California Corner: Loss of Use under Commercial General Liability Insurance Policies Includes the Inability to Use a Property in a Particular Manner

Julia K. Holt

Most commercial general liability (“CGL”) policies contain standard, insurance industry-drafted language regarding an insurer’s duty to defend and indemnify its insured. The language typically states something like, the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of . . . ‘property damage’ to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ seeking those damages.” Commercial General Liability Insurance Policy Form No. CG 00 01 04 13, § I, Coverage A.1.a. (Insurance Services Office, Inc. 2012). “Property Damage” is defined as “[p]hysical injury to tangible property, including all resulting loss of use of that property” or “[l]oss of use of tangible property that is not physically injured.” Id. at § V, ¶ 17.a and b.

The second definition of “property damage” provides coverage when the allegations do not amount to physical injury of tangible property. However, insurers often attempt to strictly narrow the coverage available by arguing that certain types of lost use are not covered because they are merely the loss of economic privileges that accompany the property, such as the right to hold a liquor license or to use the property a certain way via a permit. In other words, insurers often argue that “loss of use” of tangible property requires the total loss of all uses on the property, not merely some uses. The California Court of Appeal recently rejected this argument. See Thee Sombrero, Inc. v. Scottsdale Ins. Co., 28 Cal. App. 5th 729, 239 Cal. Rptr. 3d 416 (2018). Continue reading “California Corner: Loss of Use under Commercial General Liability Insurance Policies Includes the Inability to Use a Property in a Particular Manner”

Insurers Seize on Kokesh Ruling to Disclaim Coverage for SEC Disgorgement

Justin F. Lavella and Alexander H. Berman

In April 2017, white collar and securities attorneys, as well as potential defendants, cheered the Supreme Court’s unanimous opinion in Kokesh v. SEC, which held that civil disgorge­ment, when imposed as part of a Securities and Exchange Commission (“SEC”) enforcement proceeding, is a “penalty” and therefore subject to a five-year statute of limitations.[1] At the time, Kokesh was hailed as limiting the size of future dis­gorgement awards, in some cases dramatically. However, the court’s categorization of SEC disgorgement as a “penalty” may have much wider ripple effects that could jeopardize billions of dollars in potential future insurance recover­ies. This ripple effect first manifested itself in J.P. Morgan Sec., Inc. v. Vigilant Ins. Co., where New York’s intermediate appellate court recently held that an SEC disgorgement settlement was no longer a covered “loss” under the defendant’s insurance policy, because Kokesh recategorized such disgorgements as non-covered “penalties.”[2] Continue reading “Insurers Seize on Kokesh Ruling to Disclaim Coverage for SEC Disgorgement”

Insurance Coverage for Hurricanes: Insurers May Dispute “Causation”

Jared Zola, Linda Kornfeld, John E. Heintz, and Alan Rubin

Like the 2017 Atlantic Hurricane season before it, the 2018 season brought devastating storms to the United States. A prime example: One of the most powerful hurricanes on record to hit Florida’s Panhandle wreaked havoc in October 2018 and left a trail of devastation in its wake as it weakened to tropical storm status but still brought large-scale destruction to southeastern states.

Hurricane Michael made landfall on October 10 approximately 20 miles southeast of Panama City, Florida, with biblical 155 mph sustained winds, violent waves, and heavy rain. The extent of the damage in Florida is still being evaluated, but it is extensive to the naked eye. Two hospitals were evacuated. Many homes were destroyed, power lines were downed, cars and trucks overturned and destroyed.

It took weeks before roads were cleared and electricity was fully restored. Even once businesses reopened, the storm’s destruction prevented employees from traveling to work. In addition, municipalities reported decreased tax revenues from business closures. The economic impact of storm-related losses for businesses and municipalities combined will be significant. Continue reading “Insurance Coverage for Hurricanes: Insurers May Dispute “Causation””

Insurer Liability for Retained Counsel’s Malpractice

Frank M. Kaplan

The Hypothetical Facts

Take the following hypothetical: A California company is sued in the Los Angeles Superior Court for personal injuries suffered by the driver of a vehicle that was injured in a crash involving the company’s car. The company has insurance for bodily injury liability. Its insurance company, however, does not believe there is coverage and denies that it has any duty to indemnify its insured. The insurer agrees, however, that it will defend the insured subject to a reservation of rights.

The insurance company retains a lawyer employed by one of its panel firms. The lawyer has litigated personal injury suits for 15 years and appears, at least outwardly, competent to handle the insured’s case.

It turns out, though, that the retained lawyer does a very poor job of defending the insured, failing to take or follow up on critical discovery and missing various deadlines. The insurance company is aware of the lawyer’s incompetent performance, but does nothing about it. As the case approaches trial, the insured settles the case, using $250,000 of its own money and a small amount begrudgingly offered by the insurer. Continue reading “Insurer Liability for Retained Counsel’s Malpractice”

California Corner: California’s Bar on Coverage for Willful Acts under Insurance Code Section 533—Don’t Assume It Applies

David A. Thomas and Linda Kornfeld

Like a number of states, California prohibits insurers from indemnifying policyholders for liability based on intentional conduct that was committed with the intent to cause harm, although it does not bar a defense against such claims. California’s public policy is codified in Insurance Code Section 533, which provides: “An insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.”

A significant body of law has elucidated the rules for application of Section 533. Reckless or grossly negligent conduct generally does not trigger application of the statute.[1] Nor, with very limited exceptions, does the mere fact that a policyholder intended the act that caused the harm bring the conduct within Section 533.[2] Instead, the policyholder must have intentionally performed a liability-producing act for the express purpose of causing harm or with knowledge that harm was highly probable or substantially certain to result.[3] Fraud and malicious prosecution are common examples.[4] Section 533, however, does not bar coverage for intentionally harmful acts based solely on vicarious liability.[5] Continue reading “California Corner: California’s Bar on Coverage for Willful Acts under Insurance Code Section 533—Don’t Assume It Applies”

Seeking Insurance Coverage for Data Breach Claims? A Recent Case Confirms that Certain D&O Policies Potentially Provide Coverage

James S. Carter

Businesses are increasingly purchasing dedicated cyber insurance policies to address their cyber and data security exposures. To date, however, many of the judicial decisions addressing insurance for cyber exposures have done so under other, more traditional, types of insurance policies such as commercial general liability (“CGL”) and commercial property policies. Some of these rulings have disappointed policyholders by concluding that such non-cyber insurance policies do not cover cyber exposures. But a recent decision by the United States Court of Appeals for the Fifth Circuit demonstrates that certain non-cyber policies potentially afford coverage for cyber exposures. In Spec’s Family Partners, Ltd. v Hanover Insurance Co., No. 17-20263, 2018 U.S. App. LEXIS 17246 (5th Cir. June 25, 2018), the court of appeals found that a contractual liability exclusion in a management liability policy did not excuse the insurer of its duty to defend its policyholder, a private company, against a claim arising out of a payment card data breach. Continue reading “Seeking Insurance Coverage for Data Breach Claims? A Recent Case Confirms that Certain D&O Policies Potentially Provide Coverage”

American Tooling and Medidata: The Latest Rulings on Coverage for Phishing Scams

Amy J. Spencer

“Phishing” is a scheme in which criminals use spoofed e-mails, copycat websites, or other deceptive communications to trick unwitting companies or individuals into sharing valuable personal information or into wiring money to sham bank accounts.[1] As these schemes become unfortunately more common and sophisticated, companies are increasingly turning to their insurance policies to cover their monetary losses. However, many businesses that have purchased crime insurance to cover this type of “computer fraud” may not realize that e-mail-based thefts are not always covered. Businesses may reasonably assume that coverage exists under a crime insurance policy covering computer fraud because the loss is computer related, but insurance companies will likely insist on proof of a direct causal relationship between the computer fraud and the loss of funds before providing coverage.

The American Tooling case is the most recent pronouncement from the courts on “computer fraud” coverage. On July 13, the United States Court of Appeals for the Sixth Circuit ruled in favor of the policyholder and reversed the Michigan district court’s grant of summary judgment to Travelers Casualty and Surety Company of America. Am. Tooling Ctr., Inc. v. Travelers Cas. & Sur. Co. of Am., No. 17-2014, 2018 WL 3404708, — F.3d. — (6th Cir. July 13, 2018). Continue readingAmerican Tooling and Medidata: The Latest Rulings on Coverage for Phishing Scams”