Defense Denied.

That was the collective response last year from the casualty insurance industry to the National Football League and NFL Properties (the marketing arm of the league)—defendants in a flood of concussion liability lawsuits, and plaintiffs in suits against their primary commercial liability and umbrella insurers seeking to force the carriers to uphold defense and indemnity obligations under their policies.

Our question: Defense denied at what cost?

How does the dollar-value of potentially saved claim payments measure up against the diminished relevance of casualty insurance to yet another iconic American industry?

We are not the only to cite the possible erosion of the relevance of the insurance industry. “Insurance is declining in relevance to the society as a whole in the property casualty space,” said XL Group’s Chief Executive Officer Mike McGavick said, in widely reported comments from a speaking tour last year. “We either reverse this trend, and therefore see our value in the economy grow. Or we fail to reclaim our space, our relevance, and we will see continued decline.”

McGavick’s remarks did not address the NFL claims situation. Instead, he cited the industry’s shrinking relevance to sectors like the energy sector, which seems to have basically outgrown the traditional, risk-transfer property/casualty insurance space.

In addition, referring to insurance industry reactions to contingency business interruption loss following the 2011 floods in Thailand, McGavick warned: “We cannot exclude our way to prosperity. We cannot sublimit our way to relevance.” Instead, the industry needs to show that it can “make a difference” for its clients and give them “something that really matters.”

While the NFL had only spent $5 million in defense costs as of August last year when the coverage lawsuit was filed, defense cost coverage is clearly something that really matters to all commercial insureds. We submit that the property/casualty insurance industry cannot deny its way to prosperity or relevance either.

Concussions: A Growing Societal Issue

The NFL and NFL Properties (hereafter “the NFL”) face lawsuits from former players alleging that the two organizations “fraudulently concealed the long-term effects of concussions.“ (Language quoted from the case David Pear, et al., v. National Football League, NFL Properties, et al., C.D. CA.)

Court filings suggest the NFL has long known of the harmful effects of concussions, noting that the NFL formed a committee to undertake concussion research in 1994. We have also found evidence of serious, independent scientific studies before that—dating back to at least the 1980s. The National Center for Catastrophic Sports Injury Research, for example, was founded in 1982. It was staffed by Dr. Robert C Cantu, a prominent researcher in the field of traumatic brain injury and concussions.

Yet, according to filings, it wasn’t until June 2010 that “the NFL warned any player of the long-term risks associated with multiple concussions, including dementia, memory loss, CTE [Chronic Traumatic Encephalopathy] and related symptoms.” (Pear lawsuit, page 25)

It is currently believed that roughly 10 former NFL players have committed suicide, at least in part to depression and mental decline owing to multiple concussions suffered during their playing career. Over 3,500 former NFL players have joined more than 150 lawsuits against the NFL. The numbers seem likely to grow.

The lawsuits are complicated, and grow increasingly so. We boil down key litigation milestones in the accompanying timeline.

Some 40 states have passed laws in the past two years addressing the risks of concussions. This is a significant, and growing, societal issue.

Coverage Obligations Analyzed

Through conversations with industry professionals, we have observed a tendency of some to minimize the liability claims. Terms like, “assumption of risk” or assertions that “it’s a workers’ compensation issue” are the more frequent phrases we hear.

We note, however, that the NFL, in a motion to dismiss the underlying litigation, does not cite workers’ compensation at all. Rather, the NFL asserts that the underlying action is “fundamentally…a labor dispute that depends upon an interpretation of the terms of collective bargaining agreements.”

Moreover, we strongly suggest any interested reader take the time to read any one of the underlying cases. We believe the fact patterns at least raise the possibility of the negligence, fraud, and misrepresentation alleged against the NFL in the underlying cases.

For liability claims, the duty to defend is broader than the duty to indemnify. A seminal case establishing this principle was Gray v. Zurich, which was heard in the Supreme Court of California in 1966. The decision in Gray noted that the liability policy issued to Mr. Gray promised that “the [insurance] company shall defend any suit against the insured alleging such bodily injury or property damage…even if any of the allegations of the suit are groundless, false, or fraudulent.” In the absence of further clarifications, that language would lead the insured to reasonably expect the insurer to defend him against suits.

Turning to the language in the primary policies cited for breach of contract in the insurance coverage dispute brought by the NFL, those policies “impose on each insurer a duty to defend any suit against the NFL and/or NFL Properties on account of bodily or personal injury covered or potentially covered by the Policy, even if the allegations of the suit are groundless, false, or fraudulent.”

So why is the industry denying even the duty to defend? Surely their attorneys have heard of reservation of rights letters.

One document we reviewed related to coverage litigation brought by subsidiaries of Travelers (Discover Property and Casualty Company, et al. v. NFL, et al., Cal. Sup. Ct. LA) asserts that “the core allegation of the Underlying Lawsuits is that high-level NFL management knew, or should have known the risk with repetitive head trauma and failed to disclose it to players. If true, such corporate actions or inactions – which would likely eliminate coverage under the Travelers policies,” the document says.

Without moving too deeply into areas where we aren’t licensed to provide opinions, we can observe that the Gray case addressed a substantially similar issue. Gray was alleged to have committed an assault, and was in turn denied defense coverage by Zurich under the assertion that such assault was intentional. The court ruled, however, that the insurer could not prejudge the outcome of a trial, explaining that the “carrier’s obligation to indemnify inevitably will not be defined until the adjudication of the very action which it should have defended.”

How Much Could It All Cost?

We cannot help but wonder whether the excessive legal posturing is a function of the dollars at stake.

The suit filed by Alterra reveals policy limits totaling $76 million for the policy period from August 1, 2011 to August 1, 2012 ($1 million primary, $50 million umbrella, and $25 million excess). Deflating those limits to maintain similar purchasing power over the 44-year period covered in the suit—back to 1968, using CPI figures from the Bureau of Labor Statistics for the calculation—results in a figure for available total limits approaching $1.5 billion.

A cynic might roll his or her eyes at that figure. After all, it’s not even the size of a Category 1 hurricane. But we invite readers to break out their own calculators and come to the dark side for a moment.

Consider that:

• There are 3,600 players involved in these lawsuits. The average playing career is thought to be around six years for those who make an opening day roster, and each player might have played in, say the majority of a 16-game season.
• We couldn’t begin to count the number of hits to the head each player might have incurred during the course of his career.
• Asbestos, environmental, and lead paint litigation may provide clues about coverage trigger theories.
• The associated phrases “stacking of limits,” “exposure” and “manifestation,” which together became known as the “triple trigger,” could mean that policies in place throughout a player’s career are triggered.
• It is unlikely that all the policies in question contained annual aggregate caps.
• The primary commercial general liability policies issued roughly halfway through the contested period (1986-2012) might contain such caps, but prior to that we suspect not.
• The NFL generates at least $9 billion in annual revenue, according to court documents.

Does anyone think an attorney hired to pursue these actions will aim low?

Also consider this excerpt from the NFL lawsuit, National Football League, et al. v. Fireman’s Fund Insurance Company, et al:

“In a case alleging or involving injury occurring over a period of time, each policy in effect during that period is triggered and separately requires each issuing insurer to pay the entire amount the insured becomes legally obligated to pay because of injury caused by the occurrence (subject to any monetary limit expressly and unambiguously set by the policy and shown to be applicable by the insurer). If more than one policy is “triggered,” the NFL and/or NFL Properties may select any of the “triggered” policies and call on the issuing insurer to pay the entire amount of the NFL and/or NFL Properties’ legal liability.”

That sounds complicated and potentially expensive. No wonder no insurer wants to be the first to step forward.

Finally, don’t forget that references to the “NFL” are actually to the National Football League and NFL Properties—distinct entities with separate insurance programs based on our information and belief.

Should we multiply by two?

We have intentionally not added all this up to calculate an upper liability limit. In our experience, there tends to be excessive focus put on estimates that are nothing more than wild guesses at the early stage of these complex cases.

Still, we suspect this trip to the dark side served its purpose, demonstrating perhaps that insurers are not loath to defend the NFL on technical grounds. Rather, they are keenly aware of the dollars at stake and the complexity of the litigation as well as the substantial defense costs, which are typically outside of policy limits.

Weighing against the potential dollar claim costs, however, scenarios like the NFL claim issue do not help policyholders to view the industry as relevant. Nor do they to demonstrate that the industry can “make a difference” for its customers or give them “something that really matters.”

We understand the fiduciary obligation that insurance management teams have to shareholders, and we appreciate that some of the lawsuit documents we have read may be “normal course” legal posturing observable at the outset of most complex liability cases.

Still, if a commercial insured like the NFL has to sue its insurance carrier to honor even the duty-to-defend obligations under their contract as part of the normal course, then why do they pay their premiums?

We can’t help wonder whether other industries observing what promises to be a highly visible legal battle will ask themselves that same question.

(Photo Credit: AP Photo/Don Wright, File)