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Carrier Won't Pay Former Biotech CEO's Legal Bills
The Recorder
December 09, 2008
A San Francisco Bay Area biotech company and its former executives have burned through three layers of D&O insurance, and a fourth carrier won't pay without a fight.
An insurer for Brisbane, Calif.-based InterMune Inc. is refusing to honor a $5 million policy needed to defend the company's former CEO, Scott Harkonen. Federal prosecutors accuse him of illegally marketing the company's drug Actimmune; the case will likely be the first of its kind to reach a jury.
Arch Specialty Insurance Co.'s decision -- which, coming before a conviction, is rare -- prompted a pair of Kasowitz, Benson, Torres & Friedman partners to seek an injunction. The lawyers, Marcus Topel and William Goodman, say they may have to suspend Harkonen's defense once the money in another carrier's policy dries up next week.
Arch's move also is bad news for InterMune. If the insurer doesn't pay, Harkonen may seek indemnification directly from the company. And InterMune is hardly a cash cow: It lost over $11 million last quarter. While that's better than last year, the company drew down its cash and stock reserves to $185 million, according to securities filings.
The Kasowitz team -- along with InterMune's Covington & Burling lawyers, who are defending the company in civil suits -- took little more than six months to burn through the company's third layer of coverage, a $5 million policy, according to court filings.
Goodman declined to say how much of that went to each firm. But his team is reviewing millions of pages of documents, interviewing witnesses and retaining experts in anticipation of a June 2009 trial, which is expected to take weeks. Meanwhile, the civil litigation hasn't yet entered discovery, said plaintiffs counsel Thomas Sobol of Hagens Berman Sobol Shapiro.
Arch's decision comes after three other carriers have already honored their InterMune D&O policies, to the tune of $20 million. Beyond Arch, InterMune has one last $5 million layer with another carrier, Goodman said.
"I think it is extremely rare to see a situation like this where three carriers have paid out their policy limits in relation to the same basic claims that are at issue," he said.
Arch did not have a comment by press time. But in a letter to the parties, the insurer justified its action pointing to a warranty, in which Harkonen said he was unaware of any circumstance that could lead to a claim. In fact, Harkonen "was fully aware of his actions and misrepresentations with respect to Actimmune," the insurer claims.
To bolster its argument, the insurer cited a 2006 deferred prosecution agreement between InterMune and the federal government which outlined the behavior in which Harkonen allegedly engaged in 2003.
That particularly rankled Topel, because the company did not admit or deny those facts.
"I have been a practicing criminal defense attorney for over 32 years and ... I have not had a D&O carrier decline coverage based on allegations stated in criminal charging documents or civil complaints, prior to those matters being resolved by a jury and affirmed on appeal," he wrote in a declaration.
Because three other insurers have already paid, Arch's decision is unusual, said Kevin LaCroix, an Ohio attorney who runs The D&O Diary blog. However, Harkonen may have made problematic representations to Arch that were not given to the other insurers, he said.
The situation highlights a common problem for companies when they underestimate their D&O exposure, he said, and a wave of white-collar litigation hits. "You can go through a lot of insurance money pretty fast," LaCroix said.
Kasowitz has taken the lead in pursuing payment from Arch, even though Covington is affected, too. Two Covington partners did not return calls for comment, nor did a spokesman for InterMune.
Harkonen's lawyers are looking to get the issue before U.S. District Judge Marilyn Hall Patel next week.
