Increased litigation alleging exposure to per- and poly-fluoroalkyl substances (PFAS) present potential significant losses for companies in a wide range of industries. PFAS are a group of chemicals commonly used in consumer products and manufacturing applications. After health studies linked PFAS exposure to adverse health impacts, there has been increased regulatory attention and significant litigation. The risks from this litigation to companies that manufactured or sold PFAS-containing products is manifest. And with that increased litigation risk, so too, the need to secure insurance coverage has grown. As is often the case, the ability to secure coverage for PFAS-related claims will depend on the specific facts and language of the policies at issue. Through this post, we identify several of the coverage issues associated with these claims.

What are PFAS?

PFAS are chemicals commonly used in manufacturing, industrial and consumer products such as food packaging, nonstick cook-wear, and cosmetics. PFAS have been used since the 1940s and are commonly referred to as “forever chemicals” due to how long they take to degrade naturally. Because of their popularity, PFAS are found virtually everywhere, including in drinking water, household products, personal care products, and soil and groundwater near waste sites. And because they are slow to break down, PFAS can build up in people and the environment over time. According to the EPA, research suggests that exposure to certain PFAS may lead to adverse health outcomes. See Our Current Understanding of the Human Health and Environmental Risks of PFAS

Continue Reading Insurance coverage implications for PFAS-related liabilities

At least since the California Supreme Court’s ruling in Buss v. Superior Court, 939 P.2d 766 (Cal. 1997), insurance companies have urged courts to let them sue their own policyholders to recoup the costs that the insurance companies paid to defend their policyholders if, at the end of the day, some or all of the claims are excluded from coverage. The Hawaii Supreme Court is the latest state supreme court to reject the Buss approach, instead requiring the insurance company to bear the full cost of its duty to defend.

Continue Reading Hawaii Supreme Court rejects insurance company claims for defense expense reimbursement

When James W. Marshall found gold in 1848 in California, over 300,000 prospectors migrated to California to take part in the new financial economy. The Oregon gold rush started a few years later at Josephine Creek, and a smaller rush happened in Washington State in the early 1880s starting at Swauk Creek. As a result of this influx of prospectors to the gold-rich West Coast, and the high risk/high reward nature of the business, appetite for risk in the region increased dramatically. Prospectors knew that it was a big risk to get a big reward.

This appetite for risk continues to this day in the realm of third-party liability coverage. When you purchase a general liability policy, the insurer agrees that it will pay any covered settlement or judgment up to the “policy limits,” an amount negotiated when the policy is purchased. But the insurance policy does not typically require an insurer to settle a case before trial. Courts have changed that.

Continue Reading The Gold Rush – Risks and Rewards When an Insurer Prospects for a Defense Verdict

As discussed in our post last month, it was a long road for Arrowood Indemnity to be placed into liquidation in Delaware. On November 8, 2023, it finally happened [see Liquidation Order]. What happens now?

State Guaranty Funds 

For many policyholders, it means falling into the guaranty association safety net. By statute, states have created guaranty associations (or in New York, security funds administered by the Liquidation Bureau) to pay covered claims owed by the insolvent insurance company. The National Conference of Insurance Guaranty Funds has a handy compilation of those statutes. But there are a few things you need to know.

First, recovery may be possible from multiple guaranty associations. Because each state sets its own requirements, more than one guaranty association may be applicable to any particular loss, including (1) the state where the policyholder was a resident at the time of the insured event; (2) the state where the “claimant” was a resident at the time of the insured event; and (3) the permanent location of property from which the claim arises. There may be numerous insureds, and numerous claimants, and numerous properties, depending on the situation.

Continue Reading Arrowood Indemnity Company enters liquidation

The Kemper/Lumbermens saga

To refresh everyone’s recollection, this is a report from Business Insurance from March 14, 2010:

  • The Long Grove, Ill.-based insurer [Kemper], which has been in voluntary runoff since 2004, earlier this month revealed a steep decline in its surplus, which several observers say indicates that liquidation is near.
  • But that may be preferred by some policyholders who have been wary of settling liabilities with Kemper without full knowledge of its settlement strategy, which they say has been veiled by the confidential nature of the runoff, some observers note.
  • In financial statements filed March 1, Kemper reported that its lead insurance unit, Lumbermens Mutual Casualty Co., had a surplus of $8.1 million as of Dec. 31, 2009, a drop from about $113.2 million a year earlier.
  • Kemper’s American Manufacturers Mutual Insurance Co. unit reported surplus of $11.2 million at the end of 2009, relatively unchanged from a year earlier. Lumbermens reinsures American Manufacturers, sources said.
  • The Illinois Department of Insurance approved Kemper’s runoff in 2004. Details of the runoff operations under the department’s supervision have been kept confidential.
  • But with Kemper’s operating expenses running at about $5 million a month and its surplus nearing depletion, a liquidation order is expected this year, several sources said.

It took another three years for the Kemper/Lumbermens companies to be ordered into liquidation proceedings in Illinois, over a decade after its alarming financial condition burst into public view at the end of 2002. Another ten years later, that liquidation continues, as noted in the Office of Special Deputy Receiver’s 2022 Annual report (see pages 6-7).

Continue Reading Is Arrowood the next Kemper? The insurance insolvency system is broken

Early this year, on January 25, 2023, the Delaware Court of Chancery extended the duty of oversight required of a corporation’s directors to its corporate officers, in In re McDonald’s Corp. Stockholder Derivative Litigation, No. 2021-0324-JT, 2023 Del. Ch. LEXIS 23 (Jan. 25, 2023). Before McDonald’s, the Delaware standard had been governed by the 1996 decision in In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).  Caremark held that corporate directors breach their duty of oversight if they:

  1. Fail to ensure effective information and reporting systems exist; or
  2. Ignore the red flags indicating wrongdoing, when the director (i) knows of the red flags, (ii) consciously fails to take action, and (iii) the failure to take action was sufficiently sustained, systematic, or striking as to constitute bad faith.

The reasoning in Caremark was adopted by the Delaware Supreme Court, again only recognizing the oversight duties for directors. See Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

Continue Reading Recapping the McDonald’s Delaware court decision – Duty of oversight and D&O considerations

The U.S. Securities and Exchange Commission (“SEC”) implemented rules governing registrants’ disclosure requirements pertaining to cybersecurity risk management, governance, and incident reporting on July 26, 2023. These rules are likely to give rise to novel issues pertaining to public companies’ insurance portfolios, in particular, directors’ and officers’ liability (“D&O”) and cyber insurance policies. This post provides a short overview of the rules and some of the insurance issues likely to arise going forward.

The SEC’s cyber security disclosure rules and increased exposure

The new rules require registrants to disclose information in three categories: (1) cybersecurity risk management; (2) cybersecurity governance; and (3) cybersecurity incident reporting.

With regard to cybersecurity risk management and governance, public companies are now required to annually report their cybersecurity risk processes and governance of risks in Form 10-K SEC. Under the cybersecurity risk management disclosure rules, registrants have to describe how they assess, identify, and manage material cybersecurity risks and whether they have materially affected or are reasonably likely to materially affect their businesses. Similarly, under the cybersecurity governance disclosure rules, registrants have to describe board oversight of cybersecurity risks and the role management plays in assessing and managing material cybersecurity risks.

Continue Reading Insurance coverage implications of SEC’s cybersecurity disclosure rules

An indemnification provision is a legally binding agreement between two parties specifying that one party (indemnitor) will compensate the other party (indemnitee) for any losses or damages that may arise from a particular event or circumstance. This type of provision appears in nearly all commercial contracts and is an important tool to allocate risk between parties. As a result, indemnification is one of the most commonly and heavily negotiated contract provisions. 

For companies doing business across state lines, it is critical to consider differences in states’ laws regarding indemnification. This blog post highlights just a few differences between the laws of neighboring states—Pennsylvania, Delaware, and New Jersey—and the importance of drafting clear contractual indemnity provisions with reference to which state law governs.

Continue Reading The importance of drafting clear contractual indemnity provisions

Supply chain disruptions due to natural and man-made events, such as the COVID-19 pandemic, climate change, and global and regional conflicts, have become more prevalent in recent times. Businesses need to focus on these issues more carefully as part of their risk management strategies. Many companies seek to insure potential losses caused by disruptions to their supply chain through first-party or property insurance coverage. The insurance industry has designed a range of coverages for this exposure, the main one being contingent time element (or dependent property) coverage, which provides coverage when (typically) physical loss or damage to a third-party supplier or customer prevents that third party from supplying goods to or purchasing goods from the policyholder. Policyholders need to be aware of certain key issues with this coverage.

Continue Reading Tomorrow’s supply chain – First-party insurance coverage for supply chains