vemma-logoSince August 2011 Vemma has held a Private Company Management Liability Insurance Policy with Hanover Insurance Company.

The policy has a liability limit of $5 million dollars, yet to date Vemma have been unsuccessful in getting Hanover to fund their FTC lawsuit defense.

Should BK Boreyko have read Vemma’s insurance policy closer, or is he getting screwed?

The core of Hanover’s lawsuit against Vemma focuses on the word “claim”.

Within the context of the FTC’s Vemma lawsuit, a claim made through Vemma’s insurance policy pertains to the company allegedly being a pyramid scheme.

As per Vemma’s policy with Hanover, coverage is extended only so far as when a claim is first made.

Hanover argue that because pyramid scheme claims have been made against Vemma dating back to 2012, they aren’t obliged to defend Vemma or cover their losses.

An actual controversy exists between Defendants and Hanover regarding Hanover’s purported obligation to provide them with a defense and indemnity for the FTC Lawsuit, which cannot be resolved without a declaration of the rights and responsibilities of the parties by this Court.

Verbatim, Vemma’s policy with Hanover states:

The liability coverage parts are written on a claims-made basis.

Subject to its terms, this policy applies only to claims first made against the insureds during the policy period.

Hanover cite several pyramid scheme claims made against Vemma in their lawsuit, including;

  • BLS, LLC commencing arbitration proceedings ‘alleging that Vemma was “an illegal pyramid promotional scheme under state and federal law.”‘ (2012)
  • over 100 consumer complaints filed against Vemma with the DOJ, Arizona Better Business Bureau and FTC, ‘alleging Vemma was a “pyramid scheme”‘ (2012-2013) and
  • Italian regulators successfully suing Vemma for being an illegal pyramid scheme (2013-2014)

As per the policy, Vemma is required to provide Hanover with writte notice of a claim “no later than 90 days” after it’s made.

Hanover claim Vemma never informed them of the cited pyramid scheme claims made against them.

The lack of disclosure the insurer claims bars any of the claims from coverage under Vemma’s policy.

And because the FTC Lawsuit is a “related” Claim, Vemma’s failure to provide notice of the original Claims similarly means there is no coverage under the Policy for the FTC Lawsuit.

In a nutshell, because Vemma didn’t provide notice to Hanover of any of the earlier pyramid scheme claims made against it, they aren’t covered. And because the FTC action is of the same nature, it too isn’t covered.

With respect to the liability coverage parts, all related claims will be considered as a single claim made in the policy period … in which the earliest of such related claims was first made.

Hanover in effect are washing their hands of any financial obligation to assist Vemma in the FTC lawsuit.

Secondary clauses in Vemma’s policy are also cited, including

  • unfair business practices exclusion
  • profit/advantage exclusion and
  • dishonest/fraud exclusion

The unfair business practices exclusion is cited because the FTC’s lawsuit is ‘[d]irectly or indirectly based upon, arising out of, or attributable to… unfair business practices, including but not limited to any … alleged … unfair business practices.”‘

The profit/advantage exclusion prohibits Vemma for making claims based on losses as a result of the FTC lawsuit, because

this insurance does not apply to “Loss” on account of any “Claim” made against any “Insured” … directly or indirectly based upon, arising out of, or attributable to an “Insured” gaining any profit, remuneration or advantage to which such “Insured” was not legally entitled.

Vemma naturally wouldn’t be “legally entitled” to revenue generated via a pyramid scheme.

The dishonest/fraud exclusion is self-explanatory, with operation of a pyramid scheme nullifying any claims made against the policy.

And just in case all of Hanover’s arguments thus far fail in court, the insurer has added an alternative “known claim exclusion”.

At the time the 2015-16 Policy Application was submitted, Vemma and Boreyko were “aware of any fact, circumstance, situation that might reasonably be expected to result in a Claim that would within the scope of the proposed Liability Coverage Parts,” but Vemma and Boreyko failed to disclose the same to Hanover.

Specifically, (Vemma and Boreyko) knew that Vemma was a pyramid scheme, knew of the Arizona Pyramid Arbitration, more than 100 Consumer Complaints (including an Oregon DOJ Claim), and the Italian Proceeding, and also knew that the failure to disclose the same constituted a misrepresentation “which materially affect the acceptance of the risk or the hazard assumed by the Insurer under this Policy.”

Publicly calling out Vemma for knowing it was a pyramid scheme? Ouch.

Seeking a jury trial, Hanover is asking the court to declare that

  • Vemma’s insurance policy provisions preclude coverage foe Vemma in the FTC lawsuit
  • Hanover has no duty to defend and no duty to indemnify Vemma for any loss related to the FTC lawsuit
  • Hanover is entitled to attorneys’ fees, costs and recoverable interest and
  • further relief as the court deems just and equitable

With respect to the whole claim thing, I’m not an insurance expert but I can see it being interpreted both ways.

Hanover are obviously using the theme of the claim as the basis for excluding the FTC’s lawsuit. I imagine Vemma are going to argue the nature of the claim pertains to the FTC, with this being the claim made regarding an FTC “action”.

Whether that’s possible in an insurance related lawsuit I can’t say for sure, but otherwise I have no idea how Vemma are going to respond.

If the nature of claims is as Hanover are claiming, the terms of Vemma’s lawsuit leave no room for interpretation.

They failed to inform Hanover of prior claims within 90 days of any of them being filed. That means they can’t be claimed retrospectively, nor can any present and future pyramid scheme related claims against Vemma.

Hanover’s lawsuit was filed on April 15th, with Vemma yet to file a response.

Stay tuned…