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

This post was written by Richard Lewis and Paul Walker-Bright.

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.

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.

The cyber security actions taken by NYDFS are not limited to the insurance industry: in December 2014, the department issued an industry guidance letter to all New York chartered or licensed banking institutions outlining the department’s new, targeted cyber security preparedness assessments. As part of those assessments, which are becoming “ongoing parts of all DFS bank examinations moving forward,” banking institutions will be examined on a number of factors including: their protocols for the detection of cyber breaches and penetration testing; corporate governance related to cyber security; their defenses against breaches, including multi-factor authentication; and the security of their third-party vendors.

Data Security and Privacy Liability (“Cyberliability”) insurance may protect financial institutions and other companies against the costs of investigating and responding to, and liabilities arising from, cyber breaches. Companies considering, placing or renewing cyberliability coverage, or interested in examining the scope of coverage or determining whether certain types of claims may be insured under a particular cyberliability policy form should contact the authors of this blog post, the Reed Smith Insurance Recovery Group’s Global Practice Group Leader, Doug Cameron, or any Reed Smith Insurance Recovery Group attorney with whom you routinely work.

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.

The Deputy Secretary emphasized that the financial costs associated with cybersecurity incidents are only increasing, with losses stemming from “an array of cyber risks ranging from liability and costs associated with data breaches to business interruption losses and even tangible property damage caused by cyber events.” Raskin encouraged bank CEOs and boards of directors to consider whether their insurance is adequate based on their company’s cyber risk exposure.

For these reasons, policyholders should seek guidance from experienced coverage counsel who can undertake a review of your existing insurance program to ensure that it provides adequate protection in the event of a data breach or other cyberliability loss. If you wish to enhance your insurance program to best respond to the particular risks you face, please contact the authors of this blog post, the Reed Smith Insurance Recovery Group’s Global Practice Group Leader, Doug Cameron, or any Reed Smith Insurance Recovery Group attorney with whom you routinely work.

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.

As Federal and State Agencies Warn of Increased Cyber Threats, Insurance Incentives for Compliance with NIST Cybersecurity Framework May Be on the Horizon

This post was written by J. Andrew Moss and Emily Garrison.

Since the President’s February 2013 Executive Order directing the National Institute of Standards and Technology (NIST) to lead the development of a voluntary framework to address and reduce cyber risks, the agencies and stakeholders involved have been exploring whether to tie the February 2014 Framework for Improving Critical Infrastructure Cybersecurity (the NIST Framework) to incentives such as cyberliability insurance. For example, in a Report to the President on Cybersecurity Incentives, the Treasury Department suggested that “[c]yber insurance can promote adoption of stronger security measures” because, among other reasons, “insurers could require policyholders to comply with minimum security standards as a condition of insurance coverage, including adoption of the Framework.”

The Treasury Department held a public meeting on November 6 that included a discussion of developments in the market for cyberliability insurance and the NIST Framework.

A webcast of the meeting and meeting materials will be made available on the Treasury Department’s website within the next few weeks. The Commodity Futures Trading Commission (CFTC) also recently commented on the increasing importance of cyber security. In a November 5 speech at the Futures Industry Association's Expo 2014 in Chicago, CFTC Chairman Timothy Massad commented that the “need to strengthen the security and resilience of our financial markets against cyber attacks is clear,” and outlined steps the CFTC has been taking regarding cyber and information security. And at the state level, California’s Attorney General, Kamala D. Harris, issued a report in October showing that data security threats are on the rise in the Golden State, and recommended specific steps California retailers should take to improve data security and reduce breaches.

At least one major insurer may now be developing the initiatives suggested by the Treasury Department and other agencies. In recent statements to Bloomberg BNA, American International Group (AIG) indicated that its companies are considering incorporating elements of the NIST Framework into the underwriting process. AIG stated that adoption of the NIST Framework may make companies eligible to purchase cyberliability insurance at cheaper rates, but also stated that companies will not be required to adopt the Framework as a condition of receiving special insurance rates or a condition of obtaining cyberliability coverage.

Andy Moss is a partner in Reed Smith’sInsurance Recovery Group and a co-leader of the Group’s Cyberliability practice area. Emily Garrison is an associate in the Insurance Recovery Group. Companies considering, placing or renewing cyberliability coverage, or interested in examining the scope of coverage or determining whether certain types of claims may be insured under a particular cyberliability policy form should contact Andy or Emily.

Beware Of Gaps In Your Cyber Risk Policy - AreYou Covered In the Event of an Insider Attack or Data Breach?

This post was written by Brian T. Himmel, J. Andrew Moss and Robert H. Owen.

The evolving market for cyberliability insurance coverage reveals significant differences in the scope of coverage afforded under available policies. A coverage gap that may exist under some policies is for insider cyber attacks. While external attacks receive substantial news coverage, a recent study finds that businesses may be far less equipped to stave off attacks involving insiders: employees, vendors, suppliers and others who may have authorized access to critical or sensitive data. Liability insurance protection – even under specialized cyberliability policy forms – may potentially lag behind on this important issue. Differences in policy language – including policy definitions and exclusions – may have a significant impact on the scope of coverage available for a cyberliability claim. It is therefore critical to understand the coverage provided under your company’s cyberliability policy in response to insider attacks or data breaches.

Brian Himmel and Andrew Moss are partners in the Reed Smith Insurance Recovery Group and co-leaders of the Group’s Cyberliability practice area. Rob Owen is an associate in the Insurance Recovery Group. Companies considering cyberliability coverage or interested in determining whether certain types of claims may be included as an insured risk under a particular policy form should contact Brian, Andrew or Rob to address questions regarding their specific cyberliability coverage needs.

Insurance Coverage for Violations of the Privacy Right of Seclusion

By Timothy P. Law

The scope of insurance coverage for publication of material that violates a person’s right of privacy is a hotly debated issue nationwide. A decision earlier this week by the Court of Appeals of Wisconsin squarely addresses a key facet of this debate: coverage available for violations of the Telephone Consumer Protection Act (“TCPA”).

In Sawyer v. West Bend Mutual Insurance Co., decided on July 10, 2012, the Wisconsin Court of Appeals ruled that liability coverage for publication of material that violates a person’s right of privacy applies both to the privacy right of secrecy and to the privacy right of seclusion. 

Given that standard general liability insurance policies contain no explicit distinction between secrecy and seclusion, this would seem to be an obvious conclusion, but a minority of courts (most notably, the Court of Appeals for the Seventh Circuit) have inferred such a distinction in cases involving the TCPA. 

In finding coverage for a TCPA claim, the Wisconsin Court of Appeals followed the Illinois Supreme Court’s decision in Valley Forge Insurance Co. v. Swiderski Electronics, Inc., 860 N.E.2d 307 (Ill. 2006). The court noted that the faxed advertisement transmitted printed material and communicated information to the public, so it was a publication. The material transmitted was an unsolicited fax advertisement, which violated the TCPA. That material violated the recipient’s right to be left alone, i.e., his right to seclusion. Therefore, there was the publication of material that violated a person’s right of privacy.

This is the majority rule nationwide. The supreme courts in Florida, Massachusetts, and Illinois have all adopted this interpretation, as have the federal Eighth Circuit, Tenth Circuit, and Eleventh Circuit courts of appeals.

The insurance industry has responded to the spate of TCPA and privacy claims by issuing exclusions for liability under particular privacy statutes, including the TCPA. Given the majority rule and the wide availability of form exclusions specifically addressing coverage for TCPA liabilities, an insurance company should provide coverage without dispute where standard-form coverage language is employed and no TCPA exclusion was issued.

The attorneys in Reed Smith's Insurance Recovery Group have extensive experience advising clients on issues relating to coverage for violations of the TCPA and other issues relating to coverage for violations of privacy.

Coverage For Construction Defects

By Paul Walker-Bright

A hypothetical: The roof of a parking garage that is part of a condominium development partially collapses, destroying landscaping over the collapsed section of the roof and the floors underneath the collapsed section. The roof had been fully installed and the parking garage was being used at the time of the collapse, but work continued on the landscaping and the condominium units. The cause of the collapse is traced to roof beams not strong enough to withstand the load of the landscaping. The design of the parking garage called for weaker roof beams. The roof beams cannot be replaced, and consequently the landscaping over the rest of the roof must be removed and replaced with lighter materials to prevent further collapses.

This hypothetical, which is not an outlandish scenario in the construction business, raises a myriad of coverage issues under several different types of policies, including first party property, builder’s risk, general liability and professional liability policies. The attorneys in Reed Smith's Insurance Recovery Group have extensive experience advising policyholders and engaging in litigation regarding these types of coverage issues.

Back to the hypothetical: Insurers can be expected to contest coverage for the collapsed parking garage roof on a number of grounds. One perennially hot topic is whether construction defects involve an “occurrence” as that term is used in policies. Insurers argue that damages from construction defects are not covered “occurrences” because they stem from foreseeable business risks rather than fortuitous accidents; insurance policies are not performance bonds. However, there is nothing expected or intended about a roof collapse, even one due to defective materials or faulty work, and policyholders expect to be covered for such accidents. Courts have been split on this issue, and lately several state legislatures have stepped in with laws intended to clarify the situation (with mixed results).

Another common issue is which type of policy applies to a loss. Builder’s risk policies are intended to cover structures undergoing construction or renovation, but usually are limited to specific projects and time periods. General liability policies, by contrast, may exclude damage from “ongoing operations” but insure damage included in the “completed operations hazard.” Both builder’s risk and general liability policies may exclude professional negligence (e.g., the architect’s mistake in designing a roof with weak beams). The damage in that case may be covered by the architect’s professional liability policy.

General liability policies often attempt to exclude damage caused by “faulty workmanship,” and damage to the policyholder’s “work” or “products,” but then give back much of the coverage in the form of confusing and overlapping exceptions to the exclusions. For example, damage may not be excluded where the work is performed on behalf of the named insured by subcontractors. Ensuing loss to other property caused by defective work or products also is typically not excluded. Paul specializes in threading ways through the arcane policy language applicable to construction defects.

A commonly overlooked source of coverage is additional insured coverage under someone else’s policy. General contractors often require that subcontractors name them as additional insureds under the subcontractors’ policies, but fail to ensure this is done, or do not timely notify the subcontractors’ insurers of an accident. Additional insured coverage can be vital because additional insureds are often exempt from many exclusions applicable to the named insured, resulting in coverage that in many cases is broader for the additional insured than the named insured. Paul can assist policyholders in crafting contract language to obtain maximum additional insured protection under business partners’ policies.

Answers To The Most Common And Perplexing Questions About Professional Liability Coverage

Reed Smith partner Tom Marrinson, resident in the firm’s Chicago office, has been advising policyholders about their insurance coverage, and representing them in coverage litigation, for more than 20 years. While Tom’s experience ranges widely, he has literally written the book on insurance coverage for professionals and companies that employ them

Professional Liability Insurance, published by Law Journal Press, is written to appeal to both the neophyte and those with considerable experience in the area of professional liability insurance. The book begins with some of the basics of professional liability insurance (such as, who is a "professional" and what types of services are considered "professional services") and how a professional liability insurance policy is put together, in an attempt to provide a basic background for the more in-depth look that the book takes at some of the other issues confronting those involved in professional liability insurance disputes.



Many of the topics covered in depth are similar to those that would be encountered in other types of insurance contexts. For example, the book contains a discussion of notice issues (although with a keener focus on claims-made policies than might be the case in a more general insurance treatise), rescission, the duty-to-defend, and exclusions that are found in both professional liability and other types of policies.

In treating these issues, however, the book attempts to focus on cases involving professional liability insurance and to focus on those aspects of the issues that have not necessarily been detailed in other insurance treatises. For example, in handling the duty-to-defend discussion, Tom has attempted to place the book’s focus less on the well-established and already well-known principles governing the duty to defend and more on the types of "in the trenches" issues faced in attorneys’ day-to-day practice, such as what standards are used to determine reasonableness of defense costs, how courts have handled recoverability of Westlaw charges and travel expenses, etc.

Other topics covered by the book that might be of more general interest but that the book attempts to handle in more practical detail than might be the case with other insurance treatises are allocation of loss between covered and non-covered claims, control of settlement, and insurer recoupment of defense costs or settlements paid with reservation of rights.

The book also contains several sections that are specific to insurance issues that face specific professions (for example, doctors or lawyers) or that involve issues that tend to arise repeatedly and in a very specific way in the context of professional liability insurance. For example, "innocent insured" issues (both with respect to rescission claims and application of conduct-based exclusions) tend to involve recurring fact patterns in the professional liability insurance area, as do issues involving prior knowledge exclusions (i.e., exclusions for claims resulting from acts or omissions which the insured reasonably expected to give rise to a claim prior to policy issuance).

Pushing Back on Insurance Coverage Denials for Sexual Abuse Claims

This post was written by John B. Berringer

It has become routine in the past ten years or so for liability insurance companies to deny insurance coverage for sexual abuse claims, often on the theory that sexual abuse is intentional in nature. Many liability insurance policies commonly adopt the definition of “occurrence” which requires that a claim must arise from an “accident.” Under these policies, whether allegations of sexual abuse are encompassed by the term “accident” will determine whether the abuse claims are covered. 

Until recently, the law in New York and elsewhere appeared settled that sexual assault could never be an “accident.” The courts’ reasoning was that allegations of sexual assault involve intentional acts which cannot be deemed an “accident” for purposes of triggering occurrence-based coverage. Under this line of cases, injuries caused by an assault were not caused by a covered, triggering “occurrence.” See e.g., Green Chimneys School for Little Folk v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 244 A.D.2d 386, 664 N.Y.S.2d 320 (1st Dep’t 1997); Public Mutual Ins. Co. v. Camp Raleigh, Inc. 233 A.D.2d 273, 650 N.Y.S.2d 136 (1st Dept. 1996) (“the inclusion in the underlying complaint of causes of action sounding in negligent hiring and supervision does not alter the fact that “the operative acts giving rise to any recover are the intentional sexual assaults’.”); but see Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 399, 425 N.E.2d 810, 442 N.Y.S.2d 422, (N.Y., 1981) (holding that “[w]hether [coverage for underlying sexual abuse] is permissible depends upon whether the insured, in committing his criminal act, intended to cause injury”).

In recent years, however, the New York Court of Appeals has called into question the holding in those cases. See RJC Realty Holding Corp. v. Republic Franklin Ins. Co., 2 N.Y.3d 158, 777 N.Y.S.2d 4 (2004) (“RJC”). In RJC, the insurer of a health spa was denied coverage for an action in which a customer of the spa alleged a sexual assault by a masseur. The policyholder in RJC sought insurance coverage for claims by the customer against the spa including, among others, negligent hiring, supervision and retention of the masseuse.

Considering the issue of “whether a liability insurer is obligated to defend and indemnify its insured     . in an action brought against the insured based on an alleged sexual assault by the insured’s employee,” the court reversed the Second Department’s denial of coverage. The Court of Appeals reasoned that because, pursuant to its decision in Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932, 693 N.Y.S.2d 67 (1999), the masseur’s alleged intentional assault could not be attributed to the spa on the basis of respondeat superior, the assault was an “accident”

from the spa’s standpoint.

The parties here agreed that the policy would cover only an “accident” and would not apply to certain acts “expected or intended” by RJC. When they did so, they could reasonably have anticipated that the rules of respondeat superior would govern the question of when a corporate entity is deemed to expect or intend its employee’s actions. Since the masseur’s actions here were not RJC’s actions for purposes of the respondeat superior doctrine, they were “unexpected, unusual or intended” by RJC. Accordingly, they were an “accident” within the coverage of the policy, and were not excluded by the “expected or intended” clause.

RJC, 2 N.Y.3d at 164-65.

Since the Court’s ruling in RJC, a number of New York courts have adopted the Court of Appeal’s reasoning as to coverage for claims arising from underlying acts of sexual abuse. See e.g., ACE Fire Underwriter’s Ins. Co. v. Orange Ulster Bd. Of Cooperative Educational Services, 8 A.D.3d 593, 779 N.Y.S.2d 545 (2d Dept. 2004); NYAT Operating Corp. v. Gan National Ins. Co., 8 Misc.3d 975, 977-79, 900 N.Y.S.2d 272 (N.Y. Sup. Ct. 2005) (“where an employee departs from his or her duties for solely personal motives unrelated to the furtherance of the business, the doctrine of respondeat superior does not apply.”); NWL Holdings, Inc. v. Discover Property & Cas. Ins. Co., 480 F.Supp.2d 655 (E.D.N.Y. March 20, 2007); see also Sweet Home Central School District v. Aetna Commercial Ins. Co., 263 A.D.2d 949, 951-52, 695 N.Y.S.2d 445 (4th Dept. 1999) (dissent) (arguing that “where the gravaman of the complaint against Sweet Home is negligence . . . “ the “expected or intended” exclusion for bodily injury damages does not apply “[b]ecause no evidence was presented that Sweet Home expected or intended the acts upon which the underlying complaint is based [sexual abuse]”).

These decisions are consistent with decisions by New York courts which have found the term “accident” in liability policies to be ambiguous. Citing multiple New York cases, the First Department in Tortoso v. MetLife Auto & Home Ins. Co., 21 A.D.3d 276, 799 N.Y.S.2d 506, (1st Dept. 2005) explained that when analyzing coverage for “accidents,” a greater degree of importance must be placed upon the expected or intended nature of the offense as opposed to blanket offense-specific exclusions.

The policy requires that Metropolitan provide a defense where there has been an occurrence, i.e., an accident that results in bodily injury. Exactly what constitutes an accident is not defined in the policy. However, an accident may be considered “an event which is unanticipated and the product of thoughtlessness rather than willfulness.” McGroarty v. Great Am. Ins. Co., 36 N.Y.2d 358, 363, 368 N.Y.S.2d 485, 329 N.E.2d 172 (N.Y. 1975). Indeed, “No all-inclusive definition of ‘accident’ is possible, nor any formulation of a test applicable in every case, for the word has been employed in a number of senses and given varying meanings depending upon the relevant context.” Matter of Croshier v. Levitt, 5 N.Y.2d 259, 262, 184 N.Y.S.2d 321, 157 N.E.2d 486 (N.Y. 1959).

An intentional act may, but need not necessarily, result in intended consequences. “Clearly more than a casual connection between the intentional act and the resultant harm is required to prove that the harm was intended.” Allstate Ins. Co. v. Mugavero, 79 N.Y.2d 153, 160, 581 N.Y.S.2d 142, 589 N.E.2d 365 (N.Y. 1992).

Tortoso, 21 A.D.3d at 278-279, 799 N.Y.S.2d at 509 (1st Dept. 2005).

Thus, it is possible that coverage may exist for sexual abuse and other intentional torts even when a policy’s definition of “occurrence” requires an “accident.” Don’t take no for an answer, push back.

Predictable Responses to Benmosche Leak

This morning’s WSJ report that Robert Benmosche, recently appointed CEO of AIG, is unhappy with government pay restrictions, has elicited predictable, less than sympathetic responses. “Tiny Violins” is the headline from the Daily Beast.  New York Magazine’s Daily Intel responded with sarcasm:

Apparently, someone told Robert Benmosche that running the world's largest and most [expletive withheld] insurer was going to be a cakewalk, because three months into the job and two months after returning from a vacation at his Croatian villa, the CEO is considering throwing in the towel, owing to the restrictions placed on him by the company's new owners, the good old United States government.

… But wait: Didn't he know that when he took the job? We'd assumed he was like the David Blaine of CEOs; you know, that he liked putting himself into impossible situations and getting out against all odds, but apparently, Benmosche was on a media blackout for 2008-2009 and had no idea what he was getting into. What did the board tell him, we wonder? That he was being hired to run an insurance company? 


Clusterstock goes with outrage:

Robert Benmosche should not be given the opportunity to step down as the chief executive of AIG. He should be fired immediately.

The scope and scale of the arrogance of Benmosche is almost stunning. Except that we've become so accustomed to financial big shots acting like they were divinely anointed that we hardly notice.

If this kind of PR ploy actually works with Ken Feinberg, well …; more likely, it will just continue to backfire. In any event, the parlor game of predicting Benmosche’s successor has begun.

Feinberg’s letter to AIG can be found HERE.

UPDATE: In response to the uproar (e.g. "AIG's Benmosche is a drama queen") created by the WSJ story, Benmosche has sent a letter to AIG employess saying he's "totally committed" to the job.

NY High Court Holds that "Self-Serving" Testimony from Underwriter is Insufficient for Rescission

This post was written by J. Andrew Moss

The New York Court of Appeals rejected an effort by Continental Casualty Company (CNA) to rescind an excess professional liability (E&O) policy issued to the law firm Pepper Hamilton LLP, in a decision under Pennsylvania law that also affirmed summary judgment in favor of two of the firm’s other excess E&O insurers based on the application of a “prior knowledge” exclusion in their policies. Executive Risk Indemnity Inc. v. Pepper Hamilton LLP, No. 130 (N.Y. Oct. 20, 2009).

The dispute centered on Pepper Hamilton’s work on behalf of the now-defunct Student Finance Corporation, which eventually led to significant litigation against Pepper Hamilton. According to the opinion, in March 2002 Pepper Hamilton and one of its partners learned that SFC and its principal (the now twice convicted Andrew Yao),

had engaged in securities fraud in connection with SFC’s securitization of student loans. The firm terminated its representation of SFC one month later and in June SFC was forced into involuntary bankruptcy. Pepper Hamilton’s professional liability (or E&O) insurance came up for renewal the following October. In connection with its renewal process, the firm’s general counsel asked all its attorneys whether any were aware of any fact or circumstance, act, error, omission or personal injury that might be expected to be the basis for a professional liability claim. In early August, the partner who was aware of the SFC fraud advised the firm accordingly, but the application submitted by the firm in September did not disclose any information concerning SFC. In April 2004, a new bankruptcy trustee proposed that Pepper Hamilton enter into a tolling agreement with respect to potential claims against the firm by the estate and its creditors. At that point, the firm gave notice to its insurance companies. Lawsuits were filed against the firm in early 2005 and the firm’s primary insurer, Westport, defended the claims.

The Pepper Hamilton ruling on rescission is instructive. CNA had submitted an affidavit from its underwriter stating that he would have treated the application differently had the information been disclosed. The court concluded that CNA failed as a matter of law to meet its high burden, which requires proof by “clear and convincing evidence,” for rescission:

[E]ven if the law firm defendants' omission of the SFC incident is a known false statement, [CNA] failed to establish as a matter of law that the false statement was material to the reinsurance [sic] determination and that the false statement was made in bad faith. Here, the self-serving affidavit of [CNA's] underwriter -- that Pepper Hamilton's renewal application would have been treated differently had it disclosed the underlying circumstances which led to the denial of coverage -- is insufficient to meet the insurer's heightened burden of proof.

On the “prior knowledge” exclusions, the court reversed the pro-policyholder ruling of the intermediate appellate court. Rather than the First Department’s requirement that the insurer had to prove knowledge of "wrongful conduct on the part of the insured" (Executive Risk Indem. Inc. v Pepper Hamilton LLP, 56 AD3d 196, 204 [1st Dept]), the New York high court held that the prior knowledge exclusion

excludes coverage of "any act, error, omission, circumstance ... occurring prior to the effective date of the [policy] if any [insured] at the effective date knew or could have reasonably foreseen that such act, error, omission, circumstance … might be the basis of a [claim]."

On the basis of this stricter standard, the court granted summary judgment to the two excess insurance companies with policies containing this exclusion.

UK's Solvent Schemes Dealt Another Blow: Hopefully, the Coup de Grâce

The travesty that is the Solvent Scheme of Arrangement has been dealt another blow; one hopes a fatal one. A month after issuing a blistering attack on the practice, Lord Glennie entered final judgment this week refusing to sanction the Scottish Lion scheme. It is worth taking a long look at Lord Glennie’s lengthy opinion.

The issue, succinctly stated by the court, was: “Can it ever be fair to sanction a ‘solvent’ scheme of arrangement in the face of continuing creditor opposition to having their occurrence cover compulsorily terminated?” The court’s answer was, Probably Not.

Under UK law, an insurance company can wind up its operations under either an Insolvent Scheme of Arrangement or a Solvent Scheme of Arrangement. An Insolvent Scheme has US equivalents in our state-run insurance liquidation processes. However, Solvent Schemes are unique to the UK. They allow an otherwise solvent insurance company, including companies that sold occurrence policies for which the company has largely unquantifiable continuing obligations to its policyholders, to wind up operations by forcing policyholders to accept policy commutations. 

Solvent Schemes are governed by Section 899 of the Companies Act 2006 (although they have been around longer). The act requires 75% of the value of each class of creditors to approve the Scheme. The attacks on the British Aviation Insurance Scheme led to the current requirement that creditors with IBNR (Incurred But Not Reported) claims be treated separately from those with existing claims, with separate meetings and votes. 

The valuation of IBNR claims by Scheme administrators have led to numerous attacks. Those valuations are critical to the voting, since they determine the weight of each creditor’s vote. Objectors usually are US policyholders with IBNR long-tail claims under occurrence policies, usually environmental, product liability and toxic tort claims. That was the case in Scottish Lion as well. Whatever the merits of “actuarial science” in the context of liability coverage may be, it is certain that the projected value of the IBNR claims will be wrong, whether too high or too low. These valuations also determine the amount paid in the eventual commutation, once the Scheme is sanctioned.

The objections to Solvent Schemes can be summarized as follows:

  • Policyholders paid substantial premiums for occurrence-trigger policies, which are valuable and now irreplaceable assets
  • No amount of money paid in commutation will allow a policyholder to replace this coverage.
  • Unless the policyholder is in need of short-term cash, there is no benefit to these commutations for policyholders; all of the benefit goes to the insurance company and its owners and managers.
  • Nothing prevents a policyholder which wants a commutation from seeking one; there is no reason to force unwilling policyholders to do so. 

In the end, the court agreed, following the reasoning of the court which refused to approve the British Aviation scheme in 2006:

"If individual policyholders wish to compound the company's contingent liabilities to them, and to accept payment in full of an estimate of their claims, there is nothing to stop them doing so. But to compel dissentients to do so would ... require them to do that which it is unreasonable to require them to do."

That unreasonableness seems to me to stem from the fact that where the company is solvent it is unnecessary for the body of creditors or class of creditors to as a whole that there should be any scheme, still less a scheme forced upon unwilling participants. I respectfully agree with that reasoning.

The Court of Session is Scotland’s supreme civil court. The case may eventually end up before the new Supreme Court of the United Kingdom which opened on October first


UPDATE [November 3, 2009]: PricewaterhouseCoopers, Scheme Advisors to Scottish Lion and many other effective and proposed solvent schemes has announced their intent to appeal Lord Glennie's decision.