Top 10 Tips for Insurance Policyholders (Fall 2020)

John A. Gibbons

1. Assess the policies you have and reassess the policies you should buy in the future.

2020 has brought a host of unwelcome events: pandemics, fires, floods, cyberattacks, financial failures, etc. An insurance program tailored to the risks and business opportunities of your specific company can provide for recovery during dark times, and specialized insurance products can help you safely expand your business. It is time to consider how tailored your current program is, and how you can better align insurance assets to your business in the future.

2. Use indemnities and additional insured status to expand your insurance assets.

Everyday business for many companies involves the use of terms and conditions; sales or services orders; and leases that address indemnification, minimum insurance requirements, and additional insured status. A well-thought-out use of additional insured status can allow you to leverage the insurance assets and insurance premiums of counterparties.

3. Ensure that you get the full benefits of your liability and property insurances.

Insurance policies provide many coverages, policy limits, and extensions that may not be readily apparent, and all of which may provide substantial financial assistance in the event of a loss. In addition, specialized forms of insurance, additional riders, or policy wording upgrades can better tailor policies to your specific business attributes. Use the renewal season to explore your options.

4. Avoid “conventional wisdom” about what is or is not covered.

With insurance, words matter! In fact, the wording determines the outcome. Do not accept statements about what others think a policy does or should cover. For example, claims for intentional wrongdoing and punitive damages often are covered by liability policies. Likewise, losses from your supply chain may be covered under your property policies. Non-payments of debts and breaches of contractual promises are covered under various forms of policies. Let the words lead you to coverage.

5. Give notice once you know of a loss or claim.

Typically, notice should be given soon after a loss, claim, or lawsuit, but remember that a delay in giving notice will not necessarily result in the loss of coverage. Consider the potentially applicable insurance assets that may apply and give notice.

6. Insist your insurers fully investigate claims.

Insurers have a duty to investigate claims thoroughly and must look for facts that support coverage.

7. Watch what you say.

Communications with an insurer or an insurance broker regarding a lawsuit against you or a loss are not necessarily privileged.

8. Don’t take “no” for an answer.

A reservation of rights is almost always the start of the insurance claim process, and a denial should not dissuade you from pursuing your rights. Even if coverage is not obvious at first, it may be there, if you look in the right places.

9. Document, document, document your claim.

Whether it is a first-party loss or a liability suit against you, write to your insurer and document your submission of information and materials. Require your insurer to respond in writing and to explain its position. A well-documented chain of correspondence narrows disputes, helps to limit shifting of insurer positions, or helps to make such shifting very apparent if your claim proceeds to formal enforcement measures.

10. Insist that your insurers honor their duties.

In the liability context insurers frequently owe broad duties to defend with independent, conflict-free counsel, even if uncovered claims dominate the lawsuit against you. In property insurance contexts, insurers have duties to help you on an expedited emergency basis to protect your interests immediately after a loss. It is important to hold insurers to their duties to protect you immediately upon assertion of liability or after a loss—delay only benefits insurers.

 

California Corner: Insurer’s Failure to Immediately Commence Defense Waives California Civil Code Section 2860 Rate Limitations for Independent Counsel

Julia K. Holt

California courts strictly enforce an insurer’s duty to immediately commence defending its insured. The insurer’s delay in doing so, even if the delay is short, constitutes a breach of this important duty. In fact, California imposes a 40-day time limit for an insurer to provide its written coverage position under the Prompt, Fair and Equitable Settlement of Claims requirements stated in Title 10 of the California Code of Regulations at Section 2695.7.

A breach in this regard results in a waiver of any claimed right of the insurer to control the defense of its insured. This includes a waiver of the insurer’s ability to seek to impose any Civil Code Section 2860 rate limitations for independent counsel. See Travelers Indem. Co. of Connecticut v. Centex Homes, No. 11-CV-03638-SC, 2015 WL 5836947, at *5 (N.D. Cal. Oct. 7, 2015), objections overruled, No. 11-CV-03638-SC, 2015 WL 6164429 (N.D. Cal. Oct. 8, 2015). In Centex Homes, the Court found “that Travelers breached its duty to defend by failing to provide Centex with a defense at least 30 days after the complaints were filed in the [noticed] actions . . . [and therefore] Travelers also lost its right to control Centex’s defense.” Id. Continue reading “California Corner: Insurer’s Failure to Immediately Commence Defense Waives California Civil Code Section 2860 Rate Limitations for Independent Counsel”

Case Review: Seventh Circuit Repudiates Insurer’s Attempt to Sell Illusory Coverage to Policyholder

Shareen Sarwar

Last week, the Seventh Circuit had occasion to consider the scope of a contractual liability exclusion in the context of professional liability coverage. In Crum & Forster Specialty Ins. Co. v. DVO, Inc., No. 18-2571, 2019 WL 4594229 (7th Cir. Sept. 23, 2019), an insurer insisted that its contractual liability exclusion did not render the professional liability coverage it sold illusory. The Court disagreed, however, holding that the exclusion was overbroad and would, if applied, defeat the fundamental purpose of the insurance. The Court further concluded that the policy must be reformed to meet the policyholder’s “reasonable expectations” of coverage.

The insurer had sold both primary and excess insurance policies to its policyholder, DVO, a company which designs and constructs anaerobic digesters. Pursuant to the coverage grant, the insurer agreed to pay DVO’s liabilities for, among other things, “damages or cleanup costs because of a wrongful act” arising out of “a failure to render professional services.” The Court opined that the essential purpose of this insurance was to provide coverage for professional malpractice. Continue reading “Case Review: Seventh Circuit Repudiates Insurer’s Attempt to Sell Illusory Coverage to Policyholder”

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”

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”

Unenforceable “Policy Interpretation” Provision

Frank M. Kaplan

There are certain immutable truths. For example, we know that the sun will rise in the east tomorrow, that the earth is not flat, that coverage grants in an insurance policy are to be interpreted broadly consistent with the insured’s reasonable expectations, and that policy exclusions are to be interpreted narrowly. The latter two, which together with others, are long-held canons of insurance policy interpretation protecting insureds that appear in thousands of court decisions and are not subject to reasonable dispute by lawyers on either side of the insurance coverage bar.

So what happens when an insurer attempts to alter these and other fundamental, bedrock principles of policy interpretation by unilaterally altering them in a form, non-manuscript insurance policy? Must a court abandon decades of settled jurisprudence in favor of policy language that seeks just that result? The answer should be “no.” Continue reading “Unenforceable “Policy Interpretation” Provision”

The Ninth Circuit Reconfirms that under California Law an Insurer Bears a Heavy Burden to Demonstrate an Exclusion Eviscerates Its Defense Duty

Julia K. Holt

Under California law, the insurer has the heavy burden of establishing there is no potential for coverage of an underlying claim. With respect to the duty to defend, “[t]o prevail, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.” Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 300 (1993). The Ninth Circuit reconfirmed this fundamental principle earlier this year in Hanover Insurance Co. v. Paul M. Zagaris, Inc., No. 17-15477, 2018 U.S. App. LEXIS 5429 (9th Cir. March 2, 2018), when it upheld the district court’s decision that the insurer failed to establish that an exclusion for deceptive business practices applied to the entire proposed class action for an alleged kickback scheme. Continue reading “The Ninth Circuit Reconfirms that under California Law an Insurer Bears a Heavy Burden to Demonstrate an Exclusion Eviscerates Its Defense Duty”

Government Investigators at Your Door? Check Your Insurance Policies.

Robyn L. Michaelson and Omid Safa

Michaelson, Robyn L. Safa, OmidA governmental entity may initiate an investigation with something as seemingly innocuous as an “informal” request for information, or as ground shaking as armed government officials executing a full-blown search and seize warrant at your company’s headquarters. In either scenario, the ensuing investigation is likely to be expensive, time consuming, and a distraction from your business operations. Any governmental investigation can quickly escalate into an extensive and protracted inquiry that forces your company to spend significant time, resources, and legal fees responding to (and defending against) the government’s investigatory demands. These investigations may also result in subsequent legal or administrative enforcement actions, which expose the company and its directors and officers to potential liability for damages, fines, penalties, and other financial obligations. These actions pose a serious threat to the organization and its top brass, and must be met with a vigorous defense. The crucial question is: How will you pay for your response and defense? The answer may lie with your insurance portfolio. Continue reading “Government Investigators at Your Door? Check Your Insurance Policies.”

New York’s Highest Court Clarifies That “Disgorgement” Losses May Be Insurable

Jared Zola

Zola, JaredOn Tuesday, in deciding J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al., the New York Court of Appeals handed down a victory for policyholders seeking insurance coverage for liabilities arising from Securities & Exchange Commission (SEC) claims, particularly broker-dealers and clearing firms. Frequently, the SEC resolves such claims by way of a consent order (e.g., an “Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions”), which requires a policyholder to pay certain amounts as “disgorgement.” Insurers typically refuse to cover disgorgement remedies, contending that public policy prohibits insurance recovery for the return of so-called “ill-gotten gains.”

But not all “disgorgement” is created equal. In J.P. Morgan, the Court of Appeals clarified that mere labels used in an SEC conseimage by Shutterstock licensent order will not determine a policyholder’s rights under an insurance policy. Using the court’s analysis, the insurer must examine the nature of the disgorgement payment to determine whether it represents revenue that the policyholder pocketed or improper profits acquired by third parties. If the disgorged monies are not the policyholder’s own revenue, then the company will not be unjustly enriched by recouping insurance proceeds and may obtain coverage for its loss. This is particularly good news for financial companies with potential liability to the SEC for allegedly ill-gotten profits that ultimately end up in third parties’ pockets, such as hedge fund customers. Continue reading “New York’s Highest Court Clarifies That “Disgorgement” Losses May Be Insurable”

The Second Circuit’s Ali Decision Supports Zeig on Exhaustion of Insurance

John A. Gibbons

John A. GibbonsThe Second Circuit’s June 4, 2013 decision in Ali v. Federal Insurance Co. addresses when and how a policyholder may recover from excess liability insurance policies for future liabilities when underlying insurers are insolvent. (Opinion linked here). A number of insurer-leaning commentators have cast the case as a rethinking of Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928), the seminal Second Circuit decision authored by Judge Augustus Hand, which first established the principle that policyholders could recover against excess insurance policies even if the policyholder did not collect the full limits of underlying insurance policies.  In Zeig, the Second Circuit rejected an excess insurer’s attempt to walk away from its insurance obligations simply because Mr. Zeig settled his claim against a separate insurance company. Zeig established the principle, recognized by numerous courts since, that a policyholder’s settlement with one insurer does not forfeit the policyholder’s rights against other insurers.

The characterization that the Second Circuit has now called Zeig’s common-sense, and widely recognized principle into question, however, seriously misreads the decision in Ali. To understand Ali—what it does and does not hold—requires an understanding of the issues that were actually ruled on by the district court and affirmed by the Second Circuit. Continue reading “The Second Circuit’s Ali Decision Supports Zeig on Exhaustion of Insurance”