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AIG Can’t Recoup $19M in Fees/Costs in Underlying Claim

February 27, 2019 | Posted in : Coverage of Fees / Duty to Defend, Defense Fees / Costs, Expenses / Costs, Fee Dispute, Litigation Management

A recent Law 360 story by Jeff Sistrunk, “AIG Can’t Escape Paying AlixPartners’ $19M Costs on Appeal,” reports that an AIG unit cannot recoup over $19 million paid to help AlixPartners LLP defend and settle a claim that it gave bad advice to a private equity firm that acquired a model railway maker, a Michigan appeals court affirmed, agreeing that AlixPartners’ notice of the claim was timely. 

A panel of the state Court of Appeals upheld Judge Wendy Potts’ March 2017 ruling granting AlixPartners' motion for summary disposition on AIG unit Illinois National Insurance Co.'s complaint, saying the trial judge got it right when she determined that the consulting firm had properly notified the insurer of the underlying arbitration claim lodged by Kingsbridge Capital Management GP Ltd.  As such, Illinois National cannot recover the sums it paid on AlixPartners’ behalf, the panel found.  “Finding no error in the court’s determination as to when the claim was first made, we affirm the trial court’s finding that the Kingsbridge claim was covered under [the policy],” Judge Deborah A. Servitto wrote for the panel.

London-based Kingsbridge had hired AlixPartners to perform due diligence in connection with its acquisition of Marklin, a German model train company.  The consulting firm prepared a report indicating that, by shifting production to Asia and implementing online marketing, Marklin could significantly increase its earnings before interest, tax, depreciation and amortization, or EBITDA, according to court documents.  In May 2006, AlixPartners and Marklin signed a separate management consulting contract, with AlixPartners agreeing to help implement the restructuring concept it crafted, court papers indicated.

By 2007, though, Marklin’s earnings were almost €6 million ($8.3 million) lower than the projections AlixPartners had presented.  Marklin sent a letter in March 2008, and a subsequent letter the following month, requesting that AlixPartners return part of its fees, according to court papers.  Due to the problems at Marklin, Kingsbridge initiated arbitration against AlixPartners in late 2011, alleging the consulting firm committed malpractice during the due diligence process.  An arbitrator found in favor of Kingsbridge, determining that Marklin’s earnings and debt level were significantly lower than AlixPartners had presented in its investment advice.  However, while the award was on appeal, Kingsbridge and AlixPartners reached a multimillion-dollar settlement.

Illinois National had agreed to defend and indemnify AlixPartners, while reserving its rights to later challenge coverage.  After paying $19.1 million in defense and settlement costs on AlixPartners' behalf in the Kingsbridge action, the insurer filed the instant suit in 2014, seeking reimbursement.  AlixPartners contended that it had properly reported the Kingsbridge dispute to Illinois National under a policy spanning from March 15, 2008, through June 15, 2009, with an extended reporting period through the end of August 2009.  The consulting firm gave notice to the insurer in August 2009 after receiving a draft arbitration complaint from Kingsbridge a month prior, according to court documents.

Illinois National, on the other hand, argued that AlixPartners first became aware of the Kingsbridge dispute when it received Marklin's March 2008 letter and, as a result, failed to properly report the claim.  Judge Potts sided with AlixPartners, finding in her March 2017 order that, among other things, the consulting firm's fee dispute with Marklin and the arbitration against Kingsbridge were two different matters.

In the decision, the appellate panel said Judge Potts’ reasoning was sound.  Kingsbridge’s claim revolved around AlixPartners’ advice on the Marklin acquisition, while Marklin’s claim concerned the consulting firm’s alleged mismanagement of the model train maker, the panel noted.  In addition, it said, the Illinois National policy excluded claims pertaining to fee disputes, so AlixPartners had no obligation to report Marklin’s demands to the insurer.

“The Kingsbridge arbitration complaint clearly referred to issues specific to the defendant’s contract with Kingsbridge in the same way that the March and April letters referred to matters unique to the defendant’s Marklin agreement,” Judge Servitto wrote.  The appeals panel also said Judge Potts properly declined to retroactively reform AlixPartners’ policy. Illinois National had argued that AlixPartners wrongfully concealed the fee dispute with Marklin in its application for a policy renewal.

Judge Potts, however, pointed out that none of the questions in the renewal application requested information regarding any circumstances that may have resulted in a claim against AlixPartners.  Under Michigan law, a policyholder is not obligated to volunteer information about any pending or prior claims, the judge said in her order.  The appellate panel agreed with Judge Potts that AlixPartners was not required to disclose Marklin's letter demands to Illinois National, given that those fee-related claims were excluded from coverage under the policy.  “[Illinois National] fails to provide an explanation as to why an uninsured claim need be reported and how a claim that [Illinois National] would not be responsible to cover under the policy would materially change the risk for those claims that it contracted to cover," Judge Servitto wrote.

The case is Illinois National Insurance Co. v. AlixPartners LLP, case number 337564, in the State of Michigan Court of Appeals.