October, 2005

I.Firm News

Thomas Paschos, Esquire will be one of three panel members in an all day seminar entitled “Current Issues and Impacting Insurance Defense Practice in New Jersey”. The seminar will take place at the Holiday Inn, 2175 Route 70 & Sayer Avenue, Cherry Hill, NJ on October 25, 2005. Tom Paschos will be speaking on two topics:

  1. Effective Negotiation and Settlement Techniques
  2. Insurance Issues Involving Defense of Mold and Mildew Claims

If anyone is interested in attending the seminar, please contact Tom Paschos at 215-636-0555 or 856-354-1900.

II. Corporate Liability Issues.

U.S. DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA RULES THAT SECTION 304 OF THE SARBANES-OXLEY ACT DOES NOT PROVIDE A PRIVATE RIGHT OF ACTION FOR SHAREHOLDERS TO FILE A DERIVATIVE ACTION.

In a case of first impression, The Honorable Stewart Dalzell, held in Neer v. Pelino, 205 WL 2434685 (E.D. Pa. 9-27-05), that Section 304 of the Sarbanes-Oxley Act does not provide a private right of action for shareholders to file a derivative action. In Neer, the plaintiff was a shareholder of Stonepath Group, Inc. He sued Stonepath and 14 of its current and former officers and directors in a derivative action suit. He alleged violations of the Sarbanes-Oxley Act of 2002, breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment that took place between January 1, 2001 and the time of the lawsuit. Stonepath is a “non-asset based third-party logistic services company”. The company deprives income primarily from freight forwarding, customs brokerage, warehousing and other value added services. Prior to the litigation, Stonepath issued four restatements, in August and November 2003, January 2004, and January 2005 to modify financial statements earlier made with the Securities and Exchange Commission (“SEC” or “Commission”). After the plaintiff initiated this action, the defendants filed a motion to dismiss pursuant to Rule 12(b)(6). The court granted the defendants’ motion to dismiss, and held that Section 304 does not provide a private cause of action. Section 304 provides for forfeiture of certain bonuses and profits by CEOs and CFOs when a restatement is required due to an issuer’s noncompliance with any financial reporting requirements of the securities law, if the noncompliance arises from misconduct. In its entirety, Section 304 states:
  • (a) Additional compensation prior to noncompliance with Commission financial reporting requirements: If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for: (1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the issuer during that 12-month period.
    • (b)
  • Commission exemption authority - The Commission may exempt any person from the application of subsection (a) of this section, as it deems necessary and appropriate. 15 U.S.C. § 7243 (2002). In holding that Section 304 does not provide a private cause of action, the court compared it to other sections of Sarbanes-Oxley Act of 2002, and held that Section 304 is silent on the matter to whether the parties have a private cause of action, and when compared to other sections of the Act, it was clear that the legislative intent was not to provide a private cause of action pursuant to Section 304. Therefore, the court dismissed the action and held that since there was no federal claim under the Sarbanes-Oxley Act, the plaintiff should pursue the action in the Delaware state courts, the place where the defendant was incorporated, for any causes of action that it may have pursuant to Delaware corporate law.

III. Insurance Coverage Issues.

PENNSYLVANIA SUPREME COURT HOLDS THAT A CLAIMS-MADE POLICY OF AN INSOLVENT INSURER, WITH A REPORTING TAIL ENDORSEMENT OF UNLIMITED DURATION, IS THE FUNCTIONAL EQUIVALENT OF AN OCCURRENCE POLICY.

The Pennsylvania Supreme Court, in an issue of first impression, ruled in the case of Universal Health Services, Inc. v. Pennsylvania Property & Casualty Insurance Guaranty Association, 2005 WL 2335065 (Pa. Super. 9-26-05), that professional liability claims made by an insured were “covered claims” of an insolvent insurer for which the state pooled-risk fund was liable, under a claim-made policy with a reporting tail endorsement of unlimited duration, even though the fund claimed that the liquidation act cut off all claims made after 30 days after the entry of the liquidation order. In this action, the Pennsylvania Property & Casualty Insurance Guaranty Association (PPCIGA) appealed an order from the trial level denying its motion for a summary judgment, and which entered summary judgment in favor of Universal Health Services, Inc. (UHS). The court was asked to determine whether claims under a “reporting tail” endorsement to a claims-made policy, first reported more than 30 days after an insurer’s insolvency, are obligations of PPCIGA under the Pennsylvania Property & Casualty Insurance Guaranty Association Act. The court held that such claims are indeed the obligation of PPCIGA. The action arose as a result of the liquidation of PHICO Insurance Company (“PHICO”). Prior to the liquidation, UHS was insured by PHICO under a professional liability policy for claims related to UHS’s operation of various medical facilities. PHICO was declared insolvent and placed in liquidation by order of the court on February 1, 2002. The Liquidation Order triggered obligations of PPCIGA to provide statutory coverage to UHS to the extent provided under the Guaranty Act. UHS’s policy with PHICO was a claims-made policy and was initially issued on January 1, 1998, and remained in effect until January 1, 2002. At the time of the purchase, UHS also purchased a “reporting tail” endorsement of unlimited duration, which took effect at the end of the policy period. UHS received several claims based on events that took place during the policy period, but those claims were first reported to UHS more than 30 days after the determination of insolvency. PPCIGA denied coverage on those claims, asserting that its obligations to provide coverage extended no further than to claims reported within 30 days after the determination of insolvency, despite the reporting tail endorsement. As a result, PPCIGA maintained that its obligations had ended. UHS, on the other hand, contended that because of the unlimited reporting tail, there was no end date to PPCIGA’s obligations under its policy and the Guaranty Act. In essence, UHS contended that the reporting tail converted the claims-made policy into an occurrence policy, claims under which it is undisputed PPCIGA would provide coverage. In finding in favor of UHS, the court stated: “Regardless, we see no functional difference between a claim made under an occurrence policy and a claim made under a claims-made policy with a reporting tail (endorsement of unlimited duration), where the claim is made during the reporting tail period, and we find there is substantial support for the notion that a claims-made policy with a reporting tail is the functional equivalent of an occurrence policy.”

THE PENNSYLVANIA SUPREME COURT HOLDS THAT AN OWNER OF A REGISTERED UNINSURED AUTOMOBILE, WHO WAS INVOLVED IN AN ACCIDENT WHILE DRIVING AN INSURED VEHICLE, IS NOT ENTITLED TO FIRST-PARTY BENEFITS..

In Swords v. Harleysville Insurance Co., 2005 WL 2396625 (9-29-05), the Pennsylvania Supreme Court held that the owner of a registered uninsured automobile, who was involved in an accident while driving an insured car owned by his father, is not entitled to first-party benefits. In this case, the father of the injured son owned a 1997 Chevrolet S-10 pick-up truck. The father insured the car through Pennland Insurance Co. On September 14, 1999, the father gave permission to his son to use the truck. On that day, the son was involved in an automobile accident in New Holland, Pa., while operating the father’s truck. At the time of the accident, the son owned a vehicle that he registered with the Pennsylvania Department of Transportation, but for which he never obtained any insurance coverage. Following the accident, the son sought to recover first-party benefits pursuant to the father’s Pennland policy. Pennland denied the first-party benefits. Finding in favor of the insurance company, the Pennsylvania Supreme Court stated, “there could be no doubt that in passing the Motor Vehicle Financial Responsibility Law (“MVFRL”), the Legislature sought to penalize owners of registered vehicles who did not maintain financial responsibility….. In Section 1714 of the MVFRL, the Legislature could not have been any clearer in so much as it intended to preclude owners of registered vehicles who did not have financial responsibility from being eligible to recover first-party benefits, regardless of what vehicle in which they are injured.”

Copies of the full text of any of the cases discussed in this Newsletter may be obtained by calling our office.  The articles contained in this Newsletter are

for informational purposes only and do not constitute legal advice.



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