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Vol. 3, Iss. 4
March 5, 2014
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Last year I addressed the Indiana Court of Appeals’s April 2013 decision in Hammerstone v. Indiana Insurance Company, holding that products coverage was owed under a policy that contained an exclusion for the “Products–Completed Operations Hazard.” How can this be?, you ask. Because the declarations page provided a products/completed operations aggregate limit of $2,000,000. The court found this to be an ambiguity and concluded that the policy offered products coverage.
That decision served as a strong warning to insurers that, if they do not intend to provide coverage for products liability, then it is critical that they not include a Products Aggregate limit on their Dec Page. That seems simple enough.
Another court – this time a supreme court -- just issued the same warning to insurers in Scentry Biologicals, Inc. v. Mid-Continent Casualty Co., No. DA 13-0415 (Mont. Feb. 28, 2014). Given the significant financial consequences of this policy issuance error, and seeming ease to prevent it, it is worth addressing the Supreme Court of Montana’s decision in Scentry Biologicals and repeating the warning.
Scentry is the manufacturer of NoMate, a pest control product designed to protect various agricultural crops from destructive insects by thwarting their mating activities. Applewood Orchards used NoMate on its apple crop in spring and summer 2006 for protection against codling moths. Applewood subsequently discovered significant moth damage. Applewood pursued a tort action against Scentry and the product’s distributor. Coverage was sought from Mid–Continent, Scentry’s general liability insurer, for both Scentry and the distributor.
Putting aside a host of issues – trial and settlement and additional insureds and a lower court opinion and other coverage issues -- because they are not relevant to the point to be made, the case went to the Montana Supreme Court on several issues, including the following one.
Mid–Continent argued that Scentry did not establish the existence of Products–Completed Operations coverage in the lower court because the first page of its 2–page Dec Sheet indicated that Scentry paid no separate premium for Products–Completed Operations coverage. Thus, Mid–Continent maintained that Scentry had no coverage for products. Scentry countered that the second page of the Dec Sheet expressly indicated a $2 million limit of insurance for “products-completed operations aggregate.” The trial court found that Scentry’s policy from Mid–Continent provided $2 million in both CGL and Products–Completed Operations.
The Supreme Court of Montana agreed. The court set out a visual representation of the Dec Sheet to show the discrepancy between there being no products premium and a products aggregate limit. The Montana high court concluded that the lower court got it right when it held that the Mid–Continent policy provided Products–Completed Operations coverage to Scentry: “Although page one of the Mid-Continent policy does not reflect the payment of a premium for PCOH coverage, page two of the declarations specifically provides limits of insurance in the sum of $2 million for ‘Products–Completed Operations Aggregate Limit.’ It is well-established that ambiguities in an insurance policy are construed against the insurer.”
While I did not study every aspect of the case, as it was not relevant for the purpose intended, it appears that the erroneous inclusion of a Products–Completed Operations aggregate limit on the Dec Sheet cost the insurer in excess of $1 million in products coverage for which it alleged that it received no premium and had no intention to provide.
I’m not sure how this happens. Perhaps because products coverage is so prevalent on a CGL policy that some insurers pre-fill a products aggregate limit on the Dec Page. But, if that’s not the case, then, perhaps, because of the prevalence of products coverage, a products exclusion gets lost at the time of preparing the Dec Page. Either way, or some other way, it is an administrative error with large potential consequences that seems like it should be preventable.
As I concluded in the April 24, 2013 issue of Coverage Opinions, Hammerstone, and now Scentry Biologicals, demonstrate a huge risk for insurers that is inherent in their business. An insurer accepts a few thousand dollars from a party in exchange for the possibility of having to turn around and pay that party several million dollars. But the insurer knows this going in. It accepts this seemingly odd arrangement because it has concluded that the event that is required to cause such mismatched exchange of capital has a low probability of taking place. But, as Hammerstone and Scentry Biologicals demonstrate, with this arrangement also comes the risk that the insurer will have to write a big check, in exchange for a small one, that was never in the cards. All that was needed for this wildly bad deal to take place for Indiana Insurance and Mid-Continent were a few unintended key strokes.
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Vol. 3, Iss. 4
March 5, 2014
Randy Spencer’s Open Mic
I’m Not Lion: The Coverage Case
Involving Cats That You Must Read
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I really dislike cats. It has got to be one of the worst musicals ever. That it came from Lloyd Webber just serves as evidence that even the greatest are entitled to an off day now and then. That it is one of the most successful Broadway and West End musicals ever just serves as evidence that P.T. Barnum was right. Thankfully “Memories” was performed in Act I so I could leave before Act II.
As for cats and coverage, there are very few cases involving this combination – as in, almost none. Dogs on the other hand – you can’t even count them all. There are no doubt lots of reasons for this disparity owing to the many differences between dogs and cats.
The last issue of Coverage Opinions looked at some coverage cases involving dogs. In particular, claims involving show dogs that bite. In the amazing coincidence category, just as that issue of CO was being put together, the California Court of Appeal issued an opinion addressing liability coverage for an incident involving cats. And not just any opinion, but one with wacky facts that makes for very interesting reading. You’ll see. While Coverage Opinions is not bound by any sort of equal time requirements, like television networks, it only seemed fair to follow up last issue’s dog article with one involving cats.
Abrahams v. Allstate Ins. Co., No. B244642 (Cal. Ct. App. Feb. 6, 2014) goes like this. Leslie Abrahams and Hal Gosling, husband and wife, undertook to protect the feral cat population at California State University, Long Beach by maintaining feeding stations around the campus. Scott Miller lived adjacent to CSULB and frequently walked, jogged and rode his bicycle through the campus with his dog and young children. Allegedly, one day in 2005, Abrahams stopped Miller on campus and demanded that he not walk his dog. Miller ignored the demand and four years later Abrahams confronted Miller and his son as they walked their dog on the campus. She berated Miller, told him she represented CSULB and he was not welcome on the campus with his dog. Abrahams threatened that “the campus cat club was going to ‘take care of him.’”
Let me repeat that line here because I don’t tire of hearing it: The campus cat club is going to take care of you.
Wait, it gets better. The court put it this way. “Over the next year, on multiple occasions, Abrahams and Gosling drove their car toward Miller and his sons in a threatening manner as they walked or biked with their dog on the CSULB campus. Abrahams and Gosling repeatedly followed and stared down Miller and his sons and videotaped Miller and his family at their home and at CSULB. Abrahams also charged up to Miller in a post office parking lot, berated Miller’s wife and son as they exited a local Sears store, and contacted Miller’s son’s daycare provider to report that Miller was emotionally unstable, a danger to the community, and a threat to the daycare provider’s cats.” Someone was getting into the catnip.
Miller sued the cat duo alleging causes of action for invasion of privacy, stalking, intentional infliction of emotional distress and assault. The couple sought coverage from Allstate, their homeowner’s insurer. Allstate disclaimed coverage and litigation ensued. The trial court granted Allstate’s motion for summary judgment on the basis that Abrahams and Gosling’s alleged conduct was deliberate and no accident that triggered Allstate’s duty to defend. The case went to the Court of Appeal, where the cat lovers coughed up a fur ball.
The couple argued that they did not intend to threaten, frighten or intimidate Miller. They described their motivations as benign and that they lacked knowledge that Miller was emotionally hypersensitive. They also asserted that others would have perceived their behavior to be innocuous. However, the court held that their peaceable motivation did not transform their actions into accidental conduct: “[A]ppellants essentially argue their mistaken belief about Miller’s receptiveness to their deliberate behavior rendered their conduct accidental because they did not anticipate or intend its result. They are incorrect. Miller alleged appellants confronted, berated and threatened him on multiple occasions; drove their car toward him in a threatening manner several times; followed, stared at and videotaped him; and made a negative report about him to his son’s daycare provider. Appellants might not have anticipated this conduct would injure Miller, but their miscalculation did not transform the conduct from deliberate to accidental.”
The campus cat club is going to take care of you.
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Vol. 3, Iss. 4
March 5, 2014
Declarations:
The Coverage Opinions Interview With Gary Zipkin – The Coolest Coverage Lawyer In America
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So many reading this have been experiencing a brutal winter – bone chilling cold and snow storms that just keep coming one after another after another. But before you start complaining about the weather, just realize that it could be so much worse. You are probably not living in Alaska. But Gary Zipkin, coverage lawyer and shareholder at Guess & Rudd, PC, does. With much of the nation in a deep freeze this winter, it made sense to sit down with the coverage lawyer who knows cold better than anyone.
I set out to learn what makes practicing coverage law in Alaska different from the rest of the country. I suspected that there are cases involving moose. I was right about that. But it turns out that that’s just the tip of the iceberg. And who better to explain all of this than Alaska’s Insurance Lawyer of the Year for 2013 according to Best Lawyers.
Gary Zipkin has been practicing coverage law in Anchorage, on the carrier-side, for 40 years. Of course, one doesn’t speak to a coverage lawyer in Alaska without asking the most obvious question. And the answer is – No. He can’t see Russia from his office window. But he can see bald eagles, as well as Mt. McKinley, which is pretty cool – especially when you consider that it’s 175 miles away. Just imagine if he were that close to Russia. Such choice of law problems to deal with.
Gary didn’t start out in Alaska. He attended law school in San Francisco and graduated in 1974. He was convinced during a job interview to come to Alaska to check it out. He made the move and has never left. In fact, he’s still with the same firm that hired him four decades ago.
In an animated phone call that lasted well over an hour, Gary Zipkin told me several things, besides the moose, that make practicing insurance coverage law in Alaska different.
First, what makes practicing law in Alaska unique is, well, Alaska. Gary explained that there are so many things about the state that make it challenging – the weather, its size, topography and inaccessibility of certain communities. Sometimes it is just not so simple to reach a witness or get to a courthouse. Ask yourself, have you ever been stopped from reaching a courthouse because of a vast herd of caribou crossing the road? Have you ever attended a deposition in a place that can only be reached by an air taxi that lands on a dirt road? Insurers located out of state may not always appreciate the challenges that accompany many things that they otherwise take for granted. And while the state is huge, the bench and bar is the exact opposite. You will unquestionably come across the same people in practice again and again.
Another aspect of Alaska that is unique, or not appreciated by many, is that the state, at least certain parts, offers a high risk of a “shocking” plaintiff’s award. I was surprised to hear this. Gary said that, while Mississippi and Alabama are usually discussed as states with a real risk of a runaway jury award, Alaska is just as deserving to be on that list.
This exists mainly in the rural parts of the state. I asked why and Gary gave a few reasons. First, there is a desire to “protect your own” against out of state corporations. But more so Gary believes that it is because people in the rural parts of Alaska often live a “subsistence lifestyle.” Gary meant no disrespect by this. He was simply explaining that such people do not operate in a “cash economy.” They exist by hunting and fishing and may not appreciate the amount of money that they are awarding in a case. Because of this it can be difficult to explain to an unfamiliar insurer that a case that it values at $2,000 could easily result in a $20,000 verdict.
As for some fundamentals of insurance coverage in Alaska, the state has a statute that is modeled after California’s Cumis statute with respect to an insured’s entitlement to independent counsel. That I knew. I asked Gary if Alaska follows California law when Alaska law is silent. He indicated that Alaska is not dogmatic in following California. That I didn’t know. I thought it might be. But no, Gary said, Alaska likes to strike out on its own.
In general, Alaska can be a challenging state for insurers on numerous fronts. Gary provided several examples and pointed to Great Divide Ins. Co. v. Carpenter, 79 P.3d 599 (Alaska 2003) as the place to start if you want to get an appreciation for such challenges. He’s right. Consider what happened there. The court held that a classification limitation exclusion, in a CGL policy issued to a floor covering business (limiting coverage to the insured’s floor-covering installation), did not bar coverage for bodily injuries sustained by a claimant, who was struck by a falling tree that was cut by a sometime employee of the insured, for purpose of obtaining firewood to heat the house that was owned by one of insured’s owners (the business was operated out of the insured’s home and heated with wood stoves). The court concluded that the tree-felling activity was an incidental support activity to the insured’s floor-covering business, so the classification limitation exclusion did not bar coverage. [It is a breathtaking decision.] Gary also explained that the consequences for an insurer’s breach of the duty to defend can be severe and the state offers a variety of harsh and novel penalties for bad faith.
In the end, Gary cautioned that, on account of Alaska’s uniqueness, it is not a place for insurers to traverse without the benefit of someone with local knowledge. While that sounds like a marketing line, Gary wasn’t saying it in that context. He was simply stating fact.
Lastly, Alaska is a “Loser Pays” state. In other words, a prevailing party may recover a portion of its attorney’s fees as costs. That is typically not the case in this country -- unless there is a statute or contract that permits the recovery of attorney’s fees. But Alaska Rule of Civil Procedure 82 allows a prevailing party to recover a portion of its attorney’s fees without the need for statutory or contractual authorization. Gary minced no words about Rule 82 – it is a “disaster.”
Rule 82, he explained, creates constant battles over whether a party qualifies as a prevailing party. While that sounds simple enough, it is far from it. Gary characterized Rule 82 as the most litigated issued in all of Alaska civil law.
While the rule may sound like a good idea – deter frivolous litigation – it does not work that way in practice, Gary explained. Even if a defendant wins, and is entitled to recover its attorney’s fees, the plaintiff may not have the funds to pay. Or the plaintiff will file an appeal and then offer to drop the appeal in exchange for the defendant dropping its Rule 82 request for fees. In the end, according to Gary, Rule 82 is only a weapon for plaintiffs against defendants and not the other way around. Not to mention that, when an insurer pays its policy limit, it must also pay an additional component, on top of the limit, for the plaintiff’s attorney’s fees.
Any place where large herds of caribou may cross the road will surely have some unique cases. Gary pointed to one of his own where a woman was rendered a quadriplegic when a car in which she was a passenger struck a moose carcass and veered off the road and rolled over into a ditch. There are also lots of cases that grow out of the prevalent use of air taxis to travel between villages.
Gary Zipkin summed up life and law in Alaska very simply: “All sorts of strange things happen under the midnight sun.”
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Vol. 3, Iss. 4
March 5, 2014 |
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When putting together Coverage Opinions I often come across interesting cases, articles or general news items that are worthy of note, but not long enough to justify a stand-alone article. So these items usually go by the wayside. Then the idea came to me that if I aggregated these small items they would collectively be the equivalent of a typical CO article. Now these nuggets would not be lost. [Like so many ideas, once you think of it you wonder why it took so long to do so.]
So welcome to the inaugural edition of the Tapas column – where small dishes of insurance coverage news and notes are served. Let’s see if it works. [If it doesn’t, then like so many bad ideas, you wonder why you didn’t see it coming before you tried it.]
West Virginia High Court Finds Single Occurrence (for purposes of a limit and not a deductible, that is)
I often hear that a certain state is “bad for insurers.” Having spent four years researching the law on 21 coverage issues, across 50 states, I do not believe that such a place exists. Are there bad states for insurers on certain issues? Of course. But blanket assertions, that a certain state is just plain bad for insurers, are not provable. Even West Virginia.
While it won’t be enough for insurers to start looking for office space in Wheeling, West Virginia’s highest court held in Kosnoski v. Rogers, No. 13–0494 (W.Va. Feb. 18, 2014) that the emission of carbon monoxide, from a gas boiler furnace, was a single event – despite there being injuries to two families, occupying separate apartments, a leak taking place over the course of an evening and each apartment being exposed to different levels of carbon monoxide. As a result, the policy at issue was subject to a $1,000,000 occurrence limit and not a $2,000,000 general aggregate limit.
Appeals Court Allows Discovery Of Claims Files In Other Claims
In FC Bruckner Associates, L.P. v. Fireman’s Fund Ins. Co. (N.Y. App. Div. Feb 18, 2014), a New York appellate court addressed an insured’s attempt to rebut an insurer’s presumptive prejudice from late notice (addressing Ohio law). At issue was late notice under an excess policy.
The insured sought to rebut the presumption by showing that the insurer, as an excess insurer, would not have become more involved in the handling of the underlying action had it received notice at an earlier time. Thus, the insured sought to review other claim files under the excess policy. The court permitted the discovery: “The requested claims files may shed light on defendant’s excess claims handling practices and policies during the pertinent time period by showing the actions that defendant took when it received timely notice of claims arising under the same excess policy. Therefore, the requested files are material and necessary to plaintiffs' prosecution of this case.”
Sometimes I Don’t Want People To Read Coverage Opinions
It is hard to pay too much attention to those three paragraph decisions, on a discovery issue no less, from the New York Appellate Division. But National Union v. TransCanada Energy USA, Inc., 650515/10 (N.Y. App. Div. Feb 25, 2014) caught my eye because it involved an issue that is near and dear to me and so many Coverage Opinions readers – discoverability of a coverage opinion authored by an insurer’s outside counsel. That’s what the appeals court allowed in TransCanada: “The motion court properly found that the majority of the documents sought to be withheld are not protected by the attorney-client privilege or the work product doctrine or as materials prepared in anticipation of litigation. The record shows that the insurance companies retained counsel to provide a coverage opinion, i.e. an opinion as to whether the insurance companies should pay or deny the claims. Documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so merely because the investigation was conducted by an attorney.” (citation and internal quotes omitted).
Given it’s brevity I can’t say much about this decision. But the issue is an important one and no shortage of cases have addressed it. In general, it is not as cut and dry as the TransCanada court makes it sound. Different scenarios affect whether an outside counsel’s coverage opinion may be discoverable.
Data Breach Article Of A Different Flavor
These days the only thing more prevalent than data breaches are articles about data breaches. Many of these articles focus on the nature of the cyber threats, specific breaches (ala Target), the cyber insurance industry, coverage issues, relevant laws, statistics, costs and projections of the future picture.
A lengthy blog post on The Security Advocate recently focused on an aspect of data breach that has not been talked about much. In “Suffer a Data Breach? Your 1st Call Should Be to … a Lawyer,” the author warns that if your first call after a data breach isn’t too a lawyer, then “every panicked email, detailed investigative report and potentially embarrassing internal memo could be subject to discovery in a subsequent government investigation or lawsuit and wind up in the hands of class action plaintiffs’ attorneys determined to make your organization pay.” But, if you call a lawyer first, the author says, and K&L Gates partner Roberta Anderson concurs, privileges could attach that protect these documents from discovery.
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Vol. 3, Iss. 4
March 5, 2014
Carl Salisbury: Just Say No To Moral Hazard
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If you are not reading the Kilpatrick Townsend “Global Insurance Recovery Blog,” you should be. I particularly enjoyed a recent post from co-editor Carl Salisbury: “The (Mis)Application of ‘Moral Hazard’ to Insurance.”
Carl’s post was spurred on by a recent Illinois state appeals court decision finding coverage for an insured’s violation of the Junk Fax statute. Carl noted that “the court lamented that the decision, however correct under the language of the policy, created incentives for people to violate the TCPA in the future, thus tending to defeat the purpose of the statute. This notion that the existence of insurance makes people behave badly is an old one. It is also wrong.”
The post takes aim at courts that deny coverage on the basis of “moral hazard,” the concept that people are more willing to engage in risky behavior if the cost of doing so will be borne by another. Carl argues that, for many reasons, courts should stop using moral hazard in judicial analysis of the availability of insurance coverage. As he points out, don’t all insurance contracts create a moral hazard that eliminates incentives for good behavior? Yet, he notes, fire insurance policies do not inspire people to play with matches.
The post caught my eye because I’ve always found the moral hazard concept to be an interesting one. On one hand, it has an attractive and common sense appeal, e.g., insure punitive damages and people will be more willing to engage in conduct that they know could cause injury to others. But do people really act like this? Is moral hazard really an accurate portrayal of human behavior? Or is it only convincing in law review articles, written by those in the patches-on-the-sleeve set, for others in the patches-on-the-sleeve set ?
Carl’s post also grabbed my attention because I recalled that a court, in a coverage decision not too long ago, addressed moral hazard and tossed the argument aside. In Beaumont Hospital v. Federal Insurance Company, No. 13-1468 (6th Cir. Jan. 16, 2014), the Sixth Circuit addressed an insurer’s argument that moral hazard should prevent it from having to provide coverage to a hospital for the return of money wrongfully withheld. Otherwise, the insurer argued, it would incentivize wrongful behavior.
But the court did not agree: “While we must consider whether insurance coverage may encourage moral hazards, we have previously addressed this issue, noting that common sense suggests that the prospect of escalating insurance costs and the trauma of litigation, to say nothing of the risk of uninsurable punitive damages, would normally neutralize any stimulative tendency the insurance might have. (citations and internal quotes omitted). Here, in addition to the damage to the reputation of Beaumont, the hospital also faced up to $1.8 billion in damages. The Policy limit for anti-trust claims is $25 million—far less than the threatened $1.8 billion which the plaintiffs sought jointly and severally from Beaumont. No insured is likely to bet on a gain of $25 million against a loss of $1.8 billion.”
Check out Carl Salisbury’s article and, more generally, the Kilpatrick Townsend “Global Insurance Recovery Blog.” There are so many things competing for your screen time these days – blogs, articles, newsletters, news sites, law firm alerts and e-mails from Nigerian Princes. The KT blog deserves your time. It really stands out in a crowded field. |
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Vol. 3, Iss. 4
March 5, 2014
New York’s Highest Court Considers Giving Policyholder Insurance Of Last Resort
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Breaking news! The New York Court of Appeals has more insurance cases than just K2.
On one hand, cases addressing whether a policyholder can sue its broker, for failing to obtain insurance to cover a claim, aren’t coverage cases in the true sense of the word. They do not address whether an insurer is obligated to provide coverage, under certain policy provisions, for a specific loss that took place. That being so, it is easy to overlook such cases if your focus is on judicial opinions addressing insurance coverage.
But it could also be said that cases addressing broker liability are nothing short of coverage cases. After all, if a policyholder fails to obtain any, or adequate, insurance from its own insurer for a claim, and, if its insurance broker is legally responsibility for the coverage deficiency can be established, then the broker’s errors and omissions policy may fill the void. Thus, the broker’s errors and omissions policy can sometimes be an insured’s policy of last resort. When you look at it this way, a broker liability case is a coverage case with a different name.
Even if broker liability cases are designed to get the insured to the same place as a traditional coverage case, I still don’t follow them that closely. But sometimes you have to stand-up and take notice of a broker liability decision. Sometimes such cases simply can’t be ignored – like when they are from the New York Court of Appeals and especially when the court decides that the policyholder may be able to hold its broker liable. This is Voss v. Netherlands Insurance Company, No. 11 (N.Y. Feb 25, 2014). [Indeed, the last time I addressed a broker liability case was in the December 19, 2012 issue of Coverage Opinions -- American Building Supply Corp. v. Petrocelli Group, Inc. This decision was from the New York Court of Appeals and the court decided that the policyholder may be able to hold its broker liable.]
Deborah Voss operated two modeling agencies at a building on Henry Clay Boulevard in Liverpool, New York. In 2004 Voss met with a representative of CH Insurance Brokerage Services (CHI), Joe Convertino, Jr., to discuss insurance coverage for the premises and her two companies. The court described their initial meeting as follows: “[T]hey discussed property insurance, professional liability coverage and business interruption insurance. Convertino asked Voss to disclose sales figures and other pertinent information to enable him to calculate an appropriate level of business interruption coverage for her companies. According to Voss, Convertino also represented that CHI would reassess and revisit the coverage needs as her businesses grew.”
Convertino ultimately recommended a policy with The Netherlands Insurance Company that afforded $75,000 per incident in coverage for business interruption losses. “When Voss questioned whether the $75,000 limit was adequate, Convertino allegedly assured her that it would suffice based on the condition of the building as well as the size of her businesses. According to Voss, Convertino also averred that he calculated the level of coverage at a threshold level and reemphasized that, each year, CHI ‘would take it up as the business evolved.’ As a result, Voss accepted Convertino’s recommendations and paid the premium for the Netherlands policy. No claims under the Netherlands policy were made while the businesses were located at Henry Clay Boulevard.”
In 2006 a company that Voss controlled purchased a building on First Street in Liverpool. The new building contained more than twice the square footage of the previous location. Voss moved the modeling agency to the new building and opened two new businesses there. After Voss discussed the move and the new business arrangements with Convertino, CHI renewed the Netherlands policy with the same $75,000 business interruption limit for the new location and entities.
Voss suffered a water damage loss in March 2007 on account of a roof leak. The damage disrupted her business operations and a roofing contractor was retained to replace the roof. The following month the new roof failed, resulting in far more extensive water damage to both floors of the premises. All three of Voss’s businesses were required to close for various periods of time. Voss recouped only $3,197 for the first loss and $30,000 for the second loss under the Netherlands policy.
In the spring of 2007, Voss met with another CHI representative, Carrie Allen, to discuss the renewal of the Netherlands policy. Voss received a proposal indicating that the business interruption coverage would be reduced from $75,000 to $30,000. She asserted that she questioned Allen about the reduction and Allen’s response was that she “would take a look at it.” Voss did not follow up and when the Netherlands policy was renewed in April 2007 it reflected a per occurrence limit of $30,000 in business interruption coverage. In February 2008, the roof failed a third time, causing significant damage to the premises and further disrupting Voss's businesses. In May 2008, while the insurance claims stemming from the third loss were still pending, Voss commenced an action against CHI, Netherlands and the roofing contractor.
Putting aside how the case was resolved by the trial court and Appellate Division, the issue before New York’s highest court was this: Voss alleged that a special relationship existed with CHI and that CHI had negligently secured inadequate levels of business interruption insurance for all three losses.
First, the court addressed an insurance broker’s duty of care: “As a general principle, insurance brokers ‘have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage’. Hence, in the ordinary broker-client setting, the client may prevail in a negligence action only where it can establish that it made a particular request to the broker and the requested coverage was not procured.”
Voss did not allege that she specifically requested higher business interruption policy limits. Thus, she was not proceeding against CHI under a common-law theory of liability, but, rather, on the basis of the existence of a “special relationship.” “Where a special relationship develops between the broker and client, we have also indicated that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. In Murphy [v. Kuhn, 90 N.Y.2d 266 (1997)], we recognized that ‘particularized situations may arise in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law’ and that the question of whether such additional responsibilities should be ‘given legal effect is governed by the particular relationship between the parties and is best determined on a case-by-case basis.’”
The Voss court noted three exceptional situations that may give rise to a special relationship, thereby creating an additional duty of advisement: “(1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.”
It is important to note that Voss was a summary judgment decision. The court did not decide whether a “special relationship” existed. Rather, the court’s decision was that CHI did not satisfy its burden of establishing the absence of a material issue of fact as to the existence of a special relationship. To the contrary, the court described the possible formation of a “special relationship” on the basis of the following: “[V]viewed in the light most favorable to plaintiffs, the evidence suggests that there was some interaction regarding a question of [business interruption] coverage, with the insured relying on the expertise of the agent. Voss testified that she and Convertino discussed business interruption insurance from the inception of their business relationship. She asserts that he requested sales figures and other relevant data in order to calculate the proper level of coverage. When Convertino later returned with a proposal that included $75,000 in business interruption insurance, Voss avers that she questioned that amount and that Convertino assured her that it was adequate based on his review of her business finances as well as the layout of the building. Moreover, although the $75,000 per occurrence limit was originally placed in 2004, before plaintiffs moved to 105 First Street and expanded their businesses to include a restaurant and catering operation, Voss testified that Convertino repeatedly pledged that CHI would review coverage annually and recommend adjustments as her businesses grew.”
The court concluded that the possibility existed that Voss relied on CHI’s expertise in calculating the proper level of business interruption coverage during the relevant time frames.
The Voss court was quick to point out that special relationships in the insurance brokerage context are the exception and not the norm. However, given that brokers are in the business of providing service to their insured-clients – and use high levels of service as a selling point and competitive advantage -- it is not inconceivable that a close working relationship can develop between brokers and their clients that leads to “a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.”
When you consider that the test for whether a “special relationship” exists is handled on a case-by-case basis, i.e., there are no bright lines, brokers need to be sure that, if their client relationship is moving into the “special relationship” category, they recognize the obligations that come with that. |
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Vol. 3, Iss. 4
March 5, 2014
High Court Provides A Warning On The Wishy-Washy Disclaimer Letter
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When it comes to the rules surrounding the issuance of a disclaimer letter, New York is very unique. So, on one hand, the New York Court of Appeals’s decision in QBE Insurance Corp. v. Jinx-Proof, Inc., No. 25 (N.Y. February 18, 2014) could be seen as one whose applicability is limited to the Empire State. But the decision in fact offers a valuable lesson that is also relevant to the other 49.
At issue in Jinx-Proof was a disclaimer letter for a claim involving injuries sustained in an incident in the insured’s bar. An employee of the bar allegedly threw a glass at a customer’s face. The important point, for purposes of discussion here, is that the insurer issued disclaimer letters that the majority stated had “some contradictory and confusing language.” In general, the letters stated that the insurer was disclaiming coverage but they also contained reservation of rights language. The dissent concluded that such language “simply cannot serve to properly advise an insured of his rights and remedies under the policy.”
While the insurer prevailed, and its disclaimer was found to be effective, Jinx-Proof highlights an important point. If an insurer is intent on disclaiming coverage, it should say so in unequivocal terms. Time and time again I see letters that are intended to serve as disclaimers, but use language that contains equivocation in making that point. For example, the insurer states that it is disclaiming coverage and then goes on to state that the exclusion that is the basis for the disclaimer “may apply.” Or, as in Jinx-Proof, the insurer states that it is disclaiming coverage and then reserves its rights to apply the relevant exclusion.
This is what I call the wishy-washy disclaimer. If an insurer is disclaiming coverage, and especially a duty to defend, where it will not be retaining counsel, then it should say so using language that makes that point clearly and beyond doubt. If a decision to disclaim coverage is being made, it is because coverage is not owed – not because it “may not” be owed. After all, if coverage “may not” be owed, then it may also be owed. And the possibility of coverage being owed is what triggers a duty to defend in most states. |
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Vol. 3, Iss. 4
March 5, 2014
Just How Many Cyber Policies Are Floating Around Out There?
(Not Nearly As Many As You Are Being Told)
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Sometimes there are questions for which nobody knows the answer. And sometimes there are questions to which I know the answer but wish I didn’t – like how many Girl Scout Thin Mint cookies I ate last night.
One question in the Tootsie Roll Tootsie Pop category is how wide-spread are cyber or data breach insurance policies? There is one answer to this question that has been put forth: 31% of U.S. companies have such policies. This number comes from a 2013 report prepared for Experian – the people in the credit score and identity theft protection business. This number has been cited in articles appearing in The Financial Times (February 21, 2014) and The Wall Street Journal (December 3, 2013) and countless other stories on the web.
Looking at another source, an unnamed insurer participant, at a U.S. Department of Homeland Security cyber insurance workshop in October 2012, stated that only about 25% of companies have a cyber policy. [The report from this Homeland Security cyber insurance conference is interesting. If you poke around on the internet you’ll find it. But warning – you must remove your shoes to be allowed to read it.] A Law360 article on February 21st cited to a cyber lawyer’s conclusion that 25% of the property – casualty market has purchased cyber coverage. According to the Insurance Information Institute, the net written premium in 2012 for the property-casualty section of the insurance industry (auto, home and commercial) totaled $456 billion.
If Experian’s 31% conclusion is the right number, then of the pizza place, bagel store and burrito shop in the strip center near my house, one of these three businesses has an insurance policy to protect against the various risks of a data breach or cyber attack. The moon is more likely made of cheese. I decided to take a closer look at the Experian report -- in other words, the report itself and not the media portrayals of it. My conclusion: The Experian report has led to false impression about the current take-up rate of cyber or data breach insurance policies.
According to the U.S. Census Bureau’s 2011 figures (the latest I could find on their website), there are about 5.7 million firms in the United States. To keep it simple, using six million firms for 2013 (which seems reasonable), then a 31% take-up rate means that two million of them have cyber polices. The Financial Times cited to a June 2013 report from a risk consultant that estimated that the annual gross written premium for cyber policies was $1.3 billion. Doing some back of the envelope math means that the average annual premium for each of these two million cyber policies is $650. But according to the report prepared for Experian, of the 43% of respondents that have no plans to purchase a cyber policy, 52% cited premiums being too high as a reason. Not to mention that an average premium of $650 -- about what I pay per year for veterinary insurance for Barney my dog -- seems low considering how hard many insurers are working to get a toe-hold on the cyber insurance market.
My sense is that, if 31% is the right number of companies that have a cyber policy, it is 31% of a certain type of company and not 31% of ALL U.S. companies across the board, as is being portrayed. Let’s take a look at the Experian report and how it arrived at 31%.
First, the Experian report – “Managing Cyber Security as a Business Risk: Cyber Insurance in the Digital Age” (August 2013) -- is really one that was independently prepared by Ponemon Institute LLC for Experian. According to the report, Ponemon is “dedicated to independent research and education that advances responsible information and privacy management practices within business and government. Our mission is to conduct high quality, empirical studies on critical issues affecting the management and security of sensitive information about people and organizations.” For simplicity, I’ll refer to the Ponemon report as the Experian report.
How large was the sample size for the survey that was conducted to reach the 31% conclusion? Ponemon started with a random sample of 18,829 “experienced individuals involved in their companies’ cyber security risk mitigation and risk management activities in various-sized organizations in the United States.” 957 respondents completed the survey. After screening and reliability checks removed 319 surveys, the final sample was 638 surveys.
Of these 638 surveys, a whopping 86% were from companies with a global head count of 500 or more employees. Compare this with the percentage of all U.S. firms that have 500 or more employees, which is three-tenths of one percent according to the census folks. U.S. companies with fewer than twenty employees make up 90% of the total. Given the gargantuan difference between the size of the Experian companies, and U.S. companies in general, it is inconceivable that 31% of these very small companies – many probably just trying to make ends meet -- have a cyber policy. Any comparison between these two groups is apples to washing machines.
The Ponemon survey asked if the respondent company, over the past 24 months, had experienced one or more cyber attacks that infiltrated the company’s networks or enterprise systems resulting in the loss or theft of 1,000 or more records. The number of respondents that answered yes was 56%. Of these companies, 60% pegged their out of pocket cost of the attacks at between $1 million and $25 million. So it is hardly a surprise that, of the companies that experienced a data breach, 70% said that such breach increased their interest in purchasing cyber insurance.
You do not need a degree from MIT to see that it is very hard to say that 31% of ALL U.S. companies have cyber policies, as the Experian report’s conclusion has been described. Not even close. The actual across the board number has to be many, many multiples fewer. All that can be said about the Experian report is that 31% of mostly the largest companies in the country, half of which have already experienced a data breach, have a cyber policy.
None of this is to say that there is anything wrong with the Experian report. Its conclusion, that 31% of huge companies, half of which have already been stung by a data breach, have a cyber policy, sounds entirely reasonable. The authors of the Experian report are quick to point out that there are limitations in it. Among other caveats, they state that “[t]here are inherent limitations to survey research that need to be carefully considered before drawing inferences from findings.”
The problem with the Experian report is not its conclusion, but that such conclusion has been applied too broadly and then treated as if it were written on stone tablets. It reminds me of Y2K. Someone was the first to say that airplanes may fall out of the sky at the stroke of midnight on January 1, 2000. That possibility was then continuously repeated in article after article after article addressing the Year 2000 risks.
While the number of U.S. companies that have a cyber policy may be elusive, this much can be said with certainty. Based on the recent data breach at Target, and other widely-reported breaches, the number of policies can only go in one direction. The Target data breach was the equivalent of ten free Super Bowl ads for insurers selling cyber policies.
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Vol. 3, Iss. 4
March 5, 2014
Responding To A Reader And Taking Another Look At Lipsky v. State Farm
(Emotional Injury As Bodily Injuy)
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In the last issue of Coverage Opinions I addressed the Pennsylvania Supreme Court’s recent (and somewhat under the radar) decision in Lipsky v. State Farm, addressing the all-important question whether emotional injury qualifies as a sufficient injury for purposes of triggering “bodily injury” coverage. Pennsylvania was sorely in need of a high court decision on this issue. The existing Pennsylvania cases were a hodgepodge of federal and state decisions.
The Supreme Court’s decision was that the Justices eligible to vote were equally divided. As a result, the court ruled that, by operation of law, the Superior Court’s decision was affirmed.
Based on this decision, I concluded that “Pennsylvania now has much needed Supreme Court authority on the question whether emotional injury qualifies as a sufficient injury for purposes of triggering ‘bodily injury’ coverage.” In particular, Pennsylvania had now joined the majority of courts nationally that hold that emotional injury, when accompanied by physical manifestation, qualifies as “bodily injury.”
I heard from a Coverage Opinions reader who took issue with my conclusion that Lipsky is now the law in Pennsylvania. He informed me that, in the case of a 3-3 affirmance, the Supreme Court’s decision becomes the law of the case but does not have precedential value and is not binding on other cases.
I know that lawyer who sent me this e-mail and he’s a very smart guy. The analysis he sent me certainly sounded persuasive so I didn’t look into it further. As a smart guy, and one that has been around a long time, I give him every benefit of the doubt that Lipsky is technically not the law in Pennsylvania. But technical and practical are two different things.
It certainly seems likely that the practical effect of Lipsky is that it will be treated as the law in Pennsylvania and not simply the law of the Lipsky case. After all, the existing Pennsylvania cases, on the emotional injury as bodily injury question, were a hodgepodge of federal and state decisions. Second, the Superior Court’s decision, that emotional injury, when accompanied by physical manifestation, qualifies as “bodily injury,” is the majority rule nationally. So it’s not as if the rule adopted by the Superior Court, and affirmed by the Supreme Court in a 3-3 fashion, was some crazy outlier. For these reasons, I suspect that the practical effect of Lipsky is that it will be treated as the law in Pennsylvania. I appreciate being told that there’s more to Lipsky than I realized.
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