CFO’s Thirst for Wine Club Invitation Costs Hospital Millions

Faegre Drinker Biddle & Reath LLP
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You can’t make this stuff up.  Last Monday a federal court in Rhode Island ordered two insurance companies to pay a $30 million claim by hospital management company Lifespan Corp.  Lifespan filed the claim after being ordered in an earlier suit to pay that amount to New England Medical Center and the Massachusetts Attorney General.

Lifespan became NEMC’s management company through a multi-year affiliation.  After an angry divorce, NEMC sued Lifespan for breach of fiduciary duty, and the Massachusetts Attorney General joined in.  In that earlier suit the court found that Lifespan had breached its fiduciary duty in two basic ways.  First, it was negligent in negotiating NEMC’s major insurance contracts.  Second, the Lifespan CFO caused NEMC to enter into a risky interest-rate swap transaction, and NEMC lost its shirt.

What’s more, the CFO had failed to disclose his close personal relationship with the investment banker behind the transaction and – this is the part you can’t make up – his desire to impress the banker so he’d get an invitation to join the banker’s wine club.

Monday’s decision held the two insurers liable for Lifespan’s loss under two Directors & Officers policies, despite the exclusion for actions “attributable to the gaining of any profit or advantage.”  In the court’s view, entry into the wine club was “a rather paltry benefit when compared with the  multi-million dollar rate swap” and therefore not the sort of profit or advantage contemplated by the exclusion.

Besides, he never got the invitation.

The case is Lifespan Corp. v. National Union Fire Insurance, No. 12-300-M (D.R.I. 2014).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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