Insurance Coverage Litigation – Insurer and Policyholder Perspectives

Insurance Coverage litigation may be, by some, considered a last resort. That is, a process to enter into when all other avenues of settlement have failed. In certain situations, however, insurers file early declaratory judgment actions. In others, policyholders sue soon after receipt of a denial of coverage letter. There appear to be other considerations at play.

The stakes can be high for both insurers and policyholders, and the perspectives on litigation from both the insurer and policyholder perspectives are seldom discussed together. Here, two insurance coverage litigation adversaries candidly discuss what factors and considerations should go into insurance coverage litigation.

To understand better what goes into insurance coverage litigation cases, we put together a panel of two insurance trial experts in the field, Deborah L. Stein of Simpson Thatcher, (addressing the insurance company side of the equation), and Mark E. Miller of Miller Friel (addressing the policyholder side of the equation). The full course is available from PLI and the PowerPoint for the presentation is linked here. Insurance Coverage Litigation PLI

Six topics were covered:

  • Pre-Litigation – what goes on prior to filing suit;
  • Filing a Complaint – what drives the decision;
  • Motions to Dismiss – valuable to both sides;
  • Discovery – using it effectively;
  • Summary Judgement – a critical juncture;
  • Trial – best practices and perspectives.

At the risk of oversimplifying, here are some of the highlights on the competing  policyholder / insurer perspectives on insurance coverage litigation:

1. Pre-Litigation – what goes on prior to filing suit

INSURER PERSPECTIVE POLICYHOLDER PERSPECTIVE
Compile information;
Correspond with policyholder;
Evaluate dispute, jurisdiction, timing of claim issues.
Full evaluation of the claim – law, facts;
Send well-drafted letters to insurers refuting denials;
Compliance with policy conditions, even if waived;
Develop strategy to maximize recovery.

2. Filing a Complaint – what drives the decision

INSURER PERSPECTIVE POLICYHOLDER PERSPECTIVE
Issue of first impression;
How clean are facts and law;
Duty to defend law;
Burdens;
Duty to indemnify law;
Coverage issues vs. valuation issues;
Jurisdiction.
Key question – will filing suit maximize legal recovery. Look at:
a) Choice of law;
b) Law of jurisdiction
c) Risk of being sued first
d) Insurer reputation
e) Insurer conduct / bad faith
f) Reasons for denial (potentially legitimate vs. industry custom and practice;
g) Overall case strategy.

3. Motions to Dismiss – valuable to both sides

INSURER PERSPECTIVE POLICYHOLDER PERSPECTIVE
Case specific – be selective in filing;
Possible filings for:
a) Jurisdictional and standing issues;
b) Whether claimant is an insured;
c) Timing of injury (outside of period);
d) Undisputed law and facts;
e) Bad faith;
f) Statutory claims handling causes of action.
File if insurer filed suit in wrong jurisdiction;
Care taken so complaints cannot be dismissed.

4. Discovery – using it effectively

INSURER PERSPECTIVE POLICYHOLDER PERSPECTIVE
Build your defenses and themes from the discovery you produce and obtain, but don’t force a story;
Document Requests – think about types of documents you need; request further documents in depositions;
Interrogatories – Use strategically (identification of documents, witnesses, facts); untargeted interrogatories not helpful;
RFAs – look for discrete admissions; use for authentication;
Depositions – usually the most effective tool; prepare, prepare, prepare; remember that you are still discovering.
Focus Discovery on elements of proof at trial;
Offensive Discovery – use it to build the story of improper denial; don’t waste time taking 30(b)(6) depositions;
Defensive Discovery – this is where cases are lost; prepare witnesses properly, as insurance issues are too complex to understand without preparation; pay extra attention to those that know about insurance (risk managers and brokers);
Know the rules; be prepared;
Recognize that no document has ever spoken for itself;
Think about what documents you need authenticated, and what documents you don’t.

5. Summary Judgement – a critical juncture

INSURER PERSPECTIVE POLICYHOLDER PERSPECTIVE
Frame issues wisely;
Consider purpose: resolve dispute, avoid trial; knock out claims; obtain direction from court;
Evaluate facts and law;
Know undisputed facts necessary for motion;
Be true to record; don’t overreach.
Overall goal is to get to trial;
Consider proactive motions such as duty to defend motions;
Motions and responses need to be drafted so the Court comes to the conclusion that you are right;
Insurance jargon and insurance complexities are not your friend.

6. Trial – best practices and perspectives

INSURER PERSPECTIVE POLICYHOLDER PERSPECTIVE
“Your trial presentation wasn’t complicated enough,” said no one ever;
Focus;
Keep it simple;
Know elements and evidence; consider burdens;
Prepare order of proof;
Remember the big picture;
Humanize witnesses; don’t be over-technical and don’t stretch;
Don’t overuse documents.
Trial preparation starts on day one, as everything that is done is for the purpose of trial;
Develop case theme based on discovery;
Simplify case to its essential elements and tell your story;
Simplify;
Be likable, interesting, and nice;
You are painting a picture. You decide what to put on the canvas. Opponent will try and mess up your beautiful painting. Don’t let this happen.

Although there is enough material on any one of these topics to fill an entire CLE course, this CLE is a good start for in house counsel faced with the task of managing either insurance coverage litigation or an insurance claim.  Moreover, policyholders seldom get the insurance company counsel perspective, which is always valuable when assessing a claim. All that and more can be found in this course.

The most important information I got from presenting this course is:

  1. Claim denials can be reversed, but sending a nasty letter will not do the trick.
  2. Rather, well-crafted letters rebutting each and every error made in an insurer’s denial letter is the way to go.  This requires mastery of the facts and law.
  3. Prepare for trial from the moment you become aware of the claim.
  4. Letters are drafted for the Court.
  5. There are ample opportunities to make mistakes, and policyholder self-inflicted wounds are the most common way that insurance coverage cases are lost.
  6. Develop your story, and refine that story through discovery.
  7. Push for trial.  If an insurer wants to settle, they know who to call.
  8. When preparing for trial, think about painting a picture for the judge and jury.  You decide what colors to use, and what to put into the record.  Insurers will try and mess up your painting.  Don’t let them.

For other Miller Friel PLI presentations on the topic of insurance, please see Top Ten Insurance Issues for Non Insurance Lawyers, State of the Art D&O Insurance.

 

 

Insurance Policy Enhancements to Coverage

Best practices for securing insurance policy enhancements to coverage should not be a confusing issue.  Insurance brokers, who are essential to placing coverage, offer pre-approved insurance policy enhancements to coverage, and shop for the best price. Some corporate policyholders stop there, which is great, until a claim comes in.  When an insurer denies the claim, the policyholders rightly question why their claim was denied.  All too often, the insurer cites to an insurance policy enhancement to coverage, that was not really an enhancement to coverage, but a limitation to coverage.

Insurance Policy Placement — A One-Sided Process, Even With the Best Insurance Broker

There is nothing better than a great insurance broker.  But, not all brokers understand that the gold standard for insurance policy placement involves more than just price and adding pre-approved broker enhancements to coverage to the policy.  Depending on the company, an integrated legal /broker team may be warranted.   There, the broker focuses on price, and obtains the best language they can find. Then, the suggested program is evaluated by policyholder counsel to determine if the proposed language functions as intended.  The result is that the policyholder binds the best possible coverage for their specific needs.

This is not a complicated or expensive process, but the essential piece, legal review, can be overlooked if policyholders conclude that pre-approved endorsements are all that is needed to secure the best possible coverage.

Price is Important But Price is Not the Only Factor

Focusing only on price is a disservice to corporate policyholders. The purpose of insurance is to provide coverage for claims.  Insurers sell a promise, and that promise is only as good as the language contained in the insurance policy.  Yet, Insurance policies are one sided.  They are drafted by some of the best insurance company lawyers in the industry, and are designed to cover less rather than more.  Standard form policies are marketed to brokers and policyholders with the understanding that many corporate policyholders will accept their terms and conditions, as proposed, without alteration.

Standard Policy “Improvements” Can Create More Issues Than They Solve

Naturally, most corporate policyholders push back on policy language.  Insurers expect this and have contingencies to appease policyholders.  Insurers and brokers have developed standard pre-approved “improvements” to coverage that are added by the broker as endorsements to the policy.  The policyholder  may then be told that they have all of the improvements, and that the coverage is great.  The problem with these improvements, like the policy itself, is that they were expertly drafted by insurance company lawyers who understand insurance law in all 51 jurisdictions.   Many times, an “improvement” to coverage actually takes away coverage afforded by recent case law.   Hence, an insurance policy with all of the bells and whistles recommended by a broker in good faith,  may provide less coverage than the original policy.

Learning From Insurance Company Practices

Insurance coverage for any given claim is determined by ever changing insurance case law and statutes.  Insurers constantly monitor these developments, as it is a critical part of their business.  Policy language is adjusted based on the law.  Pre-approved forms are adjusted to limit coverage.

Policyholders, however, may unintentionally rely on insurance brokers to interpret the law and tell them what the policies cover.  Insurance companies know this as well.  But, insurance companies do not rely on insurance brokers to tell them what their policies mean.  Instead, they rely on lawyers, and they have many of them at their disposal.  See   Where Have all of the Insurance Lawyers Gone

Fixing the Problem of Insurance Policy Enhancements to Coverage

Although insurers are intently focused on insurance law when approving policy language, policyholders are at a distinct disadvantage.  Insurance brokers, upon who policyholders rely, don’t practice law and will readily admit that they cannot opine on what the policies cover .  The best they can do, is try.  And they do a valiant job at that.  But, without an understanding of the law, their proposed adjustments to policy language may not be proper.

Selecting appropriate policyholder counsel for insurance policy review, however, can be difficult. Virtually every law firm in the country advertises their ability to review insurance policies.  Most of these firms represent insurance carriers.  Some openly claim that because they wrote the policy forms for insurers, they are uniquely suited to revise them for policyholders. That could be true, but it raises questions of loyalty, and makes one wonder if such a firm would later advise an insurer on how to avoid revisions they made for a policyholder, because they are, in fact, uniquely suited to do so.  Call me old fashioned, but it does not seem right for a law firm to play on both sides of the corporate fence.

Either way, the best practice for securing insurance policy enhancements to coverage is for corporate policyholders is to not accept an insurance program without legal review.

Miller Friel represents corporate policyholders in insurance coverage disputes.  We litigate and resolve complex insurance claims on behalf of some of the world’s finest companies. We also see the worst of the worst insurance company tactics.  Some of this can be avoided if care is taken at the front end when policies are being underwritten.

The important thing is that policyholders find a corporate insurance recovery law firm to review their policies.   There are many law firms doing this, but only a few are doing it correctly.   Moreover, there are drastic differences in how effectively policyholder law firms address the problem.  The important thing for policyholders to recognize is that the process of insurance policy placement, from start to finish, is one sided in favor of insurers.

Miller Friel handles insurance policy reviews for select corporate clients with complex insurance programs.  For those we cannot serve, we are happy to recommend unbiased counsel to assist.

Insurance Broker RFPs

Insurance broker RFPs are one of the best ways for corporations to select qualified insurance brokers.   The practice of using RFPs for the selection of insurance brokers, however,  is underutilized, and, even when used, it does not always provide meaningful information.   Typical RFPs elicit a canned marketing presentation and lots of glad-handing.  Interesting, perhaps, but certainly not the best way to test broker abilities and approach.

Insurance Broker RFPs — Obtain Useful Information by Asking the Right Questions

The best way to keep brokers moving in a direction that is consistent with corporate interests is to have perspective brokers submit RFPs every several years. The problem with most insurance broker RFPs is that they seldom get to the issue of how good brokers are at placing coverage or assisting with respect to claims. To get this kind of information, RFPs need to be specifically targeted at current insurance issues.

To be useful, broker RFP questions need to be targeted.  From an insurance law standpoint, questions should be designed to address three critical issues.  First, how the insurance broker addresses important insurance policy language issues.  Second, how the broker deals with insurance provisions that are one sided towards insurance company interests.  And, third, how hard the broker pushes for policyholder (as opposed to insurer) interests.

The following select questions, for a technology company insurance broker RFP, gives an idea of just how specific RFP question need to be to elicit an appropriate response:

SAMPLE INSURANCE BROKER RFP QUESTIONS
TECHNOLOGY COMPANY

For Discussion Purposes Only
Not to Be Used Without Prior
Consent of Miller Friel, PLLC

I.  Commercial General Liability

  1. Please provide examples of the best advertising injury language you have secured for a company like [INSERT CLIENT NAME], and your opinion on whether or not you will be able to achieve similar results for [INSERT CLIENT NAME].
  2. Examples in policies of this kind where you have been able to secure patent coverage; same for trademark.
  3. Please provide examples of the best data and software coverage language you have been able to obtain for clients.

II.  Technology Errors and Omissions

  1. Examples of the best technology policies you have secured for clients, and things that you would improve with respect to that language.
  2. Please provide examples of how you have secured coverage for false advertising.
  3. Examples of whether you have secured coverage under such policies for patent claims.

III.  Directors and Officers Liability

  1. Please provide examples of the best definition of “Claim” language that you have been able to secure for clients.
  2. Please give examples of how this language was found to cover governmental investigations.
  3. Please provide examples of the best definition of “Loss” language that you have been able to secure for clients.
  4. Please provide examples of how this definition of “Loss” language was found to cover fines and penalties assessed against the policyholder.
  5. Please provide examples of how you have narrowed the scope of the bump up exception to the definition of “Loss” to avoid potential application to traditional fiduciary duty claims.
  6. Please provide the best punitive damages coverage language that you have been able to secure for clients.

IV.  Claims-Made Coverage Generally (D&O, E&O)

  1. Please provide examples of the best interrelated wrongful acts language that you have secured for clients.
  2. Please provide examples of the best prior-notice exclusions that you have secured for other clients.
  3. Please provide examples of the best prior-knowledge exclusions you have been able to secure for clients.
  4. Please provide examples of the best prior-claim notice language that you have secured for other clients.
  5. Please explain how you structure such interrelated wrongful acts, prior-notice, and prior claim exclusionary language so that insurers cannot claim that neither current nor past policies cover otherwise covered claims.
  6. Please provide examples of the best conduct exclusions you have been able to secure for clients.
  7. Please provide your position on whether applications are necessary for renewal policies, and examples of when you have instructed insurers that applications are not warranted.
  8. Please provide examples of when you have revised standard-form application language to protect the insured.
  9. Please provide examples of situations where you have had insurers waive warranty requirements; please provide examples of the same when coverage was new (not renewal coverage).
  10. Examples of when you have challenged prior and pending dates proposed by an insurer, and the outcome of such challenge.

V.  Other

  1. Your recommendations on the best additional time-element provisions for [INSERT CLIENT NAME], with examples (including extra expense, royalties, contingent time element, interruption by villi or military authority, ingress/egress, extended period of indemnity).
  2. Please provide examples of how you have revised exclusions in policies to make certain that all terrorism related activities under TRIA for certified acts of terrorism are covered, including dirty bombs and bio-terrorism.
  3. Please confirm that you will be able to secure pre-approval of defense counsel, by endorsement, for the following law firms: [INSERT NAMES OF PREFERED DEFENSE COUNSEL].
  4. Please provide examples of the best endorsements you have secured for clients providing for approval of pre-selected defense counsel, and identify what, if anything, additional you recommend adding to such endorsements.
  5. Please provide examples of the best hourly rates you have been able to secure for defense counsel.
  6. Please provide examples of how you have worked with coverage counsel both in litigation and pre-litigation to resolve claims.
  7. Please provide your recommended course of action to preserve legal privilege for discussions you may have with for [INSERT CLIENT NAME] concerning claims.
  8. Please provide examples of insurers pressuring your firm with respect to a policyholder claim, and how you dealt with it, and whether your firm will take similar action with respect to [INSERT CLIENT NAME].
  9. Please provide your examples of situations where you have challenged arbitration language in an insurance policy prior to issuance, and the outcome of such challenge.
  10. Please provide examples of the best ADR provisions you have secured for clients, and why you believe that such language is advantageous.
  11. Please provide examples of the best warranty language that you have been able to secure for clients.

Most RFPs will contain what the insurance broker believes are their strongest selling points, like, how much coverage they place. who their clients are, their great relationships with insurers, and the fact that they have claims people on staff.  This information will be provided even without an REP.  RFP questions should be designed to address something more.  In the insurance context, that more is how well the broker pushes issues to benefit the policyholder.

Insurance Policy Review 101 (Part 3)


Today’s blog post is the third video in a series by Miller Friel attorney Tab Turano discussing the kind of insurance policy reviews that are routinely conducted corporate policyholders.  This video continues with the need for a yearly audit of claims and potential claims as part of the insurance renewal process.  This video focuses on the so-called “notice-of-circumstances” clause contained in standard D&O policies.  This provision affords companies the ability to provide notice of events, circumstances or other potential wrongful acts that, although not currently the subject of any legal proceedings, may later lead to the filing of a lawsuit against the company.  The video highlights, by way of example, the benefit of reporting such potential future claims to D&O insurers prior to policy expiration, and the practical significance of such actions, including the ability to preserve the limits of liability of current D&O policies.

Please watch the video to learn more, or Contact us if you have any questions.

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Insurance Policy Review 101 (Part 2)

Today’s blog post by Miller Friel attorney Tab Turano highlights the need for companies to conduct a yearly audit of claims and potential claims as part of the insurance renewal process.  This video explains the importance of timely notice of claims under so-called “claims-made” insurance policies, such as directors and officers policies, errors and omissions policies, and professional liability policies.  While the failure to provide timely notice of a claim may be fatal to insurance coverage, in many circumstances, the need to provide such notice may not be obvious, as highlighted in the video by way of example.  It is imperative that companies focus on notice as a regular part of the process of renewing insurance coverage.  Often times, consultation is with coverage counsel is an important step in this process.

Please watch the video to learn more, or Contact us if you have any questions.

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Insurance Coverage for Opioid Litigation and Investigations

Opioid insurance coverage is now one of the most important issues faced by the pharmaceutical industry, which is now in the cross-hairs of plaintiffs lawyers.

Insurance Coverage for Opioid Claims

To date, hundreds of lawsuits have been filed, and the solution to the problem includes a variety of liability insurance policies sold to the various entities in the supply chain for legal prescription opioid pain medicine.   The issue of opioid insurance coverage has certainly gotten the attention of insurance company lawyers.  As is typical in these kinds of situations, the insurance industry is lawyered up to fight against paying opioid claims.  Based on our experience representing policyholders in the opioid crisis, many of the arguments raised by insurers are invalid, and many of the claim denials issued by insurers are improper.  A synopsis of the opioid crisis in general, and arguments for defeating insurer denials of coverage are addressed below.

1.  The Explosion of Investigations and Lawsuits Against Those in The Supply Chain of Legal Prescription Opioid Pain Medicine

Public concern over the alarming level of opioid abuse and the staggering number of opioid-related overdose deaths has driven increased legal and regulatory action at many levels.  Most of the tens of thousands of opioid deaths directly result from illegal street drugs, not prescribed opioid pain relievers.  Prescribed medicines — developed to relieve pain and suffering and approved and regulated by the government — according to some, are now being alleged to have contributed to the crisis of addiction and death.  And, as with prior public health crises (asbestos, tobacco), where there is suffering and death, plaintiffs’ lawyers will follow.  SeeThe Opioid Crisis Has Plaintiff Lawyers Smelling Cash,” (Wall Street Journal, January 3, 2018), (subscriptions required); “Lawyers Circle America’s Opioid Crisis,” (Financial Times, August 3, 2017).

A cadre of private lawyers is now teaming up with state, county, municipal and tribal governments to investigate and file lawsuits against pharmaceutical manufacturers, wholesale distributors, retail pharmacy chains and others in the supply chain of opioid pain medicine regarding their actions in connection with the marketing, sale and distribution of opioid pain medications. More specifically:

  • Pharmaceutical manufacturing companies have been sued in state courts by many state Attorneys General, and in state or federal court by scores of city, county and local government agencies and Native American tribes. These lawsuits typically allege a variety of claims related to marketing and sales practices, including false advertising, unfair competition, public nuisance, consumer fraud, deceptive acts and practices, negligence, false claims and unjust enrichment. The suits generally seek equitable and/or injunctive relief and monetary damages.
  • Wholesale distributors and retail chains have also been sued alleging that they failed to provide effective controls and procedures to guard against the diversion of opioid pain medicine, acted negligently by distributing pain medicine to pharmacies that served individuals who abuse controlled substances, and failed to report suspicious orders of opioid pain medicine in accordance with regulations.
  • Additionally, a coalition of states has issued requests for documents and information regarding the distribution of prescription opioid pain medications.
  • Health insurers have sued manufacturers and others, seeking to recover damages allegedly sustained as a result of defendants allegedly defrauding insurers into paying for prescribed opioid pain medications.

Because of these lawsuits and investigations, many companies have also been sued by shareholders for alleged violations of securities laws and/or are nominal defendants in derivative litigation alleging that their directors and officers breached their fiduciary duties.

In September 2017, plaintiffs in some of these lawsuits filed a motion before the Judicial Panel on Multidistrict Litigation to have all federal opioid crisis actions transferred to a single federal court for consolidated and coordinated pretrial proceedings.  In December 2017, the Judicial Panel transferred over 115 pending federal actions to the Northern District of Ohio and, with the consent of that court, assigned them to the Honorable Dan A. Polster for coordinated or consolidated pretrial proceedings. Since then, as of this writing, more than 250 additional actions have been transferred to the MDL, and many more cases are expected to follow.

Although coverage must be determined on a case-by-case basis, Insurance policies can afford a solution to companies that are targets of these investigations and lawsuits by providing coverage for the costs of defense, and ultimately, settlements or judgments paid to resolve these opioid-related claims.

2.  Insurance Policies Responding to Opioid Litigation and Investigations

Depending on the nature of the claims asserted, target companies should seek coverage for opioid-related claims under several different types of insurance policies.

A.  General Liability Insurance Policies

Commercial general liability (GL) insurance policies typically have broad grants of comprehensive coverage that respond to many kinds of opioid-related lawsuits. These policies usually cover “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ . . . caused by an ‘occurrence.’” The policies typically define “occurrence” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  In most jurisdictions, a GL insurer has a duty to defend a policyholder against all claims in a lawsuit so long as a single claim falls potentially within the scope of coverage.

Based on our experience representing pharmaceutical entities in the opioid crisis, the insurers have identified three points of attack:

Bodily injury caused by an “accident.”   Insurers routinely argue that allegations in opioid lawsuits assert intentional acts by defendants, not fortuitous “occurrences” or “accidents.” Allegations in the underlying opioid lawsuits that allege negligence, however, allege a potentially a covered “accident” and trigger the duty to defend. One court reasoned that,

“the defendants here were engaged in the lawful activity of providing prescription drugs to pharmacies. They may not have been sufficiently careful about whose hands the drugs eventually reached, but that does not preclude finding accidental injury.”

But an outlier decision by the California Court of Appeal recently held that underlying complaints against a manufacturer did not allege the potentiality of liability based on an “accident,” because none of the injuries alleged was, in the court’s view, unexpected, independent or unforeseen. This is the most pernicious defense that insurers are likely to assert, because it turns on its head the concept of fortuitous loss, and if accepted potentially eviscerates coverage for virtually every kind of claim, as, under this theory, the negligent consequences of any volitional action would be excluded from coverage.  Thus, opioid claims are covered “accidents” and this defense should remain a minority position, at best.

Damages “because of ‘bodily injury.’”   Insurers also argue that opioid lawsuits, especially those asserted by governmental entities, do not seek damages because of “bodily injury” to citizens, but rather seek only to recover the economic loss suffered by the governments (or health insurers) in the form of increased costs allegedly incurred because of defendants’ actions.  Most certainly, claims by governmental entities and health insurers are seeking compensation because of bodily injury, as without bodily injury, there would be no claims.  Accordingly, this novel, but creative argument raised by the insurers has already been rejected by one federal appeals court.   Nonetheless, insurers are relentlessly pushing the argument and have found some isolated traction with the argument.

Products/completed operations exclusions.  Although opioid claims fall within the GL policies’ grant of coverage as loss because of bodily injury caused by an occurrence, insurers are taking the position that opioid claims are not covered because they fall within  within the products-completed operations hazard.  Even if insurers are correct, a duty to defend still exists if covered and non covered causes combine to result in the alleged loss. Insurer’s rights based on products exclusions may be reserved, but, in most instances, these exclusions do not warrant an outright denial of coverage.  Moreover, to the extent that a loss properly falls within the completed operations hazard, such loss is exactly the kind of loss covered under separate products liability insurance (as discussed below).

B.  Products Liability Insurance Policies

Defendants in opioid-related litigation, especially pharmaceutical manufacturers, often carry specialized life sciences insurance coverages, including products liability coverage. These policies may, for example, cover sums that the insured becomes legally obligated to pay as damages because of bodily injury included within the products-completed operations hazard.  Products liability policies typically cover all bodily injury occurring away from premises owned or rented by the policyholder and arising out of the company’s “product,” which includes opioid pain medicine.

Even here, insurers are raising defenses to coverage.  These include:

The “expected or intended” exception to the definition of “occurrence.”   Here, insurers are taking the absurd position that policyholders expected the injury and loss.  This is a variant on the fortuity defense asserted under GL policies, that has been soundly rejected in other contexts.

Exclusions for “unfair competition,” criminal violations, and intentional acts of non-compliance with FDA rules or regulationsAlthough these kinds of exclusions may be found in policies issued to companies involved in the distribution chain of legal opioid pain medication, they are not applicable at the duty-to-defend stage of the underlying litigation, and, the insurer has the burden of proving their applicability.  In most jurisdictions, this burden can only be met if the excluded basis for liability is the only potential cause of loss.  Given the nature of claims opioid claims alleged to date, this burden cannot be met.  In any event, a duty to defend exists where covered and non covered causes combine to result in the loss alleged. Accordingly, these exclusions do not permit an early termination of the duty to defend while the underlying litigation remains pending.

C.  Management Liability Insurance Policies (D&O)

Management liability policies, including directors’ and officers’ (D&O) policies, afford broad coverage for loss arising from claims first made during the policy period against insured persons for “wrongful acts,” commonly defined to include any “actual or alleged act, error, misstatement, misleading statement, neglect, omission or breach of duty.”  Private company D&O insurance policies cover wrongful acts of the company, as well as individuals, whereas public company D&O insurance policies typically cover loss to the company arising from securities claims brought against the company on behalf of shareholders, and derivative actions brought to enforce a right of the company, for wrongful acts under same definition. The definition of a covered “claim” in these policies may include requests, investigative demands or subpoenas by regulatory, administrative, governmental or similar authority demanding to examine insured persons under oath or requiring the production of documents. Wording is not uniform, and each policy must be studied carefully.

Given the amount of money at stake, Insurance company lawyers have spent a considerable amount of time working up potential D&O insurance policy defenses.   Some of the defenses to coverage raised by D&O insurers include:

Definition of “Loss” Defenses.  Here, insurers note that the definition of Loss in some policies  excludes from coverage fines,  penalties or matters uninsurable under applicable law.  Even with such definitions, insurers must provide a defense for the entire cost of defending opioid claims, and of resolving claims for damages exclusive of the fines or penalties.

Conduct Exclusions.  Management liability policies may also exclude coverage for claims arising out of: (1) the gaining by any insured of any profit or advantage to which such Insured was not legally entitled; or (2) the commission by any insured of any criminal or deliberately fraudulent or dishonest act.   But, such exclusions commonly require a final adjudication in the underlying claim adverse to such insured establishing the excluded conduct.  Hence, these exclusions have no applicability if the underlying claim is settled.  Moreover,  mere allegations of a complaint are insufficient to trigger these exclusions, and cannot relieve an insurer of either its defense or indemnity obligations absent a required final adjudication.

3. Conclusions

Because insurers are facing a difficult time evading coverage for opioid claims, they are raising all sorts of non-contractual defenses to avoid coverage, including a “social insurance” argument they have raised in the past.   If past public health crises are prologue, these arguments will run something like this: Holding insurers responsible to pay for the costs of public services, including health care, will transform private party liability insurance into social insurance to underwrite public health epidemics caused by all manner of ills.  According to insurers, this will, at a minimum, increase the cost of liability insurance, and financially harm liability insurers, who have not priced this risk into their premiums.  Moreover, holding insurers liable to pay will shift costs away from those best equipped to address the social problem; the companies that supply the opioid products.

These arguments are inconsistent with insurance law, which permits parties to freely contract to cover risks, and which place the burden on insurers to pay for insured risk, even if they made an error in underwriting.  Courts interpret insurance contracts according to their language and construe them against insurers if they are ambiguous, and in favor of an insureds’ reasonable expectations of coverage.

Moreover, to the extent courts are inclined to look past contract language when construing insurance policies, the social arguments cut in favor of coverage, not against it, because  liability insurance is designed to perform risk management, and deterrence and compensation functions of insurance are important to the social functioning and ordering of society. See, e.g., J.W. Stempel, The Insurance Policy as Social Instrument and Social Institution, 51 William & Mary L. Rev. 1489 (2010).  These social purposes are especially easy to grasp in the context of pharmaceutical companies that develop and bring to market countless products, including opioid pain medicine, that can relieve human pain and suffering. These companies bought and paid for liability insurance to manage the risks inherent in their business. They are entitled to enforce the promises made to them by those insurance companies that accepted their risks and their premiums.

If you have any questions concerning the issues addressed in this post, please contact Bernard Bell   (bellb@millerfriel.com / 202-760-3158 (DC) / 212-203-6750 (NY)).

Insurance Policy Review 101 (Part 1)

In today’s blog post, Miller Friel Attorney Tab Turano discusses the basics of insurance policy review for corporate directors and officers (“D&O”) D&O insurance programs.  Companies purchase D&O insurance to protect against a wide-array of liabilities, from securities lawsuits to governmental investigations.  Often times, corporate policyholders accept either off-the-shelf policies offered by insurance carriers, or pre-approved insurance broker enhancements.  These form policies and broker enhancements are seldom state-of-the-art, and can always be improved.  Unless the language is truly boilerplate in nature, Insurance companies are open to negotiation.  The best language maximizes insurance coverage, rather than minimizes it, but this kind of language is not what is offered.  For this reason, many corporations retain insurance coverage lawyers at the underwriting stage to provide a second look at proposed coverage.  Counsel can combine their knowledge of both the insurance market and insurance law to craft enhancements to standard policy terms, and broker-suggested enhancements, which can, in some cases, do more harm than good.

Please watch the video to learn more, or Contact us if you have any questions.

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Are Actual Post-Hurricane Market Conditions Relevant to “Loss Sustained” Under Business Interruption Insurance Coverage?

 

Hurricane Harvey caused complete or partial interruption of many businesses in the Gulf Coast region, including many refineries and hotels. Business interruption insurance covers such a loss, but how business interruption insurance treats post-hurricane market conditions can have a significant impact on how much is recoverable.

For example, a hurricane-related interruption might result in higher refining profit margins or more hotel demand after the hurricane than existed before. Due to these conditions, some businesses may be able to “make up” losses at other locations, or earn greater profits on operations that continue or resume after the storm. Of course, the storm may just as easily create a post-loss environment in which earning opportunities diminish, for any number of reasons, such as reduced hotel occupancy in a devastated, post-loss resort area.

Is it appropriate to consider actual post-loss market conditions after a hurricane when measuring the insured’s actual loss sustained under business interruption insurance policies? The short answer: It depends. There are sharp differences among courts that have considered this issue in lawsuits arising when an insured peril, like a hurricane, creates a significantly different market environment after the loss than the environment immediately preceding the loss.

Disputes regarding the propriety of considering post-loss market conditions typically focus on the proper interpretation of the phrase “had no loss occurred.” This phrase appears in common policy language stating that, when valuing a loss, “due consideration shall be given to the experience of the business before the period of recovery and the probable experience thereafter had no loss occurred.” One interpretation is that the word “loss” in this phrase means the financial result to the policyholder of the hurricane, and does not mean either the hurricane itself or the effect of the hurricane on customers or other business. Under this reading, therefore, policy provisions direct the parties to give due consideration to the policyholder’s probable experience at the insured location had that location not been damaged, but instead had been able to operate in the environment that existed in the immediate aftermath of the hurricane. Although neither courts nor litigants are rigidly consistent in their interpretations, this reading tends to permit consideration of actual post-loss market conditions. This approach is neither inherently coverage-maximizing nor coverage-minimizing.

A contrary interpretation is that the words “had no loss occurred” mean “had no peril occurred,” or, stated otherwise, had no hurricane occurred. Generally (though not uniformly), this reading tends to forbid consideration of actual post-loss conditions, at least when those conditions are related to the hurricane, because it posits that the hurricane did not occur.

As will be seen, the Fifth Circuit, when hearing cases from Texas, Louisiana and Mississippi, has tended to favor the interpretation of the phrase “had no loss occurred” that forbids consideration of the actual post-loss conditions, regardless of whether those conditions maximize or minimize coverage. That said, many policies now in effect have language intended to address this issue, which may (or may not) render prior court decisions distinguishable. Disputes over the valuation of business interruption losses are heavily dependent on the policy terms and the particular facts of the insured business. It is exceedingly difficult to assess probable litigation or appraisal outcomes without analyzing these terms and facts. With that caveat, a thorough discussion of the case law follows.

A.  The Divided Panel in Colleton Enterprises Aptly Frames the Post-Hurricane Market Conditions Issue

In a decision of a divided panel of the Fourth Circuit in Prudential LMI v. Colleton Enterprises, Inc., 976 F.2d 727 (4th Cir. 1992), the majority interpreted the “had no loss occurred” language to preclude a motel owner’s claim that, had a hurricane not damaged the motel, the insured would have been able to profit from increased demand for hotel rooms caused by the hurricane. The majority’s decision rested not on its interpretation of the insurance policy language, but on its conclusions regarding the parties’ reasonable expectations and the proper purposes of business interruption insurance.

The Colleton majority ignored the difference between “loss” and “hurricane” (or other peril) and held that the phrase must be read to mean that gross earnings should be determined by giving due consideration to likely earnings “had no hurricane occurred.”

The Colleton majority criticized the policyholder’s interpretation of the policy as conferring a windfall, but the majority failed to consider that the same policy interpretation would diminish recoveries if a regional catastrophe destroyed or eliminated the insured’s market, rather than created an increased profit opportunity. The Colleton majority held that this result is not what “contracting parties rightly could have expected,” which arguably was a substitution of the majority’s judgment for the language of the contract.

The dissent in Colleton applied a stricter standard to the construction of the policy. The dissent reasoned:

The majority acknowledged that the language of the policy would permit recovery if the policyholder could prove that it would have earned a profit during the period of interruption, even though it had been losing money for many months before the hurricane. Therefore, the dissent reasoned that, although the hurricane “caused both the property loss and created the profit opportunity, it does not strike me as an ‘intuitively-sensed logical flaw’ to permit recovery under these circumstances.” (Another unreported decision, American Automobile Insurance Co. v. Fisherman’s Paradise Boats, Inc., Nos. 93-2349-CIV-Graham, 94-0014-CIV-Graham, 1994 U.S. Dist. LEXIS 21068, at *9-10 (S.D. Fla. Oct. 3, 1994), followed the reasoning of the Colleton majority without independent reasoning).

The reasoning of the Colleton dissent accords with the common definition of “gross earnings,” which focuses on the individual insured’s business – how the business was doing before it suffered damage or destruction, and how it would have done had it not suffered the “loss.” Dictionaries define the term “loss” to mean “injury or diminution of value,” or “the amount of an insured’s financial detriment by death or damages that insurer becomes liable for.”  “Loss” is not commonly defined to mean “peril” or “catastrophe,” and therefore it is arguably mistaken to treat the words as equivalent in an insurance policy. A policyholder would certainly argue that any ambiguity in the phrase should be construed to maximize coverage.

B.  Post-Colleton Cases Disregarding Post-Loss Conditions

In Finger Furniture Co., Inc. v. Commonwealth Ins. Co., 404 F.2d 312 (5th Cir. 2005), the insured owned furniture stores in Texas, and the business of the stores was interrupted by flooding caused by a tropical storm. The weekend following the stores’ reopening, sales soared as Finger cut prices and customer demand increased.

The insurer argued that Finger’s losses during the period of interruption should be offset with Finger’s additional post-storm profits after re-opening. The Fifth Circuit rejected this argument, in a holding which maximized coverage on the facts before it, reasoning that:

The contract language does not suggest that the insurer can look prospectively to what occurred after the loss to determine whether its insured incurred a business-interruption. Instead, the policy requires due consideration of the business’s experience before the date of the loss and the business’s probable experience had the loss not occurred. Finger’s historical sales figures reflect that consideration.

Another more recent Fifth Circuit case illustrates that this reasoning minimizes coverage on different facts. In Catlin Syndicate Ltd. v. Imperial Palace of Mississippi, Inc., 600 F.3d 511 (5th Cir. 2010), the policyholder was a casino whose business was interrupted by damages caused by Hurricane Katrina. After the casino re-opened, its revenue was significantly greater than before the hurricane because several competitors remained closed after the hurricane. The court addressed whether the amount of a covered loss should be calculated solely on the basis of the policyholder’s pre-loss sales, or whether the court could consider post-loss sales, which were significantly greater. The casino claimed a loss of $80 million during the period of recovery; the insurer calculated a loss of $6.5 million.

The parties urged different constructions of the policy language “had no loss incurred.” The casino argued that its loss should be calculated as if the hurricane had struck and damaged all of the competitors but spared the policyholder. The insurer argued that the loss should be calculated as if the hurricane had never happened. The court agreed with the insurer and held that “only historical sales figures should be considered when determining loss, and sales figures after reopening should not be taken into account.”

The Fifth Circuit drove home the point in another post-Katrina case, Consolidated Companies, Inc. v. Lexington Ins. Co., 616 F.3d 422 (5th Cir. 2010). The owner of a warehouse damaged in the hurricane sought coverage for business interruption damages, and the insurer resisted, arguing that the adverse effects of Katrina on the insured’s market should effectively reduce the amount of actual loss sustained. The court, applying Louisiana law, disagreed:

This is effectively the same interpretation rejected in Catlin, namely, that the policy requires Conco to calculate damages as if Hurricane Katrina ‘struck but did not damage [Conco’s] facilities,’ not as if ‘Hurricane Katrina did not strike at all.’ We reject this interpretation for the same reasons that we rejected it in Catlin. The jury was not to look at the real-world opportunities for profit post-Katrina, but instead was to decide the amount of money required to place Conco ‘in the same position in which [it] would have been had [Katrina not] occurred.’”

C.  Post-Colleton Cases Recognizing Post-Market Conditions

The opposite conclusion was reached in another hurricane case, Stamen v. CIGNA Property & Casualty Insurance Co., No. 93-1005 CIV-Davis (S.D. Fla. June 13, 1994). In Stamen, the owner insured 35 convenience stores under the same policy. Hurricane Andrew damaged some of the stores, which were then closed for repairs. Most of the insured’s stores that remained open, or that could re-open quickly, experienced increased income immediately after the hurricane. The insurance policy provided that “in calculating your lost income, we will consider your situation before the loss and what your situation would probably have been if the loss had not occurred.” The insured argued that in measuring lost profits, the parties should consider profits the stores would have made if the hurricane had occurred but the stores were able to remain open. The insurer argued that the parties should only consider pre-hurricane profits in measuring the covered loss.

The Stamen court held that the policy required the insurer to consider what each insured store would have earned if it had been open after the hurricane.  The decision criticized the Colleton majority’s “windfall” argument, which the insurer had urged on the Stamen court:

The insurance policy calls for [the insurer], in calculating business interruption losses, to consider what each Food Spot store would have profited had it been open after the hurricane. The fact that the Food Spot stores would have reaped greater profits in the aftermath of Hurricane Andrew and that [the insurer] therefore must pay higher business interruption losses is not accurately described as a windfall. Food Spot is seeking to recover its actual losses, which is exactly what the insurance policy requires [the insurer] to pay.

Another case that looked to post-loss market conditions was Levitz Furniture Corp. v. Houston Cas. Co., No. 96-1790, 1997 U.S. Dist. LEXIS 5883 (E.D. La. Apr. 28, 1997). There, the insured’s furniture store was closed as a result of flood water that damaged the insured’s building and destroyed its inventory. When the insured reopened, it experienced strong sales as a result of the flood. The insured argued that it was entitled to a recovery based upon the improved market conditions. The court agreed, although it rested its decision on the differences in language between the policy before it and the policies at issue in Colleton and other cases. The Levitz policy provided that the amount of loss was to be determined based upon the experience of the business before the interruption and “the [p]robable experience thereafter … that would have existed had no interruption of production or suspension of business operations or services occurred.” The court allowed consideration of the post-loss environment to increase recovery.

As with the other approach, however, whether consideration of the post-loss environment minimizes or maximizes coverage will depend on the facts. For example, consider the coverage-minimizing decision of a federal district court in Penford Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 09-CV-13-LRR, 2010 U.S. Dist. LEXIS 60083 (N.D. Iowa June 17, 2010). There, the court permitted the insurer to offer evidence that the actual loss sustained should be adjusted downward to account for the effect of a recession on post-loss demand for the insured’s products. The Penford court distinguished the Fifth Circuit’s reasoning in Catlin, holding that “unfavorable market conditions, such as a recession, would have affected Penford’s earnings regardless of whether the flood ever occurred. Accordingly, they are relevant to the question of what Penford’s likely revenues would have been in the absence of a flood.” Similarly, another district court in a Katrina case considered the insured’s post-loss market to deny recovery where the insured’s business increased after resumption. B.F. Carvin Constr. Co., Inc. v. CNA Ins. Co., No. 06-7155, 2008 U.S. Dist. LEXIS 53678, at *10 (E.D. La. 2008) (disallowing recovery where damage due to Hurricane Katrina required business to shift from bidding on public contracts to smaller, residential projects, which proved more lucrative).

D.  Alternative Wording May Govern The Issue

Be aware that the policy language may specify a narrower method for calculating gross earnings. For example, one of the ISO forms has been modified to specifically exclude from consideration income “that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses.” ISO Form CP 00 30 06 95. This form has not been without its own issues. See Berk-Cohen Assocs., LLC v. Landmark Am. Ins. Co., No. 07-9205c/w07-9207-SSV-SS, 2009 U.S. Dist. LEXIS 77300 (E.D. La. Aug. 27, 2009); Rimkus Consulting Group, Inc. v. Hartford Cas. Ins. Co., 552 F. Supp. 2d 637, 642-643 (S.D. Tex. 2007).

If you have any questions concerning the issues addressed in this post, please contact Bernard Bell   (bellb@millerfriel.com / 202-760-3158 (DC) / 212-203-6750 (NY)).

Computer Fraud: Two Similar Scams, Two Very Different Insurance Outcomes

Two recent decisions by two different federal courts interpreting “Computer Fraud” insurance coverage reveal the limitations of cyber insurance in a rapidly changing cybersecurity landscape. Two businesses fell victim to fraudulent email tricks (known as “spoofing” or disguising an email to look as if it came from someone else) and ended up sending large amounts of money to unknown third parties, who quickly disappeared. Both turned to their “Computer Fraud” insurance coverage, and despite the apparent similarities in their claims and insurance policies, one court determined that the claim was covered while the other court did not. In the end, specific facts of the claims, slight differences in policy wording, and even the forum in which the cases are heard, can be the difference between a covered claim and a large cyber loss borne by an insured business.

I.  Two Similar Computer Frauds

In the first case, Medidata Solutions fell victim to a spoofing scam in September 2014. See Medidata Solutions Inc. v. Federal Ins. Co., No. 15-CV-907 (S.D.N.Y., July 21, 2017). As part of the scam, a third party was able to send multiple Medidata employees emails that looked like they came from the company president, even including his picture in the “from” field. The initial emails notified an employee in the finance group to expect a phone call from an outside attorney. An employee later received such a call, requesting that she initiate a wire transfer. The employee notified the scammer that she needed approval for such a transfer from the company President, Vice President and Director of Revenue. The Vice President and Director of Revenue then received a second fake email from the President, again displaying his correct email address and picture in the “from” field, instructing them to approve the wire transfer. On this instruction, the executives approved the wire payment of $4.7 million. A second attempt was made four days later, but this time the employees noticed that when replying to the President’s e-mail, a “suspicious” e-mail address appeared in the “Reply to” field. A new email to the President revealed that he had never sent any of the authorizing emails, and the company contacted the FBI.

In the second case, a hack at American Tooling Center (“ATC”) followed a similar course. See American Tooling Center, Inc. v. Travelers Cas. & Sur. Co., No. 16-12108 (E.D. Mich., August 1, 2017). ATC, a tool and die manufacturer out of Michigan, subcontracts some of its project to a Chinese vendor YiFeng. The standard practice was for YiFeng to submit invoices for completed work to ATC by email, which ATC paid by wire transfer. In March 2015, ATC contacted YiFeng for a list of outstanding invoices. The reply email told ATC to send wire payments for several legitimate outstanding invoices to a new bank account. The reply had come from a third party, who was able to make the email look as if it had come from YiFeng, as had been done in Medidata. ATC wired $800,000 to the new account, which promptly disappeared.

II.  Two Markedly Different Rulings

Both companies submitted claims for their losses to their insurance companies, and both claims were promptly denied. Both insureds filed suit in federal court – Medidata against Federal Insurance Company in the Southern District of New York and ATC against Travelers Casualty in the Eastern District of Michigan.   There their fortunes diverged.

Medidata’s policy with Federal was labeled a “Federal Executive Protection” policy. The policy contained a “Crime Coverage Section” that included subsections for “Computer Fraud Coverage,” “Funds Transfer Fraud Coverage,” and “Forgery Coverage.” The “Computer Fraud Coverage” provided coverage for the “direct loss of Money, Securities or Property sustained by an Organization resulting from Computer Fraud committed by a Third Party.” “Computer Fraud” was defined as “the fraudulently induced transfer of Money, Securities or Property resulting from a Computer Violation.” “Computer Violation” was defined as “the fraudulent (a) entry of Data into … a Computer System.” Federal denied the claim arguing that there was no “fraudulent entry of Data into Medidata’s computer system.” Since the emails were sent to an inbox authorized to receive such messages, the insurer argued that the entry of that email to the computer was authorized and therefore the loss not covered.

The court rejected this argument, ruling that the third party sending the email in Medidata was not an authorized user of the company email system, and his fraudulent activity met the standard of a “Computer Violation.” The court noted that consistent with earlier New York precedent, the policy provided coverage for “fraud where the perpetrator violates the integrity of a computer system through unauthorized access” but did not provide coverage “for fraud caused by the submission of fraudulent data by authorized users.”

Federal also argued that there was no “direct nexus” between the fraudulent email and the wire transfer, as the policy requires a “direct loss … resulting from Computer Fraud.” The court disagreed with a Fifth Circuit ruling in Apache Corp. v. Great American Ins. Co., 662 F.App’x 252 (5th Cir. 2016), that had denied coverage for a scam that included spoofed emails because the loss was not directly tied to the Computer Fraud. Instead, the court ruled that the “Medidata employees only initiated the transfer as a direct cause of the thief sending spoof emails posing as Medidata’s president” and therefore the loss was “directly” tied to the fraud (and despite the fact that the scheme also included at least one phone call).

ATC argued many of the same claims to much different results. The Travelers policy covered “computer crime” with the provisions stating “[t]he Company will pay the Insured for the Insured’s direct loss of … Money, Securities and Other Property directly cause by Computer Fraud.” “Computer Fraud” is defined as “the use of any computer to fraudulently cause a transfer of Money, Securities or Other Property from inside the Premises … (1) to a person … outside the Premises …; or (2) to a place outside the Premises ….” As in Medidata, the insurer argued that the loss was not a direct result of the fraud. The ATC court, in contrast to the Medidata ruling, highlighted that between receipt of the fraudulent emails and the wire transfer, the insured had confirmed the production milestones that justify payment, authorized the transfers and initiated the transfers. These “intervening events” were relied upon to find that the transfers were not the “direct” result of the fraud. The ATC court relied on a prior Sixth Circuit ruling that had held the word “directly” meant “immediate” and “without anything intervening” under Michigan law. Of course, the Medidata employees had done much the same thing, and yet there the court held that the loss was a direct result of the fraud.

The ATC court attempted to distinguish the Medidata ruling by claiming that the policy language of the two policies were different, and that Medidata’s coverage did not have the “directly caused by Computer Fraud” language. Medidata’s policy did require the “direct loss of Money,” but it did not reuse “directly” again before the term “Computer Fraud.” The differences in the policy language appear to be ever so slight, but that difference appears to have been determinative in the coverage (or lack thereof) of the claim.

The Michigan court’s holding in ATC would appear to severely restrict coverage for a most common method of computer fraud, and require, without specifically saying so in the policy, that coverage only exists if the fraudulent party reaches into an insured’s account and removes the funds itself. But of course that’s not how con artists work. You only have to remember the final scenes of “The Sting,” where Doyle Lonnegan hands over his cash to bet on a sure thing. Had Lonnegan made his bet in Detroit rather than New York City, he would have lost a second time.

III.  Lessons Learned

Computer Fraud is a quickly changing problem, with scammers showing new methods of stealing, swindling or holding data hostage seemingly every month. The victims include television networks, hospitals, online retail providers and governments. In fact anyone using a computer network is susceptible, even the NSA.

Engaging your insurance brokers in a conversation about the types of fraud that appear in the news is the first step, but that is not enough. Understanding how Courts treat various insurance clauses must be taken into consideration as well.   Coverage should not be narrowly tailored to address last year’s problem.   Rather, it should be negotiated to cover current scams, taking into account recent insurance decisions as well. Understanding how computer fraud coverage interacts with other types of cyber crime policies is also essential, because as these types of coverage mature the Courts can severely limit their application in the real world.

Finally, at the point of claim, businesses often get conflicting or incorrect advice concerning coverage. How claims are approached makes a big difference in whether they are ultimately covered or not, and an understanding of the law is critical to maximizing coverage. Getting a claim reviewed by experienced coverage counsel early in the process gives the insured an independent analysis taking into account the latest developments in coverage law, even those decisions that are not necessarily about the same types of coverage at issue but that can be critical in determining coverage.

Insurance Defense Firms: The Fox May Be Guarding the Hen House

When corporate policyholders consent to defense counsel in litigation, they assume that the law firm defending them is loyal to their interests.  Law firms are presumed to be independent, which goes part and parcel with a the ethical obligation of a litigator to “zealously” litigate on behalf of their clients.  Yet, over the years, insurance carriers have instituted higher and higher levels of control over defense counsel.  Chubb appears to be at the forefront of this growing trend, and Chubb’s control of defense counsel through direct ownership of “House Counsel” law firms illustrates just how problematic this issue has become.

1. The Fox

Recently, Chubb issued a press release announcing that it has promoted Liz Daly to Senior Vice President, and something called “House Manager” for its North American Claims Organization.  Chubb states that “House Counsel attorneys provide litigation, trial and appellate legal services to Chubb’s commercial and personal policyholders.”  There are 11 different law firms in 18 cities in the U.S. that currently fall within Chubb’s House Counsel program.   These firms provide legal services just like other law firms, such as defending companies in “commercial litigation including contract disputes . . . . state and federal courts and agencies alleging discrimination, retaliation and harassment involving the following federal statutes and claims and their equivalents:  Fair Housing Act, Americans With Disabilities Act (ADA).”

2. The Fox is Well Hidden    

A casual observer would never know Chubb owns these law firms.  The name Chubb is not found anywhere in those law firm firms’ names.  Rather, the firms sound and look like your garden variety independent law firms, with names such as Kuluva, Armijo & Garcia in California, McGuinness & Cicero in Florida, and Daly, Lamastra, Cunningham, Kirmser & Skinner in New Jersey.   In fact, the Daily in  Daly, Lamastra, Cunningham, Kirmser & Skinner appears to be the very Liz Daly who also serves as a Senior Vice President for Chubb.

3.  The Fox is in the Hen House

Leaving aside the issue of whether the lawyers at these firms are providing the highest quality legal services, the most important question is why would any company trust its insurer’s in-house claims lawyers to defend and protect their interests?  Often times, the ultimate determination of whether an insurer will provide full coverage, or even perhaps the determination of whether it will file an action against its insured to recoup the attorneys’ fees it has paid on its insured’s behalf, results from facts discovered during the course of litigation .  A Chubb lawyer, who also may wear the hat of company claims executive, consciously or subconsciously, may steer a case in a way that is not in the best interests of an insured in terms of coverage.  Or an in house insurance company lawyer may share confidential information with its employer, Chubb, about the insured.

There is an inherent conflict of interests, both real and potential with this kind of relationship.  It’s in an insurance company’s interests to pay as little as possible for a claim.   An insurance company employee can not serve its employer’s interests and zealously represent a client in litigation that has interests adverse to the insurer.  What’s more, it’s unclear how many other insurers are providing this sort of in-house legal service to their insureds.

When an insurance carrier has agreed to defend, corporation should insist on independent legal counsel.  If you’re uncertain as to your rights, contact a coverage lawyer.