Texas Supreme Court Issues Long Awaited Opinion on Additional Insured Coverage

This post was written by John Shugrue, Jennifer Dotson and Kevin Dreher.

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

This post was written by Emily Garrison and Andy Moss.

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

This post was written by Evan Knott, Robert Deegan, Brian Himmel and Traci Rea.

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

This post was written by Kevin Dreher, Ann Kramer and Anthony Crawford.

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

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.