Legal Newsletter

Definition of disability
The definition of “disability” is subjective because some people can work without complaint with a condition that would disable and incapacitate others. A typical life and health insurance policy may define disability insurance as including insurance related to injury, disablement, or death resulting to the insured from accidents or sickness.

Forms of coverage
The two principal forms of disability coverage in life and health insurance are disability income insurance and waiver of life insurance premium payment during disability.

Disability income insurance
Disability income insurance pays certain monetary benefits to the insured during his disability as defined in the policy. These benefits are common in group insurance.

Waiver of life insurance premium
Waiver of premium payment during disability is a benefit whereby the insured need not pay the premium on a life insurance policy during his disability. Although the premium is considered “waived,” in effect, the insured pays a premium that provides a cash credit toward the premium on the policy in case he becomes disabled.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Insurance agents act on behalf of one or more insurance companies. That relationship between the insurance agent and the insurance company provides authority for the agent to act for and bind the insurance company. Insurance brokers, on the other hand, represent insurance purchasers rather than insurance companies even though insurance brokers may receive their commissions from insurance companies. Insurance brokers do not have authority under principal-agent or employer-employee theories to bind the insurance companies that provide the policies insuring companies or individuals.

Insurance agencies may differ according to the amount of authority granted by insurance companies to the agency. A general agency may have authority to issue its own contracts of insurance under which an insurance company will be bound to provide coverage. Soliciting agencies may have authority only to receive and forward insurance applications but not have authority to bind the insurance company. However, such soliciting agencies still may be found to have apparent authority to bind an insurance company depending upon the factual situation presented to the court.

Generally, insurance brokers represent only the insurance purchaser. However, because the income of the broker normally comes from the insurance companies providing the insurance, questions may arise as to the degree to which an agency relationship between a broker and an insurance company should be inferred.

An insurance broker will have a duty to the purchaser to carry out its obligation to obtain correct types and amounts of insurance for the purchaser to the extent possible. Normally, a broker would not be responsible to meet obligations to the insurer or to meet obligations of the insurer to the purchaser. However, depending upon the factual situation, there may be sufficient reasons for a court to decide that obligations of an agent have arisen for an insurance broker.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Who is an innocent co-insured?
When multiple insureds obtain an insurance policy, usually on jointly owned property, and one insured causes a loss through wrongdoing, the other insureds are considered “innocent co-insureds.” When the innocent co-insureds submit a claim to the insurer to obtain coverage for the loss, an issue arises as to whether the claim should be paid because it would benefit the insured who committed the wrongdoing.

Example: A husband and wife obtain a homeowner’s policy on their jointly owned home. The parties begin an unfriendly divorce, and the wife burns down the home out of spite. If the husband, as the innocent co-insured, submits a claim and receives coverage, the wife, as the wrongdoer, benefits because she partly owns the home. If the insurer denies coverage, the husband is punished for the wife’s wrongdoing.

Public policy
There are several public policy considerations that some courts consider when determining whether or not an innocent co-insured should be compensated for his loss. Denials of claims are based on the public policies of barring the wrongdoer from benefiting from his wrongdoing and preventing the perpetration of fraud on the insurer. However, claims may be paid based on the public policies of preventing the unjust enrichment of the insurer and not allowing an innocent victim to be blamed for a wrongdoer’s acts.

Recovery barred
Traditionally, most courts barred the innocent co-insured from recovery if a co-insured intentionally caused the loss or perpetrated some type of fraud or misrepresentation against the insurer. The principle supporting the denial of recovery was that a wrongdoer should not be rewarded, directly or indirectly, for his wrongful act.

Recovery allowed
Under the modern rule, the majority of courts allow an innocent co-insured to recover based on the public policy that he should not be penalized for another insured’s wrongdoing unless the policy provides no coverage. Generally, if the policy states that responsibility for the fraud is several or separate, rather than joint, an innocent co-insured will not be punished for another insured’s fraud. If the policy is ambiguous, it is usually construed in favor of the innocent co-insured.

Change in insurance policies
In response to the approach of allowing innocent co-insureds to recover despite another insured’s wrongdoing, insurers began inserting language in policies that voids the policy if “an” or “any” insured, rather than “the” insured, is guilty of wrongdoing. However, despite the change in policy language, courts still seek to allow innocent co-insureds to recover. They may do so by using a contract-based approach to give effect to the intent of the parties to the policy.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Life insurance companies may sell their insurance policies through full-time agents, brokerage markets, direct sales, or mass marketing.

Agents
Full-time life insurance agents are usually licensed by the state and by a particular insurer, and they cannot sell life insurance for other insurance companies without the primary insurer’s consent. They usually work through a general agency of the insurer. A general agent recruits and trains other agents, and the applications submitted through those agents are processed by the general agent. Field agents, also called producers, also sell life insurance. A soliciting agent usually has less authority from the insurer than a fully licensed agent does.
Brokerage market

An insurance broker is traditionally the insured’s representative, except that he is the insurer’s agent when he collects the initial premium and delivers the policy. A general agent of the brokerage market life insurer is compensated on the basis of the production of the brokers who work for him. The brokerage market also includes agents who have not contracted to sell insurance for one particular insurer.

Direct sales
Few life insurers sell life policies through direct sales. Those that do utilize direct mail or advertising by television or radio calling for coupon or telephone response. The reason for the lack of use of direct sales is because selling life insurance tends to require a personal touch to deal with the topic of death. Group life insurance, however, is a popular product sold through direct sales, usually as large sales to companies and employers.

Mass marketing
Mass marketing is the presentation of a selling message to induce a number of insureds at one time to purchase life insurance policies. Mass marketing allows the insurer to issue volumes of policies at lower costs because it does not pay agents for one-on-one sales. An insurer may choose to conduct the mass marketing program itself through direct mail, radio, television, or publication, or it may be accomplished by cooperating organizations, such as credit card companies. The organization solicits its own customers to purchase the insurance and then bills the customers for both the organization’s product and the insurance premiums.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Mass marketing in the insurance field is the presentation of a selling message to induce a number of insureds at one time to purchase insurance policies. It has changed the traditional method of selling insurance on a one-on-one basis.

Advantages
Mass marketing is advantageous in that it reaches insureds who generally have no access to their own brokers or agents. It also brings the policies to the insureds usually at lower prices than those charged in one-on-one sales because it reduces the “middleman” cost of agents.

Disadvantages
Opponents of mass marketing assert that it has disadvantages because it may use scare tactics and gimmickry to sell volumes of policies of low value. Mass marketing also lacks the personal aspect that agents give to customers, such as helping insureds apply for the insurance policy. In addition, it may cause unlicensed persons or entities to act as agents in selling insurance without a license.

Methods
Mass marketing is generally accomplished either by the insurer and its agents through direct mail, radio, television, or publication or by cooperating organizations that solicit their own members or customers.

An insurer conducts direct mass marketing by associating itself, often through an independent agent, with another type of commercial business that has a large number of customers. The business in effect gives its approval of that insurer, as opposed to other insurers, to its customers.

Issues arise, however, in relation to the business’ collection of premiums from its customers on behalf of the insurer. The business usually bills the premium at the same time that it sends its own statement to the customer, sometimes on the same statement. Thus, if an insured fails to pay, the business is sometimes required to advance the premium to the insurer on behalf of the customer, who continues to receive coverage, without a convenient way of recouping the premium from the customer. Other arrangements avoid this issue by having the insurer’s premium bill merely included in the business’ mailings. Issues may also arise if an insurer attempts to have its insureds pay premiums through a credit card company because some jurisdictions do not permit such activity.

Mass marketing has contributed to the sales of insurance to certain classes of people, such as students, and associations, such as labor unions. The agency contracts differ with respect to class-based marketing as opposed to those involved with an insurer’s relationship with commercial businesses.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Lawyers and doctors in the past often have conducted their businesses through corporations known as professional corporations. Such corporations served dual purposes: to shield the lawyer or doctor from personal liability for the debts and liabilities of the person’s professional practice and to obtain a corporate tax rate on profits of the business that in the past were lower than rates on individual income.

Tax structures change, and a professional corporation that once obtained a lower tax rate on retained earnings now may classified by the Internal Revenue Service as a personal service corporation with a flat tax rate. That rate may exceed the rate that the professional would pay if there were no professional corporation.

Professional corporations still serve to shield their owners from personal liability for debts and liabilities of the corporation with an important exception for liability of the professional for malpractice. Thus, a professional corporation made up of two lawyers would shield one of the lawyers from personal liability for acts attributable to the other lawyer. In another example, a doctor’s professional corporation would shield the doctor’s personal assets from liability or debts of the corporation attributable to the acts of the doctor’s staff.

Limited liability companies or limited liability partnerships are other structures that may be considered by professionals to shield personal assets from debts or liabilities of the professional’s business. Such structures are established according to the particular laws of each of the states, and a state government office should have helpful information available to assist the professional in examining the suitability of a business structure providing greater protection of personal assets from liability than a sole proprietorship or traditional partnership. Professionals other than doctors and lawyers may also wish to consider such alternative business structures.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Under Section 807 of The Sarbanes-Oxley Act of 2002 (Act), any person who knowingly commits securities fraud is subject to a hefty fine, a prison term of up to 25 years, or both. Section 807 does not criminalize securities laws violations for the first time; however, it does combine several existing laws so as to facilitate and streamline federal prosecutions. Section 807 does impose significantly harsher criminal penalties than the penalties prescribed under prior laws.

Severe criminal penalties may also be imposed pursuant to the Act (up to 20 years in prison and a $5,000,000 fine) if chief executive officers and chief financial officers provide materially inaccurate information in financial statements that are filed with the Securities Exchange Commission (SEC). Chief executive officers or chief legal officers who sign these statements must personally certify the information contained therein. If the statements are materially inaccurate, the signing official can face a fine of up to $5,000,000 and prison terms of up to 20 years. The penalty depends on whether the certification of materially inaccurate information was done knowingly or willfully. A knowing violation subjects the signing official to 10 years in prison and/or a $1,000,000 fine. A willful violation subjects the signing official to faces a maximum $5,000,000 fine and up to 20 years in prison.

Additionally, the Act now makes it a felony to knowingly alter, destroy, conceal, or otherwise falsify a document with intent to impede, obstruct, or influence “any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter.” It is also a felony to commit any of those acts knowingly with intent to impede, obstruct, or influence a federal court or congressional proceeding. A person convicted of these crimes can be fined, imprisoned up to 20 years, or both. The Act targets the actual perpetrator, not just the person who may have directed the prohibited activity.

The Act also targets any person who attempts or conspires to commit securities fraud violations under the Act. Enhanced criminal penalties are available for mail and wire fraud convictions and violations of the Employee Retirement Income Security Act of 1974 (ERISA).

The penalties under the Act resulted from the United States Sentencing Commission’s review and amendment of the Federal Sentencing Guidelines. Congress directed that the Sentencing Guidelines be amended “where appropriate to ensure that they “reflect the serious nature of the offenses and the penalties set forth in this Act, the growing incidence of serious fraud offenses . . ., [and] the need to modify the sentencing guidelines and policy statements to deter, prevent, and punish such offenses.” The Federal Sentencing Guidelines basically increased the offense level for corporate (organizational) crimes such as securities fraud, frauds that cause catastrophic loss, crimes involving more than 250 victims, crimes that endanger a public company’s solvency, and the conduct prohibited under the Act.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

The Safe Drinking Water Act provides protection for whistleblower-employees who file claims under the statute. Section 1450 of the statute provides:

No employer may discharge any employee or otherwise discriminate against any employee with respect to his compensation, terms, conditions, or privileges of employment because the employee (or any person acting pursuant to a request of the employee) has — (A) commenced, caused to be commenced, or is about to commence or cause to be commenced a proceeding under this subchapter or a proceeding for the administration or enforcement of drinking water regulations or underground injection control programs of a State, (B) testified or is about to testify in any such proceeding, or (C) assisted or participated or is about to assist or participate in any manner in such a proceeding or in any other action to carry out the purposes of this subchapter.

OSHA’s role
While the Environmental Protection Agency administers the general provisions of the Safe Drinking Water Act, employee complaints of discrimination are filed with and handled by the Occupational Safety and Health Administration within the Department of Labor. Such complaints must be filed within 30 days after the violation of Section 1450 occurs (although that deadline may be tolled if the discrimination is continuing in nature).

Section 1450 of the Safe Drinking Water Act protects employees who themselves or through others provide information, file complaints, or participate in any manner in a proceeding related to administration or enforcement of the Safe Drinking Water Act. An employee’s complaint to management or refusal to perform work due to conditions that the employee reasonably believes are unsafe or unhealthful may be considered participation in a proceeding under the Act.

Actionable discrimination under the Act is viewed broadly and includes not only termination from employment but also any discrimination in compensation, terms, conditions, or privileges of employment attributable to the employee’s participation in a Safe Drinking Water Act proceeding.
Process

Complaints of discrimination received by OSHA are reviewed by supervisors who in turn will notify EPA of any potential environmental hazards disclosed by the complaint. The complaint letter, with witness names redacted, is sent to the respondent and the local EPA office, and an investigation is conducted by OSHA. A written notice of the results of the investigation and, if appropriate, an order of abatement should be completed within 30 days.

Remedies for the employee may include affirmative action to abate the violation, reinstatement of the complaining employee to the employee’s former position with back pay, compensatory damages, and exemplary or punitive damages. The employee also may be awarded all costs, including attorney fees, incurred in complaining about the discrimination.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Common stock and other securities may be issued with or without a stated face value or “par” value. Par value is a nominal value of a security which is determined by an issuer company at a minimum price. Issuing stock with or without par or face value may have several consequences.

If authorized by its charter, a corporation may issue par value stock. However, it must collect at least the stated amount of the par value from the person to whom the stock is issued. The cumulative dollar amount of issued par value stock then must be maintained by the corporation as stated capital and must not be distributed to shareholders in the form of dividends. Further limitations on the use of stated capital may be set out in the state corporation statute.

At one time, the amount of stated capital of the corporation was a measure of the corporation’s credit capacity, and limitations on uses of stated capital still provide a small measure of protection for creditors of the corporation. However, credit of a modern corporation is more likely to depend on factors such as income and cash flow.

The fees and taxes to be paid by a corporation may be affected by the par value of the corporation’s stock. Such fees and taxes may vary in many jurisdictions according to the total par value of all authorized stock. For corporations that have authorized stock with no par value, fees and taxes may be set according to a presumption as to the par value of the stock to avoid the assessment of zero fees and taxes. In states that follow this procedure, the presumptive par value may be set much higher than the corporation might set if it had par value stock. In such instances, corporate charter authorization of par value stock with a minimal par value may reduce fees and taxes imposed on the corporation.

In describing the legal capital structure for corporations, the Model Corporation Act produced by the American Bar Association and adopted in various states does not rely on provisions describing par value or restricting use of stated capital. The Model Act does continue to permit issuance of par value stock, but requirements regarding distribution of corporate assets are not tied to the designation of stock as par value or no par value unless the board of directors chooses that result.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.

Employers have a general duty under the Occupational Safety and Health Act (OSHA) to provide a workplace free from “recognized” hazards. A violation of this duty can lead to criminal sanctions in addition to civil penalties. An employer can also be exposed to liability under occupational safety and health regulations promulgated by the Secretary of the Department of Labor. Directors and high-level executive officers must act to reduce or eliminate workplace dangers or risk OSHA liability.

OSHA provides for criminal sanctions when (1) the employer’s willful violation of a standard, rule, order, or regulation has caused the death of an employee, (2) when the employer falsely represents its compliance with OSHA, or (3) when a person gives advance notice of an OSHA inspection. There have been few criminal prosecutions for OSHA violations.

OSHA imposes liability on an “employer.” An “employer” is defined as “a person engaged in a business affecting commerce who has employees . . .” A “person” is defined as “one or more individuals, partnerships, associations, corporations, business trusts, legal representatives, or any organized group of persons.” The OSHA Review Commission has declined to recognize a corporate officer as an employer; however, at least one federal district court concluded that the question of whether a corporate officer was an “employer” under OSHA was one of fact for the jury.

A federal district court in New Jersey found that “an officer’s or director’s role in a corporate entity (particularly a small one) may be so pervasive and total that the officer or director is in fact the corporation and is therefore an employer” under OSHA. The court acknowledged that if an employee’s role was not substantial enough to raise him to the level of an employer, he could not be charged as a principal or an aider and abettor. The Seventh Circuit Court of Appeals has indicated that an officer or director may fit the definition of an OSHA employer under the appropriate fact scenario and held liable as either a principal or an aider and abettor.

A director or officer who conducts corporate business before the corporation is formed or continues to conduct corporate business after the corporation is dissolved may qualify as an OSHA employer. Thus, the individual director or officer could be exposed to personal liability for violating OSHA provisions.

Most courts recognize that OSHA did not preempt the field of workplace safety. In fact, at least 20 states and two territories have the Secretary of Labor’s approval of their own workplace safety plans. Even though corporate officers and directors may not qualify as “employers” in some jurisdictions and under certain fact circumstances, they may nonetheless be held personally liable for breaches of fiduciary duty and other claims independent of OSHA.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.