Proving Your Business Income Loss: Defeating Insurance Company Challenges to Policyholder Evidence

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.

Texas Supreme Court Issues Long Awaited Opinion on Additional Insured Coverage

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.

New York Department of Financial Services Announces New Cyber Security Measures Directed at Strengthening Insurers’ Cyber Defenses

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.

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Pursuing Insurance Coverage for Alleged Mislabeling of Dietary and Herbal Supplement Products

Businesses in the dietary supplement supply chain are taking cover after the New York Attorney General (NYAG) ordered four major retailers to cease and desist the sale and alleged mislabeling of certain herbal supplements. After genetically testing store-brand product samples of Ginko Biloba, St. John’s Wort, Ginseng, Garlic, Echinacea, and Saw Palmetto, the NYAG alleged that the supplements were unrecognizable or contained substances other than those disclosed on their packaging labels. Class action lawsuits already have been filed, and the NYAG directed the targeted retailers to provide it with detailed information regarding the manufacturing, testing, and procurement of the herbal supplements, and announced that it may bring charges for alleged deceptive practices in advertising.

In a recent Client Alert, authored by Evan Knott, Robert Deegan, Brian Himmel and Traci Rea, the authors, members of Reed Smith’s Global Insurance Recovery Group, discuss how impacted businesses along the dietary supplement supply chain should carefully scrutinize their commercial general liability (CGL), directors and officers liability (D&O), product recall, and errors and omissions liability (E&O) insurance policies to determine the availability of, and take all steps necessary to preserve, potential coverage.

Harmonizing Risk Transfer: Avoiding Pitfalls With Additional Insured Provisions

Insurance requirements in commercial agreements and corresponding additional insured provisions in insurance policies are important tools to manage and transfer risks. However, far too often those efforts are thwarted by inattention and, in some cases, sloppiness. As exemplified by the disastrous outcome for the contracting parties in Cincinnati Insurance Company v. Vita Food Products, Inc., No. 13 C 05181 (E.D. Ill. January 30, 2015), there are many pitfalls to successfully transfer risk and secure additional insured coverage. In Vita Foods, the insurer (Cincinnati) argued that its policy required Vita to have received a certificate of insurance prior to a loss because the contract between the parties (Vita and Painters) was oral. It is unsurprising that parties operating on the basis of an oral agreement failed to satisfy this condition. The court agreed with Cincinnati, finding that the failure to obtain the certificate prior to the loss was fatal to the “additional insured’s” request for coverage. Although this factual scenario is rare, it serves as a harsh example of how parties’ carelessness can defeat their intentions to transfer risk through commercial agreements and insurance policies.

In a recent Client Alert authored by Ann Kramer, Kevin Dreher and Anthony Crawford, the authors, members of Reed Smith’s Global Insurance Recovery Group, discuss how to harmonize risk transfer in commercial agreements and insurance policies.

Top Ten Things to Know about Representations and Warranties Insurance

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

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

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

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

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.

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