On July 21, 2015, the Pennsylvania Supreme Court issued its much-anticipated decision in Babcock & Wilcox Company et. al. v. American Nuclear Insurers et. al, No. 2 WAP 2014. Reed Smith filed an amicus brief in the case urging the court to adopt a “reasonable settlement” standard. Under that standard, an insured is permitted to enter into a reasonable settlement over an insurer’s objection without forfeiting coverage when an insurer is defending under a reservation of rights. The court adopted the reasonable settlement standard. Under Babcock, policyholders now may enter into a reasonable settlement over the insurer’s objection, rather than risk a substantial and adverse verdict at trial, without forfeiting coverage. At the same time, insurers may still contest coverage for a settlement that is unreasonable or one that is not covered under the terms of the policy. The court’s “reasonable settlement” standard balances the rights and interests of the parties and is a strong and fair statement of Pennsylvania law.
The New York Supreme Court, Appellate Division, First Department’s June 23 decision in Dupree v. Scottsdale Ins. Co., Case No. 653412-11, highlights the importance of negotiating favorable language in a fraud exclusion, a standard feature in D&O liability insurance policies that precludes coverage for claims arising out of fraudulent or criminal acts committed by the insured, typically as determined by a final adjudication in the underlying action.
In Dupree, the insured, Rodney Watts, sought coverage for defense of a criminal action alleging (i) conspiracy to commit bank fraud, (ii) bank fraud, and (iii) making false statements. Scottsdale paid for Watts’ defense through his conviction and sentencing pursuant to a preliminary injunction. Scottsdale, however, sought to be relieved of its obligation to pay for Watts’ subsequent appeal – and to recoup defense costs it had already paid – based on the operation of the policy’s fraud exclusion, which became operable only upon a “final judgment” against the insured. The question before the court was simple enough: when is a judgment final for purposes of triggering the fraud exclusion? In particular, is a judgment final during the pendency of an appeal?
Two years is too long to wait before reporting an EEOC charge to your EPL carrier, according to a recent a court decision from the Western District of Virginia. A company’s employment practices liability policy defined “employment claim” to include “a formal administrative or regulatory proceeding commenced by the filing of a notice of charges…including…a proceeding before the Equal Employment Opportunity Commission” and it required that notice of a claim be given to the carrier “as soon as practicable.” The company received notice in April 2011 that a former employee had filed a charge with the EEOC alleging employment discrimination, but it did not report the charge to its carrier. More than a year later, after initially dismissing the charge, the EEOC found reasonable cause to believe discrimination had occurred and ordered the parties to engage in mediation in March 2013. The company waited another five months – to February 2013, nearly two years from the date of the original charge – before informing the carrier of the pending mediation. The carrier denied coverage due to the delayed report.
In the world of insurance coverage litigation, insurance companies like to accuse policyholders of attempting to expand coverage terms, or limit the scope of exclusions, beyond the language’s plain meaning. “The policy means what it says,” is a common refrain insurers use to justify coverage denials. However, a recent decision by the federal Fourth Circuit Court of Appeals, Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s, London, No. 14-1239 (June 10, 2015), demonstrates that insurers are at least as likely as policyholders to try to make policy language say what they wish it said, rather than what it actually says. The court does an admirable job of applying the straightforward language of an additional insured endorsement that has given some other courts trouble, and demonstrates that oftentimes the best approach is simply to hold insurers to the plain meaning of the language that they drafted.
The facts of Capital City are simple. Capital City Real Estate, LLC (“Capital City”) was a real estate company operating as the general contractor for the renovation of a building in Washington, D.C. The building was owned by 57 Bryant Street, NW LP and Bryant St., LLC (together “Bryant Street”). Capital City subcontracted work on the foundation, structural and underpinning work to Marquez Brick Work, Inc. (“Marquez”). The subcontract required Marquez to indemnify Capital City for damages caused by Marquez’s work and further required Marquez to obtain general liability insurance that named Capital City as an additional insured. Marquez duly obtained a general liability policy from Certain Underwriters at Lloyd’s, London (“the Underwriters”). The policy contained a standard additional insured endorsement that insured Capital City:
but only with respect to liability for … “property damage” … caused in whole or in part by:
- the Named Insured’s acts or omissions; or
- the acts or omissions of those acting on the Named Insured’s behalf
in the performance of the Named Insured’s ongoing operations for [Capital City].
The Pennsylvania Supreme Court recently issued a long-awaited decision in Mutual Benefit Insurance Company v. Politsopoulos, No. J-85-2014, delivering the insured in that case, and policyholders across Pennsylvania, a big victory.
As explained more fully in Reed Smith’s recent Client Alert – “’The” insured versus “any” insured: The Pennsylvania Supreme Court limits the application of the employer’s liability exclusion – the court, in Politsopoulos, rejected the insurer’s argument that an employer’s liability exclusion in a commercial general liability (“CGL”) policy potentially applies not just when an insured is sued by its own employee(s), but also when it is sued by an employee(s) of any entities that are co-insured by the same policy. The court thereby shut down an avenue that insurance companies had been using to try to deny Pennsylvania policyholders coverage under CGL insurance policies.
Instead, following the reasoning set forth in an amicus brief prepared by Reed Smith on behalf of a number of the firm’s clients, the court held that the exclusion only may apply when claims are asserted “by employees of ‘the insured’ against whom the claim is directed ….”
Not only did the court rely heavily on the amicus brief authored by Reed Smith attorneys, but, in their brief to the Supreme Court, the appellees cited to an article (George Stewart and Mike Sampson, “Interpretation of Employer’s Liability Exclusions,” The Legal Intelligencer (Aug. 26, 2014)) written by the same Reed Smith attorneys concerning the appropriate interpretation of the employer’s liability exclusion.
More recently, Reed Smith attorneys have been cited in Law360 (Jeff Sistrunk. “Pa. Justices Narrow Employer Liability Exclusions” Law360 (May 27, 2015)) and The Legal Intelligencer (Max Mitchell, “Justices Decline to Broadly Interpret Policy Terms” The Legal Intelligencer (June 2, 2015)), discussing the effects of this decision, which is nothing less than a resounding victory for policyholders across Pennsylvania.
In light of the growing concern over cybersecurity, the United Stated Department of Justice (“DOJ”) issued guidance last week on how to prepare for and respond to cyber attacks. Taking lessons learned by federal prosecutors while handling cyber investigations, and input from private sector companies that have managed cyber incidents, the guidance contains a step-by-step guide on what to do before, during and after a cyber incident.
Specifically, the DOJ recommends having a plan in place before any cyber attacks occur. That plan should include identifying critical data and assets that warrant increased security, having the technology and services needed to respond to a cyber incident in place, having legal counsel that is familiar with legal issues associated with cyber incidents, and ensuring that your team knows who is responsible for what tasks in the event of an attack. If an attack happens, the DOJ recommends assessing the scope of the incident and working quickly to prevent any on-going damage, collecting and preserving data related to the attack, and notifying law enforcement. The DOJ cautions against using any systems that have been compromised and trying to “hack back” against the system involved in the attack.
Confronted with an ambiguity in its own insurance policy, an insurance company will sometimes attempt to rewrite its policy long after it first issued that policy. Last week, the Pennsylvania Superior Court again rejected such gamesmanship, emphasizing that, when interpreting an insurance policy, a court “must examine and construe the policy as it exists, not the way [the insurer] wishes it had drafted it with the benefit of hindsight.” In Rourke v. Pennsylvania National Mutual Casualty Insurance Company, 2015 PA Super 100 (Pa. Super. Ct. 2015), the Superior Court reaffirmed the long-standing principle that a court cannot rewrite a policy to include terms an insurer omitted.
In Rourke, a 19-year-old (former) foster child was severely injured in an auto accident. Seeking coverage pursuant to their personal auto policy, the (former) foster parents argued that that policy afforded coverage because the 19-year-old was a “family member.” “Family member” was defined in their policy to mean “a person related to you by blood, marriage or adoption who is a resident of your household. This includes a ward or foster child.” The policy, however, failed to define the terms “foster child” or “ward.” In relevant part, the Court’s analysis focused only on whether the 19-year-old was a “ward.” The insurer claimed that the 19-year-old was not a “ward” because he was not a minor at the time of the accident. The Pennsylvania Superior Court soundly rejected this argument:
Courts commonly observe that the purpose of Business Interruption or Business Income insurance is to put the policyholder in the same position it would have been in had there been no interruption. The Business Interruption inquiry is, thus, counterfactual. As such, for Business Interruption claims that go to trial, insurance companies and policyholders alike usually rely on experts – certified public accountants acting as “forensic accountants” – to calculate the policyholder’s performance absent the interruption.
Increasingly, however, insurance companies are challenging policyholder experts under the “junk science” rule in Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), governing the admissibility of expert testimony pursuant to F.R.E. 702. See, e.g., Manpower Inc. v. Ins. Co. of the State of Pa., No. 08C0085, 2011 WL 1356945 (E.D. Wis. Apr. 11, 2011); Lightfoot v. Hartford Fire Ins. Co., No. 07-4833, 2011 WL 381613 (E.D. La. Jan. 26, 2011). Having prepared a case that depends upon the admissibility of an expert accountant’s opinions, a policyholder can easily lose its case if the court grants this motion and bars the expert from testifying. See, e.g., Lava Trading, Inc. v. Hartford Fire Ins. Co., No. 03 Civ. 7037 (S.D.N.Y. Apr. 8, 2005); Wyndham Int’l, Inc. v. ACE Am. Ins. Co., 186 S.W.3d 682 (Tex. App. Mar. 10, 2006).
Such decisions are misguided and may result in standards that are unrealistically high for many policyholders.. A policyholder should be able to prove its Business Interruption claim through virtually any type of evidence. Business Interruption coverage is designed to cover not only international conglomerates capable of hiring forensic accountants and economists, but also mom and pop grocery stores, for which requiring rigorous proof through costly experts makes the coverage practically illusory. The proper avenue for challenging the policyholder’s evidence, including evidence presented through a forensic accountant, is cross-examination at trial. See, United States Fire Ins. Co. v. Kelman Bottles LLC, No. 11 cv 0891, 2014 WL 3890355 (W.D. Pa. Aug. 8, 2014); Safeguard Storage Props., LLC. v. Donahue Favret Contractors, Inc., 60 So. 3d 110 (La. App. 2011).
Nonetheless, policyholders need to be aware of the threat of a Daubert challenge at trial. We suggest that policyholders do not rely solely upon forensic accountants, but instead backstop those witnesses. Since the insurance industry’s Daubert maneuver became commonplace, courts have accepted testimony as to the amount of a Business Income loss from:
- Public adjusters as expert witnesses: Shathaia v. Travelers Cas. Ins. Co., No. 12-cv-13657, 2014 WL 197731 (E.D. Mich. Jan. 16, 2014);
- Tax attorneys as expert witnesses: Boardwalk Apartments, L.C. v. State Auto Prop. & Cas. Ins. Co., No. 11-2714-JAR-KMH, 2014 WL 1308876 (D. Kan. Mar. 28, 2014);
- Forensic accountants as lay witnesses: Ryan Dev. Co. v. Indiana Lumbermens Mut. Ins. Co., 711 F.3d 1165 (10th Cir. 2013); Penford Corp. v. National Union Fire Ins. Co., No. 09-CV-13, 2010 WL 2509985 (N.D. Iowa June 17, 2010); and
- Regular, business accountants as lay witnesses: Louisiana Med. Mgtt Corp. v. Bankers Ins. Co., No. 06-7248, 2007 WL 2377137 (E.D. La. Aug. 16, 2007); Brown Family Orthodontics, LLC v. Travelers Ins. Co., No. 06-2359, 2007 WL 1063640 (E.D. La. Apr. 3, 2007).
Obviously, a policyholder need not put on large numbers of witnesses to prove its loss, but policyholders are best advised to be prepared to prove their case with different types of witnesses to avoid losing all of their rights to a misplaced Daubert ruling.
On February 13, 2015, the Texas Supreme Court, in response to certified questions from the Fifth Circuit, held that BP was only entitled to limited coverage for Macondo related claims as an Additional Insured under Transocean’s insurance policies. Specifically, the court held the Transocean insurance contracts included the language required to necessitate “consulting the drilling contract” to determine BP’s status as an additional insured. The court then found that, under the drilling contract, BP’s status as an additional insured was inextricably intertwined with the limitations on the extent of coverage to be provided by the Transocean policies. Further, the court found that the only reasonable interpretation of the drilling contract’s additional insured provision is that BP’s status as an additional insured is limited to liabilities assumed by Transocean in the drilling contract. As such, the court held BP is not entitled to coverage under Transocean’s policies for subsurface pollution because BP had assumed liability for subsurface pollution under the contract. The court took pains to identify distinctions in the verbiage of the Transocean policy versus the policy at issue in Evanston Ins. Co. v. Atofina Petrochems., Inc., 256 S.W.3d 660, 665 (Tex. 2008), in which the court held coverage for additional insureds must be determined by the coverage language in the policy, without regard to the underlying contract.
After issuing a ruling regarding the scope of additional insured coverage available to BP, the court then expressly declined to respond to the second question involving contra proferentum. As a result, contra proferentum remains the law in Texas, without any “sophisticated insured” exception.
The New York Department of Financial Services (NYDFS) announced last week a series of measures it plans to take “to help strengthen cyber hacking defenses at insurers.” Those measures include, among other things: regular, targeted assessments of cyber security preparedness at insurance companies; putting forward enhanced regulations requiring institutions to meet heightened standards for cyber security; and considering the ways in which NYDFS can support and encourage the development of the cyber security insurance market. The NYDFS stated that it plans to initiate these measures in the coming weeks and months.
Sunday’s announcement also included the release of NYDFS’ Report on Cyber Security in the Insurance Sector , which contains the department’s findings from a cyber security survey of 43 regulated insurance companies, including health and life insurance providers. Among other things, the survey found that 95% of insurers already believe that they have adequate staffing levels for information security, but 40% reported a need to modify their strategies to address new and emerging risks. The companies identified the increasing sophistication of cyber security threats (81%) and emerging technologies (72%) as primary barriers to ensuring information security at their organizations.