Cybercrime has come a long way from the days of Nigerian Princes seeking aid from unsuspecting AOL subscribers to liberate their family fortunes from the grips of oppressive regimes. Cybercriminals today are far more sophisticated, and so too are their victims. Now, it is C-Suite executives and publicly traded corporations being swindled by ever-evolving “spoofing” scams, while some of the world’s largest healthcare providers, airlines and hotel companies fall victim to massive data breaches as a result of “phishing” schemes and other malware. Indeed, recently a handful of multi-national conglomerates had their operations virtually shut down by malware purportedly released by the Russian military.1 The costs to companies associated with these modern-day cyberthreats can be staggering. Cybercrime is among the most significant risks facing businesses today. Fortunately, in the event of an attack, companies may not have to go it alone. In many instances, insurance may be available to cover some or all of the loss.
This article highlights a few of the more recent massive cyber incidents inflicted on well-known U.S. companies, and discusses the various types of insurance products marketed and sold to protect businesses against such risks, as well as notable court decisions addressing the scope of cyber coverage under such policies. Finally, some practical pointers are offered for effectively insuring against the risks of modern cyberthreats.
The Growing Threat of Cybercrime
Earlier this year, Equifax, the multinational consumer credit reporting agency, finalized the largest data breach class-action settlement in history. The case arose from an incident in 2017 in which hackers accessed personal data, including names, dates of birth, social security numbers and driver’s license numbers from approximately 150 million consumers. Ensuing claims were brought by the Federal Trade Commission, the Consumer Financial Protection Bureau and various state attorneys general. More than 300 class-action lawsuits were also filed by consumers and financial institutions, which were consolidated in Federal District Court in Atlanta, Georgia.2
A recent decision from the U.S. Court of Appeals for the Fifth Circuit held that a higher deductible applied (so as to bar recovery for the policyholder), but reaffirms that policies covering the peril of windstorms include damages due to heavy rains and flooding accompanying hurricanes. The decision also serves as a warning for policyholders with high deductibles to buy deductible buyback insurance before hurricane season strikes.
The Pan Am Equities Decision
Pan Am Equities Inc. v. Lexington Insurance Co. presented the issue of which deductible to apply under a commercial property policy. After Hurricane Harvey drenched the greater Houston area in more than 60 inches of rainfall, the policyholder suffered more than $6.7 million in flood damage to two of its properties. The policyholder had a commercial property policy with two different deductibles: a $100,000 flood deductible, and a windstorm deductible with the following language:
5% of the total insurable values at the time of the loss at each location involved in the loss or damage arising out of a Named Storm (a storm that has been declared by the National Weather Service to be a Hurricane, Typhoon, Tropical Cyclone, Tropical Storm or Tropical Depression), in Tier 1 Counties including Florida, regardless of the number of coverages, locations or perils involved (including but not limited to all Flood, wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain) and subject to a minimum deductible of $250,000 any one occurrence.
A deductible is “a clause in an insurance policy relieving the insurer of responsibility for an initial specified small loss of the kind insured against.” An insurer’s duty to pay only kicks in after the policyholder’s losses exceed the amount of the deductible. “The purpose of a deductible is to shift some of the insurer’s risk to the insured, which is accomplished by setting a limit on the value of covered losses below which the insurer is not obligated to pay.” The calculation of a policy’s deductible is thus extremely important because if the policyholder’s losses don’t exceed the deductible, the insurer doesn’t have to pay anything.
In Pan Am, the total insurable value of the policyholder’s two properties exceeded $190 million. If the $100,000 flood deductible applied, the policyholder could recover most of its losses. However, if the windstorm deductible applied, the insured would not recover anything, because its $6.7 million in losses would not exceed the deductible (5% of the $190 million in total insurable values).
The district court held that the higher windstorm deductible applied because the flooding that damaged the policyholder’s properties resulted from Hurricane Harvey, which was a windstorm. Critically, the court noted that a hurricane is a windstorm by any definition. The policyholder tried to argue that the windstorm deductible only applied to wind damage, but the court rejected this argument, noting that the windstorm deductible did not apply only to wind damage.
On appeal, the Fifth Circuit affirmed, holding that the windstorm deductible applied to all loss due to windstorm, including flood damage to the policyholder’s buildings. The court again rejected the policyholder’s argument that the windstorm deductible only applied to wind damage.
Pro-Policyholder Implications of Pan Am Equities
While the Fifth Circuit ruled in the insurer’s favor in Pan Am, the decision may benefit policyholders more than insurers. Specifically, the policy at issue in Pan Am did not define what the term “windstorm” meant. The Pan Am decision affirms that a hurricane is a type of windstorm and hurricanes usually involve heavy rains. Many policies provide coverage for the peril of windstorms and insurers routinely argue that the peril of windstorm does not include flooding.
The implication of the Pan Am decision is that the windstorm peril includes damage caused by heavy rains and flooding associated with storms such as hurricanes. This is a heavy blow to insurer attempts to distort the plain meaning of their policies as somehow only covering wind damage.
The Importance of Deductible Buyback Coverage
Policyholders can also take steps to minimize their potential exposure by purchasing deductible buyback insurance. A commercial property policy may have a relatively low flood deductible, but if the insured property suffers flood damage from a windstorm (such as Hurricane Harvey), Pan Am Equities holds that, in certain circumstances, the higher windstorm percentage deductible may apply.
Policyholders should consider purchasing deductible buyback insurance. These policies buy back, or restore, coverage for large deductibles under commercial property policies. For policyholders based in high-risk areas such as the Gulf Coast, now is a good time to review your coverage, before hurricane season arrives. As Pan Am makes clear, total insured value percentage deductibles for windstorms may leave businesses exposed to the elements when the next hurricane strikes.
 Pan Am Equities, Inc. v. Lexington Ins. Co., No. H-18-2937, 2019 WL 2115173, at *1 (S.D. Tex. May 2, 2019).
 Penthouse Owners Ass’n, Inc. v. Certain Underwriters at Lloyds, London, 612 F.3d 383, 387 (5th Cir. 2010).
 Pan Am, 2019 WL 2115173, at *2.
 Pan Am, 2020 WL 2709351, at *2.
 Id. at *1.
 Pan Am, 2019 WL 2115173, at *3 (citing Leonard v. Nationwide Ins. Co., 2006 WL 1674288, at *1 (S.D. Miss. June 13, 2006) (“a hurricane is a type of windstorm”).
 Pan Am, 2020 WL 2709351, at *3.
 Id. at *4.
 Id. at *1 n.1.
 Pan Am, 2019 WL 2115173, at *3.
 Id. (citing Seacor Holdings, Inc. v. Commonwealth Ins. Co., 635 F.3d 675, 681 (5th Cir. 2011)) (holding that “losses caused by a Named Windstorm, which under the policy’s definition includes hurricanes, could include losses caused by heavy rains”).
Miller Friel, PLLC is pleased to announce that Stephen R. Mysliwiec has joined the firm as a partner, serving clients from Miller Friel’s Washington, DC office. Steve was previously a partner in the Washington, DC office of DLA Piper, one of the world’s largest law firms, where he was a partner for over 30 years.
Steve is recognized as one of the leading insurance recovery lawyers in the country, representing some of the largest and best known companies in the world with respect to all lines of commercial insurance. Steve has litigated numerous insurance coverage disputes involving policyholders in the real estate, construction, banking, healthcare, life insurance, hotel, assisted living, computer, transportation, steel, commodities, and food service industries. Steve also represents trade associations, builders, and owners regarding various insurance coverage and liability issues arising from claims of defective workmanship and defective building materials. He has submitted numerous amicus briefs in appellate courts around the country on these issues. Steve iscurrently representing a number of companies in connection with their business income losses caused by COVID-19.
Steve’s practice also involves advising clients with respect to the insurance aspects of transactional matters. He helps developers, contractors, owners, lenders, landlords, tenants and other clients in the real estate, construction and financial services sectors deal with insurance and indemnity issues in complex real estate and construction transactions. He also advises clients regarding the insurance aspects of mergers and acquisitions, insurance for initial public offerings, insurance issues in bankruptcy proceedings, trade credit insurance, reps and warranties insurance, and environmental insurance. He also has substantial experience advising owners and lenders regarding insurance programs for professional sports stadium projects, including OCIP programs.
“Miller Friel is thrilled to have a lawyer of Steve’s experience, reputation and caliber,” said Brian Friel, Co-Founder and Managing Partner. Brian added, “with the addition of Steve to our team, Miller Friel continues its path forward asone of the leading insurance policyholder law firms in the country, exclusively representing companies pursuing insurance recovery.” As noted by Co-Founder, Mark Miller, “Steve shares our vision as a single practice law firm, focused entirely on representing corporate policyholders without any conflicts or constraints imposed by insurers or brokers, in a team effort to maximize insurance recovery.”
“I share Miller Friel’s belief that a boutique insurance recovery law firm is the right model to most effectively and vigorously represent corporate policyholders,” added Steve. “Also, I am drawn to Miller Friel because of its cohesive team atmosphere, surrounded by other attorneys who have been fighting for insureds since the early days of this practice area.” Steve further stated, “DLA Piper is a wonderful firm, and it was difficult for me to decide to leave. But my practice is focused on representing policyholders, which I will be able to continue to do with Mark and Brian and the rest of the Miller Friel team. I look forward to helping expand the firm’spolicyholder client base andtoburnishing the firm’s reputation as one of the leading, if not the leading, corporate policyholder law firms in the country. There is a sense of excitement and focus here at Miller Friel that is very special. I am excited about continuing to represent my policyholder clients and to expanding my practice both nationally and internationally.” Steve received his B.A magna cum laude fromthe University of Notre Dame in 1970 where he was a member of Phi Beta Kappa, his M.A. from the University of Notre Dame in 1972, and his J.D. from Yale Law School in 1975, where he was Notes Editor of the Yale Law Journal. Steve was a law clerk in the Fifth Circuit for the renowned Judge John R. Brown.
Twenty-six years ago, I sat in an overcrowded courtroom filled with insurance company lawyers ready to argue that insurance companies should not pay for environmental cleanup costs. A distinguished grey-haired gentleman lawyer, my boss, was leading an assault on the insurance industry. He walked slowly to the podium and said, “Your Honor, you see all of these men and women here in nice suits? They are all liars.” The question American businesses should ask with respect to coronavirus is whether history repeats itself.
The CEO of the insurance giant Chubb, Evan G. Greenberg, stated in a recent WSJ Opinion that it won’t help anyone “to try to pin the damage on insurers like my company.” Decades ago, insurance carriers made this same argument with respect to the environment. There, insurance companies were held responsible, and American businesses were helped greatly. The same will likely hold true for coronavirus losses.
Mr. Greenberg’s is wrong to assert that “virus is not covered.” At a minimum, Mr. Greenberg begs a legal question that will be decided by the courts. Insurance companies willingly and knowingly sold insurance policies covering “all risks.” For decades, if not longer, it has been the law that “all risks” policies cover all risks of direct physical loss or damage unless specifically and unambiguously excluded. And, courts throughout this country have held that coverage is provided in similar situations, where property cannot be used for its intended purposes, or is otherwise rendered unsafe to use. COVID-19 is a covered risk. It has rendered property unsafe and unusable. The presence of Covid-19 alone triggers coverage.
The only question, then, is whether COVID 19 is excluded from coverage. On April 10, President Trump correctly noted that there is a problem with what insurance carriers are pushing, stating:
In a lot of cases, I don’t see it. I don’t see reference, and they don’t want to pay up. I would like to see the insurance companies pay if they need to pay.
No insurance policies, other than those being currently issued, contain COVID-19 exclusions. Some policies address viruses. Others do not. Each policy needs to be individually considered, and in a lot of cases, coverage clearly exists.
Mr. Greenberg claims that it would be “wildly counterproductive” to force big insurance companies to pay for losses they didn’t insure. Insurance companies litigated what they claimed were uncovered environmental claims for decades, only to pay in the end. The failure to pay covered claims is and has always been counterproductive.
Recognizing this, numerous states are considering bills requiring insurers to pay for Covid-19 losses. To this, Greenberg claims protections under Article I of the Constitution. This classic “red herring” distracts us from the fact that most insurance policies address this issue head on. Insurance is a regulated industry, and insurers are contractually bound to follow newly enacted laws and regulations. Constitutional crises avoided.
The financial impact of damage caused by the coronavirus is immense. Virtually every business in the U.S. is suffering and policyholders need to take action now to preserve their rights to coverage.
Last week, one New Orleans restaurant took such action by filing suit against its insurer. Oceana Grill v. Certain Underwriters at Lloyd’s, London, filed in the Civil District Court for the Parish of Orleans, State of Louisiana, stands as the first insurance lawsuit on record for coronavirus coverage. It will not be the last, and other policyholders across the country will face similar, if not identical, coverage disputes.
The restaurant’s petition demonstrates one way a policyholder may seek coverage. It also sheds light on coverage battles to come and underscores the importance of securing coverage for coronavirus losses.
Oceana Grill filed its lawsuit against its insurer seeking coverage under an all-risks property policy. All-risks policies typically cover all risks of direct physical loss or damage to insured property occurring during the policy period, unless they are specifically excluded.
Under an all-risks policy, once the policyholder demonstrates a loss or risk of damage to the property, the insurer has the burden of proving that the policy clearly and specifically excludes the cause of the loss.
Many courts have held that the presence of harmful substances that render property uninhabitable or unusable constitutes “direct physical loss or damage” and that tangible or structural damage is not required.
The Oceana Grill petition tees up the question of whether coronavirus losses constitute direct physical loss or damage under property policies. Policyholders can expect their property insurers to claim that physical damage is required, and that coronavirus does not cause tangible or structural damage to insured property.
However, courts across the country have held that the phrase “physical loss or damage” does not require tangible damage to a building’s physical structure. These decisions hold that the presence of harmful substances such as asbestos, fumes or odors in quantities sufficient to render the property uninhabitable or unusable may constitute direct physical loss within the meaning of a property policy.
1. The presence of coronavirus constitutes direct physical loss or damage.
The Oceana Grill plaintiffs argue that coronavirus constitutes a cause of real physical loss and damage that is physically impacting public and private property, and physical spaces in cities around the world. The Centers for Disease Control and Prevention have now stated that it may be possible for a person to contract COVID-19 “by touching a surface or object that has the virus on it and then touching their own mouth, nose, or possibly their eyes.”
The Oceana Grill plaintiffs also allege that coronavirus “physically infects and stays on the surface of objects or materials, ‘fomites,’ for up to twenty-eight days, particularly in humid areas below eighty-four degrees,” and surface infection of insured premises by coronavirus “would be a direct physical loss needing remediation to clean the surfaces of the establishment.”
2. Coronavirus losses may also implicate civil authority coverage.
Many commercial property policies also cover business income losses suffered when a civil authority prohibits or impairs access to either the policyholder’s premises or property other than the insured’s property. The Oceana Grill plaintiffs also seek a declaratory judgment that orders issued by Louisiana Gov. John B. Edwards trigger the civil authority coverage of their policy.
As the plaintiffs correctly predicted, civil authorities initially tried to slow the spread of coronavirus by limiting the size of social gatherings, but many have since ordered the outright closure of service-industry businesses such as bars, restaurants, gyms and movie theaters. Losses due to these government-mandated closures may also trigger civil authority coverage.
3. Pollution exclusions should not apply to coronavirus losses.
The Oceana Grill petition notes that the policy does not include an exclusion due to losses from a virus or global pandemic. However, insurers are preparing to deny coverage for coronavirus losses based on pollution exclusions. These exclusions are designed to exclude coverage for environmental cleanups. A common version bars coverage for the costs of cleaning up or removing “pollutants,” defined to include any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.
Insurers argue that virtually everything is a pollutant, but courts analyzing pollution exclusions have construed them narrowly, noting that the terms “irritant” and “contaminant” are “virtually boundless, for there is no substance or chemical in existence that would not irritate or damage some person or property” and reading the exclusion literally “would negate virtually all coverage.”
These cases also note that pollutants are primarily inorganic in nature, and have held that bacteria was not similar to the listed examples. The use of the term “waste” also implies that the term applies to industrial byproducts, and not organic matter.
4. Policyholders must act now to preserve their claims under property policies.
The past few weeks have spread fear and uncertainty. Yet even in these uncertain times, policyholders can be sure of a few things. First, for many service-industry businesses, the stakes literally could not be higher. As the Oceana Grill plaintiffs note, the restaurant’s closure due to coronavirus represents an existential threat to its survival as a business.
In these bleak times, the same holds true for many bars, restaurants, gyms, movie theaters and other businesses in service industries. Securing coverage under property insurance may mean the difference between making it and filing for bankruptcy.
Second, do not assume that your policy does not cover business losses. When disaster strikes, insurers try to discourage policyholders from filing claims by setting a media narrative that there is no coverage for a given event. Businesses should not be dissuaded from making claims. Don’t take an insurance company’s advice on what is or is not covered.
Insurers sell coverage for all risks, including coronavirus. Don’t let insurers shake their heads and solemnly declare that there just isn’t coverage. As with all advice, consider the source.
Third and finally, policyholders must act now to preserve their claims under their property policies. This requires reviewing the policies and providing the required notice as soon as possible, to stave off insurer claims of late notice. Fighting coronavirus losses by securing property insurance coverage requires immediate action.
 Pet. for Declaratory J., Oceana Grill v. Certain Underwriters at Lloyd’s, London, No. 20-02558 (La. Civ. Dist. Ct. Mar. 16, 2020).
 Id. at ¶ 14.
 Port Auth. of N.Y. v. Affiliated FM Ins. Co., 311 F.3d 226, 231 (3d Cir. 2002).
 See, e.g., Cincinnati Ins. Co. v. Banks, 610 F. App’x 453, 457 (6th Cir. 2015); Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281, 1287 (10th Cir. 2006).
 See, e.g., Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826-27 (3d Cir. 2005) (holding that a genuine issue of material fact existed regarding whether the insured’s property was nearly eliminated or destroyed, or made useless or uninhabitable, sufficient to constitute a “physical loss”); W. Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 55 (Colo. 1968) (holding that fumes from gasoline seeping into the soil under an insured church and rendering it uninhabitable established a “direct physical loss”); Widder v. La. Citizens Prop. Ins. Corp., 82 So. 3d 294, 296 (La. Ct. App. 2011) (holding that dust from lead paint rendering a home unusable or uninhabitable qualified as a “direct physical loss”); Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997), aff’d in part, rev’d in part sub nom. Sentinel Mgmt. Co. v. Aetna Cas. & Sur. Co., 615 N.W.2d 819, 825-26 (Minn. 2000) (“Direct physical loss also may exist in the absence of structural damage to the insured property.”); Farmers Ins. Co. v. Trutanich, 858 P.2d 1332, 1335 (Or. Ct. App. 1993) (holding that odors from a methamphetamine “cooking” lab constituted “direct physical loss” within the meaning of the policy); Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1, 17 (W.Va. 1998) (“Direct physical loss also may exist in the absence of structural damage to the insured property . . . Losses covered by the policy, including those rendering the insured property unusable or uninhabitable, may exist in the absence of structural damage to the insured property.”).
 See, e.g., Port Auth., 311 F.3d at 236; First Presbyterian Church, 437 P.2d at 55; Widder, 82 So. 3d at 296; Trutanich, 858 P.2d at 1335.
 Pet. for Declaratory J., ¶¶ 19-20.
 Centers for Disease Control & Prevention, How COVID-19 Spreads (2020), https://www.cdc.gov/coronavirus/2019-ncov/prepare/transmission.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fcoronavirus%2F2019-ncov%2Fabout%2Ftransmission.html.
 Pet. for Declaratory J., ¶¶ 21, 23.
 Id. at ¶¶ 25, 35.
 Id. at ¶ 31 (“[P]laintiffs expect that more restrictive orders may occur within the next 30 days as they have occurred in other cities around the world, including New York City, New York, where restaurants have been ordered to close . . .”).
 Id. (citing Am. States Ins. Co. v. Kiger, 662 N.E.2d 945, 948 (Ind. 1996)).
 See, e.g., Motorists Mut., 131 F. App’x at 828 (noting that bacteria defied description as a solid, liquid, gaseous, or thermal pollutant because it was a living, organic “irritant” or “contaminant”); Keggi, 13 P.3d at 790 (holding that a pollution exclusion did not bar coverage for injuries suffered from drinking bacteria-contaminated water).
A quick Google search would have businesses believing that there is no insurance coverage for coronavirus losses. Insurance carriers and brokers have seized control of the narrative, and they have done a good job of convincing policyholders that coronavirus claims are not covered. This analysis offers an alternative and correct view — businesses are covered.
There is a frenzy of misinformation about coverage for coronavirus claims. Fortunately, none of this has any bearing on coverage. To get the correct answer, one must read the insurance contract without preconceived notions of coverage. If this is done, businesses are left with many insurance-related options to counter coronavirus-related losses.
This point is illustrated by looking at how insurance policy language addresses three common coronavirus claims: (1) third-party lawsuits, (2) business interruption losses, and (3) event cancellation losses.
1. Third-Party Lawsuits
With coronavirus, businesses are susceptible to lawsuits alleging that they should have done something to prevent injury to persons. The first of these claims was just filed–a lawsuit alleging wrongdoing on the part of a cruise ship company. Just as night follows day, more will follow.
General Liability policies cover allegations of “bodily injury.” If a claimant alleges that he or she was injured, coverage is triggered. Coronavirus lawsuits are classic examples of covered general liability claims.
Insurance carriers, however, are pushing the narrative that coronavirus is a pollutant and therefore excluded from coverage pursuant to pollution exclusions. This is an old concept. In the past, insurers found themselves paying pollution claims, no matter what kind of pollution exclusions they put in their policies. So, they expanded the exclusions to prevent coverage for environmental cleanups.
Insurance carriers now argue that pollutants include any kind of “irritant” and that pollution exclusions apply to almost any claim. For example, if the sun got in a person’s eyes and that resulted in a car crash, insurers would argue that the sun is an irritant, and that the pollution exclusion precludes coverage. Yet, everyone knows that sunshine is not a pollutant. Similarly, if a third party is burned and sues, insurers will argue that fire is an irritant, and that the pollution exclusion precludes coverage. Of course, fire is not a pollutant, and at least one court awarded bad-faith damages where an insurance carrier made this claim. See Winning Bad Faith Coverage Cases at Trial.
Common sense will prevail here as well. Coronavirus is not a pollutant.
2. Business Interruption Losses
Almost certainly, the largest category of losses business will experience as a result of the coronavirus are business interruption losses. Airline flights have been sidelined, people are not going out, and businesses of all kinds are suffering. The narrative insurers push here is an old one: insurers argue that property policies are not triggered unless there is physical injury to tangible property. This narrative was developed after 9/11 to stem payments to businesses suffering huge financial losses.
Based on policy language, though, physical injury is not required. All-risk property insurance policies cover “all risks of physical loss or damage.” This insuring clause addresses two separate things. First, it states that it covers all risks of physical loss. Second, it states that it covers all risks of damage. Damage includes all forms of financial loss. Coronavirus is the risk. If it caused damage in the form of financial loss, this falls squarely within coverage.
There is substantial case law on this issue as well.
Case Example One — A church smelled because gasoline was leaking into the basement. The house was unsafe and smelled so bad that the owner had to move out. The insurer denied coverage, stating that there was no physical damage to the house. The court held otherwise, finding coverage.
Case Example Two – A river meandered, leaving a structure precariously sitting on a riverbank. The structure was fine, but it could not be used because it was unsafe and could fall down. The insurer argued there was no coverage because there was no physical damage to the property. The court ruled otherwise, finding coverage.
Case Example Three – A homeowner rented its house to crack dealers. After the crack dealers left, the home smelled so bad that it could no longer be rented. The home had no structural damage, so the insurer denied coverage. The court disagreed, as the house could not be used as intended.
There are two overlapping and well-developed lines of cases holding that physical injury to property is not required. The first relies on the inability of the property to be used as intended. The second relies on the fact that the property was somehow rendered unsafe. Both lines of cases are directly applicable to coronavirus losses.
In addition, property policies contain numerous other insuring clauses that similarly do not contain a requirement of physical injury to property in order to be triggered. Among them, ingress/egress coverage (covering financial losses when a business is prevented from entering their property) and civil authority coverage (covering losses when the government prevents normal operations).
The leading case on these issues is Fountain Powerboat Indus. v. Reliance Ins. Co., 19 F. Supp. 2d 552 (E.D.N.C. 2000). The Fountain Powerboat Decision is one of History’s Best Insurance Decisions. There, the Fountain Powerboat company of North Carolina had a work slowdown as the result of a hurricane. It pursued relief under their property insurance policy pursuant to an “ingress/egress” provision. Its insurance carrier denied coverage based on an all-too-common insurance industry custom and practice—denying coverage because there was no physical damage to insured property. The court flatly rejected this argument in favor of insurance policy language and awarded Fountain Powerboat the attorney’s fees it incurred to pursue the action against its insurer.
3.Event Cancellation Losses
Every day now, more and more major events are being canceled or postponed because of the coronavirus, including trade association conferences, college and professional sporting events, and concerts. Even a conference on Coronavirus was canceled because of coronavirus. What is missing from the headlines are the myriad of trade associations that need money from events to survive but have been forced to cancel events because of coronavirus.
Event cancellation insurance is commonly triggered when an event is necessarily cancelled, abandoned, curtailed, or postponed. A typical scenario, where an event is cancelled (or postponed) due to coronavirus concerns, falls squarely within coverage. See Event Cancellation Insurance Claim Denials Tips for Recovery.
Yet, insurers are fighting coronavirus event cancellation claims. One argument that insurance companies are making is that an event was cancelled due to fear and panic. Given that policies don’t contain fear or panic exclusions, there is no merit to this argument. Similarly, insurers allege that the events could have proceeded but for the public’s fear and panic.
Not all event cancellation policies are the same. In some situations, insurers argue that the cancellations must result from the “physical or legal inability to proceed” with an event, and short of either a physical barrier preventing the public from entering a hotel conference center or sports arena, or a government order banning any mass gatherings, there is no coverage. Again, the insurers’ position is inconsistent with the policy language. For example, if there is a genuine fear of contracting the virus, this is a “physical inability” to proceed with the event. In addition, many companies have instituted travel bans, making it physically and legally impossible for employees to travel. Also, even if a government recommends that the public not attend mass gatherings (events with over 250 people), this is a form of “legal inability” to proceed with events.
Both of these reasons for denial bring to mind a situation that we are currently addressing. We had a settlement meeting with seven insurance companies scheduled for months. The meeting was to take place in NYC, and the insurers had agreed to be present in person at that meeting. Several days before the meeting, various insurers notified us that they could not attend because of coronavirus. Many had travel restrictions. Others were just unwilling to subject themselves to any additional risk of contracting the virus.
Were these insurers motivated by panic? Should this insurer-scheduled event have gone forward as planned? The insurers said, “No. We won’t attend. We are rational. You need to cancel. Coronavirus is a legitimate reason to cancel.” In other words, events that insurers should attend must be canceled, but all others must go forward.
Unless the insurers learn to be honest about what is going on, their hypocrisy will cost them dearly. Coronavirus cancellations are exactly what event cancellation policies are designed to cover.
The concept of “social inflation” is back in vogue these days among property/casualty industry underwriters and their service providers in trade journals and other media. The term generally refers to the allegedly increasing costs of insurance claims resulting from various aspects of the US civil justice system, including increased third-party litigation funding, lawyer advertising, injured parties’ perceptions of what they are owed, and corresponding jury awards.
Today, insurers are shirking their duties to defend and indemnify insureds caught up in public nuisance litigation extortion, most notably in the opioid litigation. If insurers were truly concerned about the expansion of judge-made law and corresponding erosion of traditional notions of tort causation, they would honor their promises and stand with their customers to defeat these dangerous claims. Muddled thinking about “social inflation” is no justification for refusing the contractual promise to defend claims that undoubtedly may result in covered, albeit unjust, liability.
Indeed, skeptical observers suspect that the hue and cry over “social inflation” is simply cover for underwriters raising rates and restricting coverage. Available data contradict the notion of an industry supposedly “under siege.” For example, the Insurance Information Institute reports net income after taxes in the property/casualty industry in 2018 and 2019 were at the highest level in a decade.
1. Warren Buffett on “Social Inflation”
Today’s commentators on “social inflation” frequently invoke decades-old quotes from Warren Buffett. In the 1970s – before he was the Oracle of Omaha – Buffett raised “social inflation” as an excuse for poor performance. For example, addressing insurance losses in his 1975 letter to shareholders, he wrote: “‘Social’ inflation caused the liability concept to be expanded continuously, far beyond limits contemplated when rates were established – in effect, adding coverage beyond what was paid for.” Although insurers today quote Buffet as an authority equivalent to the Founding Fathers or the Four Evangelists, Buffet’s 1975 statement is wrong as a matter of both contract law and public policy.
Expansions of liability do not, in Buffett’s words, add liability coverage “beyond what was paid for.” Coverage for uncontemplated liability is precisely what liability insurance buyers paid for. Policyholders should continue to enforce their contractual rights to coverage they’ve paid for, and resist industry attempts to restrict coverage based on purported “social inflation” arguments.
2.Expanding Notions of Justice Are the Norm
This is not to deny that the US justice system has from time to time expanded liability beyond what either insurers or insureds likely contemplated when entering contracts. In 1975, Buffett was presumably speaking about asbestos liability. In 1980, environmental liability was expanded with enactment of the Superfund law. Lead paint, toxic mold, tobacco, Chinese drywall, and firearm litigation followed that. The current opioid and revived sexual misconduct litigations are further examples.
Indeed, today US business faces a sustained effort to turn public nuisance into a catch-all tort cause of action to seek a judicial remedy for every societal ill. These public nuisance shakedowns, nominally in the name of governments and the “public good,” and typically led by private contingent-fee lawyers with deep pockets often funded by litigation speculators, eviscerate (among other things) a core requirement of centuries of tort jurisprudence: proving that the defendant caused the alleged harm. Courts have facilitated these shakedowns by going far beyond resolving cases and controversies, and far outside their expertise, to craft public policy in the form of judicial remedies when managing the risks of beneficial but potentially harmful products more properly, under our form of government, should be a legislative and regulatory function.
3.Businesses Buy Insurance Specifically to Transfer Risk, Both Known and Unknown
The past and present expansions of liability do not, in Buffett’s words, add coverage “beyond what was paid for.” Coverage for uncontemplated liability is the entire point of liability insurance, which is to transfer the risk of liability, with the insurer accepting the risk that resources available from premium and investment return from an entire pool of insureds will be enough to pay claims.
In the typical contract, an insured buys an insurer’s promise to pay “those amounts the insured becomes legally obligated to pay as damages” resulting from a claim. The grant of coverage – “what was paid for” in Buffet’s words – is just that: ALL damages that the insured is liable to pay, subject only to exclusions and policy limits. Of equal or greater importance, policyholders also pay for the insurer’s promise to defend against “any suit” asserting claims that are potentially or arguably covered by this grant, even if the suit is based on groundless, false or fraudulent allegations.
From a public policy perspective, the socially beneficial aspect of risk-spreading through insurance is only realized when the risk is actually spread, and insurers honor their promises and do not abandon their insureds. If insurers collect premium from businesses providing legal, useful and in many cases government-approved and -regulated goods and services, only to turn around and deny coverage when courts impose retroactive liability, then the insurance enterprise is not beneficial, it’s a harmful tax on productive businesses.
Policyholders, with the assistance of experienced coverage counsel, should resist insurer efforts to deny or restrict coverage on the basis of “social inflation.”
In this blog post, Mark Miller addresses two common mistakes policyholders make with property insurance claims.
To provide context, it is important to understand how corporate property insurance claims are typically handled. Because property insurance claims present a series of complex legal issues, insurance companies typically obtain legal advice on larger property claims from inception. Policyholders, on the other hand, typically do not. Policyholders typically engage an insurance broker or public adjuster to handle claims on their behalf. Brokers and public adjusters know insurance industry custom and practice, and they know how to handle claims in accordance with long-established understandings with insurance companies regarding what insurers will and will not pay. Legal involvement on the policyholder side, if at all, only comes into play down the road when the insurance company refuses to pay what they owe.
It is only at this point, perhaps a year or more into the claim, that policyholders are advised by counsel about the legal implications of their claim, including mistakes that were made. This video illustrates two common mistakes.
Proof of Loss Deadlines
The first mistake centers around proof of loss deadlines. A proof of loss is a sworn statement outlining the loss. Many property insurance policies state that a proof of loss must be filed within a specific period of time, such as 90 days from the date of loss. With complex corporate claims, it is impossible to assess a loss within 90 days, let alone swear under oath that the stated amount is the full amount of loss suffered. Moreover, business interruption and other “time element” losses often continue long after the proof of loss deadline has expired. So, policyholders are faced with an impossible-to-meet deadline.
For this reason, insurance industry custom and practice is to ignore proof of loss deadlines. When asked if a proof should be submitted, insurance adjusters will likely say that there is no need to submit a proof of loss until the loss has been agreed to by the policyholder and the insurer. In fact, if a policyholder offers to submit a proof of loss before they are asked to do so by the insurance company, the insurance company will treat the unrequested proof as a “hostile proof.” The word hostile says it all. In the insurance industry, irrespective of what the policy says, policyholders are instructed not to submit proofs of loss unless and until the insurance company asks them to do so.
The mistake with respect to proofs of loss arises because policy language and industry custom and practice are different. Although most jurisdictions will not require a policyholder to submit a proof of loss in this typical situation, the law is far from uniform. The solution to the problem, as addressed more fully in the video, is really quite simple, request an extension.
Suit Limitation Deadlines
The second mistake that policyholders make is by being lulled into thinking that the insurance company will pay the claim and missing a limitation on filing suit. Many property insurance policies have a limitation on filing suit against the insurance company. Commonly, these limitations are one or two years. Problems arise because complex property insurance claims are not typically resolved in this time period. In fact, in some situations, business interruption losses can continue for two years or more. Hence, it makes no sense for a policyholder to preemptively file suit if the parties are still working out the claim.
For these reasons, industry custom and practice is to ignore suit limitations deadlines. Typically, insurance carriers are negotiating claims, and cutting checks for losses, long after the suit limitations period has expired.
The issue comes up only when the insurance carrier decides they are done paying the claim. At that point, their counsel sends the policyholder a letter stating that the insurance company is finished paying, and that there is no recourse, given that the suit limitations period has expired.
The solution, as addressed more fully in the video, is to obtain a suit limitations extension from the carrier.
Please watch the video to learn more, or Contact us if you have any questions.
The spread of the coronavirus from Wuhan, China, and the ensuing reactions from governments and corporations are causing tremendous disruption in the global supply chain, especially among the world’s largest jet and auto makers, as well as technology and telecom giants. Each day brings additional stories of compounding losses for businesses operating in and around Wuhan, and those dependent on them as either suppliers or customers.
Companies who are suffering interruption of their business should carefully review business interruption insurance policies to see if they may be covered for increased costs and loss of revenue resulting from the virus outbreak. There are many different variations in policy language, but many forms extend coverage to losses arising from : (1) closure of “dependent properties” in the chain of supply or distribution; (2) denial of access to business premises by civil authorities, sometimes even in the absence of direct physical loss or damage; (3) loss of ingress or egress to covered premises; (4) loss of attraction extensions; and (5) contagious disease. See Business Interruption Claims Best Practices; Best Insurance Recovery Decisions: Fountain Powerboat.
Crisis teams working to navigate the virus situation should assume responsibility for reviewing their property and business interruption policies to assess potential coverage for their losses and provide notice under the applicable policies. We can help.
The question of whether Lloyd’s of London is still relevant in today’s insurance market is a good question for corporate policyholders to consider. On the one hand,Lloyd’s plays an important if not crucial role in the U.S. market. They are known to ensure risks that others will not touch. They are also known for using innovative policy language.
However, Lloyd’s of London is not an insurer. Rather, it is a marketplace for underwriting risks. For a typical Lloyd’s of London policy, there is no single entity insuring the risk. Rather, underwriters of various corporate and non-corporate structures take portions of the risk. Each underwriter gives its two cents on what they want to pay. If there may be no lead appointed, it is not uncommon for underwriters to disagree as to how a claim should be paid or defended. This can lead to chaos.
When this chaos is imposed on cases filed in what is known as the “rocket docket,” such as that employed in the Eastern District of Virginia, all hell breaks loose. There, cases go from filing to trial in less than 12 months. To say that defense decisions in the rocket docket need to be made quickly is an understatement. Recently, we had the opportunity to gauge Lloyd’s of London’s performance in this setting, and they did not perform admirably.
Please watch the video to learn more, or Contact us if you have any questions.