Employment-related practices exclusions and Biometric Information Privacy Act litigation

In West Bend Mutual Insurance Co. v. Krishna Schaumburg Tan, Inc., 2021 IL 125978, the Supreme Court of Illinois held that coverage existed for a class action alleging violations of the Illinois Biometric Information Privacy Act (BIPA) under the terms of a general liability policy. Although a win for the policyholder bar, the precedential value of Krishna was arguably limited by the fact that the underlying class action targeted the insured’s use of customer biometrics. Where the use of employee biometrics is at issue instead, policyholders are likely to face unique coverage issues left open by Krishna, such as the applicability of certain exclusions that bar coverage for injuries arising out of the employment relationship. This blog post provides a brief overview of the employment-related practices (ERP) exclusion and explains why it should not apply to preclude coverage for employment-based BIPA class actions.

Employment-related practices exclusions

The ERP exclusion is a common provision in commercial general liability policies. As it is usually drafted, the exclusion bars coverage for bodily injury or personal and advertising injury to a person arising out of any of the following:

Refusal to employ that person
Termination of that person’s employment
Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, or discrimination directed at that person

In coverage disputes arising out of employment-based BIPA class actions, the issue will be whether the conduct at issue is an employment-related practice that falls within the third prong of the exclusion.

Case law analyzing employment-related practices exclusions

Several courts that have analyzed the scope of the ERP exclusion have concluded that it should be interpreted narrowly. For instance, in Peterborough Oil Co. v. Great American Insurance Co., after the insured fired an employee for theft and pressed charges, the employee sued the insured for malicious prosecution and intentional infliction of emotional distress. 397 F. Supp. 2d 230, 234 (D. Mass. 2005). The insured tendered the lawsuit under its commercial general liability policy, and the insurer denied coverage in reliance on the policy’s ERP exclusion. Id. at 235. The insured filed a coverage action and argued that the exclusion did not apply. Id.

Insurance companies in run-off

By Elizabeth F. Vieyra and Tim Law on 10 November 2021 Posted in Insurance Coverage, Insurance Insolvency & Regulatory

What is an insurance company “in run-off”?

An insurance company is considered to be in run-off when it ceases selling new insurance policies. The essential business of an insurance company is risk pooling. Insurance companies evaluate risks, price and sell insurance policies that assume risks, and pay claims to policyholders that suffer losses covered by the insurance. Insurance companies generate revenue to pay claims principally from two sources: premiums and investment income. Insurance companies also typically buy insurance to insure the risks they have assumed – called reinsurance – which acts as a secondary risk pool. When an insurance company enters run-off, it loses the benefit of ongoing premiums as a source of income to pay claims. The only sources of income become investment earnings, sales of assets, and potential recovery from reinsurance.

What does run-off mean for the policyholder?

Being in run-off does not absolve an insurance company of its duties under policies it has already sold. The contractual relationships between the insurance company and its policyholders do not end. The insurance company still owes to its policyholders the full complement of duties that the policyholder purchased with its premiums. Most important, the insurance company must pay claims as they come due under the policies.

While entering run-off cannot rewrite the terms of existing insurance policies, in practice, many policyholders encounter unexpected challenges from an insurance company in run-off. Because the insurance company is no longer writing new business, its claims-handling protocol may not prioritize customer service as an active company, seeking to maintain its customers, might. In many circumstances, the insurance company may contract with a professional run-off administrator to handle claims. While, again, a run-off insurance company and its agents are subject to the same duties to policyholders as existed before the run-off, from the policyholder’s perspective, the quality of claims handling is often diminished.

Music to my ears: Coverage considerations for musical instrument insurance (Part II of II)

By John Vishneski and Adrienne N. Kitchen on 22 October 2021 Posted in Insurance Coverage

Part II: exclusions, considerations, filing a claim, and tips

This is the second part of a two-part blog series titled, “Music to my ears: Insurance coverage for musical instruments”. Part I covers policy options.

Professional and amateur musicians alike can purchase insurance to cover their instruments.

Musical instrument policies are subject to exclusions and requirements, which may vary. Requirements under the policy are another important component.

Exclusions

Some common exclusions in musical instrument coverage include:

Wear and tear, inherent defect, deterioration, and vermin damage.
Breakage of strings, reeds, or drumheads while the instrument is being played.
Neglect, such as the failure to maintain or properly store the instrument.
Loss or damage during maintenance, repair, or restoration.
Humidity, aridity, or temperature extremes (unless caused by storm or fire); condensation; dampness; frost; dust; effects of sunlight; fading; and changes in color, texture, or finish.
The cost to obtain an estimate or quote to replace or repair the musical instrument.
Damage or loss while the instrument is in an unattended vehicle (though cover may be obtained, sometimes limited by the night-time clause, excluding coverage for loss or damage of instruments left in a car between 10 p.m. and 6 a.m. There may be no coverage without forced entry).
Transit by air, postal, or other delivery transit.
Costs as a result of being unable to use the musical instrument (which may be covered by business income loss coverage under a commercial policy).
Unexplained disappearance.
Intentional damage.
Damage due to pollutants.
Governmental or military action, war, and terrorism (though cover for terrorism may be purchased from some carriers as an endorsement for an additional premium).
Nuclear hazard.

Some exclusions may include anti-concurrent causation language, precluding coverage when the excluded cause of loss is involved, whether there are other causes or not. In particular, the nuclear hazard, war and military action, and pollution coverages may be excluded regardless of whether any other covered cause of loss is also present.

Other considerations

Valuation issues

Insurance carriers providing agreed value coverage require an appraisal for valuation purposes when they issue and/or renew a policy. Appraisals should be reviewed at renewal time, and they should be updated at least every three years. If the instrument is extremely rare, insurers may request their own appraiser prior to issuing coverage.

The value of the insured instruments may be determined at the time of loss or damage, even though an appraisal was required at the time of placement. The insurer may force the insured into arbitration or litigation regarding valuation. If your instrument is more than three years old, the policy should include new for old cover so you can get full replacement value.

Music to my ears: Coverage considerations for musical instrument insurance (Part I of II)

By Adrienne N. Kitchen and John Vishneski on 18 October 2021 Posted in Insurance Coverage

Part I: Policy options

This is the first part of a two-part blog series titled, “Music to my ears: Insurance coverage for musical instruments”. Part II covers exclusions, considerations, filing a claim, and tips.

Musical instruments can cost significant sums running from a few hundred or thousand dollars to a million dollars or more. And that is to say nothing of the special bond musicians have with their instruments (the authors are both amateur musicians, and when the violist even thinks her viola has been bumped while in its case, she feels as though her own person has suffered injury). Professional and amateur musicians, as well as collectors of highly valued or rare instruments, may require or desire insurance to protect their instruments from loss or damage.

Instrument insurance covers the instrument, and usually covers accessories like bows, sheet music, cases, bags, and stands, unless specifically excluded. High-value accessories should be individually listed on the policy.

Musicians may need coverage if the instrument is used routinely for performances or teaching, or if it travels to school, work, lessons, rehearsals, or concerts. Collectors with expensive and rare instruments may want coverage. Professional musicians may need a commercial musical instrument policy (discussed below) to limit the time they spend without their instrument if it needs repair, if they need to rent a temporary instrument while repairs are made or if they need to purchase a new instrument.

Musical instrument coverage can be customized, with policyholders choosing the amount of coverage they need and the amount of the deductible. Musical instrument carriers, which may be specialty insurers, frequently divide instruments into categories, and coverage may also include electronic instruments, recording equipment, and electronic gear.

Some policies have a maximum amount they will insure per instrument. Commercial musical instrument policies provide several valuation options, such as payment for a claim based on an agreed-upon value determined when the policy is placed, the instrument’s value, or its replacement value at the time of loss.

Coverage counsel can assist with placement, review, and renewal for musicians, collectors, and ensembles, and if valuation or coverage disputes arise in the event the unthinkable occurs.

Musical instrument coverage for amateur musicians

Amateur musicians are those who play a musical instrument (or several), but who do not receive compensation for playing the instrument, including people learning to play an instrument, and those who play as a hobby alone or in a group. A musician who makes any income from his or her playing is not an amateur for coverage purposes and may require business insurance.

Some homeowner’s or renter’s policies cover musical instruments, but they are subject to some limitations. Frequently, they contain limits for the home’s total property damage and may have applicable per-item limits or sub-limits for musical instruments, which may be lower than the musical instrument’s value. Many only cover damages occurring while the instrument is in the covered residence. Even when there is off-premises coverage, that amount is limited to 10 percent of the policy’s dwelling coverage limit, which may not cover the loss. Homeowner’s and renter’s policies only cover damage from “named perils” such as fire and theft, but not for unnamed perils. Typically, such policies only provide actual cost value, so it can be difficult to receive compensation for the instrument’s replacement value.

Five COVID-19 business interruption appeals to keep an eye on

By Ashley Jordan and Jessica E. Gopiao on 30 July 2021 Posted in Insurance Coverage

More than a year has passed since COVID-19 first plagued the United States and impinged on the health of more than 34 million Americans. Hundreds of thousands of businesses have shuttered due to the pandemic. Policyholders have relied, and will continue to rely on their business interruption insurance policies to respond to their pandemic-related losses. In these unprecedented times, trillions are at stake with many policyholders calling on the courts to protect their rights.

Reed Smith’s Insurance Recovery Group recently launched a Thomas Reuters column covering cutting-edge topics in insurance from the policyholder perspective. The first column article titled “The appeal of COVID-19 business interruption appeals” discusses the current appellate landscape of COVID-19 business interruption cases.

Brief overview of appellate landscape

The only appellate court that has issued a ruling is the 8th U.S. Circuit Court of Appeals in Oral Surgeons v. Cincinnati Insurance. There, the 8th Circuit affirmed the Iowa district court’s decision to dismiss the insured’s complaint, reasoning that dismissal was warranted where the policy required direct “accidental physical loss or accidental physical damage” and the complaint did not allege any physical alteration of property. The complaint, rather, only pled “generally that Oral Surgeons suspended non-emergency procedures due to the COVID-19 pandemic and the related government-imposed restrictions.” Given the particular policy language, allegations of that complaint, and lack of a “physical alteration” requirement under the law of most states, the decision is not expected to have a significant impact (if any) on pending appeals.

Appeals remain pending in California, District of Columbia, Florida, Illinois, Indiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Oklahoma, Pennsylvania and Wisconsin. No state appellate court has yet rendered a decision.

The article flags five pending appeals for policyholders to keep an eye on, as they will likely shape the future of the law surrounding insurance coverage for COVID-19 business interruption losses. Continue Reading

Consistency not a concern for insurers fighting COVID-19 business loss claims, but policyholders can take advantage of divergent coverage positions

By David E. Weiss, Adrienne N. Kitchen and Andrew Barrios on 29 June 2021 Posted in Insurance Coverage

Under standard property policies, insurers are broadly claiming that the pollution exclusion applies to bar coverage for losses caused by the COVID-19 pandemic. But the insurer in Essentia Health v. ACE American Insurance Company, which involved a Premises Pollution Liability Portfolio Insurance Policy, made the precise opposite argument. Essentia alleged that COVID-19 was a covered pollution condition, while ACE claimed that COVID-19 did not involve pollution. Essentia Health v. ACE American Insurance Company, No. 21-cv-207 (ECT/LIB) (D. Minn., May 25, 2021). Because Essentia turns the usual COVID-19 arguments upside down, it may provide helpful precedent for policyholders seeking coverage. In particular, ACE argued that a separate limitation on virus coverage demonstrated that insurers recognized the risks from a virus pre-COVID-19, and accordingly chose to limit the coverage for losses from diseases that are transmitted from person to person.

The court agreed with ACE that pollution condition could not include a virus (the opposite claim to that made by insurers relating to COVID generally), particularly when read with an endorsement providing limited coverage for viruses

The court granted ACE’s motion, because Essentia sought coverage only on the ground that COVID-19 was a “pollution condition,” reasoning that “pollution condition … read in conjunction with other provisions of the policy in this case, cannot reasonably be understood to include a virus.”

FCA v. Arch and others – The UK Supreme Court’s final word on business interruption insurance losses in light of the COVID-19 pandemic

By Peter Hardy, Margaret Campbell, Mark Pring, Laura-May Scott, Catherine Lewis, Emily McMahan, Charlotte Stewart-Jones and Thomas Morgan on 3 February 2021 Posted in Insurance Coverage, Property Damage & Business Interruption

The United Kingdom Supreme Court (UKSC) handed down its judgment on 15 January 2021 in The Financial Conduct Authority v. Arch Insurance (UK) Limited and Others. This test case was brought by the FCA on behalf of SME business interruption (BI) policyholders who have suffered financial losses as a result of COVID-19. The High Court judgment was handed down on 15 September 2020, with the special direct appeal to the UKSC taking place on 16 – 19 November 2020. The UKSC decision was largely seen as a victory for policyholders. As commented by Reed Smith partner, Mark Pring, in the Financial Times, “it can be said, without fear of hyperbole, that in principle at least this really is a catastrophic outcome for insurers.”

We have been reporting on these matters closely since March of last year, and have produced several more detailed alerts, which can be found on our Perspectives platform.

The court was asked to consider three broad categories of BI policy wordings, namely:

Disease wordings – which provide cover for BI losses sustained in consequence of, following or arising from the occurrence of a notifiable disease within a specific radius of the insured premises (COVID-19 was made a notifiable disease in England and Wales on 5 March 2020);
Hybrid wordings – which provide cover for BI losses sustained where restrictions have been imposed on the insured premises in relation to a notifiable disease; and
Prevention of access / public authority wordings – which provide cover for BI losses sustained where access to the insured premises has been prevented or hindered as a consequence of authority action/restrictions owing to an emergency in the vicinity of the insured premises.

In this post, we summarise some of the key points of the UKSC’s most recent decision and set out our views on some of the implications of the decision for policyholders (subject always to their individual circumstances).

Recent pro-policyholder COVID-19 business interruption decisions

By Matthew B. Weaver and Jessica E. Gopiao on 10 December 2020 Posted in Uncategorized

The COVID-19 pandemic has caused a wave of business interruption lawsuits, particularly between policyholders and their insurance companies. Initially, the nationwide trend was in favor of insurance companies, but recent decisions confirm that policyholders are gaining traction.

Policyholder arguments gather steam in court

One of the pioneer lawsuits, for example, recently survived a summary judgment motion. In Cajun Conti LLC v. Certain Underwriters at Lloyd’s of London, No. 2020-02558 (La. Civ. Dist. Ct., Orleans Parish, Nov. 4, 2020), the policyholder, a restaurant group, sought a judgment declaring that its insurance company should cover losses related to an order entered by Louisiana’s governor banning gatherings of 250 people or more. This caused the restaurants to operate at 50 percent capacity and cease service by 9 p.m. On November 4, 2020, the Louisiana state court denied the insurance company’s motion for summary judgment after finding the following four issues of material fact:

(1) Whether COVID-19 constitutes direct physical loss or damage;

(2) Whether the policy interests necessitate a more liberal reading of prior case law;

(3) If COVID-19 constituted a physical loss or damage, whether COVID-19 impacts the environment;

(4) In the context of civil authority coverage, whether COVID-19-related damages to property at another location within one mile of any of the restaurants is a covered cause of loss.

Likewise, a Pennsylvania state court overruled the insurance company’s motion to dismiss a tavern’s complaint for business interruption coverage because “at this very early stage, it would be premature for this court [to] resolve the factual determinations put forth by defendant to dismiss plaintiff’s claims.” Taps & Bourbon on Terrace, LLC v. Those Certain Underwriters at Lloyd’s, London, No. 00375 (Pa. Ct. Com. Pl. Phila. Cnty. Oct. 27, 2020) (emphasis added). The complaint alleged that the tavern sustained business losses resulting from “the COVID-19 pandemic and . . . state and local orders mandating that all non-essential businesses be temporarily closed.” The order also recognized that “the law and facts are rapidly evolving in the area of COVID-19-related business losses.”

Interpretation of “physical loss of or damage to” property

One area of law that has developed is the interpretation of the phrase “physical loss of or damage to” property, which is commonly found in policies at issue in COVID-19 business interruption cases. Noting the import of the disjunctive “or” in the phrase “physical loss of or damage to” property, the court in Hill and Stout PLLC v. Mutual of Enumclaw Insurance Company, No. 20-2-07925-1 (Wash. Super. Ct. King Cnty. Nov. 3, 2020) held that the policy provided alternative means for coverage: (1) physical loss of property (the Physical Loss Option) and (2) damage to property (the Damage Option). The Washington state court found the Physical Loss Option ambiguous and, consequently, construed it in favor of the policyholder. Under this interpretation, the court concluded that a dental practice’s alleged inability “to see patients and practice dentistry” sufficed to trigger the Physical Loss Option for coverage under the policy.

D&O insurance basics (Part 2)

By Andy Moss and Carolyn Rosenberg on 11 August 2020 Posted in Commercial General Liability, D&O, E&O, Professional Liability, Insurance Coverage, Insurance General

Directors’ and officers’ liability (D&O) insurance protects the personal assets of corporate directors and officers in the event of a lawsuit or other “claim” made against them for, among other things, an alleged breach of their duties in managing the organization. D&O insurance directly covers individual directors and officers for their defense costs, judgments against them, and settlements when they cannot be indemnified by the company, and also covers the company to the extent it pays defense costs, judgments, and settlements as indemnification. It may also cover the legal fees and other costs incurred by the company as a result of a securities claim made against the company as an entity.

The first installment of this blog series on D&O insurance addressed several “nuts and bolts” features of D&O insurance, including the key insuring agreements and definitions. This post discusses key exclusions, as well as common policyholder pitfalls, and new issues that are emerging in 2020.

Key D&O exclusions

All D&O insurance policies contain exclusions. D&O insurance policies are not standardized, however, so the number and wording of the exclusions may vary from policy to policy and insurer to insurer. Most traditional D&O insurance policies can be expected to contain the following exclusions:

D&O insurance basics (Part 1)

By Carolyn Rosenberg and Andy Moss on 28 July 2020 Posted in D&O, E&O, Professional Liability, Insurance Coverage, Insurance General, Uncategorized

This is the first of two posts discussing several major aspects of directors’ and officers’ liability (“D&O”) insurance coverage. Companies approaching a policy renewal deadline, looking to place D&O insurance for the first time, considering increasing the size or structure of an existing D&O insurance program, or otherwise evaluating their overall risk management strategy may find it useful to review some basic features of D&O insurance and potential enhancements.

Why is D&O insurance important?

D&O insurance is an important risk management tool for any company. It functions as a financial backstop for directors and officers by shielding these individuals from personal liability if the company is unable to indemnify them (usually due to a legal prohibition on indemnification or insolvency). D&O insurance also adds value to and financial protection for the company by providing coverage for certain claims asserted against the company—most typically, securities claims—and its management.

Coverage basics

D&O policies typically provide coverage in several parts:

“Side A” or Insured Person Coverage directly covers Insured Persons—including directors, officers and other individuals defined under the policy—for non-indemnifiable claims made against them.
“Side B” or Corporate Reimbursement Coverage reimburses the company for amounts paid by the company as indemnification on behalf of Insured Persons for claims made against the Insured Persons.
“Side C” or Entity Securities Coverage applies in the case of securities claims made against the company as an entity. Some D&O policies issued to private or non-profit companies may provide broader coverage for other types of claims made against the company.
Additionally, some policies may include “Inquiry” or “Interview” Coverage or other investigative costs coverage for certain non-routine document requests, interviews, and other pre-claim matters involving Insured Persons.