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In re TIAA-CREF Insurance Appeals

Supreme Court of Delaware

July 30, 2018

IN RE: TIAA-CREF INSURANCE APPEALS

          Submitted: June 6, 2018

          Court Below: Superior Court of the State of Delaware C.A. No. N14C-05-178 CCLD

          Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and TRAYNOR, Justices, constituting the Court en Banc.

          ORDER

          JAMES T. VAUGHN, JR. JUSTICE.

         On this 30th day of July 2018, upon consideration of the parties' briefs, oral argument and the record on appeal, it appears to the Court that:

         (1) This is an insurance coverage case involving four consolidated appeals. In three of the appeals, insurance companies are the Appellants: Illinois National Insurance Company ("Illinois National"), Ace American Insurance Company ("Ace"), and Arch Insurance Company ("Arch"). The Appellees in those appeals are the insureds: TIAA-CREF Individual & Institutional Services, LLC; TIAA-CREF Investment Management, LLC; Teachers Advisors, Inc.; Teachers Insurance and Annuity Association of America; and College Retirement Equities Fund (collectively "TIAA"). The fourth appeal was filed by TIAA. The Appellees in that appeal are Illinois National, Ace, Arch, and Zurich American Insurance Co. ("Zurich").

         (2) "TIAA provides retirement accounts, annuities, life and other insurance, and pension plan counseling to employees of colleges, universities, and other institutions."[1] Its entities offer investors the ability to invest in various funds. When investors contribute money to their investment accounts, the contributions purchase shares in the fund selected. Each fund uses the money to invest in a portfolio of stocks, bonds, or real estate. Each fund's share price - or unit value - depends on the fund's investment performance and is calculated daily based on the market value of the fund and the expenses charged to the fund by TIAA. TIAA does not earn profit or incur loss.

         (3) An investor wishing to sell shares notifies a TIAA broker-dealer. When such a request is properly submitted to the broker-dealer, the date of submission, or an agreed upon future business day, is referred to as the "good order date." At the times relevant to this litigation, the sale of the investor's shares was not always processed on the good order date. Sometimes it might not be processed until days or weeks later. As a result, the investor's shares could increase (or decrease) in value between the good order date and the date the sale was finally processed. The difference in value of the shares between the good order date and the sale date, either positive or negative, is referred to as the Transactional Fund Expense ("TFE"). If the shares increased in value between the good order date and the sale date, there was a TFE gain. If they decreased, there was a TFE loss. After the sale was processed, TIAA would pay the investor the value of the shares as of the good order date. The TFE gains and losses were netted with operational expenses and passed through to all of the remaining investors' accounts. TFE is however, a relatively minor component of each fund's overall expenses and is "de minimis" with respect to each fund's net value.

         (4) In 2007 the first of three class actions was filed against TIAA. The class was investors or former investors who had sold shares with a TFE gain. The plaintiffs sought to recover the TFE gain on behalf of the class. That action, known as the Rink action, was settled in 2012.[2] The second and third class actions also involved investors who had sold shares with TFE gain. The second action, filed in 2009, was known as the Bauer-Ramazani action.[3] It was settled in 2014. The third class action, known as the Cummings action, is still pending, though it is apparently subject to a settlement in principle.[4]

         (5) TIAA's insurance program for the period relevant to this litigation consisted of claims-made liability insurance. A primary policy was provided by Illinois National in the amount of $15, 000, 000, subject to a self-insured retention of $5, 000, 000. Rising layers of excess insurance were provided by St. Paul Mercury Insurance Company ($15, 000, 000), Ace ($15, 000, 000), Arch ($5, 000, 000), and Zurich ($15, 000, 000). St. Paul settled with TIAA and is not a party to this appeal. Arch also issued a second excess policy with an attachment point of $100, 000, 000. This second policy is relevant only to the consent to settle defense asserted by Arch. The excess policies follow form to the Illinois National policy.

         (6) In 2007, TIAA gave notice of the Rink class action to Illinois National. Illinois National denied coverage, based primarily on a claim that the settlement payments in the Rink class action were an uninsurable disgorgement. The settlement in Rink did not reach any of the excess policies. TIAA gave notice of the Bauer-Ramazani class action to Illinois National, Ace, and Arch in 2010. Illinois National denied coverage for that class action raising the same disgorgement defense raised in Rink. Ace and Arch adopted Illinois National's denial of coverage.

         (7) In 2014, after the Bauer-Ramazani class action was settled, TIAA filed its initial complaint in this case in Superior Court against Illinois National, St. Paul, Ace, Arch, and Zurich, seeking coverage for the settlement payments it made in the Rink and Bauer-Ramazani actions. It later amended its complaint to seek coverage for the Cummings action.

         (8) TIAA and Illinois National agreed, and the Superior Court ruled, that Bauer-Ramazani and Cummings related back to Rink, making all three class actions reviewable for coverage under the 2007-2008 policy year. That ruling is not challenged in this appeal. After further pre-trial rulings and a jury trial, the Superior Court entered judgment in favor of TIAA against Illinois National, Ace, and Arch. Zurich prevailed on the defenses it asserted, lack of notice and failure of TIAA to comply with a consent to settle provision.

         (9) The first contention to be considered on appeal is one made by Illinois National, Ace, and Arch. They contend that TIAA did not suffer a "loss" as that term is defined in the policies. Under the policies, "loss" excludes "matters which may be deemed uninsurable under the law pursuant to which" the policy is to be construed.[5] They argue that the class action settlements are "disgorgements," and that under New York law a disgorgement cannot be the subject of an insurance claim as a matter of that state's public policy.[6] All parties agree that New York law applies to this issue. The Superior Court ruled as a matter of law that the class action settlements are not disgorgements.[7] Illinois National, Ace, and Arch contend that ruling is error.

         (10) The New York cases upon which Illinois National, Ace and Arch principally rely involve regulatory proceedings which resulted in settlements ordering the insured to pay disgorgement damages.[8] It appears that the principle which emerges from these cases is that New York public policy prohibits enforcement of insurance agreements in cases involving disgorgement where the payment is conclusively linked, in some fashion, to improperly acquired funds in the hands of the insured. In this case, TIAA disputed and defended itself against the claims asserted in the class actions, repeatedly asserting that the procedures that resulted in TFE and its treatment were proper and lawful. No finding that the TFE was ill-gotten gain was made in any forum. Nor could one have been. Whether TIAA's allocation of the gains and losses from its policy for handling transfer and sale requests was contractually proper, the reality is that it was a risk sharing arrangement that spread the costs and benefits of that policy among all of the funds' investors, and did not create an opportunity for TIAA to profit at its investors' expense. To this point, it is likely that members of the plaintiff classes, as investors, did not just incur costs from the policy, but also benefitted. And it is further undisputed that the dollar figures implicated by the policy were de minimis when considered as a percentage of the investors' overall economic interests in the funds. Under these circumstances, we conclude that the Superior Court was correct in distinguishing the New York cases barring insurability, which proscribe it in situations in which the insured's wrongdoing resulted in ill-gotten gains, and finding that TIAA established that New York's public policy against enforcing insurance agreements in cases of disgorgement does not apply to the facts of this case.

         (11) Illinois National and Arch next contend that the Superior Court erred by awarding unreasonable and unnecessary defense costs for the Bauer-Ramazani action. The issue of TIAA's defense costs was presented to the jury at trial. TIAA sought to recover $7, 519, 822.91 as defense costs in connection with the Bauer-Ramazani action for work performed by different law firms, including Downs Rachlin Martin PLLC, a Vermont firm, and the Washington, D.C. office of O'Melveny & Myers. The Bauer-Ramazani action took place in Vermont. When TIAA rested its case on direct at trial, Illinois National and Arch moved for judgment as a matter of law, arguing that TIAA had not satisfied its burden of establishing that the defense costs for Bauer-Ramazani were reasonable and necessary. The Superior Court reserved decision on the motion. The jury awarded TIAA the entire $7, 519, 822.91. After trial Illinois National and Arch filed renewed motions for judgment as a matter of law. The Superior Court denied the motions.

         (12) The evidence presented by TIAA in support of its claim for defense costs in the Bauer-Ramazani action included the testimony of Theresa Gee, a former O'Melveny & Myers lawyer, and expert Leif Clark, a former federal bankruptcy judge. TIAA also introduced three binders of defense invoices and payment confirmations. On appeal, Illinois National and Arch argue that TIAA failed to meet its burden of establishing that the fees were reasonable and necessary and did not present testimony from any witness who was responsible for retaining counsel, negotiating the rates in question, or reviewing the defense bills for reasonableness and necessity. They further argue that TIAA's expert made no adjustments whatsoever and agreed that had he made the effort to review all the bills, he would have found reductions for what he agreed were unreasonable billing practices. They further argue that the Superior Court should not have allowed recovery for fees (the "O'Melveny fees") that were double and triple the rates charged in the locality.

         (13) Ms. Gee gave detailed testimony regarding the O'Melveny & Myers lawyers, and the nature and extent of the work that needed to be performed. The Bauer-Ramazani action involved multiple allegations of ERISA violations, which justified the hiring of the specialized ERISA practice group in O'Melveny's Washington, D.C. office. In addition, despite the contentions of Illinois National and Arch, the record shows that Mr. Clark expressed the opinion that the defense costs were reasonable and necessary and he saw no reason to reduce the bills. A review of his testimony shows that he adequately explained the basis for his opinion. The Superior Court did not err in denying Illinois National's and Arch's renewed motions for judgment ...


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