Top Ten Things to Know about Representations and Warranties Insurance

This post was written by Courtney Horrigan.

1.  Representations and Warranties insurance has quickly risen to become a standard topic of discussion in many merger and acquisitions transaction negotiations.

2.  Representations and Warranties Insurance is not a new product – but until recently its use has been limited because of prohibitive premium pricing and buyer concerns as to whether insurers would actually pay on claims. The insurance market is working to bring prices down and establish a payment history.

3. The insurance protects against breaches of contractual representations and warranties that the seller makes in transaction documents. It can be written to cover all or some of the seller’s contractual representations and warranties.

4. Although traditionally it’s been the buyer that purchases representations and warranties coverage, both buyers and sellers can purchase this insurance. If a buyer purchases it, it’s a “buy-side” policy, and if the seller purchases it, it’s a “sell-side” policy.

5. A “buy-side” policy provides first-party coverage – meaning that it allows the buyer to recover from the insurer for its losses due to a seller’s breach of a representation or warranty.

6. A “sell-side” policy provides third-party liability coverage – meaning that it allows the seller to tender to its insurer a claim from the buyer alleging that the seller mistakenly breached a representation or warranty made at the time of closing. (Sell-side policies exclude coverage for intentional breaches.)

7.  Representations and Warranties insurance may protect the buyer if it relies upon inaccurate warranted facts when calculating the value of the target company.

8.  And Representations and Warranties insurance can allow the seller to reduce or eliminate indemnification reserves or escrows, allowing the seller to distribute the funds from a transaction more quickly.

9. So both buyers and sellers can use Representations and Warranties insurance to resolve impasses in negotiations over whether a specific representation or warranty will be issued, the scope, duration and limits of an indemnity, or the size of an indemnification escrow.

10. Next to cyberliability insurance, Representations and Warranties Insurance may represent the hottest trend in insurance heading into 2015.
 

President Obama Acknowledges Growing Cybersecurity Threats to the Government and Economy, Proposes New Measures to Fight Cyber Risks

This post was written by Courtney C.T. Horrigan and Caitlin Garber.

Just days after news broke that ISIS hackers forced the shutdown of the U.S. Central Command’s Twitter account, President Obama met with congressional leadership, members of the Federal Trade Commission and the Department of Homeland Security to unveil a proposal to facilitate increased cooperation between the private sector and government to combat growing cybersecurity threats. Citing concerns with preserving national security, public safety and public health, the President proposed new federal cybersecurity legislation, emphasizing that although our digital economy “creates enormous opportunities,” it also “creates enormous vulnerabilities for us as a nation” that are growing and costing us billions of dollars. In remarks on Tuesday at the National Cybersecurity Communications Integration Center, the President further acknowledged the serious legal and liability issues involved with private companies sharing information with the government, and argued that his proposed legislation “includes essential safeguards to ensure that [the] government protects privacy and civil liberties” and other liability protections for companies that share information on cyber threats.

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Lessons Learned: Report All Potential D&O Liability Insurance Claims Without Delay

This post was written by Courtney C.T. Horrigan.

The District Court of Massachusetts’ January 6, 2015 opinion in Biochemics, Inc. v. Axis Reinsurance Co., 2015 WL 71493 (D. Mass. Jan. 6, 2015), reaffirms the importance of providing timely notice of all D&O liability claims – including subpoenas. In Biochemics, the policyholder sought coverage from its primary D&O liability insurer, Axis, for defense costs it incurred in an SEC enforcement action commenced during the AXIS policy period. Judge Rya Zobel held that Biochemics had no coverage for the SEC enforcement action because it related back to two deposition subpoenas that the SEC served on Biochemics before the AXIS policy incepted. Because those deposition subpoenas indicated on their face that the SEC had commenced a formal investigation against Biochemics, each subpoena was a “Claim” that should have been reported to Biochemics’ prior D&O carrier. Because the Claim was “first made” before the AXIS policy period, Judge Zobel granted AXIS’ motion for summary judgment and found that AXIS owed Biochemics no coverage under its policy.

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Wisconsin Supreme Court's misapplication of the pollution exclusion and disregard for policyholders' business and purpose in purchasing insurance

This post was written by Mike Sampson and Caitlin Garber.

Last week, the Wisconsin Supreme Court issued two opinions in which it held that pollution exclusions barred coverage for third-party claims resulting from alleged contamination of water due to the seepage of cow manure and septage, respectively. As addressed in Chief Justice Shirley S. Abrahamson’s dissents to the two decisions, the majority’s opinions in both cases – Wilson Mutual Insurance Co. v. Falk, Nos. 2013AP691, 2013AP776, 2014 WL 7375656 (Wis. Dec. 30, 2014), and Preisler v. General Casualty Insurance Co., No. 2012AP2521, 2014 WL 7373070 (Wis. Dec. 30, 2014) – were faulty for a number of reasons.

Notably, Preisler considered whether there was insurance coverage available for claims against companies that haul, store, and/or dispose of septage. As the Chief Justice explained, “[t]hese septic companies purchased general liability policies to insure their business operations, that is, they purchased insurance policies to cover damage they might cause in the ordinary course of their hauling, storing, and disposing of septage.” But when that very damage occurred, the majority held that septage was a “pollutant” and that coverage for the claims was therefore barred by the applicable pollution exclusion.

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Another Listeria Outbreak Reminds Food Industry to Revisit Insurance Program

This post was written by Brian Himmel, Ann Kramer, Jay Levin, Evan Knott and Jill Priscott.

On December 19, the U.S. Centers for Disease Control and Prevention (CDC) recommended that U.S. consumers not eat any commercially produced, prepackaged caramel apples and that retailers not sell or serve them as they continue to investigate an outbreak of listeria monocytogenes which has infected at least 28 people from 10 states. The CDC has yet to identify the producer of the contaminated apples. Accordingly, the number of market players in the supply chain who will be affected by this recommendation – from farms through supermarkets – remains unknown.

Click here to read the issued Client Alert.

Reed Smith's Insurance Recovery Group Ready to Help Policyholders after U.S. Congress Fails to Extend TRIA

This post was written by Doug Widin, Gary Thompson, Mike Sampson, Ann Kramer, Amber Finch and Kit Chaskin.

Last week, the U.S. Congress adjourned for the year without making any provision for extending the federal Terrorism Risk Insurance Act (“TRIA”). Absent some sort of extension, TRIA thus will expire next week – on December 31, 2014. As a result, insurers will no longer be required to offer terrorism insurance, and even those insurers that do offer the coverage may well reassess their risk and price the coverage at substantially increased premium rates.

Terrorism insurance is an important protection which most policyholders reportedly opt to buy. Without being able to obtain and/or afford it, policyholders may be at significant risk – and not just in the event of a domestic terrorist attack. Many lenders require borrowers to have terrorism coverage in place as part of their loan policies. Real estate deals, equipment financing, and many other commercial transactions technically depend on the availability and procurement of terrorism coverage as part of the overall insurance requirements for the deal. Lack of terrorism insurance could put loans or deals at risk.

You can read more about TRIA and Congress’ failure to act in Reed Smith’s recent Client Alert, “Congress’ Failure to Extend Terrorism Risk Insurance Act Requires Policyholders to Act Diligently Before January 1.”

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You Can Assign Your Bad Faith Claims in Pennsylvania

This post was written by Luke Debevec, John Ellison and Lisa Szymanski.

This week, in a 5-1 decision resolving a certified question from the U.S. Court of Appeals for the Third Circuit, the Pennsylvania Supreme Court adopted the positions advanced by Reed Smith LLP on behalf of United Policyholders, concluding that policyholders are permitted to settle claims against them by assigning to plaintiffs and other claimants their rights to both statutory and common law-based bad faith claims against their insurance companies.

The Court’s decision in Allstate Property and Casualty Insurance Co. v. Jared Wolfe, is a significant victory for policyholders in Pennsylvania who face dangerous litigation that their insurance companies refuse to defend or unreasonably refuse to settle. Faced with such bad faith conduct by its insurer, a policyholder often has no financial means of satisfying a judgment other than assigning its coverage claim against the insurer, and little interest or experience in direct litigation with the insurer. When a policyholder is victimized by an insurance company’s bad faith, a settlement that assigns the policyholders insurance claims to the plaintiff in exchange for a release that protects the policyholder from the results of the insurer’s breach is often the most practical solution. The Supreme Court’s decision recognizes the assignment remedy as a valuable and necessary tool for protecting the Commonwealth’s diverse policy-holding citizens from insurance company bad faith and a means of deterring and punishing bad faith behavior.

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Potentially Fraudulent Insurance Company Practices Are Exposed In Superstorm Sandy Litigation

This post was written by Jay Levin and Jennifer Katz.

[This article was first published on IRMI.com and is reproduced with permission. Copryright 2014, International Risk Management Institute, Inc.]

We recently marked the two year anniversary of Superstorm Sandy. With that anniversary came an influx of litigation in response to insurance companies denying or overly limiting coverage. That litigation recently revealed highly questionable practices within the industry.

Most striking is the opinion in Raimey v. Wright National Flood Insurance Company, Case No. 1:14-MC-00041-CKP-GRB-RER (E.D.N.Y. Nov. 7, 2014). There United States Magistrate Judge Gary R. Brown exposed “reprehensible [and possibly widespread] gamesmanship” by a professional engineering firm, U.S. Forensic, retained by Wright National Flood Insurance to investigate damage to the Raimey home following Superstorm Sandy.

 

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Deputy Secretary of Treasury Encourages Financial Institutions

This post was written by Courtney Horrigan and Caitlin Garber.

Top-ranking U.S. officials continue to stress the importance of securing adequate protection in the event of cyberliability losses. Most recently, those efforts have been directed to financial institutions, an industry particularly susceptible to cyber attacks. On December 3, 2014, United States Deputy Secretary of the Treasury, Sarah Raskin, delivered a speech at the Texas Bankers’ Association Executive Leadership Cybersecurity Conference wherein she provided banks with a simple checklist to consider before a cyber attack occurs. Notably, one item on the Deputy Secretary’s checklist was cyberliability insurance – coverage at which the Deputy Secretary recommended all banks take a hard look.

In her speech, the Deputy Secretary stated that while new, the cyberliabity insurance market is growing, noting that “[m]ore than fifty carriers now offer some type of cyber insurance coverage…for organizations of all sizes, from small, family-owned shops to Fortune 500 companies.” Raskin described the cyberliability insurance market as “a mechanism that bolsters cyber hygiene for banks across the board.” She explained that cyberliability insurance not only provides a measure of financial support in the event of a cyber attack, but the underwriting processes associated therewith can also present banks with useful information to assess existing risk levels and the ability to identify those tools and best practices that the organization may currently be lacking.

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On the Coattails of United States v. Trek Leather, Make Sure You Have Suitable D&O Coverage

This post was written by Andy Moss and Stephen Winter.

Corporate directors and officers have a long list of things that can keep them up at night. Personal liability for civil fines and penalties arising out of negligence or even gross negligence committed in the course of their service to the company should not be one of them. But recently, in United States v. Trek Leather, Inc., 767 F.3d 1288 (Fed. Cir. 2014) (en banc), a federal appeals court held that the government could hold a corporate officer liable for a civil penalty based on gross negligence committed by the officer or his or her agents acting in the scope of their duties to the company, and without the government establishing fraudulent intent or attempting to pierce the corporate veil. Following the decision, a representative of the Department of Justice, although speaking for himself and not the DOJ, sought to downplay the effect of Trek Leather by—perhaps unwittingly—stating that the result in Trek Leather simply reaffirms long-standing government policies. In light of the decision in Trek Leather, as well as at least one Justice Department attorney’s belief that it is wholly appropriate to pursue individual directors or officers in their personal capacities for fines and penalties without even having to establish fraud or wrongful conduct by the director or officer himself or herself, a director or officer might understandably sleep a little less soundly.

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The End of the Snow Is Still Not the End of the Problems For the Buffalo, NY Area

This post was written by John Ellison, Rich Lewis and Anthony Crawford.

The Buffalo, New York area has been devastated with record level snowfalls causing widespread damage. Now that the snow has stopped falling, warmer weather and potentially heavy rainfall may cause flooding and will likely exacerbate the losses being experienced. This will complicate insurance claims because policyholders will inevitably face pushback from insurance companies regarding the extent of damage from the snowstorms versus subsequent flooding. In a recent Client Alert, members of Reed Smith’s Global Insurance Recovery Group give Buffalo, New York area businesses short term and long term advice on handling potential property damage or business interruption claims arising from the recent snowstorms.

Court's reasoning that "bacteria" is not a "pollutant" favorable for policyholders in other cases

This post was written by Mike Sampson and Caitlin Garber.

Insurance companies often look to the pollution exclusions in their commercial general liability policies in attempts to exclude coverage for many types of claims. They will try to fit all sorts of things within the definition of “pollutants.” Just last Friday, though, the U.S. District Court for the Eastern District of Louisiana made that more difficult, offering a common-sense understanding of the term “pollutant.” That court found that “under Louisiana law, Legionella and Pseudomonas aeruginosa bacteria” – the bacteria which cause Legionnaire’s disease – “do not qualify as ‘pollutants’ within the meaning of [pollution] exclusions.”

At issue, in relevant part, in Paternostro v. Choice Hotel International Services Corp., No. 13-0662 (E.D. La.), is whether primary and excess commercial general liability insurance policies provide coverage for claims brought against a hotel’s (i) franchisor and (ii) franchisee, owner, and operator by guests or invitees of the hotel who allegedly suffered personal injuries as a result of exposure to Legionella and Pseudomonas aeruginosa bacteria in the hotel.

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Hackers Don't Care About Your Insurance

This post was written by Brian Himmel, Andy MossDavid Weiss and Cristina Shea.

A recent study reports that the median amount of time between a breach of a company’s computer network and the discovery of the incident is 229 days. But some cyberliability policy forms require that both the breach event and discovery of loss (or resulting claim) occur during the policy period. So what happens when a breach is discovered three months into the policy period but, unbeknownst at the time, the intrusion actually occurred six months before, or even earlier? If your company’s cyberliability insurance policy excludes breach events occurring before the inception of the policy period, the company could find itself without coverage for an otherwise-covered claim or loss.

The use of retroactive dates and extended reporting periods to avoid such a gap in coverage is addressed in a Client Alert issued by members of Reed Smith’s Insurance Recovery Group. Retroactive dates extend the policy’s coverage back to a date earlier than the actual policy period, with the goal of covering events that already occurred but had not been discovered at the time the policy was purchased. An extended reporting period lengthens the period of time, beyond the expiration of the policy period, during which a claim or loss can be made against the insured and reported to the insurance company. These provisions can provide a critical protection under a cyberliability insurance program given the delays that may exist between a breach and its discovery.
 

A free pass for NICO and Resolute?

This post was written by Michael H. Sampson, Ann V. Kramer, Jennifer D. Katz and Natalie C. Metropulos.

A number of insurance companies have recently entered into reinsurance agreements with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc. When this occurs – and the arrangements do not require the consent of policyholders – the policyholders unexpectedly find themselves involved with NICO and/or its “affiliated claims adjuster,” Resolute Management, Inc. (“Resolute”). But, what happens when a policyholder disagrees with NICO’s and/or Resolute’s approach to adjusting, defending, or resolving claims? Are NICO and Resolute “untouchable”? Just recently, a New York appellate court addressed these questions, finding that NICO and Resolute could escape liability in such instances. In a recent Client Alert, members of Reed Smith’s Global Insurance Recovery Group take a closer look at that recent decision, OneBeacon American Insurance Co. v. Colgate-Palmolive Co., and explain why “all hope is not lost.”

Reed Smith's Insurance Recovery Group: Head of The Class In Insurance Law (Again)

Last week, U.S. News-Best Lawyers named Reed Smith its 2015 National Law Firm of the Year in Insurance Law. This is the second consecutive year that U.S. News-Best Lawyers has recognized our Insurance Recovery practice as its top firm for insurance law.

Reed Smith’s Insurance Recovery Group counsels and represents policyholders in insurance disputes and transactions. With more than 85 insurance recovery lawyers in offices around the globe, we represent clients throughout the world, both as an advocate in disputes with insurance carriers, as a trusted advisor for diverse insurance-related issues, and as a counselor in the purchase of insurance products. We have recovered billions of dollars for policyholders in matters involving the entire range of commercial insurance products. In addition to this latest award by U.S. News – Best Lawyers, the group is named among the best policyholder coverage practices by Chambers USA, Chambers UK, Legal 500 US and Legal 500 UK. American Lawyer Media’s Legal Intelligencer named our Insurance Recovery Group one of Pennsylvania’s “Litigation Departments of the Year” for 2014 – the only policyholder-focused firm recognized in the Pennsylvania-based publication – and The National Law Journal named our Chicago Insurance Recovery team the 2014 “Chicago Litigation Department of the Year: Insurance.”

If you have any questions about potential claims, or your insurance program in general, please feel free to contact our Global Practice Group Leader, Douglas E. Cameron, or any Reed Smith Insurance Recovery Group attorney with whom you routinely work.