Declarations and Exclusions

Enough to Make You Scream

In news that should please painting-fanciers everywhere, the Norwegian police report that they have recovered the versions of Edvard Munch's The Scream and Madonna that were stolen from the Munch Museum two years ago.  When the original theft took place, I had not yet launched the "Art and Risk" category on this weblog, so I wrote about it here.

The paintings, you may recall, were not insured.  Given the violence involved in the theft -- the frames were recovered promptly, in the getaway car, but the paintings themselves had been forcibly removed -- there had been ongoing worry that the works might be irretrievably damaged, even if they were ultimately found.  The head of the investigation, Iver Stensrud, has not described the paintings' condition in detail, but declares that he has seen them himself "and there was far from the damage that could have been feared."  The AP report adds:

During the hunt for the paintings, Norwegian news media reported that they might have been burned to get rid of evidence.

Stensrud said it was not possible for the news media, or the public, to see the paintings yet.  He also refused to discuss the methods or details of the search that led to the stolen artworks.

[A longer version of this post appears on my more personal weblog, "a fool in the forest."]

Put the Picture in the Box: Advice on Instructing Juries in Insurance Litigation

On his Insurance Scrawl weblog, Marc Mayerson offers up a lengthy, detailed and, yes, instructive post on "Jury Instructions in Insurance-Coverage and Insurance Bad-Faith Cases."  Marc provides plenty of practical advice for practitioners on either side of an insurance law dispute, and valuable reading for claims professionals or claimants who want to understand just What Their Lawyers Are Up To in trial preparation. 

Jury instructions can be compared to the wire armature underneath a clay sculpture: whichever side of the case he or she is on, counsel wants to be able to point to that armature and impress the jury with how well his or her side has fleshed it out with evidence.  ("My case hangs on those bones much more persuasively than my opponent's, ladies and gentlemen.")  The practical value of this bit of advice, in particular, cannot be overstated:

One mistake that lead counsel often makes in my view is not to personally take ownership of the jury instructions and instead delegates their preparation to the junior member of the team.  Ultimately, it is the jury instructions that determine the case – and the appeal.  Thus, it should be the responsibility of lead trial counsel to be intimately familiar with the drafting, submission, and argument over instructions to the jurors.

A highly recommended post.

Income-ing!: The D.C. Circuit Holds Congress's Power to Tax Does Not Reach Emotional Distress Damages

This weblog is not often concerned with tax law, and this is assuredly not the place to come for tax advice, but the U.S. Court of Appeals for the D.C. Circuit has issued a remarkable new decision concerning taxation of tort judgments of the sort often covered by liability insurance policies, so I will take that as an excuse to give it some attention here. 

The TaxProf Blog [pointed out via Instapundit ] reports the decision in Murphy v. United States [PDF] in which, in a surprising move, the D.C. Circuit has declared unconstitutional the taxation of tort damage recoveries representing compensation for non-physical injuries unrelated to lost wages or earnings -- in this case, damages for loss of reputation and for emotional distress sustained by a "whistle blower."  The court concludes that such damages are not "income" within the meaning of the 16th Amendment, so that Congress has no power to tax those damages as "income."

Although tax law is not my field, I did take a single-semester course in Federal Taxation in law school.  One of the most striking things the student encounters at the outset of that subject is the Internal Revenue Code's definition of "income."  You have to be able to define "income" in order to tax it, and Congress early on adopted an extra-broad definition, one that paraphrases roughly as "'income' means income . . . every imaginable kind of income and anything whatever we might characterize as income."  It is the sort of definition that ought to be pronounced from out of a burning bush.  (Cf. "I am that I am.")   "Income" is most frequently some sort of money payment received by the taxpayer but it also includes the taxpayer's receipt of other things of value, as the celebrity community in Southern California was reminded last week when the IRS declared "income" to include award show swag.

Congress has also declared certain kinds of money flows not to be "income," and one significant exception is compensatory damages in personal injury cases.  Specifically IRC section 104(a)(2) excludes from income "damages (other than punitive damages) received . . . on account of personal physical injuries or physical sickness."  [Prior to 1996, the statute excluded a broader range of damages from income, because it did not include any express requirement that the injury or sickness be "physical."] 

 In Murphy, the plaintiff Marita Murphy was a former employee of the New York Air National Guard who successfully pursued a claim before the Department of Labor for unlawful discrimination and retaliation.  That administrative proceeding resulted in an award of damages of $70,000, comprising compensation for emotional distress ($45,000) and injury to plaintiff's reputation ($25,000).  Ms. Murphy duly reported the entire award as part of her "gross income" on her income tax return and paid over $20,000 in taxes on that income.  She later filed suit seeking a refund of that payment, contending that her damage award should not be treated as "income."

Ms. Murphy made two contentions: First, she asserted that her damage award should fall within the exception from income for personal injury damages under section 104(a)(2); second, she argued that her damages simply were not characterizable as "income" at all under any proper definition of that term.  When the case reached the D.C. Circuit, it rejected the first contention -- noting that section 104(a)(2) applies only to compensation for "physical" injuries and that while there might have been physiological consequences to her emotional distress, Ms. Murphy did not receive her damages "on account of" that physical injury -- but remarkably accepted the second. 

The 16th Amendment empowered Congress only to tax "incomes."  If a payment does not fall within the meaning of "incomes" in the Amendment, Congress has no power to tax it.  Contrary to what it called a "breathtakingly expansive claim of congressional power," the Court emphasized that "incomes" does not include "every sort of revenue a taxpayer may receive."  Murphy urged that she was not "better off" from the receipt of these damages -- they did not represent a profit or betterment of any kind, and were not a substitute for wages or other cash flows commonly viewed as "income"  -- and that they should instead be viewed as a "return of capital" -- in her case "human capital."  The Court essentially agreed.  In the linchpin paragraph of the decision, the Court offers this reasoning:

As we have seen, it is clear from the record that the damages were awarded to make Murphy emotionally and reputationally 'whole' and not to compensate her for lost wages or taxable earnings of any kind.  The emotional well-being and good reputation she enjoyed before they were diminished by her former employer were not taxable as income.  Under this analysis, therefore, the compensation she received in lieu of what she lost cannot be considered income and, hence, it would appear the Sixteenth Amendment does not empower the Congress to tax her award.

Q.E.D., emotional distress and reputation damages are non-taxable.

ELSEWHERE: Unsurprisingly, there is at least some skepticism among knowledgeable tax law specialists concerning the soundness of the Court's logic here.  Orin Kerr suggests that the invocation of constitutional limits on Congressional power in the ruling makes it a likely candidate for en banc review in the D.C. Circuit, or for consideration by the U.S. Supreme Court.  Professor Bainbridge, meanwhile, sees the decision as fresh fodder for the denizens of the Tax Protester demimonde.

Attentive readers will note a California connection to this case: although the opinion is authored by Chief Judge (and one-time Supreme Court nominee) Douglas H. Ginsburg, the panel also includes former California Supreme Court Justice  Janice Rogers Brown.

This Just In: Trial Lawyers Linked to Tentacled Sea Creatures

Always on top of late-breaking news, the Los Angeles Times catches up to the ATLA/AAJ name change story with an editorial in today's edition.  The Times is no more impressed than anyone else:

ATLA's name change, apparently triggered by the successful efforts to demonize the term 'trial lawyer,' is a classic example of abstract euphemism replacing — and distorting — a perfectly specific phrase.  George Orwell denounced such linguistic evasion in his classic 1946 essay, 'Politics and the English Language.'  'The great enemy of clear language is insincerity,' Orwell wrote.  'When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.'

And is there a more 'exhausted idiom' than the unassailable ideal called 'justice'?  Trial lawyers, by comparison, are controversial, and rightly so.  Conservatives insist that they do more harm than good by seeking huge jury judgments from which they take a disproportionate cut.  Liberals counter that without enterprising — and, yes, self-interested — plaintiffs' lawyers, injustices would go unchallenged and workplaces would be less safe.

It's an important debate, and one that trial lawyers should be eager to join without shrouding the work they do in generic language. . . .

So far, the decision to become the American Association for Justice seems to have earned the trial lawyers nothing but scorn.  A professional negligence claim against their high-priced Re-Naming Consultant may be in order, to recover for the substantial emotional distress even now being sustained by the organization's thousands of members who have become the objects of so much pointing and laughter.

"The American Academy of Inky Cuttlefish" -- now that has a nice ring to it.

Now We Are Three

Today marks the third anniversary of Declarations and Exclusions.  Anyone who is curious to know what I was going on about three years ago is welcome to peruse the archive of that first week's posts. 

It appears that the author of this weblog naively aspired to be taken seriously in those early days. . . .

Many thanks to all of my visitors over these past three years, and particularly to those other weblogs that have been kind enough to link here.  I will endeavor give you cause to continue to do so.

[Photo credit: ziptrivia (dave gostisha) via stock.xchng.]

Fall Arrives Early in Paris

Just as the childish and risible "Freedom Fries" and "Freedom Toast" are disappearing from Congressional menus comes word that the French are perhaps still not to be trusted . . . at least not with fragile works of American Art.

Tyler Green's Modern Art Notes today links a Los Angeles Times report on the damage and destruction sustained by several Los Angeles-based artworks while they were on loan to a prominent Paris museum.  Per the Times:

The world-renowned Pompidou Center of Paris, which set out in March to celebrate the work of Los Angeles artists, has accidentally destroyed two of their works — which fell from museum walls.  A third piece was slightly damaged.

The incidents, all of which occurred during the March-to-July run of 'Los Angeles 1955-1985,' have experts wondering whether a major museum has ever done so much damage in the course of a single show.

The artists involved and the Los Angeles County Museum of Art, which owned one of the destroyed works, expressed bewilderment and a deep sense of loss.

Per Modern Art Notes: "Both were, essentially, dropped."

Compensation has been paid for one of the destroyed works, and "the Pompidou's insurers are negotiating compensation" with representatives of the LA County Museum for the other.  The artists' "bewilderment and sense of loss" are, sadly, non-compensable.

Insurance costs are a major concern for art museums, particularly when putting together exhibitions with large numbers of borrowed works.  The San Francisco Chronicle highlighted the issue of rising art insurance expense in a 2003 article, although it tied the problem more to concern over terrorism than to clumsy French curatorial practices:

In the past 18 months, museums' insurance rates have shot up as much as 50 percent, and in New York, where museums borrowing works from abroad have had to buy costly terrorism coverage, they've doubled.  At the same time, the price of shipping art is rising, in part because of higher air freight costs and the increased demands of lenders reluctant to let their art travel at a time of global unrest.

'I think we're going to be doing fewer exhibitions,'" said Harry Parker, director of San Francisco's Fine Arts Museums, where shipping and handling costs for some shows have risen by a third.

Prohibitive insurance costs have been cited as a reason for the cancellation of some traveling exhibitions -- an unfortunate phenomenon grumpily noted on this weblog in April 2005 -- and as a factor in the recent increase (to $20.00) of the "suggested" admission price to New York's Metropolitan Museum of Art.

Requiring insurance when works travel is one risk management method available to lending institutions.  Tyler Green recommends another technique in this case: don't lend works to the Pompidou.

Donn Zaretsky's Art Law Blog is also following this story, noting with others the Pompidou curator's sang froid and Gallic absence of remorse.

[Photo by fishing (Robert Radermacher), via stock.xchng.]

Election 2006: Steve and Cruz Get Even

Fresh developments from the major party campaigns to become California's next Insurance Commissioner:

• The Field Poll, generally deemed the most reputable and reliable of California polls, has released its first overview of the state of the non-gubernatorial November electoral races.   Unsurprisingly, the Democratic candidates currently hold significant leads over their Republican opponents in the run for  the higher profile positions such as Lieutenant Governor, Attorney General and Treasurer.   The contest of most interest to this weblog, for Insurance Commissioner, is significantly closer.   As Bill Bradley reports, Cruz Bustamante holds a lead over Steve Poizner, but it is slim enough to count as a statistical dead heat at 43% to 39%. 

• Decs&Excs continues to search for some definitive statement of the candidates' positions on the issues.  The closest approach so far may be this San Diego Union-Tribune article from June.  Its sub-head -- "Two don't have must experience" -- says a lot about the state of insurance regulation in California, and it is perhaps telling that the article devotes a long paragraph to Bustamante's past campaign finance indiscretions. (More on that subject below.)

Here the Union-Tribune offers a fleeting glimpse into the candidates' agendas:

Bustamante wants to consolidate the state's regulation of workers compensation and health care insurance under a single agency, preferably the Department of Insurance.

Poizner also has plans for health care insurance and fraud.  He wants to take a serious look at converting medical records, now kept largely on paper, to secure electronic files.  The transition could save millions that could be passed on in lower health care insurance premiums, he said.

* * *

Both candidates also will have to take a stance on Proposition 103's undelivered promise to reduce the significance of ZIP codes and make individual driving records the dominant factor in rates.

Poizner said he opposes the industry's reliance on ZIP codes, but does not support new guidelines Garamendi has proposed to minimize the weight of ZIP codes in the formula.  Bustamante said he was still analyzing Garamendi's regulations.

Decs&Excs will join Mr. Bustamante in analyzing those regulations -- now approved for implementation by the state Office of Administrative Law -- in a forthcoming post.

• The conventional wisdom since Bustamante announced his candidacy has been of the "good news - bad news" variety: The good news is that he has much higher name recognition than Steve Poizner; the bad news is that Bustamante is well known in largely negative ways, having first turned his back on Democratic governor Gray Davis by running to replace him if/when he was recalled and then having been beaten convincingly by Arnold Schwarzenegger for Davis' job.   A Field Poll summary last November remarked:

A recall campaign for governor didn't help Democratic Lt. Gov. Cruz Bustamante, who's running for insurance commissioner.  He's known by 73 percent of the voters, but more than half of those voters, 38 percent, have an unfavorable opinion of him.

• One area in which the candidates are not even is their campaign coffers.  The most current campaign finance information on the Secretary of State's site shows that as of June 30 the official Bustamante campaign had $387,988.17 on hand, while the official Poizner campaign committee boasted a rather more impressive $2,431,062.11. 

Where is the money coming from?  Not for the most part from the insurance industry.  Insurers' public images are sufficiently negative in California that taking money from them while campaigning to obtain regulatory authority over them is not encouraged.  Cruz Bustamante, who took plentiful heat during his gubernatorial run for the large sums he accepted from Native American gaming interests, was accepting insurance company money early on, but was shamed into giving much of it back prior to the Democratic primary in June.  Steve Poizner, meanwhile, has repeatedly disavowed any intention of accepting contributions from insurance sources -- easily done, given that he is in a position to infuse large sums of personal cash into his campaign if needed.

• UPDATE [1305 PDT]:  The Poizner campaign has wasted no time in distributing an e-mail spinning Bustamante's modest lead as a sign of vulnerability.  I have uploaded a copy, accessible via this link [HTML document].   Among other reports quoted in the release is a Sacramento Bee column from Dan Walters, pointing out that vocally conservative Republican candidates are all lagging well behind their Democratic opponents while more moderate Republicans -- such as Poizner -- are within striking distance or even, in the special case of Governor Schwarzenegger, running well ahead.