Archive for the ‘Financial Institutions’ Category

CFPB Issues New Arbitration Rule – Are the Flood Gates Opening for Consumer Class Actions against Financial Institutions?

Friday, July 14th, 2017

On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued a rule (full text here), which prohibits many financial institutions from including mandatory arbitration provisions that limit their customers’ ability to join class action litigation. The rule, which may become effective as early as 2018 and only applies to new accounts opened after the effective date, appears to apply to a broad range of financial institutions, including banks, credit card and consumer financing companies, debt management and collections operations, auto leasing companies, and other entities that provide fund transfers and money exchanges (i.e., check cashing services). However, there may be opposition in Congress, as well as by the current administration, to the rule’s ultimate implementation.

The rule further requires impacted financial institutions using arbitration clauses in consumer disputes to submit records relating to arbitration and court proceedings to the CFPB. The CFPB intends to review the collected information to monitor the proceedings to determine whether additional consumer protections are warranted, or if further CFPB action is required.

The enactment of the rule stemmed from the Dodd-Frank Act and instructions from Congress in 2010, which led the CFPB to conduct a study of pre-dispute arbitration agreements between consumers and financial institutions. The study found that in addition to many consumers opting to forgo a formal dispute process with financial service providers, many contracts for consumer financial products and services included mandatory arbitration clauses, which blocked the customers’ ability to join related class action proceedings. The CFPB concluded that class actions provide a more effective means for consumers to challenge potentially problematic and abusive practices by financial service providers than arbitration clauses. Additionally, the agency determined that the arbitration clauses effectively blocked similarly situated consumers from collectively pursuing common disputes in court. The CFPB also found that the use of the arbitration clauses insulated financial institutions from significant consumer-related awards and judgments, which failed to discourage harmful practices from continuing.

If the rule becomes effective, it is likely to impact a wide-array of both small and large financial institutions. By forcibly removing the ability of the financial institutions to arbitrate customer claims, it is foreseeable that the frequency and severity of consumer-oriented class actions faced by these financial institutions will sharply increase. Such an increase in consumer-oriented litigation against effected financial institutions may have a significant impact on those entities’ respective FI, E&O and D&O insurers, who may see an influx of larger claims stemming from class action litigation, instead of smaller and less costly individual arbitrations.

New Jersey Supreme Court Affirms Viability of Late Notice Defense Under Claims-Made Policies

Friday, February 12th, 2016

In a decision released yesterday, the New Jersey Supreme Court held that an insurer could deny coverage under a claims-made directors and officers policy based on the insured’s late notice, without any evidence of prejudice to the insurer.

In Templo Fuente De Vida Corp., et al. v. National Union Fire Insurance Co., ___ A.3d ___, 2016 WL 529602 (N.J. Feb. 11, 2016), the underlying plaintiffs brought a number of claims against First Independent Financial Group. (“First Independent”) in the wake of a failed real estate deal for which First Independent had promised to provide funding, only to come up empty when the closing date rolled around.  First Financial’s D&O policy with National Union required it to provide notice of claims “as soon as practicable” and within the policy period.  Yet First Financial did not notify National Union of this claim until six months after it had been served, and after it had retained counsel and filed an answer.  National Union promptly disclaimed on grounds of late notice.  In the ensuing coverage litigation brought by the underlying plaintiffs, to whom First Financial assigned its insurance claim, the trial court granted National Union summary judgment on the basis of the late notice defense, brushing aside the plaintiffs’ arguments that National Union should be required to demonstrate prejudice arising from the late notice.  After an affirmance by the New Jersey Appellate Division, the issue arrived at the Supreme Court.

The New Jersey Supreme Court acknowledged that New Jersey does require insurers to show prejudice in order to make out a late notice defense, but noted that this principle applied only to occurrence policies.  The Court emphasized that it approached occurrence and claims-made policies differently due to its belief that the “vast majority” of policyholders with occurrence policies were unsophisticated consumers buying adhesion contracts, while claims-made policyholders, especially for D&O policyholders like First Independent, were sophisticated insureds advised by sophisticated brokers.  Given this background, the Court found that the National Union policy at issue, including its notice requirement, “sufficiently conformed to the objectively reasonable expectations of the insured, and, hence, did not violate the public policy of New Jersey.”  It therefore enforced the prompt notice requirement as written, without imposing a further “prejudice” requirement.

New Frontiers for Financial Institution and Directors & Officers Insurance

Tuesday, September 1st, 2015

By Andrew Milne, Sedgwick London

Recent years have shown that regulators in developing countries are becoming more active in investigating corporate misfeasance and improper conduct of directors.

In India, action has been taken in recent months by the Securities and Exchange Board of India, the Serious Frauds Investigation Office, and the Central Bank of India against former executives and the founder of Satyam Computer Services for false accounting and pocketing wrongful gains from share transactions.  Regulators have imposed bans on the individuals’ involvement in capital markets, issued orders requiring them to repay millions of dollars to Satyam, and brought criminal proceedings against them.

In Brazil, a massive corruption scandal involving contract fixing and bribery at the state oil company Petrobras has caused, among other things, the arrest of 18 Petrobras employees and a wide ranging investigation being commenced by Brazil’s securities commission, Comissao de Valores Mobiliaros, into the conduct of Petrobras’ directors and the directors of a number of companies awarded construction contacts by Petrobras.

Although these corporate scandals could be seen as outliers, it appears more likely they mark an increased trend for regulators in India, Brazil and other developing jurisdictions in asserting firmer action against the directors and officers of companies involved in corporate misfeasance and corruption.  This is partly driven by the growth of the middle class and demands for improved governance at the public and corporate levels, as well as tougher sanctions for those who fail to adhere to the standards expected.

Indeed, recent legislation passed in both jurisdictions should have the effect of tightening the regulatory regime faced by companies and their directors with the Indian Companies Act of 2013 establishing for the first time the duties of independent directors, and the Brazilian Clean Companies Act of 2014 subjecting Brazilian companies (and foreign entities with Brazilian offices) to civil and administrative sanctions for bribery of domestic or foreign public officials.

These developments should lead to an increase in the demand for FI and D&O coverage, and may create opportunities for insurers to increase their market share through increasing their customer base.  However, insurers should be cautious and consider seeking appropriate advice so that they properly understand the coverage, claims, and regulatory issues that may arise from accepting risks in developing nations.

Eye on Insurance: A Look Back at 2013 and Forward to 2014

Monday, February 3rd, 2014

2013 was a year characterized by continued pressure on the financial sector, a new regulatory landscape and further challenges for the insurance industry branching into emerging risks and economies. The lawyers in our London office authored this update which reviews the key developments and trends for various classes of business during 2013, together with commentary on what we can expect from 2014.

To view and download a PDF copy, click here.

Sedgwick Attorneys
Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. For a complete list of our attorneys, click here.
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