New Insurance Decision Holds: No Aggregate Limits for Long-Tail Environmental Claims

We recently obtained a favorable court ruling on behalf of our client, Tecumseh Products Company LLC, on an insurance coverage issue that has vexed corporate policyholders for decades — whether primary insurance policies contain aggregate limits for long-tail environmental insurance claims.  See Bedivere Insurance Co., et al. v. Tecumseh Products Company LLC, et al., (Michigan State Court, 2019) (decision).

Good News for Manufacturers — Insurance is Provided for Pollution Claims Under Age-Old Insurance Policies.

1.  The Aggregate Limits Issue for Environmental Claims

Tecumseh’s situation was not atypical.  For years, even before litigation started in 2017, Tecumseh’s primary insurers and excess insurers conceded that their policies were at risk, but refused to pay a single dollar because of disagreement regarding whether or not the primary policies contained aggregate limits.  If the primary policies did not contain aggregate limits, those policies are on the hook to pay their full per occurrence limits for each occurrence, meaning that there are multiple limits (rather than one limit) for each former manufacturing site.  However, if those same primary policies contain aggregate limits, then payouts would be reduced dramatically, and in some situations could be zero because of prior payments on other claims. 

2.  The Primary/Excess Carrier Dilemma

Unsurprisingly, the primary insurance policy carriers have argued for years that their policies contain aggregate limits, and that they were already exhausted, or nearly exhausted from the payment of prior claims;  whereas the excess insurers have taken the opposite view that the underlying policies do not contain aggregates, are not exhausted, and thus their policies have not yet been triggered.  It’s been a classic case of the chicken and egg, with each set of insurers pointing the finger at the other, refusing to pay because of this aggregate stalemate, and both sets of insurers content to see their insured fronting the full costs of investigating and remediating the underlying environmental sites, as well as fully covering the cost of litigation by third party landowners and government agencies.

3.  The Insurers’ Best Argument — Ignore Policy Language, We Know Better

In its litigation against its historical general liability insurers related to policies going back to the 1950s and involving a number of former manufacturing sites in Michigan and Wisconsin, Tecumseh purchased primary liability policies from Travelers Indemnity Company, Maryland Casualty Company (now part of Zurich) and Michigan Mutual Insurance Company (now part of Amerisure), as well as excess liability policies from Continental Insurance Company, London Market Companies, and other excess insurers.  The primary policies were clear on their face that there were no aggregate limits, so that the full per occurrence limit was available for each individual site.  These policies stated that aggregate limits equal to the per occurrence limits of each policy would apply if and only if the polices were “rated” (i.e., the calculation of premiums) based on remuneration (i.e., payroll data for certain periods of time).  However, the policies did not even mention remuneration, let alone provide detailed payroll data for Tecumseh employees.  Rather, the policies contained detailed annual sales information for Tecumseh, which the underwriters for the primary policies used to rate or adjust the premiums then due and owing. 

4.  As It Should — Policy Language Controls

Despite the clear language in these policies, the primary insurers, as they have done in just about every other long-tail pollution or asbestos case over the past four decades, argued that the court should disregard the clear language of the policies and instead should consider and rely upon evidence outside of the four corners of the policies, such as an underwriters manual, testimony by a former Travelers executive paid by Travelers to provide so-called “fact testimony,” and vague and generalized notions of “underwriting industry practices” in the 1950s-1970s.  The Michigan trial court correctly rejected these arguments, holding that “[b]ased on the express terms of Primary Policies, no aggregate limits apply to property damage coverage in this case, [because] none of the policies contain any language indicating that the underwriters used or were authorized to use remuneration figures in the premium calculation.”  The court added the following:  “The Primary Policies in this matter contain plain and unambiguous language governing resolution of this motion as a matter of law.  The Court further finds that it would construe any ambiguous language, if there were any, in favor of Tecumseh.” 

CONCLUSIONS

The court’s decision in Bedivere Insurance Co., et al. v. Tecumseh Products Company LLC, et al., (Michigan State Court, 2019) is important for corporate policyholders facing long-tail liability claims.  These include any claim where more than one occurrence policy has been implicated, including pollution, asbestos, silicosis, opioid, sexual abuse, and any other kind of claim where bodily injury or property damage has been alleged to have occurred over multiple policy periods.  

This decision should become one of the seminal pro-corporate policyholder rulings on the aggregate limits issue, and we strongly encourage companies facing long-tail property damage and bodily injury claims to contact us if they have any questions.

Insurance Coverage For Revived Claims Under The NY Child Victims Act

Schools, religious organizations, and similar institutions (think childcare providers, summer camps, and any other businesses or nonprofits that provide services to children historically) now have less than a month to brace against an oncoming flood of claims under New York’s Child Victims Act.  Although insurance typically covers revived claims under the NY Child Victims Act and similar laws, policyholders need a comprehensive approach to securing coverage.  This post identifies some of the key issues that policyholders should consider to secure coverage. 

Plaintiffs' lawyers have targeted private schools as a source for funding claims under New York's newly enacted Child Victim's Act
Plaintiffs’ lawyers have targeted private schools as a source for funding claims under New York’s newly enacted Child Victims Act

The Child Victims Act revives claims for childhood sexual abuse or molestation that might otherwise be barred by statutes of limitation.  N.Y. C.P.L.R. 214-g (McKinney 2019).  Specifically, the Act creates a one-year window for claimants to file claims against their alleged abusers.  Id.  The statute went into effect on February 14, 2019 and created a mandatory six-month waiting period in which claimants may not file (presumably, to give defendants time to prepare their defense).  Id.  That six-month moratorium lifts on Wednesday, August 14, 2019—or in a little less than a month.  See id.  Claimants will then have a full year to file any such revived claims, or until August 14, 2020.  See id.  

The clock is thus ticking and time is almost up.  To this end, here is a brief list of suggested steps to help prepare for the coming wave of claims:

1. Search for, Locate, and Compile Relevant Insurance Policies

Most schools and similar organizations facing legacy claims have General Liability (“GL”) policies going back many years, if not decades.  These GL policies provide coverage for bodily injury taking place within the policy period.  These policies can provide two tremendous benefits to organizations facing claims under the Child Victims Act: defense coverage and indemnity coverage.  GL policies typically have a “duty to defend,” requiring the insurance company to defend against any potentially covered claims asserting bodily injury against the insured.  Also known as “litigation coverage,” this duty to defend can provide vital coverage for insureds, as lawsuits may drag on for several years and cost thousands of dollars in attorneys’ fees. 

GL policies also provide indemnity coverage, meaning that if the claimant goes to trial and wins a verdict against the insured, the insurance company will have a legal obligation to pay for the judgment.  Likewise, this indemnity coverage also covers settlements with claimants seeking damages for bodily injury.  This is important because many cases will not go to trial. 

The applicable GL policies are those in place when the alleged bodily injury occurred.  Individuals filing revived claims under the Child Victims Act may now be fully grown adults alleging sexual abuse or molestation taking place many years ago, in the 1960s, 1970s, 1980s, and/or 1990s (or even earlier).  These policies may have been issued long before the widespread use of computers or the existence of the Internet, so insureds may have to comb through paper files and other hardcopy sources.  Even if the actual policies themselves have been lost, insureds should search for letters, certificates of insurance, or other documents that refer to legacy GL policies.  Using secondary sources such as these, insureds may be able to prove that they had coverage, even if the actual policies have been lost. 

2. Review Additional Types of Coverage

Depending on the institution, other kinds of entities facing revived claims under the Act may also have Directors & Officers (“D&O”), Employment Practices (“EPL”) and/or Errors & Omissions (“E&O”) policies.  D&O policies cover claims made during the policy period against a company’s directors and officers, typically for a “Wrongful Act.”  Private company D&O policies also provide entity coverage for the alleged “wrongful acts” of business itself.  EPL coverage may also be implicated for claims alleging wrongful retention and EPL coverage for institutions is typically quite broad.  By contrast, E&O insurance — also known as Professional Liability insurance — covers claims for professional errors and omissions.  For institutions specializing in education, these additional kinds of policies may also provide coverage. 

3. Provide Notice

After finding their legacy policies (or secondary evidence thereof), insureds should provide notice to their insurance companies.  Many insurance policies contain a Notice of Claim or similar provision requiring the insured to provide written notice of any “claim” (often defined to include both an actual lawsuit and a written demand for monetary damages) “as soon as practicable.”  In addition, some policies also require notice of an “occurrence” likely to give rise to a later claim.  Although the law with respect to notice is often complex, and depending on applicable law, late notice may not be problematic, the best practice is for policyholders to provide notice under applicable insurance policies. 

Schools, religious organizations, and other institutions providing services to children may have already received letters or emails from claimants alleging sexual abuse or molestation.  These communications may qualify as “claims” within the meaning of their policies, so insureds should report them to their insurers as well as any actual lawsuits filed on or after August 14.  If the claimants provide details of their alleged abuse (including the years in which it occurred), insureds can also anticipate which policies will likely be impacted. 

4. Anticipate Likely Insurer Defenses

Depending on the size of the exposure, the insurers will likely try and find ways to limit and/or deny coverage.  For GL policies, insurers may argue that there has not been an “occurrence,”meaning an accident, because the alleged conduct was intentional.  This so-called defense has no merit for institutions, as no institution intends to harm children, and claims against institutions are most always negligence-based (such as failure to take action, failure to warn, negligent supervision, etc.). 

Some GL policies may also have exclusions for sexual abuse or molestation, but these exclusions were developed and used only in recent years.  The key issue here is for policyholders to find and pursue coverage under older policies which do not contain any such exclusion.  Alternatively, even if a policy contains an exclusion, depending on the specific language, it may not apply.

Depending on the policy period, the insurer(s) may also try and disclaim coverage by claiming that another insurer is on the hook for the claimant’s alleged injuries.  This is more of a delay tactic than a basis for denial, but it can be frustrating to policyholders when an insurer is bound to defend and indemnify, and the only thing holding it back is its idea that some other insurer should share in payment. 

To this end, it’s helpful to understand how allocation works regarding coverage for so-called “long-tail” claims taking place over several policy periods.  Courts use tend to apply one of two approaches to determine how to apportion liability across multiple policy periods: the “all sums” approach and proration.  Keyspan Gas E. Corp. v. Munich Reins. Am., Inc., 31 N.Y.3d 51, 58 (N.Y. 2018).  The “all sums” approach allows the insured to collect its total liability under any policy in effect during the periods of the alleged harm or injury, up to the policy limits.  Id. 

The “all sums” allocation approach is akin to “joint and several liability” and thus places the burden on the selected insurer to seek contribution from the insurers that issued the other policies.  In re Viking Pump, Inc., 27 N.Y.3d 244, 255 (N.Y. 2016). 

By contrast, under pro rata allocation, each insurer’s liability is limited to the sums incurred by the insured during the policy period, meaning that each insurance policy is allocated a “pro rata” share of the total loss for the portion of the loss occurring during its policy period.  Keyspan Gas, 31 N.Y.3d at 58.  In other words, pro rata shares are often calculated based on each insurer’s “time on the risk”—a fractional amount corresponding to the duration of the coverage provided by each insurer in relation to the total loss.  Id.  New York has not adopted a strict all sums or pro rata allocation rule.  Instead, the particular language of the relevant insurance policy will govern the method of allocation.  Id.; Viking Pump, 27 N.Y.3d at 257.  For example, the Court of Appeals of New York has held that “all sums” allocation is appropriate for policies containing non-cumulation and prior insurance provisions.  Viking Pump, 27 N.Y.3d at 264. 

Regardless of the defenses that the insurers raise, insureds should review their coverage response(s) carefully and refuse to simply take “no” for an answer.  With these kinds of claims, coverage denials are common, but rarely valid.  Hiring a coverage attorney is oftentimes the only way policyholders can achieve justice.    

In closing, a storm is coming on August 14.  Businesses and nonprofits are likely to face revived claims under New York’s Child Victims Act.  Insurance carriers have been preparing for some time to limit liability at the expense of their policyholders, and most have a game plan to do so.  Although insurance implications can be multifaceted, policyholders should not be dissuaded from pursuing coverage.  If done correctly, coverage can be secured.  Policyholders must act now to batten down their insurance hatches and line up coverage.   

The Craziest Insurance Defense Ever

Over the years, we have seen some crazy defenses raised by insurers attempting to limit their exposure for corporate insurance claims. Most are laughable when raised, but that does not stop insurers from pushing them.

Several examples illustrate this point. In the 1990’s the insurers came up with the idea that general liability policies do not cover injunctive relief such as environmental cleanup orders. Why? Because, according to the law of England, in place long before anyone on this planet was born, there was a difference between courts at law and courts at equity. No matter how crazy this idea now sounds, insurance companies litigated this issue for decades. Later, with the proliferation of claims-made coverages (the norm for D&O and E&O policies), insurers came up with an even crazier idea – that long since established “duty to defend” standards did not apply anymore. Why? Because the insurers claimed that their duty to pay for defense of a lawsuit was fundamentally different from their duty to defend and pay for an underlying lawsuit. As crazy as this sounds, insurers have been pushing this idea, and more litigation to address this issue is likely to follow.

We raise these examples to illustrate a fundamental observation about high-end insurance company lawyers. They are always thinking up new ways to deny coverage. They push the envelope by continually offering their clients (insurance companies) potential solutions to minimize loss.

We also raise these examples to illustrate how many in the insurance business respond to these crazy defenses. Rather than go on common sense, we see a lot of folks, lawyers included, giving credit to these crazy defenses, rather than calling them out for what they are – complete nonsense.

Recently, we came across a shocking new defense. We call this one the “it’s not over defense.” This defense comes up in the all-to-common scenario where a corporate policyholder is subjected to a series of pending claims. Let’s say there are twenty lawsuits for which coverage is sought. One of those lawsuits is going to trial, and the judge is pushing for settlement. The parties go to mediation, and reach what they think is an acceptable resolution. But, when the insurer is asked to contribute, the insurer says, we can’t, because we don’t know what our overall exposure is, given that 19 lawsuits remain.

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

A video about The Craziest Insurance Defense Ever, by Mark Miller
Attorney Mark Miller

Below is a transcript of today’s video:

The Craziest Insurance Defense Ever


The craziest insurance defense ever. Now I think about … we see all kinds of insurance defenses, these are defenses insurance companies throw up to paying corporate insurance claims. Some of them are just laughable, others are “wow I can’t believe somebody was able to think that one up”. But the bottom line is you’ve got a bunch of lawyers sitting around in their office trying to make points with the insurance companies, trying to find new ways to deny claims. It’s an industry. A lot of money is being paid by these insurance companies to have these lawyers think up new ways to not pay claims.

The craziest insurance defense ever and we’ve seen it come up repeatedly in recent claims and that defense is, “well we can’t settle that claim because you’ve still got other claims out there”. Look if you’re a corporation and sometimes these claims, they come in waves, somebody sues you for a TCPA violation and then 20 different people sue you. So, you have 20 different claims. Somebody sues you for a securities claim and then you have four different securities claims in different jurisdictions, all of these with the plaintiff’s lawyers competing on who’s going to be the big dog and get the most money.

So, they come in waves. It seldom that you see one claim and that one claim is the only claim you have. But let’s think about what the insurance company’s saying. They’re saying, “Well you have five claims, you can’t settle these three because you still have two left.” Now it’s not in the insurance policy. There’s no defense for that. It’s not anywhere else that we can see, but it’s something they’re asserting. And the basis for asserting it is, well we just don’t want to do it because we’re afraid that these other claims might cost more money and we want to do a deal with you to pay you less than policy limits. So, it’s not really a defense. It’s more a posturing for settlement.

But the problem is what we’re seeing nowadays is insurance companies are going to mediations and they’re saying, “We’re not paying anything, till we know what the universe of the claims is.” And that’s simply wrong and that’s simply something that’s inconsistent with the policy language. The insurance company has a duty to defend and they also have a duty to settle. They can’t sit back and say, “We’re doing nothing.” And if they do, they’re in a position of bad faith.

Insurance Coverage Basics For The In-House Attorney

Miller Friel attorney Bernard Bell recently presented a continuing legal education program  entitled Insurance Coverage Basics for the In-House Attorney.  This course is designed to help in-house attorneys deal with risk management and insurance coverage issues.

Whether confronting unexpected losses, learning of a dispute, receiving a subpoena, investigative demand or service of a complaint, insurance often comes into the picture. This course describes the difference between first-party and third-party insurance, explains basic features of each type of insurance, covers basic insurance policy components and terms, identifies specialty insurance that should be considered, and offers practice pointers for in-house counsel, including steps you can take to preserve possible coverage.

Please see I Have Insurance? Coverage Basics for the In-House Attorney for additional information about this presentation.

Miller Friel – Best Lawyers in America

We are pleased to announce that Bernard Bell was recently selected by his peers for inclusion in The Best Lawyers in America© in the practice area of Insurance Law in the 2019 edition.

Selecting an Insurance Recovery Law Firm

Miller Friel Attorney Bernie Bell

Best Lawyers© compiles its listings after a months-long process during which their researchers ask leading attorneys from specific areas about the professional abilities of their colleagues.  With this distinction, Bernie ranks among the top five percent of private practice attorneys in Insurance Law nationwide, as determined by his peers.

Insurance Coverage for Phishing Cons: Policyholders Twice Scammed

We have received numerous requests from businesses seeking to understand insurance coverage for phishing scams. Many of these businesses have become the victim of phishing attacks and are pursuing claims for coverage.

Scam I: Phishing

Computer email scams are increasing on an alarming rate.  The FBI reports that companies have been swindled out of billions of dollars due to email scams over the past few years.  To counteract this, the FBI recently issued public service warnings to businesses about criminals using bogus email accounts to pose as CEOs to trick financial controllers into wiring funds to the fraudsters’ bank accounts.  See FBI’s Public Service Announcements, www.fbi.gov.  Last year, Equifax, one of the three major credit reporting agencies in the US, announced a data breach affecting 143 million customers, based on hackers accessing Social Security numbers, birthdates, addresses, and driver’s license numbers.

Most companies have experienced these types of scams first-hand. The reason for this is that phishing scams have become more and more sophisticated over time.   We all know to look out for that email from a Nigerian prince asking us to hold $10 million dollars of money for them. We also know not to respond to a bank asking us to “click here” to verify user names and passcodes.  With organizations, the scams have become much more sophisticated. Cyber criminals hack into an organization’s internal computer system so that they can send what look bona fide emails from a CEO or CFO requesting the payment of invoices to a “new” bank, which coincidentally is located in China.   Employees who get one of these emails from their management, naturally respond asking for confirmation. Those emails are then intercepted by the cyber-criminal, and the cyber-criminal responds saying that all is ok.

Scam II: Insurance Company Response

Insurance companies are responding to these scams by offering specialized policies, for additional premiums of course, specifically addressing these risks or adding coverage to their standard Fidelity/Crime or Cyber Liability policies, typically under the moniker of “Deception Fraud” or “Social Engineering” insuring agreements.   As with most things in the world of insurance, the devil is in the details, but some of the insurance coverage bought to specifically to cover phishing scams is worthless.

Here’s how many insurance companies are deceiving their corporate policyholders.  “Deception Fraud” and “Social Engineering Fraud” are so broadly defined in the policies that they cover nearly every possible computer scam.  For example, in the currently available Private Choice Premier Policy, Crime Coverage Part offered by The Hartford Insurance Company, “Deception Fraud” is defined as “the intentional misleading of a person to induce the Insured to part with Money or Securities by someone, other than an identified Employee, pretending to be an Employee, owner of the Insured, . . . a Vendor, a Customer, a Custodian, or a Messenger.”   Incredibly broad, which is exactly what companies want to protect them against risks, right?  Not so fast.  This coverage may come with a very small sub-limit of $50,000-$100,000, whereas other coverages under these same policies may have limits of between $1-$5 million.

What’s even worse (and here comes the true deception) is the fact that insurers often take the position that losses falling under “Deception Fraud” or “Social Engineering Fraud” cannot also be covered under other higher limits insuring agreements, such as “Computer Fraud” or “Funds Transfer Fraud” (which are typical coverages in Fidelity/Crime policies). Insurers argue that, despite higher limits under other coverage grants, that the loss nonetheless must be recognized as a “Deception Fraud” or “Social Engineering Loss” only, subject to a small limit of insurance.  In other words, heads insurers win, tails policyholders lose.  Given this widely adopted position of insurers, Policyholders were better off rejecting these new highly promoted enhancements to coverage and relying upon coverage they previously had.

Insurance Coverage for Phishing

Insurance coverage for There’s nothing more disappointing and frustrating than to spends thousands, if not hundreds of thousands, of dollars buying insuring policies to protect against the risk of fraud, only to have an insurance accompany argue that it sold a nearly worthless policy.  Corporate policyholders should review their current and prospective policies to spot this and other clever limitations, and demand appropriate changes. If a company has already become a victim to phishing, however, it is not too late to challenge an insurance company regarding this kind of position which creates an unnecessary and unwarranted gap in coverage and retain coverage counsel to assess all options.

Cyber Insurance Claims and Coverage

The starting point for any organization seeking to understand cyber insurance claims and coverage is to understand potential cyber-related losses. It is only through this analysis that corporate policyholders can understand what cyber insurance should cover.  For illustration purposes, we examined four prominent cyber-related incidents and the fall out associated with each incident.

Insurance Recovery Issues For Corporate Policyholders

1. Cyber-Related Losses

Yahoo

Yahoo

In 2013 and 2014, roughly 1 billion Yahoo user accounts were breached. This resulted in a series of governmental investigations, numerous lawsuits alleging, among other things, gross negligence and breach of various data protection laws.  Yahoo was also forced to renegotiate its sale to Verizon at a $350 million loss

Target

Target

In 2013, 40 million debit and credit card numbers were stolen at various Target stores across the country. This resulted in a plethora of consumer lawsuits, bank lawsuits, state AG claims, and a series of credit card company claims seeking reimbursement for losses they suffered as a result of Target’s breach. Target faced roughly $240 million in reported loses for fraudulent charges, with overall expenses exceeding $290 million.  Target also suffered massive financial losses in the 4th quarter of 2013.

Anthem

Anthem

In 2015, Anthem suffered a customer database breach impacting 69 to 80 million customers. This resulted in more than 50 class action lawsuits, a series of state AG claims and a number of prominent governmental investigations. Reported losses were in the billions of dollars. A significant portion of Anthem’s loss was the cost of notifications to customers as required by law.

Sony

PlayStation

In 2011 cyber criminals targeted Sony’s PlayStation network, resulting in the loss of personal and credit card information.  102 million people were impacted, and the gaming system was temporarily interrupted. This resulted in the filing of roughly 65 class action lawsuits, with reported losses of $171 million.

2. What Cyber Insurance Should Cover

this sampling of incidents illustrates, in a very basic way, some of the main areas that cyber insurance should cover. These include:

  • Coverage for the costs of defending and settling governmental Investigations, including the recovery of regulatory fines and penalties imposed;
  • Class action and consumer lawsuit defense and settlement coverage;
  • Coverage for credit card reimbursements;
  • Coverage for notification expenditures;
  • Coverage for remediation costs and forensic investigations;
  • Coverage for losses caused by the interruption of business, lost business, and related financial losses.

3. How Insurance Carriers Have Responded to Cyber Claims

The insurance industries response to each of these kinds of losses is, for the most part, to vigorously fight against coverage. The number of cases working their way through the courts on cyber insurance denials is astounding, as are the reasons for denials.

For example, with governmental investigations, insurers routinely contended that no coverage is afforded unless the policyholder has been sued. Then, even if the policyholder is sued by the government, insurers argue that damages associated with governmental settlements are not covered because of alleged policyholder wrongdoing. Similarly, for credit card reimbursement exposures, insurers argue that contractual liability exclusions preclude coverage, even though case law holds to the contrary.   And, for business related losses, insurers routinely contend that no coverage is provided because insurers did not anticipate covering these kinds of losses.  In many instances, insurers are taking these positions, irrespective of case law finding coverage, and irrespective of policy language affording coverage.

There is a solution, but it requires a thorough understanding case law, policy language, and the law pertaining to how insurance provisions are construed.

A good insurance broker is critical to securing the best possible cyber insurance coverage.  Insurance brokers have an understanding of what insurers are selling.  This is valuable, because there are no standards for cyber coverage.  Different insurers approach the same problem from different angles.  Insurance brokers, however, typically do not opine on what the policies cover, as this is a legal function, and brokers do not practice law.

For this reason, sophisticated corporations often  seek an independent legal review of their cyber-insurance programs.

Seeing opportunity, law firms have also jumped into this hot new area, with newly minted cyber-experts available to review corporate insurance policies.  These lawyers can talk circles around most anyone when it comes to cyber-buzz words, but, when it comes to insurance coverage, they have little judgment or experience, and their counsel, quite frankly, is not that helpful.  Others have a great deal of experience, but their experience comes from representing insurance companies.

Insurance Company Lawyers have this certain mindset . . . .

There are many Insurance company lawyers who represent insurers , but also sell their “cyber-review” services to policyholders.  Their marketing materials claim that no one knows better then them as to what the policies cover — as they drafted them in the first instance.  Ethically, these firms see no legal conflicts in doing this, as long as things don’t get too contentious.  Even if they are correct on the conflicts issue, insurance company lawyers have the wrong mindset for this kind of work.  Insurance company lawyers are trained from day one not to see coverage.  They place emphasis on irrelevant things, like what insurers like to do, rather than policy language, which is the determining factor for coverage.

For additional information cyber insurance coverage, please see Cyber Insurance Claim Denials, Computer Fraud: Two Similar Scams, Two Very Different Insurance Outcomes, Cyber and Intellectual Property Claims, The Wild Wild West of Cyber Insurance, Strategies for Addressing Cloud Computing Insurance Risks.

The Role of An Insurance Broker: To Keep Lawyers from Giving Advice?


In today’s blog post, Mark Miller addresses another issue pertaining to the role of insurance broker claims advocates, namely a misperception that some brokers have about the best way to maximize insurance claim value.  Here, Mark addresses a recent visit with a prominent insurance broker seeking referrals from Miller Friel. During that visit, the brokers proudly touted marketing materials about everything they had to offer.  One of the ways this broker thought they were creating value, was by preventing lawyers from providing advice regarding the scope of insurance coverage.  This prompted us to think about some of the most successful insurance recoveries we have had for corporate clients and how best to use insurance brokers in the process.

Does a Divided Approach Make Sense? 

On one hand, what the broker is saying makes some sense. This broker was really touting its ability to help policyholders settle claims as insurance broker claims advocates.  Helping policyholders settle insurance claims is an important function of brokers.  Brokers know the right people at the insurance companies, and in many instances, they help settle claims.  It only makes sense to leverage contacts.

On the other hand, what this broker is saying is completely foolish.  Brokers know a lot of things.  They know what insurance companies have paid on claims in the past.  Brokers know how insurance companies handle claims.  And, oftentimes, brokers know what insurance companies might be willing to pay.  But, all of this has nothing to do with what is covered under the insurance policies.  Insurance policy coverage is purely a legal issue that has nothing to do with insurance company custom and practice, or what an insurance company is happy to pay to settle a claim.  Insurance coverage is controlled by the law, and despite what insurance brokers do, most don’t practice law all that well.

The Role of Insurance Broker Claims Advocates and Lawyers

So, what is an insurance broker claims advocate and what is their role?  Lawyers use the word advocate quite seriously, recognizing their obligation to zealously advocate.  Insurance brokers use the word more as a marketing phrase, to illustrate that they are helpful in the process of settling claims.  What insurance broker claims advocates do is more akin to a lobbyist than an advocate.  Insurance broker claims advocates work with insurance companies to see if they can find common ground on a claim.  They leverage their contacts to get meetings with insurers.  Like a lobbyist, they provide access and contacts.  They don’t, however, advocate for coverage in the way that insurance coverage lawyers are bound to do for their clients.

In working with insurance brokers to settle some of the largest insurance claims in the country, we have found that there is a better way.  Brokers and lawyers are a team, not advocates against one another.  Each has a different but equally important function.  Lawyers determine what is covered based on the law and develop strategies to pressure the insurance carrier to pay.  This may include submission of legal analysis to the insurer to help them reverse their position on coverage, or it may include other dispute resolution mechanisms.  Brokers keep communications open with the insurer, and search for common ground. Together, the whole is much greater than the sum of its parts.

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

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Why Insurance Carriers Prefer Insurance Coverage Arbitration Over Litigation

A question that corporate policyholders should ask before entering insurance coverage arbitration is whether arbitration is a viable way to resolve a complex corporate insurance dispute. In the not so recent past, arbitration provisions in insurance policies were rare. Now, they are common.   And, language contained in many standard-form arbitration clauses has become even more onerous over time. The reason for this is that Insurance Carriers prefer Insurance Coverage Arbitration over litigation.

Are Insurance Coverage Arbitrations a Good Option for Corporate Policyholders?

We address here some of the issues that corporate policyholders should note when faced with an insurance coverage arbitration.  We also draw some basic conclusions about insurance coverage arbitration based on our extensive experience in this area of insurance recovery law.

First, lets look at some of the reasons why insurers feel so strongly about arbitration.

1)  Arbitrators May Not Follow Policyholder-Friendly Law

To prevail on claims, policyholders rely on powerful policyholder-friendly rules of construction. For example, there is a duty to defend whenever there is any potential of coverage.   Courts and arbitrators should not look to the ultimate outcome of whether the claim is covered. Rather, if a claim has any possibility of being covered, a defense must be provided. Similarly, policy exclusions are construed against insurers and in favor of policyholders, and for an exclusion to apply, there must be no other reasonable interpretation of coverage other than the one offered by the insurer.

It goes without saying that both arbitrators and Courts should follow the law.  If these and other common insurance rules of construction are applied, policyholders have a distinct advantage.

As a general rule, courts follow the law, and if the law is followed, policyholders are typically entitled to coverage. In litigation, if a Court does not follow the law correctly, an appeal may be taken.

Arbitration is a different animal. Review of arbitration awards is limited, and arbitrators are generally afforded more flexibility than courts in fashioning their rulings.  In insurance coverage arbitration, arbitrators may be permitted to evaluate factors that have nothing to do with coverage.  Arbitrators have been known to look at what a policyholder paid for coverage in relation to the value of the claim to determine what the insurer intended as far as coverage. They may also be improperly swayed by insurance industry custom and practice regarding what insurance companies think critical language means, rather than following the legal standard of interpreting insurance policy language.  These factors that arbitrators may be interested in considering cannot be considered in court, as they are legally and factually irrelevant to coverage.

Finally, some arbitrators are reluctant to apply standard rules of construction because these rules of law are designed to render black and white coverage determinations in favor of coverage. Applying these rules to most contested corporate insurance claims can lead to a ruling that the claim is covered.

To cloud the issue, insurance carriers typically raise as many possible defenses to coverage as possible, and push for devaluation of a claim, irrespective of the validity of their so-called defenses. Hence, even if the applicable legal rules mandate coverage, arbitrators can, either intentionally or unintentionally, open the door to legally invalid insurer defenses. Although this does not necessarily lead to an incorrect decision, it unnecessarily complicates the process.

2)  Arbitrators May Ignore Insurance Carrier Bad Faith 

Another problem with arbitration is that some arbitrators have been conditioned to give insurance carriers a pass on bad faith conduct, whereas courts and juries may be conditioned in the opposite direction. Insurance carriers have a fiduciary duty not to place their interests above those of their corporate policyholders. This is an exceptionally hard standard for insurance companies to meet. Pursuant to their responsibilities to shareholders.  Insurance companies are also obligated to maximize shareholder value. One way for insurance companies to increase net income is to limit expenses, which includes limiting payments on claims. These two competing burdens, one to shareholders, and another to policyholders, puts insurance companies in a uniquely difficult place. All too often, it is just too enticing to deny claims for financial reasons, which results in a  breach of their duty of good faith and fair dealing to corporate policyholders.  In the corporate insurance context, these damages can be immense.

Insurance carriers commit bad faith because it is difficult for them to reconcile pursuit of their interests with the idea that they are not permitted to place their interests ahead of corporate policyholders.

One reason why arbitrators in an insurance coverage arbitration  may not be inclined to award bad faith damages may be purely economic.  If such a ruling is issued, and the insurers are upset by that ruling, the arbitrator will not be proposed by the insurers to handle future insurance coverage arbitrations.

3)  Some Arbitrators May Find it Difficult to Side With Corporate Policyholders

Insurance companies hire arbitrators as part of their business.  They are repeat consumers of arbitration services.  They keep track of how arbitrators handle their insurance disputes. They know who is good for them, and who is not, and they are not about to take any chances by proposing an arbitrator who does not pass their internal results-oriented tests.

For this reason, arbitrators that routinely handle insurance coverage arbitrations are generally not the best choice for corporate policyholders.  Future work drives any service oriented business and arbitration is no exception.  Corporate policyholders should assume that experienced Insurance coverage arbitrators know that insurers can drive their future business.  Arbitrators need future work to remain employed, and insurers may not be inclined to agree to use an arbitrator again if that arbitrator finds against them in a high-dollar insurance coverage arbitration.

This is not to say that arbitrators cannot see their way through this morass and find for corporate policyholders.  Rather, it is one of many important issues for corporate policyholders to consider when selecting an arbitrator for an insurance coverage arbitration.

4)  Some Insurance Arbitration Organizations are Mere Extensions of Insurance Companies

Insurance carriers are always concerned about the possibility that an arbitrator who they have not vetted properly will be appointed for an insurance coverage arbitration.  To protect against this, insurers have formed specific trade associations disguised as arbitration tribunals. The most infamous of these is ARIAS.   ARIAS arbitrators have experience working for insurers, and they translate this knowledge into finding for insurers in arbitration.  An arbitration before ARIAS is like an arbitration with the insurance company claims adjuster who denied the claim acting as arbitrator.  Policyholders should never agree to an arbitration with an ARIAS arbitrator.

Conclusions

Insurance carriers favor insurance coverage arbitrations because insurance coverage arbitration is better at limiting insurer exposure than litigation.  A number of important lessons can be learned from understanding this, including:

1)  Policyholders should not agree to arbitration clauses in insurance policies;

2)  Policyholders should resist insurance company efforts to arbitrate, unless adequate precautions have been taken to select a neutral arbitrator;

3)  Arbitrators with extensive insurance coverage experience are likely not neutral; the fact that they have been repeatedly selected for insurance matters could mean that they have rendered numerous decisions favorable to insurers; and

4)  Arbitrators with minimal insurance experience are more likely to provide policyholders with a fair arbitration.

A good friend who runs the arbitration group for a major multinational corporation once said to me, “if you get the wrong arbitrator, you lose your case upon selection of that arbitrator, but you will not know it until years later.”  These are sound words to live by.

Cyber Insurance for Business Interruption Losses

Cyber insurance for business interruption losses is of great importance to business  This year business interruption ranked as the leading threat to companies globally, with cyber incidents acting as the primary trigger for associated losses. Domestically, cyber incidents, — cybercrime, data breaches and distributed delay of service attacks — surveyed as the single most critical risk to businesses. Commerce’s increased reliance on technology-driven solutions only compounds the detrimental impact of these disruptions.

The New Frontier of Cyber Insurance — Business Interruption Coverage

Miller Friel recently had the honor of presenting on cyber insurance for business interruption losses in a recent Stafford CLE Presentation entitled Business Interruption Coverage for Cyber-Related Losses. This CLE webinar addressed the unique risks that cyber-related losses pose to business operations and how to mitigate those risks with business interruption (BI) coverage. Mark Miller of Miller Friel presented the corporate policyholder perspective, and two insurance company lawyers, Mary Borja of Wiley Rein and Eric Eric Stern of Kaufman Dolowich, provided insurance carrier perspectives.

An analysis of several recent high-profile cyber incidents demonstrates that business interruption and financial losses associated with cyber-attacks can be immense.  Case in point, after a 2013 to 2014 cyber attack at Yahoo, Yahoo was forced to renegotiate its deal with Verizon at a loss of $350 million.   Cyber insurance for business interruption losses and associated financial losses is certainly a timely issue.

What Are Insurers Doing to Provide Cyber Insurance for Business Interruption Losses?

The answer to this question is easy: very little.  Mary Borja, giving the insurers’ perspective explained that cyber insurance has developed as a series of specific coverages, for very specific cyber issues.  She describes cyber-coverage like this picture.

Current Cyber Insurance Policies — You Don’t Know What is Behind the Door Until a Claim is Made and the Door is Opened

Her analogy is that cyber insurance, as currently structured is like a series of doors.  Each door represents a different cyber insurance coverage grant.  To find out what you have, you must open a door to see.

This door picture is a good analogy.  But, with cyber insurance, no one knows exactly what an insurer will do with respect to coverage until a claim is made, or the door is opened.  Make a claim, open a door, and see what the insurers will cover.  This is not the best approach, but it is the current state of cyber-insurance.

What Can Businesses Do Now?

Even with the current state of cyber insurance, there are certain things that businesses can do no to maximize the value of their cyber insurance coverage.

 1.  Look Beyond Cyber Specific Coverage

Insurance company lawyers are not happy when a new court decision comes out finding coverage for a cyber attack under a non-cyber policy.  Eric Stern addressed some of the insurance decisions addressing cyber-related losses, focusing predominantly on “all risk” property policies, which provide coverage for a wide variety of business interruption losses.

Representing insurers, Eric argued for a  narrow reading of coverage, stating that the policies require “direct physical loss or damage to property” for coverage to be triggered.  According to  insurers, there must be direct physical loss to property for coverage to apply.  The only problem with this argument is that this is not what the policies provide.  All risk property policies expressly cover both direct physical loss of property, and damage to property.  Accordingly, if  a cyber-incident renders property, or a computer system,  unusable for the purposes intended, business interruption coverage should be provided.  There is simply no requirement of physical injury to the computer system in order for coverage to be triggered.

In the cyber context, Eric noted a number of decisions finding coverage for cyber-related losses under all risk property policies.  See Am. Guarantee v. Ingram, 2000 U.S. Dist. LEXIS 7299 (D. Ariz. 2000) (holding that physical damage is not limited to physical destruction or harm but includes “lack fo access, loss of use, and loss of functionality”); Lambrecht v. State Farm Lloyds, 119 S.W.3d 16 (Tex. App. 2003) (alternatively finding that hard drives were physically damaged because they could no longer hold or store information); NMS Services, Inc. v. The Hartford, 62 Fed. Appx. 511 (4th Cir. 2003) (holding that there was coverage under a business property policy for an insured’s loss of business and costs to restore records lost when a former employee hacked into the insured’s network);  Southeast Mental Health Center Inc. v. Pacific Ins. Co. Ltd., 439 F. Supp. 2d 831 (W.D. Tenn. 2006) (insured proved necessary direct physical loss where the insured’s pharmacy computer data was corrupted due to a power outage).

The takeaway for policyholders is that “all risk” property policies can and oftentimes do provide coverage for cyber-related business interruption losses.

2.  Pay Attention to Cyber Coverage Grants and Exclusions

The participants agreed that there is no standard cyber-policy form, so a review of applicable policy language is critical.

Without Standard Insurance Policy Forms or Regulations, We are Still in the WIld Wild West of Cyber Insurance

Mark Miller noted six specific limitations to coverage that are particularly important with respect to financially related losses, including: (1) scope of coverage grants, (2) time limitations to coverage, (3) the fraud exclusion, (4) the profit or advantage exclusions, (5) prior notice exclusions, and (6) conditions to coverage.

To find out more about the steps that policyholders need to take with respect to cyber-related claims and policies, please feel free to  contact us.