Terra Extraneus

As an Oklahoma based trial lawyer, I do not have the luxury of a continuous stream of cases all in the same genre or even area of law. Largely originating on one of the three coasts (including the Gulf Coast), cases usually come in waves. I just completed a three year group of 41 cases, ten of which were tried, against Goldman Sachs & Company. This particular wave of cases was actually the second tidal surge because during the three years prior to the just concluded three years, I was counsel against Goldman Sachs in a predecessor wave of cases.

Goldman Sachs manages its exposure somewhat idiosyncratically and not quite like the other wire houses or other member firms in the securities industry. For instance, Goldman Sachs is far more concerned about its image than it is winning or losing, or even the economics of any particular case. Because the securities industry effectively gags its associated persons thus creating a conspiracy of silence, Goldman Sachs can litigate endlessly with associated persons and face little risk that the image it jealously guards will be tarnished by inconvenient media exposure.

The news media has no effective means of penetrating this conspiracy of silence, because no member firm is going to allow its associated persons to speak freely to the media, even about other member firms (or previous employers). Also, one has to wonder if the media will even try to break the code of silence, because of the possible back lash by one or more member firms.

Abusive personnel practices have been a hall mark of about half the securities industry, and avoided by the other half. Goldman Sachs’ abuse of registered representatives was largely the result of institutional errors made when investment bankers attempted to “fix” the firm’s “brokerage” and “advisory” personal wealth management business. It reminded me of watching a newly minted teenage driver. You constantly have to remind them at first to look back over their shoulder while backing out of the driveway. Goldman Sachs was so intent upon socially engineering the lives of its registered representatives that it back over half of them.

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Errors and omissions insurance policies for registered representatives and broker-dealers have been offered at different times by different companies and usually, quickly withdrawn from the market. One of the companies that has stayed in the market longer than most has been AIG / National Union.

But, as demonstrated in a consolidated case, Ryan v National Union, United States District Court, District of Connecticut, AIG / National Union has a strange way of handling these cases.

First, the policy excluded coverage for discretionary accounts or the exercise of discretion. Second, the policy excluded outside activities that included “any entity other than the broker-dealer.” Third, the policy had a relatively short “tail,” in that it excluded coverage for acts pre-dating the policy effective dates and additional time coverage in the “tail” provision.

In other words, about the only thing covered, if the insurance company had its way, would be claims arising during the policy period resulting from acts during the policy period in brokerage accounts (not fee based advisory accounts in which discretion was exercised rightly or wrongly), which typically would include only the old fashioned stock broker, commission and sales of securities. In the Ryan case, the federal court held that the exclusions did not exclude all possible claims that might be implicated by the pleadings in the arbitration proceedings, and therefore there was a duty to defend all the claims in the arbitration proceedings.

It is sad that the AIG / National Union product has become so prevalent among the few who can afford or do buy insurance. A better product issued by a company that was more concerned about its insureds would probably lead to a broader market. A broader coverage market would lead to lower premiums because there would be more buyers among which to spread the risks.

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While the annals of Oklahoma insurance law may not be whipped into a froth, the Supreme Court ruled that “actual cash value” in the insurance code means the same as other insurance code terms such as “fair value” and “actual value.” Tyler v. Shelter Mutual Insurance Company, 2008 OK 9. The opinion was issued in response to a certified question from a federal court. It took ten judges to decide the issue.

In another case, a jury was asked to decide whether an insured of Oklahoma Farmers Union Mutual Insurance Company was entitled to indemnity payments for a substandard wood roof. Because both parties admitted the policy was unambiguous, there was no fact question to submit to the jury, so the jury verdict was superfluous as a matter of law. Based on the unambiguous policy, the Court reversed and rendered, finding coverage and ordering a hearing to set damages. The question under the policy was whether the replacement of the hail damaged wood roof shingles with plywood decking and composition shingles would be covered. Farmers attempted to cover only the repair of the composition shingles because the policy limited coverage to materials of like kind and quality, and the wood shingles were not the same as the composition shingles and plywood decking. Gutowski v Oklahoma Farmers Union Mutual Insurance Company, 2008 OK CIV APP 8.

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There seems to be some fear that many eligible tax payers will not receive their tax rebates because they did not file a 2007 tax return. An old friend sent around an email indicating that some of the people that might not have filed a 2007 return could include disabled Social Security beneficiaries and disabled or retired veterans otherwise receiving benefits, as well as others. Thus, it is time to check in with these folks and make sure they get their money by filing a return.

Please access these links for special filing instructions and a sample Form 1040A (.pdf) that highlights the simple, specific sections of the return to fill out.

Of course, the tax rebate probably would not be needed if Americans financed their federal government with sales tax receipts rather than income taxes. But, that is a topic for another day.

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The Small Business and Work Opportunity Tax Act of 2007 imposed penalties on tax preparers if the tax return understates the taxes due to the government and the tax preparer knew or should have known. Most tax preparers will wisely avoid this problem by asking for less documentation from the client to avoid the “knew or should have known problem” and rely more on the representations made by clients. Thus, the government will actually reduce the accuracy of returns by blinding tax return preparers. This is a typical example of legislative over reaction.

But, some CPAs will panic and demand from their clients voluminous proofs, and no doubt, become defacto auditors for the government.

To avoid this problem, will CPAs need a duty of zeal to their clients ingrained into them through their ethics code as has been drilled into lawyers through theirs? In the meantime, taxpayers will have to determine who their non-attorney tax return preparer or tax advisor actually represents, them or the government?

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The sword play among law firm marketing pundits and bloggers of late pretty well proves the point: law firm marketing did not grow as a profession and the concept of law firm marketing, much less governing principles, have never emerged. Larry Bodine’s blog on law firm marketing and the startling candor of Betiayn Tursi in her magazine summarized the state of things.

However, the reason few law firms “get it” when it comes to marketing, in addition to the fact that trying to organize a law firm owned by more than one lawyer is like herding cats, is because the concept of “marketing” is all but illegal among lawyers, much less not a subject of educational course work.

If law firms are ever to going to “get it,” it will only be because they finally figure out that it is the “brand” and the “brand recognition,” first and foremost, that lays the foundation for “marketing” as most lawyers understand it and accept it. Because “solicitation” is generally illegal for lawyers, the idea of “branding” and promoting the brand is often obscured. Even if you never solicit a client, make the law firm identifiable, brand it, and make the brand well known, and solicitation either becomes unnecessary or easy (and legal).

Most law firm employees that are titled as some sort of marketing professional can only be effective if they can help the firm create a brand and successfully promote it. Most law firms stumble on this through charity sponsorships. Not the ones in which the forty largest law firms in town are also named sponsors, but the ones which they sponsor exclusively, especially those charity events promoted by an existing client or officer of a client. It starts off with a few golf or T-shirts. The next year the charity event rolls around, it involves a few radio spots. The third year it includes a local but sophisticated newspaper and electronic media campaign in which the law firm becomes one of the spokesmen for the event or the charity. And after that, it takes on a life of its own.

While other marketing plans and efforts continue, such a corner stone leading to community recognition is the first step that makes everything else work. Also, it is the most fun and leads most law firms to meet the most new people in the shortest amount of time.

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UPDATE****3/26*** The Court withdrew its order on a 5-4 vote to restudy the internet access issue. Hopefully, the Court will retain the new rule requiring exercise of care when putting individual identification information in public pleadings. But, internet access to court files should be retained.
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The Oklahoma Supreme Court, though not unanimously, hurled the Oklahoma Court system backwards with such force the court system is now back in 1982. Pleadings are no longer available on line from the Oklahoma court system’s internet presence, the Oklahoma Supreme Court Network.

This action was imposed unilaterally by our highest and usually most sensible Court for the stated reason that it would protect privacy. Forgetting for the moment that the other way the Court addressed it, by passing a rule limiting personal and financial information disclosure, was the only effective way to address it, the Court’s fear of gadgetry was both humorous and sad.

Pleadings are public records that can be viewed at any Court Clerk’s office, so the court did not remove them from the public sphere, but just made them harder and more expensive to review, because now it takes a trip to the courthouse to view and copy the pleadings. The Court just reduced the convenience of review by eliminating the instant review possible on line. Because court dockets and court cases can still be searched on line, the pleadings can still be easily identified, as can the parties to law suits. Exact identification of parties might be harder, but that only is true until one makes the trip to the courthouse to review the pleadings.

Of course, only 80% of Oklahoma’s court system was ever on line, not all 77 counties were on line, and only in one or two counties could every pleading be accessed, although some access was available to pleadings in all the counties that made up the 80%. Nevertheless, our Court system seemed quite modern and efficient because of this access.

The great contradiction, and the humor, in our high court’s pull back from the 21st century, is that the unstated and underlying premise has to be that Oklahoma state court pleadings are somehow more valuable and more dangerous than federal court pleadings. Every federal court pleading in the United States, much less in the federal courts sitting in Oklahoma, unless under court ordered seal, can be downloaded for eight cents a page on the Pacer system.

The great sadness resulting from Oklahoma’s action is that because of the Court’s failure to reconcile the virtually complete access to federal pleadings with Oklahoma’s sudden phobia about access, the Oklahoma action seems to be reactionary and parochial.

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What requires the skills of an appliance technician and Spiderman? A brand new satellite dish!!

In 2007, the Oklahoma Supreme Court reiterated a time honored rule of law that before there is liability in a negligence claim there must be a duty. The breach of the duty must also cause the damage (injury). But, fundamentally, if there is no duty by one person to another, then there can be no liability.

Thus, in Lowery v Echostar Satellite Corp., 2007 OK 38, the Oklahoma Supreme Court held that the satellite dish company had no liability because it had no duty to prevent its customer from falling off her own roof when she tried to repair the satellite dish. The customer suffered several broken bones in the cause of satellite dish television. It did not matter that the customer had customer service on her wireless so that they could talk her through the repair. The satellite dish company could not see the roof, the customer, or whether the two would not be compatible.

More interesting is the fact that what caused the customer to try to scale her roof was the need to repair the satellite dish. The customer called customer service and was sent a package of three small screws. She again called customer service to inquire how the three screws were sufficient to her need and why someone was not out to repair the dish. Customer service told her no one would be coming out.

The satellite dish warranty contract apparently did not specifically require that a human be dispatched to do the warranty work, but rather anticipated that the customer would be the one to scale the roof and do the repair. Thus, the Supreme Court could do nothing for the consumer.

Nobody with any sense of fairness would sell a warranty that required the skills of a technician and Spiderman to maintain a consumer device – except the satellite dish folks, it seems. Maybe they have forgotten that the satellite dishes are small and installed on high places, rather than the old ones that were as big as small cars and had to sit on the ground.

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After the United States Supreme Court defanged the tort system in Campbell v State Farm Insurance Company by limiting punitive damages to ten times actual damages, insurance companies almost uniformly reverted to their business methods employed prior to the advent of theories of recovery involving bad faith breach of contract. The primary method of boosting insurance company financial performance has almost always been by increasing the cash reserves the companies invest, such that in the modern era, most insurance companies make more money from their investments than they do their sales of new policies.

One of the ways insurance companies increase their cash reserves, and thus the size of their investments and the resulting investment profits is to refuse to pay claims to policyholders. Insurance companies accomplish this by tightening their claims investigation procedures and excluding claims, in whole or in part, on ever more detailed guidelines for claims payment. This method has several permutations. One method is to never actually deny the claim, but rather to put up so many requirements to qualify for payment, usually manifested in ever more clever paper work technicalities, that the policyholder eventually in exhaustion gives up. Another method is to do post claim underwriting.

Post claim underwriting is manifested in “investigations” of the claim that start with the initial application, if the application is still within the time it can be contested, and sometimes even if it is not, and look for any flaw or mis-statement. The initial application is often as much authored by the commission seeking (and sometimes commission hungry) insurance sales person as it is by the prospective insured or policyholder. The application questions are usually detailed and often use technical medical or other terms.

Most insureds and policy purchasers assume that the insurance company obtained a release of medical records from them for some purpose and that erroneous medical history answers will be corrected by a review of the medical records supposedly obtained. While this might or might not be true, a few months or a few years later when the major claim is being “investigated,” many companies often revisit the original decision to accept the policy, called “underwriting,” and determine if there were any errors in the application that could be characterized as wrong or fraudulent.

Companies that engage in this sort of retrospective underwriting analysis assume the insured or policy purchaser lied and assume the selling agent just faithfully took down their answers to the questions, even though the insurers know fully that the agents often have to explain the questions and help decide what the answer should be.

In a binding arbitration in California, Bates v Health Net, Inc., BC321432, [hat tip to Lisa Girion, Los Angeles Times, otherwise, no one would have known and to TerraX’s editor, Terry Hull, or I would not have known] the arbitrator wrote a lengthy report of the testimony about post-claim underwriting that led to policy rescission (cancellation). Health Net wanted out of the policy as soon as Ms. Bates developed breast cancer and $125,000 in medical bills. The arbitrator awarded Ms. Bates $9 million, some substantial part of that in bad faith punitive damages. Thus, this Award was doubly rare, a large award in arbitration to a consumer, and, a report on the practice of post-claim underwriting, which is typically illegal or typically unfair, or both.

The Award is presently on the LA Times website, the link is in bold above, and is an excellent explanation of the post-claim underwriting methodology. The only thing missing is the one thing only a Grand Jury could probably get a handle on, and that is the cold blooded actuarial data the insurance company likely used to determine whether post-claim underwriting denials would be cost effective in preserving or increasing reserves and profits. You can bet that even though this Award laid it out in cookie cutter clarity, there will be no hearings by the enforcement division of any Insurance Commissioner in any state. That makes Campbell v State Farm all the more effective to protect insurance company financial statements.

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The folks at the 39th Annual RV SuperShow found one of our cartoons funny enough to post on their website. Our cartoon, “Red Neck Risk” portrays two of our favorite trying to hook up their RV with less than the skills taught by our friends at the RV Show, much to the suprise and pain of their cat.

[Hat Tip to our buddies over at the double wide over at House Marketing and Management.]

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