vemma-logoBack in April Vemma’s insurer, Hanover Insurance, refused to fund Vemma’s legal defense against the FTC.

Hanover Insurance acknowledged that Vemma had a $5 million liability police with them, but argued the FTC action wasn’t covered because pyramid scheme allegations had been made dating back to 2012.

According to Hanover, the ‘policy applies only to claims first made against the insured during the policy period‘.

The matter is currently playing out in court, with Hanover seeking a court ruling stipulating they don’t have to cover Vemma’s legal fees.

On May 15th, Vemma filed their response to Hanover’s lawsuit. In it, Vemma not surprisingly mostly deny Hanover’s claims.

On the same day they filed their response, Vemma also went on the offensive and filed a counterclaim.

In it, Vemma and BK Boreyko claim

Vemma gave notice of the FTC Action to Hanover on September 29, 2015, following the removal of the receiver and Boreyko resuming control of the company.

Hanover was also advised on September 29, 2015 that Vemma and Boreyko had hired counsel.

Hanover did not object, and did not seek to play a role in the selection of counsel.

Instead, in an email dated October 5, 2015, Hanover advised that “Vemma should do what it needs to protect its legal interests.”

Vemma and Boreyko have paid substantial sums to their counsel in defending the FTC Action. Moreover, Vemma and Boreyko have incurred substantial other fees and costs that meet the definition of Defense Expenses provided in the Policy.

Regarding the Hanover policy, Vemma and Boreyko assert

the Policy obligates Hanover to provides defense and liability coverage for Vemma and Boreyko, for, among other things, the FTC Action.

None of the exclusions in the Policy apply to the FTC Action or relieve Hanover of its duty to pay Defense Expenses incurred by Vemma and Boreyko in connection with the FTC Action.

Interestingly enough, Vemma’s counterclaim doesn’t address the “first claim” clause of their policy.

Instead, the company argues

Hanover delayed issuing its coverage opinion on pretextual grounds with the knowledge of that delay would injure its insureds.

The grounds for denial of coverage expressed in Hanover’s April 14 letter and in its complaint for declaratory judgment are without merit and evidence of its bad faith.

Hanover was (and is) well aware, due to its tracking of the FTC Action, that Vemma and Boreyko were (and are) experiencing financial difficulties.

Hanover was (and is) well aware that its failure to provide a defense caused (and is causing) substantial financial stress for Vemma and Boreyko.

Hanover’s delay in articulating a coverage opinion and its ultimate failure to provide a defense has caused (and is causing) severe emotional distress to Mr. Boreyko.

Hanover’s refusal to pay Defense Expenses is causing imminent and irreparable harm to Vemma and Boreyko because it leaves them without insurance coverage and the ability to defend themselves at a critical juncture of the FTC Action.

To date, Vemma has received invoices for Defense Expenses in excess of $1.3 million.

In a separate preliminary injunction filing, Vemma do assert however that

contrary to Hanover’s position, the “Related Claims” provision says nothing about a blanket exclusion of claims.

In contrast, there are express exclusions in the Policy, including some that concern prior claims. But none of them apply here.

Hanover’s interpretation of the Related Claims provision is not only contrary to the plain language of the contract, it is so broad that it effectively renders the Policy’s coverage illusory.

This suggests Vemma and Boreyko are acknowledging pyramid scheme claims have been made before, but that they don’t automatically preclude coverage of the FTC action.

Vemma and Boreyko are accusing Hanover Insurance of breach of contract and bad faith. They are also seeking a declaratory judgement and preliminary injunction.

The declaratory judgement would provide

a declaration that pursuant to the terms and conditions of the Policy, Hanover has an immediate obligation to reimburse Vemma and Boreyko for Defense Expenses incurred in connection with the FTC Action.

The preliminary injunction, if granted, would direct Hanover

to specifically perform its obligations under the Policy, including but not limited to immediate payment of Defense Expenses incurred by Vemma and Boreyko.

Vemma and Boreyko claim that if Hanover is not ordered to uphold their policy, they will be unable ‘to pay legal fees and court costs going forward‘.

This, they state will

materially hamper (their) ability to defend the FTC Action, comply with (their) discovery obligations and engage in meaningful settlement discussions.

The threat here is real and immediate. Vemma is fighting for its corporate survival.

The relief sought by the FTC, if granted, would be catastrophic for Vemma and for Mr. Boreyko.

The FTC Complaint seeks disgorgement and restitution in amounts likely in excess of $100,000,000. The FTC Complaint also seeks to hold Mr. Boreyko jointly liable with Vemma.

The FTC Complaint also seeks permanent injunctive relief against Vemma and Mr. Boreyko. The injunctive relief sought as to Vemma would effectively put Vemma out of business.

The permanent injunctive relief sought by the FTC as to Mr. Boreyko would effectively bar Mr. Boreyko from the industry in which he has worked his entire adult life.

Hanover have been given until June 3rd to file a response. As per the case docket, they have yet to file one.

A scheduling hearing was held on May 25th, with Judge Tuchi ordering a hearing on Vemma’s motion for a preliminary junction for June 16th.

Stay tuned…


Update 2nd August 2016 – Vemma’s request for a preliminary injunction has been denied. Pending payment of a $50,000 security, Boreyko will be covered by his Hanover policy.