Will Wonders Never Cease?
Pension Trustees are still turning a blind eye to their own personal exposure when they continue to hire consultants to perform other functions such as purchase bonds and fiduciary insurance for the funds and the Trustees. The most glaring conflict is when an actuarial firm charged with determining the financial soundness of the plans turns around and puts on another hat and becomes the agent for the insurance company. That actuary has a fiduciary duty to the plan, but also has a fiduciary duty to the insurance company and is paid by both. No one can serve two masters but many consultants sell their multiple services to a plan offering a shopping cart of services. They ignore the very essence of a fiduciary's duty – to work in the best interest of the plan instead they line their pockets in as many ways as possible.
As a plan trustee don’t fall into this trap. The consultants may be wonderful people, take you out to dinner, or play a great round of golf, but at some point if your plan is in trouble it is your personal assets that are at risk and you do not want an attorney sitting across the table asking you, “Why didn’t you engage a consultant to do so many things, where is the diversification of the services you were provided?” In other words why didn’t you have checks and balances in the advice you were being given.
Also, be leery of actuarial firms who oppose fighting to oppose disclosure of fees regulations. For example, The Segal Company wrote the Department of Labor in 2008 that they reconsider their proposed rules for disclosure; eventhouhg their own letter acknowledged that there may be prohibitions for rebating that restrict their ability to discount insurance commissions, so they do sell insurance, but do not want to disclose what they are paid. So if they say they are not receiving commissions they may be violating the law, yet they don’t want to disclose this to the same people who they owe a fiduciary duty. I don’t want to single out Segal, but actuaries and other consultants have to be sensitive to this issue, not pretend it does not exist.
More importantly, as a plan trustee you have to be careful. Do not let “one stop shopping” entice you into personal bankruptcy, and your plan not providing the benefits it should be providing.
Monday, April 27, 2009
Thursday, April 09, 2009
Connecticut AG Criticizes Bailout Money for Credit Rating Firms
Connecticut Attorney General Richard Blumenthal is questioning why up to $400 million in federal bailout money is going to the big three credit rating agencies that he says helped create the economic meltdown.
Blumenthal said Monday that he is investigating why a $1 trillion government bailout program designed to unfreeze the credit markets steers money to Moody's, Fitch and Standard & Poor's and shuts out their six smaller competitors.
He said the companies may have violated antitrust laws, and he alleged they overrated toxic assets before the meltdown.
"The net result here is that up to $400 million in fees will be showered on the same ratings agencies whose mistaken ratings and inflated ratings led to the economic crisis,'' Blumenthal said. "It is another reward for failure.''
Blumenthal said he subpoenaed the companies for documents last week and asked Federal Reserve Chairman Ben Bernanke in a letter sent Monday to revise the bailout program to stop favoring the three rating agencies.
The program, created by the Federal Reserve and the Treasury Department, is called the Term Asset-Backed Securities Loan Facility.
It provides loans to big investors and companies to buy newly issued securities backed by consumer debt, stimulating lending for auto, education, credit card and other loans.
The program starts by providing up to $200 billion in financing to investors, such as hedge funds, private equity funds and mutual funds, to buy up the debt. It has the potential to generate up to $1 trillion in lending.
Blumenthal said the program requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies.'' He said Moody's, Fitch and Standard & Poor's are the only raters that meet the criteria.
Spokesmen for Fitch and Standard & Poor's said they were reviewing Blumenthal's comments and would provide responses later Monday. A message was left for Moody's.
A message was also left for a Federal Reserve spokesman.
Blumenthal's new actions expand his existing antitrust investigation of the three rating agencies. He sued the firms last July, alleging they gave artificially low credit ratings to cities and towns that ultimately cost taxpayers millions of dollars in unnecessary insurance and higher interest payments.
The three firms have denied those allegations and said the lawsuit is without merit.
Blumenthal said the three agencies have become an "old boys' club'' on Wall Street and their monopoly must be broken up.
"The Fed is strengthening and entrenching the stronghold held by the Big 3,'' he said.
Securities and Exchange Commission Chairman Mary Schapiro said last month that the SEC may need to ask Congress for broader authority to supervise the Wall Street credit-rating agencies. Schapiro has suggested the SEC should explore ways to diminish the market's dependence on ratings by the big agencies. The three firms dominate the $5 billion-a-year industry.
The SEC was given new authority over them in 2006 legislation, but Schapiro has said she isn't sure whether it's enough
Blumenthal said Monday that he is investigating why a $1 trillion government bailout program designed to unfreeze the credit markets steers money to Moody's, Fitch and Standard & Poor's and shuts out their six smaller competitors.
He said the companies may have violated antitrust laws, and he alleged they overrated toxic assets before the meltdown.
"The net result here is that up to $400 million in fees will be showered on the same ratings agencies whose mistaken ratings and inflated ratings led to the economic crisis,'' Blumenthal said. "It is another reward for failure.''
Blumenthal said he subpoenaed the companies for documents last week and asked Federal Reserve Chairman Ben Bernanke in a letter sent Monday to revise the bailout program to stop favoring the three rating agencies.
The program, created by the Federal Reserve and the Treasury Department, is called the Term Asset-Backed Securities Loan Facility.
It provides loans to big investors and companies to buy newly issued securities backed by consumer debt, stimulating lending for auto, education, credit card and other loans.
The program starts by providing up to $200 billion in financing to investors, such as hedge funds, private equity funds and mutual funds, to buy up the debt. It has the potential to generate up to $1 trillion in lending.
Blumenthal said the program requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies.'' He said Moody's, Fitch and Standard & Poor's are the only raters that meet the criteria.
Spokesmen for Fitch and Standard & Poor's said they were reviewing Blumenthal's comments and would provide responses later Monday. A message was left for Moody's.
A message was also left for a Federal Reserve spokesman.
Blumenthal's new actions expand his existing antitrust investigation of the three rating agencies. He sued the firms last July, alleging they gave artificially low credit ratings to cities and towns that ultimately cost taxpayers millions of dollars in unnecessary insurance and higher interest payments.
The three firms have denied those allegations and said the lawsuit is without merit.
Blumenthal said the three agencies have become an "old boys' club'' on Wall Street and their monopoly must be broken up.
"The Fed is strengthening and entrenching the stronghold held by the Big 3,'' he said.
Securities and Exchange Commission Chairman Mary Schapiro said last month that the SEC may need to ask Congress for broader authority to supervise the Wall Street credit-rating agencies. Schapiro has suggested the SEC should explore ways to diminish the market's dependence on ratings by the big agencies. The three firms dominate the $5 billion-a-year industry.
The SEC was given new authority over them in 2006 legislation, but Schapiro has said she isn't sure whether it's enough
Misidentification Creates Problems for Insureds, Agents, Attorneys
By Beth D. BradleyApril 8, 2009
Among the issues that plague coverage lawyers and insurance agents, and especially insureds, is that of a misnamed, unnamed or mischaracterized insured. All too often in insurance policies, corporations are designated as assumed names, partnerships as individuals in corporations, or the names simply do not match the insured.
The problem is compounded when there may be several related entities, all of which are insured or intended to be insured. A related problem exists when the addresses are wrong or the insured's business is not accurately described.
These issues are also problematic for agents. As the intermediary between insurer and insured, fingers may point at the agent from either direction if there is a mistake.
Even when the named insured is correctly named, the type of entity can determine coverage. Managers of a limited liability company are insured, executive officers and directors of the corporation are insured, and spouses of partners in a partnership or joint venture are insured. If an entity is not named, it may have no coverage whatsoever. Misstating the form of an entity, be it corporation, partnership or sole proprietorship, can also lead to disastrous consequences.
For example, the policy itself provides that no coverage is included for a partnership that is not named in the declarations. Accordingly, a partnership that is misnamed as a corporation or sole proprietorship may have no coverage. And, while coverage is afforded for directors or officers of the corporation, in their individual capacity, if the corporate status is not revealed, this same coverage may not exist.
Under the standard ISO general liability form, the policy provides limited coverage for newly acquired or formed organizations, but only for 90 days unless they become named insured. Even this coverage, however, does not extend to unnamed partnerships.
A twist on these issues is created by the complaint allegation rule. If there are entities that might otherwise be entitled to coverage, they may not be if the pleadings do not match the policy names or reveal the corporate relationship.
On a related note, failure to include the proper address or addresses for the insured may also impact coverage, especially where an endorsement limits coverage to designated premises or projects.
Similarly, failure to properly describe the operation may limit coverage, if there is an endorsement for designated operations, or may lead to a claim from the insurer, if an unknown operation, for which no premium was charged, leads to coverage.
Liability policies are not the only ones impacted. Ownership of autos is another area ripe for unintended consequences under commercial auto policies, where coverage may be determined by ownership of the auto. In Houston General Ins. Co. v. Owens, 653 S.W.2d 93 (Tex. App. - Amarillo 1983, writ ref'd, n.r.e.), Ralph Owens formed a trucking company, Ralph Owens Trucking Co. Inc. The corporation engaged in the trucking business, but the trucks were owned individually by Owens. As the individually owned trucks were traded for replacements, the replacements were acquired in the corporation's name.
Although Owens testified he requested that the agent procure coverage in the names of both the corporation and Owens, individually, the primary policy was issued in the names of both entities but the umbrella policy was issued in the name of Ralph Owens only. The insured prevailed at trial, proving he had requested the coverage and establishing that the agent was acting on behalf of the insurer, but the case then proceeded to appeal.
On appeal, the court reversed, finding that while coverage existed under the umbrella based on a provision stating that any insured in the underlying was also an insured, the insured had failed to prove that the settlement was actually an amount it became legally obligated to pay because of an accident.
The entire mess likely would have been avoided had the insured been properly named in the policy.
Bradley is a partner in the Dallas law firm of Tollefson Bradley Ball & Mitchel LLP.
Editor's Note: The above is edited from an article, "What's In a Name? Or: A Rose by Any Other Name Is Not an Insured," that appeared in the March 23, 2009, edition of Insurance Journal South Central.
Among the issues that plague coverage lawyers and insurance agents, and especially insureds, is that of a misnamed, unnamed or mischaracterized insured. All too often in insurance policies, corporations are designated as assumed names, partnerships as individuals in corporations, or the names simply do not match the insured.
The problem is compounded when there may be several related entities, all of which are insured or intended to be insured. A related problem exists when the addresses are wrong or the insured's business is not accurately described.
These issues are also problematic for agents. As the intermediary between insurer and insured, fingers may point at the agent from either direction if there is a mistake.
Even when the named insured is correctly named, the type of entity can determine coverage. Managers of a limited liability company are insured, executive officers and directors of the corporation are insured, and spouses of partners in a partnership or joint venture are insured. If an entity is not named, it may have no coverage whatsoever. Misstating the form of an entity, be it corporation, partnership or sole proprietorship, can also lead to disastrous consequences.
For example, the policy itself provides that no coverage is included for a partnership that is not named in the declarations. Accordingly, a partnership that is misnamed as a corporation or sole proprietorship may have no coverage. And, while coverage is afforded for directors or officers of the corporation, in their individual capacity, if the corporate status is not revealed, this same coverage may not exist.
Under the standard ISO general liability form, the policy provides limited coverage for newly acquired or formed organizations, but only for 90 days unless they become named insured. Even this coverage, however, does not extend to unnamed partnerships.
A twist on these issues is created by the complaint allegation rule. If there are entities that might otherwise be entitled to coverage, they may not be if the pleadings do not match the policy names or reveal the corporate relationship.
On a related note, failure to include the proper address or addresses for the insured may also impact coverage, especially where an endorsement limits coverage to designated premises or projects.
Similarly, failure to properly describe the operation may limit coverage, if there is an endorsement for designated operations, or may lead to a claim from the insurer, if an unknown operation, for which no premium was charged, leads to coverage.
Liability policies are not the only ones impacted. Ownership of autos is another area ripe for unintended consequences under commercial auto policies, where coverage may be determined by ownership of the auto. In Houston General Ins. Co. v. Owens, 653 S.W.2d 93 (Tex. App. - Amarillo 1983, writ ref'd, n.r.e.), Ralph Owens formed a trucking company, Ralph Owens Trucking Co. Inc. The corporation engaged in the trucking business, but the trucks were owned individually by Owens. As the individually owned trucks were traded for replacements, the replacements were acquired in the corporation's name.
Although Owens testified he requested that the agent procure coverage in the names of both the corporation and Owens, individually, the primary policy was issued in the names of both entities but the umbrella policy was issued in the name of Ralph Owens only. The insured prevailed at trial, proving he had requested the coverage and establishing that the agent was acting on behalf of the insurer, but the case then proceeded to appeal.
On appeal, the court reversed, finding that while coverage existed under the umbrella based on a provision stating that any insured in the underlying was also an insured, the insured had failed to prove that the settlement was actually an amount it became legally obligated to pay because of an accident.
The entire mess likely would have been avoided had the insured been properly named in the policy.
Bradley is a partner in the Dallas law firm of Tollefson Bradley Ball & Mitchel LLP.
Editor's Note: The above is edited from an article, "What's In a Name? Or: A Rose by Any Other Name Is Not an Insured," that appeared in the March 23, 2009, edition of Insurance Journal South Central.
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