Sovereign nation states have been behind (or suspected of being behind) some of the worst cyberattacks. When a cyberattack has state involvement, the inevitable question is whether it constitutes an act of war. The answer can have a profound impact on insurance coverage because virtually every insurance policy has a war exclusion. In a case of first impression, a New Jersey trial court recently addressed whether a war exclusion applied to losses arising from the NotPetya cyberattack in 2017.
The United States and several other countries contended that Russia was responsible for launching the NotPetya attack to destabilize Ukraine. NotPetya quickly spread beyond its intended targets in Ukraine, causing collateral damage to millions of computers worldwide. Among the many impacted organizations was the pharmaceutical company, Merck & Co. Inc., which suffered damage to 40,000 of its computers, costing it more than $1.4 billion.
On November 27, 2020, the day after Thanksgiving was celebrated in the United States, the United Kingdom Supreme Court issued a long-awaited decision in Halliburton Company v. Chubb Bermuda Insurance Ltd., a decision that has been characterized as bringing clarity to an arbitrator’s duty of disclosure where the arbitrator has received multiple appointments by the same party in different arbitrations involving the same subject matter. From the policyholder’s perspective, however, the decision brought neither clarity nor a reassuring result.
Here are the facts:
This matter concerned an arbitrator well known in the London insurance coverage arena, Kenneth Rokison QC. The case arose out of the Deepwater Horizon disaster in the Gulf of Mexico, which spawned (at least) three separate insurance coverage arbitrations.
Arbitration 1 was between Halliburton and Chubb. Halliburton had settled the claims against it and sought coverage from Chubb under the Bermuda Form policy that it had sold to Halliburton. Chubb denied the claim on the premise that the settlement was not reasonable. Mr. Rokison was appointed by the English High Court to chair that panel.
Arbitration 2 was between Transocean and Chubb. Transocean was the owner of the Deepwater Horizon drilling rig. It also had settled the claims against it and Chubb also rejected its claim for coverage. Chubb appointed Mr. Rokison to that arbitration.
The principal focus in considering insurance coverage for COVID-19-related losses and liabilities has, thus far, primarily concerned business interruption coverage. But there are many other types of coverage that could come into play as businesses recover. Among the various other types of insurance coverage that could be implicated is Directors & Officers (“D&O”) liability insurance.
In the simplest terms, D&O insurance is meant to protect a company’s directors and officers from claims alleging that a mistake, bad judgment, or other malfeasance in operating a business has caused the business to suffer some form of loss or to incur some form of liability. These various circumstances are embodied in the definitions of what D&O policies refer to as “Wrongful Acts.” A typical “Wrongful Acts” definition includes the breach of a duty, neglect, error, misstatement, misleading statement, omission, or act of a director and/or officer of a company. Securities litigation and, to a more limited extent, regulatory investigations are the classic types of claims that arise from conduct typically encompassed within a “Wrongful Act” definition. There are generally three parts to a D&O policy, called Side A, B, and C coverage. Side A coverage is for “Wrongful Acts” committed by directors and/or officers that the company does not or cannot indemnify. Side B coverage exists to reimburse the company for indemnity payments the company makes on behalf of directors and/or officers for their “Wrongful Acts.” Finally, Side C coverage insures the company itself when it is sued. For public companies, Side C coverage is typically triggered only by securities claims. Privately held companies may be covered for a broader range of claims involving the “Wrongful Acts” of directors and officers. D&O Insurance covers not only indemnity payments but also defense costs, i.e. the costs necessary to respond to any litigation or investigation.
As far as COVID-19 is concerned, decisions that companies have made in order to operate under these difficult circumstances may be called into question as things return to “normal.” For example, companies have had to respond to the challenges of the pandemic and to issue public statements about that response. These actions could potentially prompt securities litigation (direct and derivative securities claims) and class actions to the extent that companies and/or a company’s directors and officers have allegedly failed to respond adequately or have made false statements to shareholders and/or the public. Similarly, a company’s financial reports may come under scrutiny, particularly if the company suffered a substantial loss as a result of COVID-19.
With the recent rise in novel diversity lawsuits, which have targeted some of the leading companies across the country, and are sure to be a hot topic of litigation this year and beyond, policyholders are highly encouraged to review their existing directors and officers (“D&O”) insurance policies to ensure that they have adequate protection in place to cover diversity claims.
If you are one of the more than 100 million people who watched the Super Bowl, you noticed that companies are starting to be more vocal about the importance of diversity. With ads featuring all Black actors and more modern families, companies are celebrating inclusion and promising to join the fight to end systemic racism. The NFL itself is a prime example of this change in messaging. Years after Colin Kaepernick faced backlash for kneeling to protest inequality, the NFL ran its own ad this year that highlighted its pledge to spend $250 million to end racism.
Talk of diversity and inclusion has been growing—and growing more insistent—starting with the first Black Lives Matter protests in 2013 and building to last year’s protests following the murder of George Floyd, who died while being forcibly detained by Minneapolis police. Despite their messages of support for diversity and inclusion, however, many companies have struggled to promote diversity in their own ranks, especially with respect to their boards of directors and C-suite executives. But consumers and investors alike are now pressuring companies to meaningfully respond to their demands for internal change. Of late, this includes shareholder derivative lawsuits that use federal securities law not only to target the company’s lack of success in diversifying, but also to challenge the commitment of the company’s directors and officers to enact change. These novel “diversity lawsuits” open a new realm of potential liability, in addition to forcing companies to consider how to promote diversity in their ranks and respond to internal and customer demands for change.
While there have only been a handful of diversity lawsuits filed as of today’s date, the allegations against some of the best known names in business, like Facebook, Oracle, and Monster Beverages, could easily apply to other publicly-traded companies across the country. The individual details vary from case to case, but the common charge against the directors and officers of the sued companies is that they breached their fiduciary duties and violated Section 14(a) of the federal Securities Exchange Act by failing to include diverse directors on their boards and in their senior executive ranks, while at the same time touting their commitment to diversity, equality, and inclusion in the company’s proxy statements and other corporate publications. Corporate counsel can forget about their old playbook for dealing with employee discrimination complaints or outside groups threatening a boycott. This is new legal terrain being staked out by stakeholders in companies (in some cases, institutional investors) and the class action lawyers representing them.
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.
A trial team and I were asked recently whether we would prefer to postpone an in-person jury trial several months or conduct the trial now via Zoom. We responded with a resounding, “in person.”
Not a single one of us is immune to the coronavirus COVID-19 pandemic. We’ve all suffered loss. Some much more tragic and permanent than others, but no one can honestly say that her or his life is unchanged. Some things that seemed normal earlier this year and before then may never go back to the way they were. Will we fly cross-country to conduct a four-hour deposition in person, even when it is safe to do so? Maybe; depends on the witness. Will we for an in-person meeting with colleagues? Maybe not.
While attorneys are proving every day that many parts of our profession can be performed remotely, we must closely guard the sanctity of jury trials from the coronavirus pandemic. Criminal and civil jury trials are the backbone of the American system of justice; our ultimate safeguard of civil liberties. The American jury trial is a constitutional right. I’m all for adapting to the present situation. But the thought of a “virtual” trial by jury is a bridge too far—and presents a serious risk of eroding one of the most fundamental American rights. Continue reading “Don’t Let Jury Trials Vanish Further Amidst the Coronavirus Pandemic”
One of the most basic discovery requests in insurance coverage litigation is for the insurer’s claims-handling documents and coverage analysis. A policyholder suing for insurance coverage is entitled to understand the insurer’s pre-denial coverage analysis, which is after all one of the core business functions of an insurance company along with marketing and selling policies.
Simply put, an insured must be allowed access to all documents held by the insurer, including communications and claim files that might speak to why the insurer denied the claim. In recent years, however, insurers have begun to involve both in-house and outside counsel in these deliberations, and have consequently asserted the protections of the attorney-client privilege and the work product doctrine to shield these critical business documents from discovery.
Fortunately, New York courts are developing a body of case law that properly treats such communications as discoverable. When an insurer communicates with counsel to assist in determining whether a claim is covered in the first instance, such communications are made primarily in furtherance of the insurer’s business function, as opposed to legal advice, and therefore are not immune from discovery. Any resulting memoranda simply reflects the same work that claims handlers have been performing since the establishment of the insurance industry. That the analysis was undertaken by an attorney rather than a non-attorney has no significance in the nature and purpose of the work being performed and the discoverability of the resulting analysis and documents. Continue reading “New York Courts Skeptical of Insurers Seeking to Hide Coverage Analysis as Privileged”
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”
Almost two years after Hurricane Harvey devastated parts of Texas and Louisiana, Central America, and several Caribbean islands, the coverage issues arising out of it are far from resolved. The court decisions addressing these coverage issues have not all been positive from the insured’s perspective. In particular, one recent decision in the United States District Court for the Southern District of Texas, Pan Am Equities, Inc. v. Lexington Insurance Company, No. H-18-2937 (May 2, 2019) (“Pan Am Equities”), should give insureds in Texas and elsewhere pause heading into the 2019 Hurricane Season.
The Dispute—Which Deductible Applies?
The insured in that case owned several commercial properties in Houston, including an apartment building and parking garage that sustained more than $6.7 million in flood damage as a result of Hurricane Harvey. Its properties were insured by a commercial property insurance policy that provided “Flood” coverages as well as coverages for loss caused by the peril of “Windstorm and Hail.” Continue reading “Hurricane Harvey Insurance Claim Gets Twisted”
The strategic importance and economic value of intellectual property (“IP”) can hardly be overstated in today’s global marketplace. Recognizing this, companies devote considerable time and resources to protect their vital IP assets and minimize the financial harm if/when problems arise. Evaluating the risks, understanding the insurance options available, and purchasing meaningful coverage that aligns with the needs of the business are critical pieces of the risk-management puzzle. Navigating the various options can be difficult. This article outlines some of the major issues.
Initially, policyholders have traditionally looked to their Commercial General Liability (“CGL”) policies to respond to IP disputes. Standard-form CGL policies typically cover “advertising injury” (sometimes called “personal and advertising injury”) which, depending on how these terms are defined in the policy, can cover some types of IP claims.