A Consequential Term

This year witnessed an unusually large number of Supreme Court opinions affecting the business of government. The claims and legal communities might quickly dismiss these public sector decisions as irrelevant to their “desk,” but they do so at their own peril, as the cases look at employment, contract rights, and the litigation process. Understanding this term’s opinions may be the difference between mastering your claims desk and hiding under it.

Standing

The legal question of who has the right to sue took center stage thrice this term. In Murthy v. Missouri, two states and five individuals asserted governmental violations of their First Amendment rights when the White House pressured private internet platforms to address COVID-19 and election misinformation. The Court held that states do not enjoy First Amendment speech protections, and that the government acted against the platforms so random individuals also lacked standing.

In FDA v. Alliance for Hippocratic Medicine, the Court found that the plaintiffs lacked standing, dismissing their hypothetical scenarios—such as complications from mifepristone-induced abortions could result in medical complications, which could require emergency room doctors to have to treat these complications, which could result in a negative financial impact as well as take the emergency room doctor away from other emergency patients—as too far removed to allow the plaintiffs to standing to sue.

In Truck Insurance Exchange v. Kaiser Gypsum Co., Kaiser, faced with numerous asbestos-related suits, sought bankruptcy protection. One of Kaiser’s insurers, Truck Insurance Exchange, sought to intervene a policyholder who took issue with the terms of the settlement, citing §1109 of the Bankruptcy Code, which provides that any “party in interest” may appear and be heard on any issue in the case. The statute states that a party in interest “includ[es] the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee.”

Although Congress did not specifically include insurers in their extensive “party in interest list,” the Court, recognizing that carriers have the same level of interest as those identified by Congress, interpreted the list to include insurance carriers and gave them a seat at the table. This decision is significant for insurers because it allows them to seek clarity on their coverage obligations, potentially limiting their liability without violating bankruptcy stays. It also enables insurers to proactively manage their long tails instead of waiting for the conclusion of bankruptcy proceedings.

Public Sector Claims

While Muldrow v. City of St. Louis, Missouri took place in the setting of a police department, it is a universal lesson in employment law. A plainclothes police officer was moved from her position, in favor of a male officer, as an undercover detective with a vehicle to a more flexible work schedule as a uniformed officer position. The city argued that since the officer retained the same rank and salary, there was no harm and that the employer should have the ability to assign assets as it deems necessary or appropriate. The Court found that, under Title VII, the plaintiff must show that the transfer brought about some harm with respect to an identifiable term or condition of employment, but that harm need not be significant. Many employers have avoided liability by finding sanctuary in the argument that the harm must be significant. This opinion eliminates that defense. In doing so it also may have broadened employers’ need to rethink policies and the implication of those policies on their employment liability coverage.

In a uniquely public sector scenario, Lindke v. Freed, James Freed established a “personal” Facebook profile in 2008. In 2014, he was appointed city manager and the page evolved to include both personal entries and “communications from other city officials and soliciting feedback from the public on issues of concern.” Freed often responded on his posts to comments by city residents with inquiries about community matters. He occasionally deleted comments that he considered “derogatory” or “stupid.”

Lindke took to voicing his displeasure over the municipality’s COVID-19 response. At first, Freed deleted the comments, but eventually he blocked Lindke from being able to post on his “private” page. Lindke sued, arguing that the page had become a public forum and that the city manager had denied him his free speech rights under 42 U. S. C. §1983. The Court’s unanimous decision articulated a two[1]part standard to determine if the page was either “official” or “personal.” This is not an isolated case. This will have a negative impact on public officials liability coverage premiums, and it is foreseeable that underwriters will be asking about governmental training and monitoring of their employees.

The Court’s examination of public officials continued in National Rifle Association v. Vullo, where the lower court found that the former superintendent of the New York Department of Financial Services (DFS) violated the First Amendment by coercing DFS-regulated parties, in particular Lloyds of London, to punish or suppress the NRA’s gun promotion advocacy. The Court held that viewpoint discrimination is uniquely harmful to a free and democratic society. Again, the Court’s actions this term bring into sharp focus the need for governmental entities to properly evaluate their public officials liability exposures. This case is particularly important in that it effectively reduces qualified immunity.

In Dept. of Agriculture Rural Development Rural Housing Service V. Kirtz, Kirtz secured a USDA loan and later sued the agency for money damages when the USDA negligently reported that his account was past due. The government asserted sovereign immunity, the concept that the government cannot be sued unless it clearly agrees to be sued. The unanimous Court held that the language of the Fair Credit Reporting Act, as amended by the Consumer Credit Reporting Reform Act, clearly granted that permission. By defining “persons” who can be sued to include “any...governmental...agency,” and that applies to the entire act. So, if you are a public entity that collects property taxes, and through a simple data entry error enters a tax payment of $12,354 as $12,345, a letter of apology is not going to be enough. This, again, will foreseeably add more upward pressure on public officials liability premiums.

Government Taking of Private Property

The U.S. Constitution clearly prohibits the government from taking private property without just compensation. Over the ensuing 225 years since the enactment of the Bill of Rights, the courts have repeatedly been called upon to determine what constitutes a “taking.” The Court weighed in on two different scenarios this term.

Devillier et al. v. Texas  involved the state addressing a recurring flooding issue in Texas by erecting a three-foot high barrier along a stretch of I-10 that would create a flood evacuation route. The design worked to accomplish the state’s goal, but in doing so caused recurrent flooding to roughly 120 plots of private property. The Court held that the state’s actions constituted an inverse condemnation in that the state effectively took the value of the properties and must compensate the landowners for the taking. The financial exposures are significant enough that they warrant both discussion with your broker to ensure that this type of exposure is covered by your policy and review of your professional liability contracts to ensure that these exposures are addressed and resolved.

In a more subtle application of government taking, the government charged a property owner a fixed amount for a traffic impact statement as a condition for obtaining a building construction permit to have a manufactured home delivered to the property. The landowner challenged the fixed fee, asserting it had no relationship to what was being requested. The unanimous Court in Sheetz v. County Of El Dorado, California agreed that asserting a fixed fee regardless of the magnitude of the need was a governmental taking.

As involuntary homelessness continues to rise, cities are attempting to control the issue by passing “anti-public camping” statutes prohibiting activities engaged by homeless individuals. The City of Grants Pass, Oregon passed such an ordinance denying individuals the right to sleep overnight on public property or parking overnight in public parks. Initial violations would result in fines that would graduate and eventually result in imprisonment. The plaintiffs in City of Grants Pass, Oregon v. Johnson challenged the law under the Eighth Amendment’s bar against cruel and unusual punishment. The Court decided this seemingly minor case holding that, generally, these types of laws are not “cruel and unusual.”

While the decision is limited to a relatively small number of entities, such as governmental subdivisions, the impact that was at stake was significant. Had the Court decided in favor of the homeless communities, many governmental subdivisions (municipal and county) could have found their public officials liability coverage insufficient under the weight of the present national crisis. This decision does not put the issue to rest. Governmental entities should review their ordinances to ensure that they align with the ordinance reviewed by the Court.

Another decision by the Court that implicates a public sector’s public officials liability coverage involved the police arresting a suspect on two misdemeanor and one felony charge. All three charges were based on probable cause. The person spent three days in jail pending his arraignment. Later, the prosecutor did not seek an indictment on the felony charge. Once the time to seek a felony indictment passed, the arrestee filed a suit for wrongful imprisonment. He successfully argued to the Court that had he only been arrested for misdemeanors he would not have been incarcerated. His incarceration was for an allegation of a felony that was not pursued by the state. Prior to this decision the circuit courts were inconsistent with this fact pattern. The Court has now clarified how the courts must approach these cases. This too will increase public officials liability exposure.

Statute of Limitations

A major hallmark of the Roberts Court has been the repeated limiting of the effects of statutes of limitations. This inclination continued in the 2023-24 term. In Warner Chappell Music, Inc. v. Nealy, the copyright statute in question provides a plaintiff must file suit “within three years after the claim accrued.” 17 U. S. C. §507(b). Nealy, a music producer, was serving a roughly 20-year prison sentence during which Warner allegedly infringed on the copyright. Nealy did not and could not discover the violation of his copyright until he was released from prison.

The music company argued that if it did infringe on the copyright, Nealy would only be entitled to damages going back three years. Nealy, seeking 20 years’ worth of damages, implored the Court to apply the “discovery rule,” which states that the clock does not begin to run until the aggrieved party “discovers, or with due diligence should have discovered,” the infringing acts.

Although the statute does not provide “discovery rule” language, the Court unanimously held that the right exists for three years after its accrual, but that the accrual does not begin until the injured party discovered, or through due diligence would have been able to discover, the infringement. The Court’s opening of the door to damages beyond a three-year period increases the potential damages, which, in turn, will increase exposures to intellectual property protection insurance, certain provisions in commercial general liability (CGL) insurance, and professional indemnity or liability insurance. The decision will also have a downstream effect on infringement abatement insurance. And then, from a policy standpoint, the determination of when the “occurrence” occurred will be controlled by the language of your occurrence or claims made policy.

Federal Arbitration Act (FAA)

In Smith v. Spizzirri, a delivery person filed an employment suit in federal court. The employer moved to dismiss the suit in favor of arbitration under the FAA as provided for in the parties’ contract. The lower court dismissed the case without prejudice in favor of proceeding before the FAA. The Supreme Court unanimously held that the lower courts did not have jurisdiction to dismiss the suit; the law only provided them with the power to stay the litigation pending the FAA process.

In Bissonnette v. LePage Bakeries Park St., LLC., The plaintiff sought to avoid enforcement of the FAA language in his employment, arguing that as an independent distributor of LePage’s products, he worked in multiple jurisdictions and was therefore exempt under the FAA’s language exempting “seamen, railroad employees, [and] any other class of workers engaged in foreign or interstate commerce.” The Court, finding in favor of Bissonnette, held that the law looks at the activities of the litigant, not their classification. These cases, viewed together, highlight the need for adjusters, claims managers, and defense attorneys to start any analysis by reviewing any existing contracts.

Administrative Law

In one of the most anticipated decisions of the term, Loper Bright Enterprises v. Raimondo, the Court, confronting a trial court’s deference to an administrative agency’s (EPA’s) interpretation of a statute, overturned a prior Supreme Court decision, Chevron v. Natural Resources Defense Council (1984). Chevron recognized that agencies are subject matter experts and therefore are better suited to determine the ambiguities of federal laws and regulations. Chief Justice Roberts, writing for the majority struck down Chevron, noting that the Administrative Procedure Act directs the courts to “decide legal questions by applying their own judgment.”

Just how this decision will impact litigation is yet to be seen. Foreseeably, it will allow different circuits to interpret regulations differently, resulting in increased litigation costs as litigants may have to present their claims in two different forums: the administrative agency, and a trial court. Strategically, in disputes involving regulatory interpretations, insurers may need to adjust their litigation strategies, focusing more on challenging the reasonableness of the agency’s interpretation rather than offering alternative interpretations.

Insurance Contract Language

In Great Lakes Insurance v. Raiders Retreat Realty Co., LLC, the carrier, a German corporation headquartered in the United Kingdom, provided coverage to Raiders, a Pennsylvania corporation. The policy elected New York as its governing law. Raiders’ vessel subsequently ran aground in Florida. The carrier denied coverage and a declaratory judgment action was filed in the U.S. District Court for the Eastern District of Pennsylvania. (Can you find the constitutional question hiding in this “Where’s Waldo” fact pattern?)

The Court started off by citing Article III of the U.S. Constitution’s provision that all cases of admiralty and maritime are part of the federal jurisdiction. But that is the parsley on the plate, not the steak. The two issues that are critical here are:

• Which law applies (choice of law clause)?

• Where should the trial physically take place (forum selection clause)?

The Court quickly dispatches the first question by finding that the parties agreed that the law of New York should apply since the parties contractually agreed to that term. The Court then went on to discuss the “choice of forum” question, determining that, again, the language of the policy controls except under extenuating circumstances. It is widely accepted that trying your case in the Northern District of Texas will get you a different result than trying your case in the Southern District of New York. From a claims perspective, a party to a contract needs to review these contractual clauses carefully. Failure to do so could result in a small school district in Vermont having to go to San Diego County, California to prosecute its claim over faulty designed cafeteria tables.

Bankruptcy

In the highly anticipated case, Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P., the Court weighed in on the bankruptcy plan releasing the Sackler family from liability in the opioid litigation cases. The Sacklers, owners of Purdue Pharma, fearing that the litigation would impact them personally, systematically withdrew $11 billion, 75% of the company’s value, and then had the corporation file for bankruptcy. Although the Sacklers were not a party to the Chapter 11 proceedings, they returned $4.3 billion to the corporation in exchange for a judicial order releasing the family from all opioid-related claims. The Supreme Court rejected the arrangement, holding that the language of the Bankruptcy Code does not allow the discharge of claims of a non-debtor without the consent of the affected claimants. Read along with Truck Insurance Exchange, carriers would be wise to rethink how they see bankruptcy proceedings.

Directors & Officers Insurance

Macquarie Infrastructure Corp. v. Moab Partners, L.P. involved a company failing to disclose that the sulfur content of their crude oil grossly exceeded legal limits in its 10b–5(b) filing with the Securities and Exchange Commission. When the information came out, the company’s stock price dropped by 41%, resulting in a directors & officers (D&O) suit. The statute requires companies to “[d]escribe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” Rule 10b-(5) makes it unlawful “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”

The question presented involved what the Court referred to as a “pure omission,” where the document was void of any statement as opposed to “half-truths,” representations that state the truth only so far as it goes, while omitting critical qualifying information.” The Court held that the pure omission was not prohibited. The case is important to the insurance and claims industry because the cost of the action, starting with the Security and Exchange Commission and working its way up to the Supreme Court, which then remanded it back to the trial court, demonstrates why it is critical to assess your organization’s risk and to maintain D&O coverage sufficient to cover both the defense and, if necessary, the indemnification of an exposure. Depending on whether your defense costs are inside or outside the liability limits, you could find the extra potential litigation depleting your policy leaving little or no coverage for damages.

This term saw fewer opinions but more changes in settled expectations than most Court-watchers could remember coming out of a single term in at least 50 or 60 years. As of this writing, the Court has just started accepting petitions for its 2024-25 term and nothing major has screamed, “Look at me, look at me.” Of course, from a claims and insurance perspective, that does not mean anything. The Court’s impact on our work occurs in the dozens of decisions that less informed commentators consider “remarkable trivial pursuits.”