 vote, Senate Majority Leader Frist struck a deal, on several amendments to S. 1751, with three democrats who voted against cloture. Senator Frist has pledged to bring the amended bill to the Senate Floor within the next month or so. S. 1751, sponsored by Sen. Charles Grassley (R-IA), is an amended version of S. 274, which cleared the Senate Judiciary Committee on April 11, 2003. The revised bill includes provisions that were not in the committee bill that would extend the bill to certain "mass action" cases. Under S. 1751, class action lawsuits with at least 100 plaintiffs and $5 million in question could be moved from state court to federal court if fewer than two-thirds of the plaintiffs and the primary defendants are citizens of the state in which the action was originally filed. Current law provides that class actions may be removed if all defendants and the named plaintiffs are citizens of different states and the amount in controversy for each class member exceeds $75,000. H.R. 1115, the House version of S. 1751, passed the House June 12, 2003 by a vote of 253-170. H.R. 1115 is similar to S. 1751 in its treatment of class action lawsuits but does not include the mass action provisions. Alternate legislation, S. 1769 was introduced October 21, 2003 by Sen. John Breaux (D-LA). President Bush supports enactment of legislation such as H.R. 1115 and S. 1751.

ABA Policy: The ABA, which has not taken a position on specific class action legislation, has developed principles that it believes should be considered in the drafting of such legislation. The principles include consideration of such factors as the aggregate amount in controversy, the number of plaintiffs in the alleged class, the percentage of the class who are citizens or residents in the forum state, whether the defendants are all residents of the forum state, standards for removal and existence of overlapping classes or cases, and how the entire mix of all factors balance legitimate state-court interests and federal-court jurisdictional benefits. The drafting of such legislation should not conflict with or touch upon Congressionally enacted judicial rulemaking processes and Congress should take into account the judicial impact of proposed legislation. Amendments to Rule 23 relating to the administration of class actions in federal courts have been approved by the Committee on Rules and Practice and Procedure of the Judicial Conference and the Supreme Court of the United States and are now pending before Congress. The ABA believes that differences between the relevant provisions in S. 274 and in the rules that went into effect in December 2003 could give rise to confusion and recommends that these provisions be dropped from the legislation.

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Asbestos Legislation and Reform
by Lenore Marema
Asbestos-related claims are escalating as a rate of 50,000 new cases a year. The new flood of asbestos cases is clogging the state and federal courthouses, and is threatening the solvency of corporate defendants and their insurers. In several cases before it, the US Supreme Court has said that Congress need to address the asbestos litigation situation.

A large percentage of the plaintiffs involved in the current wave of litigated do not have diseases caused by exposure to asbestos, but rather have some symptoms of exposure. Yet, the cases of the unimpaired and the truly sick are together on the court dockets, and those who are currently impaired await their remedy while the courts also try to address the multitude of cases of the currently unimpaired.

The current asbestos litigation situation has evolved over time, beginning decades ago with the claims of workers at asbestos mines and in industrial plants. Later claims were from individuals who worked with products containing asbestos and in buildings where asbestos was used in insulation and construction materials. Many of the original defendants in the asbestos litigation, the asbestos manufacturers, have sought bankruptcy protection. The current corporate defendants are distributors and others who used asbestos in their products.

Asbestos litigation reform has been introduced in Congress. On the House side (H.R. 1586), the legislation includes medical criteria, based on the ABA's own work in this area. The criteria would be used to distinguish between the currently unimpaired and the truly sick in that the courthouse doors would be open only to those who can meet the medical criteria. Meanwhile, on the Senate side, the Senate Judiciary Committee has approved, on a vote of 10-8, legislation (S. 1125) to establish a national asbestos compensation fund to pay claims with contributions coming from insurers and corporate defendants. Congress continues to debate the myriad of issues associated with such a trust fund, including the amount to be funded, the schedule of awards to be paid, the administration of the trust and the consequences of the trust fund running out of money at some point in the future. TIPS created a task force to address these issues, as well as a possible state solution based on the concepts of a pleural registry and effective case management orders in the event that a resolution is not forthcoming from Congress.

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Asbestos Litigation Legislation
by Leo J. Jordan

Background: From the 1930s to the early 1970s, there was extensive industrial use of asbestos in the workplace. Some 27 million U.S. workers in high-risk industries and occupations were exposed to asbestos between 1940 and 1979. Significant numbers of workers, who years later developed disabling and sometimes fatal illnesses, filed suit. Many of the most sick won large awards. By the end of 2000 more than 600,000 individuals, the vast majority of whom had not developed-and may never develop-an asbestos related illness, had brought claims. The volume of claims has created an enormous backlog in court dockets that delays awards for severely impaired victims of asbestos exposure. One the main reasons people who are not sick and may never get sick file suit is because people who have been given chest x-rays showing abnormalities "consistent with" asbestos-related diseases face a difficult legal dilemma. They may not have any breathing problems or consider themselves to be "sick," but they fear that the finding triggers the running of statutes of limitations that could require them to sue within a specified period of time. Once a suit is filed, unimpaired claimants may accept a settlement that, should they eventually become ill, provides insufficient redress for their eventual impairment. The terms of their pre-illness settlement typically prevent them from pursuing future litigation should a serious illness develop.

Status: Summary: S.852, the asbestos trust fund bill has passed out of the Senate Judiciary Committee and remains on the Senate agenda. It will not be taken up by the full Senate until Judiciary Committee Chair Arlen Specter can convince Majority Leader Bill Frist that he has 60 votes necessary to consider the legislation.

Details: S.852 would create a trust fund to compensate workers exposed to asbestos and prohibit those workers from suing their former employer. The fund would use medical criteria and occupational exposure to determine claimant's awards. The fund would be privately funded by private companies, existing trust funds and insurance companies

After passing out of the Senate Judiciary Committee, the bill was brought to the Senate floor in February 2006. It immediately ran into trouble. Opponents of the trust fund concept began to offer what were likely "poison pill" amendments as well as technical budget points of order. The 58- 41 vote fell short of the 60 required to waive the point of order. It will not move until has 60 votes effectively guaranteed.

On the House of Representative side, two main bills were offered with little committee action. First, H.R. 1360 was introduced by Rep. Mark S. Kirk (R. IL). This bill is similar to S.852, the trust fund concept. Second, H.R. 1957 was introduced by Rep. Chris Cannon (R.UT). It would require claimants to meet specific medical criteria before they could file a cause of action in an asbestos claim. President Bush has called upon Congress to pass an asbestos bill.

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Med Mal Damage Limits
by Robert S. Peck
The year 2003 saw the most sustained effort nationwide to enact limits on damages available to plaintiffs in medical malpractice cases. Florida, Idaho, Mississippi, Nevada, Ohio, Oklahoma, Texas, and West Virginia adopted caps on non economic damages in medical malpractice cases during 2002-03. Additional states will consider such laws in 2004, and President Bush has declared that enacting a federal cap of $250,000 for non economic medical malpractice damages is

The effort to enact medical malpractice damage limits is largely driven by the medical profession's reaction to ever-increasing medical malpractice insurance limits. According to the American Medical Association, skyrocketing premiums are "forcing physicians to limit services, retire early, or move to a state with reforms where premiums are more stable. The crisis is threatening access to care for patients in states without liability reforms." Opponents of the proposals argue that the skyrocketing premiums are the result of insurance industry practices and the business cycle, rather than litigation trends. They point out that the number of medical malpractice lawsuits filed has trended downward, suggesting that the such lawsuits cannot be the reason for the huge increases in premiums.

Recent federal Government Accounting Office (GAO) reports on the issue have shed mixed light on the problem. One report found that multiple factors explain the rising premium rates, including falling investment income, rising reinsurance costs and losses on medical malpractice claims, although the last factor varied dramatically across the sample states. Government Accounting Office, Medical Malpractice Insurance: Multiple Factors Have Contributed to Increased Premium Rates, GAO-03-702 (June 2003). In addition, in response to a request by medical malpractice damage cap supporters in Congress, the GAO found that the physician supply across the country increased at a rate higher than the population growth, suggesting that the claims of doctors fleeing certain states are overblown. GAO, Physician Supply Increased in Metropolitan and Non metropolitan Areas but Geographic Disparities Persisted, GAO-04-124 (Oct. 2004).
The issue is not a new one, but appears in cyclical fashion. A 1987 American Bar Association study of the issue found that &violent cyclical swings of boom and bust, profitability and loss& plague medical malpractice insurance and are occasioned by economic downturns and low interest rates that force insurance companies that had previously set premium rates "unrealistically low because of the hugely favorable investment climate" to "raise[] their rates dramatically, prompting startled protests from the health care services, particularly medical doctors" and resulting in the adoption of &ill-conceived& legislation &designed to reduce the recoveries.& Robert B. McKay, Rethinking the Tort Liability System: A Report From the ABA Action Commission, 32 VILL. L. REV. 1219, 1219-21, 1221 (1987)).
State courts have split on the constitutional validity of these measures

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Federal Medical Malpractice Legislation
by Leo J. Jordan

Background: Investment income is down, and as a result, the insurance industry is now charging higher medical malpractice premiums. The American Medical Association (AMA) is calling for federal legislation that preempts state medical professional liability laws to limit compensation to patients injured by malpractice because the AMA assumes such limits will reduce malpractice rates. However, there is no evidence that limiting compensation to injured patients will have a real impact on malpractice rates. The AMA is carrying on a multi-million dollar public relations campaign to gain public support for such federal legislation and for tort law changes at the state level

Status: Earlier this year, the House passed a bill (H.R. 5) that would preempt state medical liability laws and, among other things, impose a cap of $250,000 on pain and suffering awards, cap punitive damages, eliminate joint liability on non-economic damages, and impose a statue of limitations. S. 11, a bill almost identical to H.R. 5 was brought to the floor of the Senate in July 2003. It would have had to receive 60 votes in order to cut off debate and proceed to consideration of the measure. On July 9, 2003 the measure failed to get the required 60 votes to prevent a filibuster. The vote was 49-48 and the measure has been set aside for the time being. President Bush supports enactment of legislation such as H.R. 5 and S. 11. Senator Majority Leader Frist (R-TN) has pledged to bring S. 11 back to the floor of the Senate again before the end of the 108th Congress. The AMA and others continue to press for state legislation in places like Florida, New Jersey, North Carolina, etc.

ABA Policy: The ABA urges the legal and medical professions to cooperate in seeking a solution to medical liability problems, and maintains that federal involvement in the area is inappropriate. In particular, the ABA opposes caps on pain and suffering awards, supports retaining current tort rules on malicious prosecution, collateral sources and contingent fees, and believes that the use of structured settlements should be encouraged. In addition, state courts should make greater use of their powers to veto or approve inappropriate jury verdicts. The ABA also supports certain changes at the state level in the areas of punitive damages, jury verdicts and joint and several liability.

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Liability for Corporate and Security-Related Activities
by Michael S. Beaver
Sarbanes-Oxley Act of 2002 Sets Forth New Corporate Governance, Disclosure and Auditor Requirements Affecting Issuers, Management, Employees, Attorneys, Auditors and Investment Banks
In August, 2002, Congress passed, and President Bush signed into law, the Sarbanes-Oxley Act of 2002 (the "Act"). The Act is largely a response to the corporate and accounting scandals that enveloped the United States beginning with Enron. It sets forth new corporate governance, disclosure, audit and conflicts of interests standards affecting issuers, directors, officers, employees, attorneys, auditors and investment banks. The Act has a variety of implications for a number of parties, including the following: issuers, who must comply with enhanced disclosure requirements and adopt more stringent corporate governance standards, as well as face enhanced SEC review of their annual and periodic reports;

directors and officers, who must certify annual and periodic reports (including financial statements), disgorge certain profits and bonuses and comply with more timely Section 16 disclosure requirements;

employees, who are shielded by whistle blower protections;

attorneys, who have the obligation to report evidence of material violations of securities laws or breaches of fiduciary duty to an issuer's CEO or general counsel, and under certain circumstances, to the issuer's board of directors;

auditors, who are subject to oversight and discipline by a newly created independent board (the Public Company Accounting Oversight Board, or "PCAOB"), as well as additional restrictions and limitations on the non-audit services that they may provide to audit clients; and

investment banks and research analysts, who are subject to more stringent rules regarding conflicts of interest between analysts and investment bankers and disclosure by analysts of actual and potential conflicts of interest. The Act also created a number of new federal crimes related to violations of the securities laws and the provisions of the Act itself and increased the penalties and extended the statutes of limitations of certain existing laws. Most of the provisions of the Act are now effective. In addition, the PCAOB is in the process of adopting a series of rules regarding its organization, auditor registration, auditing and other professional standards, inspections, investigations and disciplinary proceedings. The new law also calls for a series of studies on such diverse topics as credit rating agencies, SEC enforcement actions, investment banks, and consolidation of public accounting firms. These studies could result in additional SEC or Congressional action in the future.

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9/11 - Victim Compensation Fund
by David L. Deehl
The Victim Compensation Fund ("VCF") for victims of September 11 terrorist attacks processed claims with the assistance of ABA members, who volunteered pro bono services through Trial Lawyers Care ("TLC"). TLC became the largest single pro bono project in the history of American jurisprudence with over 1,100 lawyers participating.

TLC attorneys processed more than 1,700 claims representing more than $200 million in free legal services. More than 3,600 families requested TLC assistance, many of whom were assisted in a variety of ways including a determination of their eligibility to file a claim and helping them file a claim on their own. Victims are from 35 states and 11 countries. Lawyers volunteered from every state, three Canadian provinces, England, Australia and Mexico.

Richard Bieder, president of Trial Lawyers Care, participated in the ABA TIPS Trial Techniques Committee's seminar on how to use trial techniques to win at mediation, at the 2002 Annual Meeting in Washington, DC.

The VCF processed claims from more than 5,000 families and physical injury survivors. More than $7 billion was awarded. The average award for death claims was slightly over $2 million. The average award for physical injury was $400,000.

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Workers' Compensation Crisis
by Stephen J. Abarbanel

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Contingency Fees
by Robert S. Peck
Use of contingency fee arrangements came under the most sustained attack in decades during 2003 and promises to continue into 2004. The biggest challenge to contingency-fee arrangements came in the form of petitions for rules changes, filed in 13 states, by an organization called "Common Good." The petitions propose a change in the rules governing lawyer ethics and would prohibit contingency fees unless plaintiff's counsel provides a notice of claim prior to the filing of a complaint, in order to entertain an early offer of settlement. If the early offer is accepted, the amount of the fee is sharply circumscribed. Petitions were filed in Alabama, Arizona, California, Colorado, Maryland, Mississippi, New Jersey, New York, Ohio, Oklahoma, Texas, Utah and Virginia.

The supreme courts of Alabama and Arizona recently rejected the petitions filed in their states. Several other states have not decided whether to take up the petitions. A similar proposal, made by the same proponents, was rejected by the ABA's Ethics 2000 Commission during the last revision of the Model Rules of Professional Responsibility.

At the federal level, the Senate Finance Committee considered but rejected S. 887, a bill that would impose a five percent excise tax on lawyers earning "excess fees" in the form of contingency fees.

In addition, several states are currently considering ballot measures that would create constitutional provisions regulating contingency fees.
The hostility to contingency fees is premised on the notion that such arrangements encourage frivolous lawsuits by giving the contingency-fee lawyer a stake in the litigation. Empirical studies, however, demonstrate that the arrangement works to screen out frivolous cases, as a lawyer is unlikely to take a contingency on a case without merit. See Herbert M. Kritzer, Seven Dogged Myths Concerning Contingency Fees, 80 WASH. U. L. Q. 739 (2002).

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Professional Body Limitations on Expert Testimony
by Robert S. Peck
An increasing number of medical professional organizations have adopted "peer review" programs that analyze the content of expert testimony given by physicians in favor of plaintiffs, treat such testimony as the practice of medicine, and mete out discipline, including expulsion from the medical society, as a sanction for the condemned testimony. In addition, several organizations have established programs to further such programs. For example, the Coalition and Center for Ethical Medical Testimony began compiling a database in 2003 to share information on cases and experts, including transcripts of expert testimony. Another group, Medical Justice, is a prepaid legal services plan that mounts lawsuits for members who believes he or she was the victim of a dishonest expert witness.

The programs appear to be having an impact on the availability of expert witnesses in medical malpractice actions. The Miami Daily Business Review reported on the withdrawal of Dr. Robert Rand as a plaintiff's expert witness, less than one month before trial. The doctor, a renowned neuro-oncologist, former professor of neurosurgery at UCLA, and current associate medical director of Santa Monica's John Wayne Cancer Institute, wrote plaintiff's counsel, &I have been informed by the senior neurological society to discontinue expert testimony for plaintiffs or risk [loss of] membership.& Steve Ellman, &Code of Silence,& Miami Daily Business Review, at 1 (Jun. 25, 2003). The report indicates that the experience was not an isolated one.

The New York Times similarly found that the practice is widespread and growing. Adam Liptak, &Doctors' Testimony under Scrutiny,& N.Y. Times, at 1 (Jul. 6, 2003). Plaintiffs' lawyers scored the practice as a form of witness intimidation susceptible of violating both civil rights and antitrust laws.

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Food Industry Liability Issues
by Robert D. Phillips, Jr.
Lawsuits are being prosecuted against food manufacturers, distributors, retailers and restaurants based upon &unfair& or &misleading& marketing activities and related failures to disclose certain risks associated with various food products. Issues ranging from the "obesity" class actions to enhanced warnings and technical labeling requirements have brought private parties into what had been until recently the domain of the FDA, the FTC and related state regulatory agencies. Expansion of the traditional limits of tort liability is being tested as well as the interplay between regulatory functions and private litigants. Express preemption and conflict preemption defenses are being raised in new contexts, and Congress is considering what changes, if any, should be made in the scope of federal regulation, particularly with respect to dietary supplement and nutrition products.

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Limits on Jury Trials and Enforcement of Arbitration Clauses
by Robert D. Phillips, Jr.
As many employers and service providers seek to limit their potential exposure in civil litigation and attempt to streamline dispute resolution, state and federal courts are increasingly in conflict with respect to the enforcement of arbitration clauses, the scope of the Federal Arbitration Act and related limits on the rights of consumers and employees to pursue their grievances before a jury. The Supreme Court's recent denial of certiorari in Ting v. AT&T Corp is just one indication that both state and federal courts continue to wrestle with these issues involving preemption, unconscionability, and the scope of remedies available to plaintiffs.

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Silicosis
by Alan S. Rutkin and Karen C. Higgins

Silica Claims
With the recent rise in claims by victims of silicosis - an allegedly disabling, and sometimes fatal, lung disease caused by exposure to respirable silica -- some speculated whether silica litigation would be the "next asbestos." Recent developments, however, question the factual bases of many silica claims.

Most significant is a June 30, 2005 decision by Judge Janis Jack, the federal court judge in the silica MDL. After conducting Daubert hearings concerning the diagnoses of silicosis in the MDL cases, Judge Jack issued a decision expressing skepticism concerning the recent silicosis claims, and detailing her findings that the silicosis diagnoses did not meet the standards of admissibility. While Judge Jack ultimately held that she had no subject matter jurisdiction in most of the MDL cases, her decision is indirectly affecting claims beyond her jurisdiction.

Judge Jack's decision also started a flurry of investigations into the mass screening process, including a New York grand jury investigation and a March 2006 Congressional Subcommittee hearing. At that hearing, several diagnosing doctors invoked their Fifth Amendment privilege when asked to certify their silicosis diagnoses as accurate and meeting medical standards and ethics.
Statutes recently enacted in such states as Ohio, Texas, Florida, and Georgia, tightened the medical criteria and other requirements for filing silica and asbestos claims.

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Diminishing Trials
by Neal Ellis Jr.
Professor Marc Galanter, professor of law at the University of Wisconsin and at the London School of Economics was commissioned by the ABA to conduct a study on the phenomenon of the diminishing number of trials in U.S. courts. The study shows a dramatic decrease in the number of civil trials. By 2002 only 1.8% of all civil cases filed in federal courts went to trial. One federal judge describes the study as documenting "nothing less than the passing of the common law adversarial system that is uniquely American." Although there was a five-fold increase in the number of civil case terminations from 1962 to 2002, the absolute number of civil trials in the federal courts dropped by 20%. While statistics from state courts are still being collected, the overall trends in the state courts appear to follow the trends in the federal courts. As fewer cases reach trial, the statistics show that more cases settle, divert to ADR, or are resolved by summary disposition. Professor Galanter's study identifies several explanations for the trend including: "increases in cost and risk that discourage parties from proceeding to trial, institutional changes in procedure that encourage such avoidance, and a corresponding shift in the ideology of judges, who increasingly view their role as dispute resolvers rather than adjudicators." The consequences of these trends are certain to be the subject of close scrutiny by all sectors of the legal community.

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Alternative Federal Chartering of Insurance Companies

State vs. Federal Insurance Regulation 
by Lenore Marema
Since the enactment of the McCarran-Ferguson Act in 1945, the insurance industry has been state regulated. With the enactment of the Gramm-Leach-Bliley Financial Services Modernization Act (GLBA) in late 1999, however, some in the insurance industry have begun to question the way in which insurance is regulated. GLBA broke down the fire walls that historically existed between banks, insurers, securities dealers and other financial services entities so that insurance policies, subject to regulation by the 50 states will now compete at various levels with other non-insurance products offered by other financial services entities, subject to regulation by a single federal regulator.

Is it time for a change in the system of state insurance regulation? Many would agree that state insurance regulation needs to be modernized in terms of the inefficiencies and delays in the 50 state process in the face of emerging challenges from new competitors and competing regulatory priorities from the financial services reform at the federal level, economic pressures attendant to market consolidation in the insurance industry, and increasing globalization of business. Yet, there is far less consensus on how to change the current state regulatory structure, and this will be the subject of much debate in the near future. Proposals have emerged to create a federal insurance charter to eliminate the application of state insurance laws and regulations and to shift control to a new federal regulator. Others propose federal standards for changes that are needed to state insurance laws and practices. Still others claim that the state regulatory system can and will make the necessary adjustments itself, and that any federal intervention will be counterproductive in that it will create a dual state-federal system. The ultimate issue may be the situs of insurance regulation-state or federal but the real question that has to be answered in that debate is what is the best model for good regulation in today's economy.

Update
by Janet S. Kloenhamer
A bill recently introduced by Senators John Sununu (R) of New Hampshire and Tim Johnson (D) of South Dakota seeks to create a more uniform regulatory system for insurance companies modeled after the nation's dual banking system. It would give insurers the option of choosing a federal or state charter. The legislation was among the options discussed at a Senate Banking Committee hearing on Tuesday, July 11, 2006, the first in a series of hearings planned by the panel as it looks at ways to modernize U.S. insurance regulation.

The Chairman of the Senate panel said he wanted to learn more about all the insurance reform approaches available. "Insurance is too important for too many Americans for us not to examine all our options for modernizing our system of insurance regulation" said Alabama Senator Richard Shelby.

The industry must have the flexibility to develop new insurance products and the capacity to pay claims, Shelby added. The Senate Banking Committee will hold additional hearings on insurance regulatory reform.

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FCRA Reauthorization and Credit Insurance Scoring Insurance Credit Scoring
by Lenore Marema
Insurance is about risk and among other things, that means changing people for insurance coverage according to the risk that they represent. Many auto and homeowners insurers are now using a tool called an "insurance score," based on an individual's credit history, to predict future insurance losses. An insurance score is developed from a mathematical model that weighs and measures certain credit information, such as the number of collections, bankruptcies, outstanding debt, length of credit history, types of credit in use, and the number of applications for new credit, and compares it to an analysis of the loss experience of millions of auto and homeowners policyholders. The mathematical models used show how each credit characteristic relates to the risk of insured loss, and the models produce an insurance score for individuals. Insurers then use that score in their decision on whether to write a policy for an individual, whether to renew a policy and what premium to charge for a policy.

Despite a correlation that insurers have shown between credit management problems and the probability of an insurance loss, state legislators and regulators are proposing measures to restrict or prohibit insurers from using insurance scores in rating and underwriting. Some argue that insurance scores are actually related to the individual's income and ability to pay for their insurance, rather than their risk of loss. Others contend that use of insurance scores discriminates against some consumers, especially low-income consumers and minorities. Concerns have also been expressed that insurance scores are based on inaccurate credit data. Yet, insurers contend that the use of insurance scores have helped them make more accurate underwriting decisions and many of their policyholders have benefited from lower rates.

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Religious Land Use and Institutionalized Persons Act (RLUIPA)
by Mary Massaron Ross Background: In 1990, in Employment Division, Division of Human Resources of Oregon v. Smith, 110 S. Ct. 1595 (1990), the United States Supreme Court abrogated the test for freedom of religion that had been established in Sherbert v. Verner, 374 U.S. 398, 402-403 (1963). In response to Smith, Congress enacted the Religious Freedom Restoration Act of 1993 (RFRA), which explicitly reinstated the compelling governmental interest standard of Sherbert. The Supreme Court struck RFRA down on the basis that it violated the separation of powers provision. Congress legislatively reinstituted the compelling interest standard in the areas of land use and also with respect to institutionalized persons. Pub. L. No 106-274, 114 Stat. 803, codified at 42 U.S.C. § 2000cc-2000cc-5.

Status: The new law prohibits a government from imposing or implementing a land use regulation in a manner that imposes a substantial burden on the religious exercise of a person, including a religious assembly or institution, unless the government demonstrates that imposition of that burden is in furtherance of a compelling governmental interest and is the least restrictive means of furthering that compelling governmental interest. 42 U.S.C. § 2000cc(a). The law also prohibits a government from imposing or implementing a land use regulation in a manner that treats a religious assembly or institution on less than equal terms with a nonreligious assembly or institution or from discriminating against it on the basis of religion or religious denomination. 42 U.S.C. § 2000cc(b). The law's proper interpretation and constitutionality is being hotly litigated around the country. In addition to substantial questions concerning its interpretation, courts are divided about its constitutionality. RLUIPA is now frequently raised as both a sword and a shield any time a local governmental agency enforces its zoning regulations against a religious institution, such as a school or church, and any time the local governmental agency considers a permit for a special use or other zoning request. See e.g., Westchester Day School v Village of Mamaroneck, 236 F. Supp. 2d 349 (S.D. N.Y. 12/4/02); Ventura County Christian High School v. City of San Buenaventura, 233 F. Supp.2d 1241 (C.D. Cal. 11/2 7/02); Mayweathers v. Newland, 314 F.3d 1062 (9th Cir. 12/27/02). The law also applies to treatment of institutionalized persons, including prisoners, in some circumstances. Thus, governmental agencies in charge of prisons are facing challenges to their regulations and procedures insofar as they arguably burden the free exercise of religion. See e.g., Wyatt v. Terhune, 315 F.3d 1108 (9th Cir. 1/2/03). Interest groups on both sides are monitoring the manner in which the law is enforced and litigating cases around the country. Groups that support the statute include the Pacific Justice Institute and the Coalition for the Free Exercise of Religion, a coalition of religious and legal advocacy groups. Groups opposed to the enactment of the bill included the National League of Cities, the National Association of Counties, the National Association of Towns, and the National Trust for Historic Preservation.

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Medicare Secondary Payer Act (MSP Act)
by Sharon Funcheon Murphy Background: The Medicare as Secondary Payer Act (42 U.S.C. § 1395y(b) et seq.) makes Medicare a secondary source of payment for medical expenses of Medicare beneficiaries whenever the costs of treatment are the result of tortious or otherwise compensable conduct. The statute authorizes the Centers for Medicare and Medicaid Services (CMS), an agency of the Social Security Administration within the Department of Health and Human Services, to seek reimbursement from, among others, the beneficiary, appropriate obligor (including insurers or self-insured third party tortfeasors), or the beneficiary's health-care providers or attorneys. In addition to obtaining reimbursement, CMS may recover penalties if litigation is required to collect.
Nothing in the statute requires CMS to timely assert or resolve its right to reimbursement. In practice, the government lacks the resources to quickly respond to notices of proposed settlement. Moreover, causation, apportionment and allocation issues sometimes make evaluation of the reimbursement obligation both complex and contentious. CMS has at times asserted a right to second-guess the adequacy of the amount, allocation and apportionment terms of hard fought settlements.

The uncertainties, delays and added costs of resolving claims that may be subject to a right of Medicare reimbursement are particularly acute and multi-faceted in the Workers Compensation and mass tort litigation contexts. Workers Compensation settlements often include a release of future benefit obligations; the CMS requires by informal procedure that such settlements include a "set-aside" for future benefits potentially payable by Medicare, and only prior approval of the set-aside provides reasonable protection against future reimbursement claims. Similarly, personal injury settlements often include compensation for future medical care, and may compromise hotly disputed liability and causation issues, including issues over the presence of multiple potential causes and the conditions and treatment that were related to the alleged misconduct. These complications are writ large in the context of mass tort litigation. Accordingly, global settlement negotiations in mass tort litigation can be held hostage by the inability or refusal of CMS to timely assert and negotiate its reimbursement rights.

Under these circumstances, potential payors who may be subject to reimbursement as a result of personal injury settlements have no reasonable way of determining, or confidently estimating, the ultimate extent of their potential responsibility to the government. Reform is needed to ensure that pursuit of the goal of safeguarding the Medicare system does not unduly interfere with the strong public policy of promoting and facilitating the settlement of injury claims.

Status: TIPS and its Workers' Compensation and Employer Liability Law Committee took the lead in sponsoring reform of the Medicare Secondary Payer Act due to its crippling impact on settlement of workers' compensation claims nationwide. At the Mid-Winter Meeting of the ABA in February 2005, a Recommendation sponsored by TIPS was passed by the House of Delegates supporting a comprehensive overhaul of the MSPA. There is now legislation pending before Congress which would enact all of the recommendations made by TIPS and the House of Delegates.

HR 5309 was introduced to the House of Representatives on May 4, 2006, by representatives Clay, Shaw, Tanner, Hayworth, Weller, Foley, Hart and Chocola. It was originally referred to the Ways and Means Committee and the Committee on Energy and Commerce. It is currently pending before the House subcommittee on Health as of May 15, 2006.

For an understanding of the issues behind, and the motivation for, this pending legislation, reference is made to the ABA House of Delegates Resolution and the excerpt from the report (which is not part of the Resolution) that follows. The reform initiative is backed by all participants in the workers' compensation system as the current administrative oversight of settlements under the MSPA is equally harmful to all parties involved. Your support for this pending legislation is strongly encouraged.

Excerpt from Report to House of Delegates In 1980 Congress amended the Medicare laws to establish that Medicare is a "secondary payer" behind certain other types of insurance so as to reduce the burden of the payment of benefits owing under the existing system. Among the "primary payers" enumerated in the legislation are those liable for the payment of worker's compensation benefits. However, the language of the legislation refers to this secondary liability existing only when "payment has been made or can reasonably be expected to be made promptly . . . under a workmen's compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan . . .." 42 U.S.C. §1395y(b)(2)(A)(ii). While this legislation remained dormant for a number of years after its enactment, it has gained prominence since approximately 2000 when the Centers for Medicare & Medicaid Services (CMS) encouraged the parties to workers' compensation settlements to establish formal "set aside trusts" designed to protect Medicare's interests.

Since then, the use of the law in the context of non workers' compensation liability suits has been successfully challenged in cases such as Mason v. Am. Tobacco Co., 2003 U.S. App. LEXIS 20168, decided October 2, 2003. The Second Circuit Court in Mason held that the MSP Act does not apply to tort cases unless the tortfeasor previously arranged to provide insurance benefits. Since such cases were only compensable after a claim arose, it was held that there was no "reasonable expectation of prompt payment" upon which to premise the jurisdiction of the Act. In comparison, workers' compensation liability insurance has been viewed as within the purview of the MSP Act due to the statutory benefit system. Unfortunately, no exception has been made for claims that are disputed in good faith from the outset, so essentially all present and future settlements of workers' compensation benefits, regardless of their merit, have been viewed as potential targets for recovery by CMS under the MSP Act

Claims closed by settlement in the past, representing hundreds of billions of dollars, are subject to substantial uncertainty as the future action of CMS with regard to them is not reliably fixed and determined. Under the MSP Act, CMS has the right to seek reimbursement of medical expenses paid by Medicare (which the employer or the workers' compensation carrier "should have" funded) from the claimant, the insurance carrier or third party administrator, the employer and/or the attorneys involved in the underlying claim. 42 U.S.C. §1395y(b)(2)(B)(ii). Pursuant to 42 C.F.R. 411.26, CMS has a right of subrogation against any individual (including an attorney) entitled to payment by a third party. Thus both claimant's counsel and defense counsel may have potential exposure under the MSP Act including professional liability exposure for failure to abide by its terms and/or adequately advise clients.

Under the MSP Act, beneficiaries who have failed to obtain approval of their workers' compensation settlement by CMS may thereafter (1) receive a notice terminating future Medicare coverage, (2) be required to prove to CMS that they have spent the equivalent of 100% of the entire settlement solely for medical expenses before receiving Medicare reimbursements, and/or (3) lose Social Security disability benefits on a dollar for dollar basis until the MSP claim, including interest, has been satisfied.
Additionally, the MSP Act provides for a private right of action against the insurance carrier for double damages for failure to provide primary payment or appropriate reimbursement, 42 U.S.C. §1395y (b)(3)(A). Thus insurance companies may be forced to pay CMS 200% of the amount CMS determines should have been set aside in the settlement for the future Medicare eligible expenses required to treat the occupational injury. As a result, every attorney, party and insurance company involved in workers' compensation settlements, past, present and future, desperately needs the amendments to the Medicare Secondary Payer Act proposed herein to alleviate the unprecedented uncertainty that permeates the system today.

Since the recent enforcement of the MSP Act has begun it has caused a rising level of deep concern within the workers' compensation community, and a partial paralysis of state, federal, and territorial workers' compensation systems, which can only occur when the Federal Government steps into the otherwise functioning state, and territorial compensation systems under its right of preemption. Since the application of federal preemption is new in the context of Workers' Compensation law, which has long been under the sole auspices of state, and territorial laws, it has led to unprecedented disruption, confusion and delay among practitioners, tribunals, employers, claimants and payers alike.

In an effort to return some level of certainty, predictability and efficiency to this Medicare set aside process so as to integrate it into the State, Federal, and Territorial Workers' Compensation systems which have been premised from their inception on the need for certitude, predictability, and efficiency, TIPS urges the support of the American Bar Association for the enactment of federal legislation addressing the most egregious of the problems that have been found to exist to date. In seeking this support, TIPS notes that there is a unique level of accord on these matters among the Plaintiff's bar, the Defense bar, the insurance industry and workers' compensation agencies and adjudicators, any of whom can readily attest to the compelling need for the proposed legislative assistance.

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ERISA Pre-emption and Discretionary Clauses
by Robert D. Phillips, Jr.
In February 2004, the California Department of Insurance issued a notice of withdrawal of approval of all group health, disability and life insurance contracts containing provisions which grant to the insurer (other other plan fiduciary) discretion to determine eligiblity for plan benefits. Since the US Supreme Court's decision in Firestone v. Bruch, group policies containing such "discretionary clauses" have been in wide use and have been cited with approval by federal courts around the country as properly granting to insurers the discretion to determine eligibility. Under Firestone, such benefit determinations are reviewed by courts under an &arbitrary and capricious& standard of review.
The California department (and since then other state departments) has taken the position that granting such deference to benefit determinations under ERISA is contrary to California law and public policy.

In an important but unpublished decision last month, a federal court in San Francisco embraced the California Department's approach and held invalid a UNUM policy provision which granted discretion to the insurer. It ruled that the benefit determination in that case should be reviewed under a de novo standard of review, notwithstanding the discretionary language in the policy form previously approved by the Department.

This issue presents a classic clash between ERISA's preemption provisions and its &saving clause&. Insurers contend that discretion is an important element in ERISA's overall benefit administration scheme, while consumers and plan participants contend that state law governing insurance benefits, including regulation of key elements of group policies, are saved from preemption.

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Investigations into Insurance Broker and Mutual Fund Compensation Arrangements Arrangements and other financial arrangements within the Insurance Industry
by Dan Brandenburg
Attorney General Spitzer of New York State and, secondarily, the Attorney General for the Commonwealth of Massachusetts began investigating and charging mutual funds and financial intermediaries over inappropriate sales practices in 2003. There have been a number of well documented settlements with well-known mutual funds involving reimbursements for investor losses and reductions in future fees. The US Securities and Exchange Commission also became involved and reaching some settlements and changing rules in areas that it had jurisdiction. Private litigation also has been brought against affected mutual fund advisors and financial intermediaries. The US Department of Labor has jurisdiction over employee benefit plans and also has become involved. These investigations and other litigation now has extended to insurance sales commissions and other charges both in the property casualty market and in the employee benefit market.

The key areas of controversy have been over favoring one customer over the other, failing to give adequate disclosure to customers which caused economic damage to the customer and requiring customers to pay undisclosed extra fees from employee benefit accounts to be able to offer the product. These investigations, settlements, new rules and law suits are changing the way business is done in these areas. The Committee will monitor future developments, Also, both the plaintiff and defendant bars needs to be vigilant to be able to properly represent clients in these areas.

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Welding Rod Products Liability Litigation
by Neal Ellis, Jr.
Thousands of welders have filed suit against welding rod manufacturers and distributors alleging that fumes from welding rods cause neurological disorders including Parkinson's disease. In a trial in the Elam case approximately one year ago, a jury awarded $1 million to a plaintiff who claimed that he suffered injuries from exposure to manganese fumes from welding rod use. The Elam case has been appealed. The industry and plaintiffs' bar eagerly awaited the result in a trial in the Presler case tried in Texas which produced a defense verdict on April 29, 2005. The defendants in the Presler case argued that there was no causal link between manganese and Parkinson's disease. The industry apparently concedes that a neurological condition known as manganism may result from exposure to welding rod fumes but denies that there is any link between welding rods and Parkinson's.

Several thousand welding rod claims have been consolidated for pre-trial proceedings in the multi-district litigation which is pending before U.S. District Judge O'Malley in the Northern District of Ohio. Defendants in the MDL have filed Daubert motions seeking to exclude expert testimony that exposure to welding rod fumes causes Parkinson's and other neurological disorders. Judge O'Malley has scheduled trials in two cases to begin on August 29 and October 31, 2005.

Insurance coverage litigation relating to the welding rod claims in pending the U.S. District Court for the District of Maryland. In that case the insurance company contends that the pollution exclusion clause extends to injuries allegedly suffered from welding rod fumes. The District of Maryland lawsuit has been certified to the Maryland Court of Appeals.

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Terrorism Risk Insurance Act of 2002 ("TRIA")
by Neal Ellis, Jr.
President Bush signed into law the Terrorism Risk Insurance Act of 2002 ("TRIA") on November 26, 2002. Vigorous debate occurred during the original passage of the law, which is set to expire on December 31, 2005. Now debate continues over whether or not to extend TRIA into 2007

TRIA requires commercial insurers to provide terrorism coverage, and in the event of a terrorist attack, federal funds will be provided to assist insurers in paying the claims. The purpose of the law is to protect consumers from market disruptions and to ensure availability and affordability of property and casualty insurance for terrorism risk. The law provided a transitional period to allow the private markets to stabilize after the September 11, 2001 attacks and build up capacity to absorb costs of any future terrorist attacks.

Many people believe that TRIA has served its purpose and should expire in December as originally planned. Others hope to extend the law. On February 18, 2005, the Senate introduced a bill to extend the terrorism risk insurance program until December of 2007. The bill was referred to the Committee on Banking, Housing, and Urban Affairs in February. On June 30, 2005, the U.S. Department of Treasury released its assessment of TRIA.

In its recent report, which was ordered by Congress, the U.S. Department of Treasury recommended against extending TRIA. The report states that TRIA has achieved its goals in supporting the insurance industry and that the private insurance market is now stable enough to function on its own. In a letter accompanying the U.S. Department of Treasury report, Treasury Secretary John W. Snow cited to growth in the gross domestic product, a decrease in unemployment, and a record number of construction jobs to show the economy's strength. Snow wrote that "continuation of the program in its current form is likely to hinder the further development of the insurance market by crowding out innovation and capacity building." A copy of Snow's letter along with a link to the full report can be found at http://www.treas.gov/press/releases/js2618.htm.

Others have adamantly supported extending the Act. U.S. Senator Charles E. Schumer (D-NY), author of TRIA, claims that TRIA should be extended because it allows developers and builders to build new large structures in America, which creates thousands of jobs and profits from new businesses. Without TRIA, Schumer argues that builders will have trouble getting insurance to build large structures like football stadiums, business towers, or amusement parks because insurers will worry that costs of a possible terrorist attack would be so devastating as to put the insurer out of business. Schumer claims the private market is not ready to cover terrorism insurance on its own.
Senate Democratic Leader Harry Reid (D-NV) also believes TRIA should be extended. On the Senate floor, Reid stated that an extension of the Act is necessary to allow the economy to rebound more quickly and to protect American jobs if another terrorist attack should occur.
Debate over continuation of TRIA will surely continue as the Committee on Banking, Housing, and Urban Affairs considers the proposed extension.

TIPS White Paper on Renewal of TRIA
These comments reflect the consensus view of the members of the Task Force and do not
reflect the positions of the firms, associations, or other entities with which the Task Force
members are associated, or their clients or members of those entities.

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Legislation Providing for Federal Regulation of Insurance Introduced in Senate
by Shaunda Patterson-Stracha Background:The "National Insurance Act of 2006" ("NIA"), S. 2509, was introduced in the Senate by Senators John Sununu (R-NH) and Tim Johnson (D-SD) on April 5, 2006. The legislation would allow life and property and casualty ("P&C") insurers to opt for federal charters as opposed to state charters pursuant to an "optional federal charter" regulatory structure. Thus, a parallel federal regulatory scheme would be established, and the state regulatory system would remain in tact for those who elect regulation under it. Similar legislation may soon be introduced in the House by Reps. Ed Royce (R-Calf) and Paul Kanjorski (D-Pa), although details regarding its substance and any likely timetable are unclear at this time.

Under the NIA, the new federal scheme would have the following key points:

• Companies electing chartering under the new federal scheme would be "National Life Companies" or "National Property and Casualty" Companies", or more generally, National Insurers. An "Office of National Insurance" would be created within the Department of Treasury; this would be an independent office, with a presidential-appointee Commissioner, subject to the advice and consent of the Senate, serving five-year terms. National Insurance Agencies could be chartered and licensed under the NIA, and would be authorized to sell insurance for any federally chartered or state licensed insurance company. Federally licensed insurance agents and brokers could sell insurance in any state on behalf of any National Insurer, however, a federal license would not be required for state licensed agents to sell on behalf of a National Insurer; educational and examination requirements for federally licensed producers would be established by the Commissioner. While National Insurers and federally licensed insurance agents and brokers would be primarily subject to federal law, they would remain subject ot certain categories of state law including state tax laws, unclaimed property and escheat laws, and laws providing for compulsory coverage workers' compensation and motor vehicle insurance. The Commissioner's office would be responsible for conducting examinations of National Insurers, agencies and federally licensed agents and brokers; the Commissioner's enforcement powers would include the ability to revoke/suspend a charter or license, issue cease and desist orders, remove/suspend offices, directors, controlling shareholders, and agents, and impose civil fines of up to $1 million/day for violations or other improper conduct. In effort to ensure the sound operation of the National Insurers, financial regulations, such as risk-based capital standards, investment standards, and asset and liability valuation requirements, would be established, based on the National Association of Insurance Commissioners' model laws and regulations. The Office of National Insurance would have a Division of Consumer Protection; in connection with this, the Commissioner would be directed to issue market conduct regulations to prevent unfair methods of competition and unfair and deceptive acts and practices addressing issues such as advertising, sale, issuance, distribution and administration of products; in addition, a Division of Insurance Fraud, would make the commission of a "fraudulent insurance act" a federal crime.
• The Office of National Insurance would not set rates or price controls for insurance products, but instead, would rely on competitive pricing in the market place.

The legislation has many advocates, including the American Council of Life Insurers and the American Insurance Association. The sponsoring senators and supporters cite the need for a more uniform regulatory system as the rationale behind the legislation. According to Senator Sununu, "A more uniform regulatory environment mirroring the highly successful dual banking system is long overdue and stands to substantially improve the environment for those who buy, sell and underwrite life and property and casualty insurance."

In advocating for the bill, Senator Sununu has expressly addressed efforts by state commissioners to achieve a more uniform system. "State commissioners may have hoped to achieve uniformity and market-based reform within the state regulatory scheme, but those improvements have simply not occurred and are not expected in the near future."

Senator Sununu believes the uniformity that would result from federal regulation will encourage "greater competition" and allow "new and innovate" products to reach consumers more quickly. Senator Johnson has characterized the proposed legislation as being about "choice." "Consumers should have the benefit of the greatest array of product choice the industry can provide and insurance companies should have a choice between state and federal regulation."

The White House seems to be on board with the concept of more uniform insurance regulation. While not endorsing any particular proposed or expected legislation, Treasury Undersecretary for Domestic Finance, Randal K. Quarles, testifying before the Senate Banking Committee at a July 18, 2006 hearing on insurance regulatory reform, noted shortcomings of insurance industry regulation by the states. He said these issues fall into three major categories: (i) potential inefficiency resulting from the substance of regulation, such as price and form control, as well as its structure, such as duplication of cost associated with several non-uniform regulatory schemes; (ii) international impediments resulting from international insurers having difficulty operating in the U.S. because of the differing standards, and (iii) "systemic blind spots'", or an inability of individual state regulators to understand the extent of the risk that insurance companies are undertaking and how their activities could impact national financial markets.

Cynics however, include the Independent Insurance Agents and Brokers of America, and the National Association of Insurance Commissioners ("NAIC"), and the National Association of Professional Insurance Agents ("PIA"). At a July 11, 2006 hearing before the Senate Banking Committee, NAIC President and Maine Superintendent of Insurance Alessandro Iuppa testified that "[a] bifurcated regulatory regime with redundant and overlapping responsibilities will result in policyholder confusion, market uncertainty, and other unintended consequences that will harm individuals, families and businesses that rely on insurance for financial protection." He urged that "The Senate Banking Committee and Congress should reject the notion of a federal insurance regime." PIA states it is "adamantly opposed to any and all optional federal charter proposals", opining that it "would create a major additional burden for agents and cause confusion among consumers - all to benefit just a few large insurance companies."

Status: S. 2509 has been referred to the Senate Committee on Banking, Housing and Urban Affairs. While hearings have been conducted, given the Congressional calendar with two recesses before the fall elections, it is unlikely that any additional activity of note will occur in 2006.

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Identity Theft
by Janet S. Kloenhamer
Identify theft is one of the fastest growing financial crimes in America, with victims numbering in the millions and economic loss exceeding $50 Billion annually. According to AIG, identify theft struck one in every four households over the last five years and nearly 10 million victims in the last year alone. A report by the Federal Trade Commission showed that the average victim spent 60 hours resolving fraud involving new accounts, adding up to a total of 297 million hours spent on identity theft resolution in 2003. Publicity surrounding this epidemic has resulted in demands upon the insurance industry to provide products and services to individuals and businesses who need protection against financial loss and assistance in dealing with the consequences.

A number of insurance companies have responded in recent years by creating product and service offerings to individual consumers and businesses. For example, AIG has released a product called Personal Identity Coverage (PIC) which they describe as a group insurance policy designed to benefit customers, members or employees. A number of companies providing personal lines insurance, for example, Firemans's Fund, have added coverages that provide for not only expenses, but include a variety of services, including toll-free access to a personal advocate who works with victims one-on-one; fast notification to relevant agencies; arrangement of appointments with law enforcement; ongoing credit monitoring and fraud alerts; and restoration of credit files, DMV records, government records and financial accounts. According to Bruce L. McDonald and Gary Seligman in their article, Insurance Coverage for Identity Theft-The Potential and Risks, coverage terms vary among insurers, but such policies typically cover loss resulting from a "stolen identity event" which is defined as "the theft, unauthorized or illegal use of the insured's name, social security number or other method of identifying the insured".

No individual or business is immune to this risk, even insurance companies. Earlier this year, AIG was required to notify 930,000 individuals that a file server containing sensitive personal data, including names, addresses and social security numbers had been stolen from one of its offices. The data had been provided to the insurance company by brokers seeking quotes for excess insurance provided by employers. There is a seeming epidemic of exposures resulting from thefts of laptops containing personal data of employees and customers of entities including, Verizon, Ernst and Young, Aetna and the Veterans Administration.

One common issue arising from each of these situations is the lag of weeks, and in some cases months, from the time businesses have discovered the theft to the time that consumers first received notification. While there is no indication that the compromise of personal data in any of these cases has actually led to consumer losses, exposure to potentially insurable injury is evident. The exposure doesn't stop at risk to the individual. Employers face risk from lost productivity due to employee credit restoration activities. Over time, insurers themselves may become the most prolific plaintiffs as they pursue claims in subrogation from exposures to numerous victims of large scale identify thefts.

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Outsourcing of Legal Services
by Janet S. Kloenhamer
New entrants to the legal profession may not remember the good old days of legal services outsourcing when lawyers had to rush through their dictation to get tapes delivered to the bicycle messenger in time for him to ride across town to the home of the transcriptionist who worked on your legal brief over night and delivered a draft for the messenger to return to your office for edits before 10 am. Advances in technology as well as several decades of increasing pressure from clients to control legal expense have moved the transcriptionists to India and otherwise changed how lawyers approach outsourcing. As reported in a recent article on CNNMoney.com, while Shakespeare didn't really suggest that killing all the lawyers is a good thing, that hasn't stopped some people from hoping they would go away, and now they are. Attorneys are the latest to see their jobs outsourced to lower cost providers outside the United States.

When law firms may question where the "bread and butter" legal work they used to count on from corporate clients has gone, they may be surprised to find that it hasn't got to the firm across the street, but to India, South Korea, Australia and other countries with well educated populations and far lower labor costs. Legal service entrepreneurs have entered the market with services such as document management and legal research at prices far below the hourly rate of first year associates performing the same tasks. While this phenomenon is unlikely to affect law school enrollment or per-partner profits in a material way, by 2004 an estimated 12,000 legal jobs had moved offshore, with an estimated 79,000 moving by 2015 according to Forrester Research, a Cambridge, Mass. based market research firm.

Of course, the guild-like nature of the legal profession in the U.S. as well as its regulatory framework restricts the types of legal work that offshore lawyers can perform. Nevertheless, outsourcing can significantly affect the types of work performed by legal assistants, paralegals and junior lawyers and the cost savings from routine work being performed by non-lawyers can add up for corporations and law firms alike. The market for more sophisticated work such as patent applications and appellate briefs is also growing. A company called Lexadigm, operating in New Delhi, reports that in 2005 they drafted their first brief to the U.S. Supreme Court in a case involving the application in a tax dispute of the Fifth Amendment's due process clause. The brief will ultimately be filed by an American law firm, which can use all, part or none of Lexadigm's work-the same as if the draft had been written by one of it's own associates.

What are the implications for U.S. lawyers? Just like the old days when your dictation tapes left the office in the bike messenger's basket, legal work is being performed by high quality providers who are today just a mouse click and a web-cam connection away. The brave new world of virtual law firms has emerged with all the tools necessary to make it a reality. How will new entrants to the profession learn their craft? Will corporations drive further unbundling of legal services to "preferred providers" who are off-shore? Are there implications for errors and omissions insurance or malpractice litigation? You decide.

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In addition to the issues which the Committee has posted to its list, the Committee is monitoring additional issues including: diesel exhaust, treated lumber, arsenic exposure, manganese.