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One-time accounting giant Arthur Andersen cannot recover $25 million in insurance coverage for its freelance settlement of $231 million with retirees who lost pensions in the firm’s demise, a federal appeals court has ruled. The 7th U.S. Circuit Court of Appeals decision puts companies on notice that they cannot assume an insurer will consent to settlements or that insurance policies covering fiduciary breaches can be stretched to cover a contract dispute. “The court was obviously disturbed that Andersen settled the case without Federal [Insurance Co.'s] consent and without it being involved in the process,” said Jonathan Constine in Hogan & Hartson’s Washington office. He represented Federal Insurance Co. in Federal Insurance Co. v. Arthur Andersen, 2008 WL 942640. “The ruling says clearly an insured can’t take for granted an insurer will consent in settling a case,” Constine said. Andersen’s attorney, Alan J. Martin in the Chicago office of Indianapolis-based Barnes & Thornburg, did not return a call seeking comment. ‘Partners’ v. ‘employees’ Arthur Andersen was indicted in the wake of the Enron Corp. collapse in 2001 and lost its client base. Although it later won its criminal case, by then its employees moved on. The retirees were left with an unfunded pension plan because senior accountants were considered “partners” rather than “employees,” and thus not protected by the Employee Retirement Income Security Act, according to 7th Circuit Chief Judge Frank Easterbrook’s opinion. Andersen had traditionally disbursed lump-sum payments to retirees on request until the Enron debacle. Then it faced the equivalent of a run on a bank, with all retirees seeking lump-sum payments at the same time. It refused to make the payments, which would have left those at the back of the line without funds. Two separate lawsuits were filed, and while one went to arbitration, the second made no negligence claims but portrayed the matter as a contract dispute concerning whether retirees had a contractual right to the lump-sum pension payments. Andersen hired Mayer Brown to represent it and did not seek help from Federal Insurance, according to the ruling. The Federal insurance policy obligated Andersen to seek approval for settlements above $250,000. In 2002, Andersen offered a deal to retirees and told its insurers it needed $75 million to fund it. It sought the policy limit of $25 million from Federal. Ultimately, Andersen settled for $231 million with two groups in 2003 and 2006. But Federal balked, arguing that Andersen had no claim since there was no claim of negligence or breach of fiduciary duty. Federal filed the current case seeking a declaratory judgment that it had no coverage obligations or duty to defend Andersen. “Arthur Andersen didn’t ask for the consent or even the comments of its insurers; it presented the deal to them as a fait accompli,” Easterbrook wrote. “By cutting Federal out of the process, Arthur Andersen gave up any claim to indemnity,” he wrote. He rejected claims that Federal failed to defend Andersen or that it had any obligation to cover pension benefits. “No insurer agrees to cover pension benefits; moral hazard would wipe out the market,” Easterbrook wrote. “As soon as it had purchased a policy, the employer would simply abandon its pension plan and shift the burden to the insurer,” he said.

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