Key considerations for policyholders after landmark biometric privacy decisions reshape insurance landscape

The landscape of biometric privacy litigation already has changed dramatically in 2023. Last month, the Illinois Supreme Court ruled in Tims v. Black Horse Carriers, Inc., 2023 IL 127801, that claims for violations of the Illinois Biometric Information Privacy Act (BIPA) (which allows individuals to sue companies directly for the wrongful collection or disclosure of their biometric data) are subject to a five-year statute of limitations. Later that month, in Cothron v. White Castle System, Inc., 2023 IL 128004, the court ruled that a BIPA violation accrues each time an individual’s data is improperly collected or shared, not merely the first time. Taken together, these rulings significantly broaden the scope of claims facing companies that have violated BIPA and the damages flowing from such violations.

In recognition of the dystopian risks presented by the rampant, unlawful sharing of biometric data, several more states are jumping on Illinois’ bandwagon, attempting to pass BIPA-like laws. According to Bloomberg, legislation proposed in nine other states also would grant a private right of action to individuals whose biometric data was wrongly collected or shared.

Despite the growing threat of civil litigation related to the mishandling of biometric data, there is a silver lining for corporate policyholders: the opportunity to obtain insurance coverage for biometric privacy liability has never been greater.

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An insurance company’s refusal to settle can be bad faith, even if the policyholder ultimately prevails at trial

As a general rule, if a policyholder reasonably attempts to settle a case for an amount at or within the limits of its insurance policy, the insurance company must put the policyholder’s interests above its own. Typically, if the insurance company does not accept a reasonable settlement within limits, then it may be responsible for a judgment amount in excess of the policy limits if the insurance company’s refusal to settle was unreasonable. The insurance company’s failure to settle may result in a bad faith claim. But what if the insurance company refuses to settle and the policyholder prevails at trial? According to a federal district court in New Jersey, if the insurance company’s decision not to settle was unreasonable, it may still be liable for bad faith.

Summary of recent New Jersey federal court decision

BrightView Enterprise Solutions, LLC v. Farm Family Casualty Insurance Company, No. 20cv7915 (EP) (AME), 2023 U.S. Dist. LEXIS 20764 (D.N.J. Feb. 7, 2023) is not your typical bad faith “failure to settle” case. It involved three different companies that were insured under a single commercial general liability insurance policy issued by Farm Family. The three companies were involved in a project to overhaul an irrigation system at a Bank of America branch in New Jersey. A Bank of America employee “slipped and fell” on a puddle of water and hit her head. The injured employee filed suit against all three companies, alleging that her “slip and fall” caused a permanent disability. Farm Family agreed to defend and provide coverage for all three defendants up to its $1 million policy limit.

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Coverage issues for medical monitoring claims

Following the February 3, 2023 derailment of 38 train cars carrying hazardous materials, resulting in a chemical spill and controlled burn in East Palestine, Ohio, several lawsuits have been filed seeking medical monitoring for people living in the affected areas.

Medical monitoring programs may allow for the early discovery and treatment of latent injuries even years after exposure to toxic substances, but such programs also present a substantial expense for any company. Medical monitoring claims may be covered by insurance, but coverage heavily depends on the underlying facts, policy language, and the law governing policy interpretation.

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Rhode Island Supreme Court recognizes that context and case law matter in interpreting policy exclusions

At the end of January, the Rhode Island Supreme Court concluded that a pollution exclusion contained in a general liability policy did not bar coverage for a suit alleging that the policyholder’s negligence caused 170 gallons of home heating oil to leak into its customer’s basement resulting in property damage.  Regan Heating & Air Conditioning v. Arbella Protection Insurance Co., No. 2020-170-Appeal.

  • First, the court confirmed that context matters. Just because a substance can be a “pollutant” in some contexts does not mean that all losses alleging damage caused by that substance are excluded “pollution” claims. 
  • Second, the court recognized that a split in judicial opinions as to the meaning of a disputed policy term is “proof positive” of ambiguity – or, at a minimum, supports a finding that the policy is susceptible to more than one reasonable interpretation.

The Regan ruling is consistent with well-settled principles of policy interpretation. The onus has always been on insurance companies, who hold the drafting pen and the bargaining power, to use clear and unequivocal language to describe what is (or is not) covered. In the absence of clear language, or where reasonable minds could differ – as was the case in Regan – the policy is ambiguous and must be interpreted in favor of coverage.

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Navigating the “Bump-Up” exclusion in 2023: Rules for the road

M&A activity is making a comeback in 2023, according to Bloomberg Law (“M&A Roars Back in $40 Billion Surge Led by Miners, Storage” A. Kirchfeld and D. Nair, Feb. 6, 2023). The rise in transactions—and the likelihood of claims involving them—will no doubt lead to continued D&O insurance coverage disputes over the “bump up” exclusion.

Policyholders can navigate this speed bump, carriers waving the recent Seventh Circuit decision in Komatsu Mining Corp. v. Columbia Casualty Co., No. 21-2695 (7th Cir. Jan. 23, 2023), and the Final Statement of Decision After Phase One Court Trial entered in Onyx Pharmaceuticals, Inc. v. Old Republic Insurance Co., Case No. CIV 538248 (Cal. Super. Ct. San Mateo Cty. Dec. 30, 2022), notwithstanding. 

Rules for the Road to keep in mind:

1. Choice of law matters

Several courts have addressed the bump-up exclusion recently, and arrived at different results. Indeed, despite analyzing the same bump-up exclusion, the San Mateo County Court in California (applying California law) ruled in favor of insurers in Onyx whereas the Delaware Superior Court ruled in favor of the policyholders in Northrup Grumman Innovation Systems, Inc. v. Zurich American Insurance Co., 2021 Del. Super. LEXIS 92 (February 2, 2021) (the Delaware Supreme Court denied interlocutory appeal), and the Eastern District of Virginia Court (applying Virginia law) did as well in Towers Watson & Co. v. National Union Fire Insurance Co., 2021 U.S. Dist. LEXIS 192480 (E.D. Va. Oct. 5, 2021) (currently on appeal in the Fourth Circuit). The Seventh Circuit applied Wisconsin law in Komatsu, ruling in favor of insurers based on a different version of the exclusion. In short, Delaware and Virginia law remain favorable whereas policyholders have not fared as well thus far under California and Wisconsin law. 

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Too damaged to repair? How to maximize your insurance recovery

When a loss event badly damages a key piece of equipment or machinery, an insured business often faces the complicated question: repair or replace? This is especially so when the extent of the damage is unclear because some may still be hidden.

A business presented with this dilemma is well advised to go through that decision-making process assuming that it is spending its own money.

In all likelihood, however, the business will have insurance for the loss event, and most commercial property policies are written on a “replacement cost” basis. Yet, those policies often define “replacement cost” as being the lesser of “the cost to repair, rebuild or replace” the damaged property with property of comparable size, material and quality. They commonly include coverage for the loss of business income sustained by the insured due to the suspension of the insured’s business during the “period of restoration,” and tie the length of that period to the date when the damaged property should be “repaired, rebuilt or replaced” with reasonable diligence. 

These standard commercial property provisions contain a trap for the unwary. Hidden within them lurks the opportunity for the insurance company to second guess the decisions that its insured is now forced to make under abnormal conditions and while facing financial distress.

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A tale of two opinions: The meaning of “physical loss” in the context of commercial property policies for Covid-19-related losses in Pennsylvania

With the onset of the Covid-19 pandemic in 2020, businesses across the country were forced to shut their doors and turn to their commercial property insurance companies to seek coverage. With their properties having been rendered useless for their intended (and insured) business purposes, these insureds reasonably expected their “all risk” policies would provide the promised “business income” protection due to the “physical loss” of their properties. The insurance industry, however, near-universally denied coverage, leading to a proliferation of lawsuits around the country – including in Pennsylvania. 

On November 30, 2022 the Pennsylvania Superior Court issued a pair of decisions that ostensibly addressed the same legal question posed in the vast majority of these cases – whether the term “physical loss” in a commercial property policy can reasonably be construed to mean the loss of use of property for its intended business purpose. Curiously, the Superior Court’s decisions in Ungarean v. CNA & Valley Forge Insurance Co., Nos. 490 WDA 2021, No. 948 WDA 2021, 2022 Pa. Super. LEXIS 467 (Pa. Super. Ct. Nov. 30, 2022) and MacMiles, LLC v. Erie Insurance Exchange, No. 1100 WDA 2021, 2022 Pa. Super. LEXIS 469 (Pa. Super. Ct. Nov. 30, 2022) reached opposite and seemingly contradictory conclusions, leaving the question far from settled within Pennsylvania.

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Even positive reforms can carry hidden risks –A potential limitation period “trap” in the UK’s Third Parties (Rights against Insurers) Act 2010

At a time when, globally, insured businesses are under severe financial strain, the availability and extent of their insurance assets take on a new significance. It is significant not just for troubled businesses and their insurers, but also for third parties with potential or actual claims against those businesses. 

An insured may, for example, notify under a professional indemnity or other liability insurance in response to a third party claim. But if the insured goes into some form of insolvency process, will any insurance proceeds (or the right to those proceeds) form part of the insolvent estate? 

In many jurisdictions, that is the case and it would leave the third party claiming on the insolvent estate in competition with other creditors. In other jurisdictions, however, the law instead affords the third party more direct access to the insurance proceeds.

The UK falls under the latter category, based on the Third Parties (Rights against Insurers) Act 1930 (the “1930 Act”) and the Third Parties (Rights against Insurers) Act 2010 (the “2010 Act”). 

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Physical loss and reasonable expectations of policyholders: The Third Circuit whiffs

On January 6, 2023, the Third Circuit affirmed lower court rulings in 14 consolidated appeals from orders dismissing claims for property damage and business interruption losses resulting from the coronavirus and/or COVID-19. Policyholder lawyers can (and will) find fault with many parts of Wilson v. USI Ins. Service LLC, Case No. 20-3124, in which the Third Circuit tries to predict how the state supreme courts of New York and Pennsylvania would interpret the phrase “physical loss of or damage to property.” 

The Wilson court distills the issue presented as, “whether the businesses’ inability to use their properties for their intended business purposes constitutes ‘physical loss of’ property.” In answering this question “no,” the Wilson court interpreted physical loss of property to require a “complete (or near complete) dispossession of the property, regardless of the purpose for which that property is used,” for there to be physical loss.

What this conclusion means to businesses that lease premises

This conclusion does little for business policyholders who rent space and commit resources towards a particular endeavor. According to Wilson, as long as the property has some function or use, there is no physical loss, even where the policyholder cannot, in whole or in part, conduct its chosen business due to the presence of a deadly virus or disease. In other words, as long an insured restaurant space can be used to, for example, store auto parts, in the court’s view, the policyholder has not been dispossessed of the property, and is not entitled to coverage. This interpretation is neither commercially reasonable nor in keeping with the expectations of policyholders who are tenants operating businesses in the buildings.

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Liability insurance in mass tort bankruptcy cases – A brief primer

Chapter 11 bankruptcy as a means for resolving mass tort claims

In recent years, a growing number of defendants have sought to use reorganization under chapter 11 of the United States Bankruptcy Code to obtain permanent and complete relief from mass tort claims. Many of these entities were defendants in asbestos bodily injury litigation, and were eligible for the special protections for such claims provided in Bankruptcy Code section 524(g). Yet defendants facing other types of claims – including those alleging bodily injury from silica, talc, silicone breast implants, opioid painkillers, and allegedly defective ear protection – also have pursued relief in bankruptcy cases. Several Roman Catholic dioceses, as well as the Boy Scouts of America, have used chapter 11 to seek permanent solutions to sex abuse claims. 

The general outline of the chapter 11 strategy for all of these defendants is similar. A debtor entity obtains immediate relief from tort system litigation (and its attendant costs) by filing bankruptcy, due to the automatic stay of all litigation under Bankruptcy Code section 362. It then prepares a chapter 11 plan that establishes a settlement trust to resolve the mass tort claims against it. The debtor will ask a Bankruptcy Court to issue an injunction that will force mass tort claimants to forego tort litigation against the debtor, in favor of submitting to the settlement trust for resolution.  The debtor’s aim is to emerge from the chapter 11 proceeding shorn of its mass tort obligations, with the settlement trust serving as the exclusive source of resolution for those claims on a permanent basis.

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