“Myopic” ruling limits policyholders’ ability to recover for common law bad faith in West Virginia

The Supreme Court of Appeals of West Virginia has made it harder for policyholders to prevail on claims of common law bad faith against insurers in that state. In State of West Virginia ex rel. State Auto Property Insurance Companies v. Stucky, No. 17-0257, 2017 WL 4582607 (W. Va. Oct. 10, 2017), West Virginia’s highest court held that an insurance company cannot be held liable for bad faith regardless of its dilatory conduct, so long as it ultimately defends and indemnifies its policyholder.  As the dissent in Stucky observed, however, “[t]his over-simplified approach is myopic.”

In Stucky, the policyholder was a construction company that allegedly damaged a couple’s home.  The construction company, though, believed it “was insured for the damage to the … property under a commercial general liability policy ….”

Although the company’s insurer initially agreed “that it would handle the claim,” the insurer nevertheless allegedly “conducted a series of inspections and investigations, thereby delaying a potential settlement of the plaintiffs’ lawsuit, increasing the amount of the plaintiffs’ property damage, and resulting in the lawsuit filed against [the construction company] by the plaintiffs.”

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Marijuana and the “Illegal/Dishonest Acts Exclusion”: Making Sense of K.V.G. Properties, Inc. v. Westfield Insurance Company

A recent federal court decision in “a property loss insurance case” involving the unauthorized growing of marijuana could have a negative impact on the enforceability of insurance policies sold to legitimate marijuana-related businesses. How much of an effect remains to be seen, but there is reason to think it should be minimal.

At issue in K.V.G. Properties, Inc. v. Westfield Insurance Company, No. 16-11561 (E.D. Mich. Nov. 8, 2017), was an insurer’s denial of a commercial property owner’s claim for coverage under a “commercial insurance policy.”  Certain of the property owned by the policyholder, which was intended to be “used for general office or light industrial business,” was damaged when the tenants to whom the property was rented used the property to grow marijuana.  As the court explained, growing marijuana was “an activity not authorized” by the policyholder.  In fact, the property owner was unaware that its tenants were using its property for that purpose until learning that “DEA agents executed a search warrant on the” property.

Nonetheless, the insurance company denied the property owner coverage for the damage to the property caused by that unauthorized activity.

In relevant part, the insurer relied on the “illegal/dishonest acts” exclusion in its policy, which precludes coverage for damage caused by a “[d]ishonest or criminal act by … anyone to whom you entrust the property for any purpose.” Continue Reading

Beware the Fine (Thumb) Print: Insurance Coverage for Class Actions Under the Illinois Biometric Information Privacy Act, and Similar Biometric Privacy Statutes

Since July 2017, national, regional and local businesses operating in Illinois have been hit with a virtual storm of class actions under the Illinois Biometrics Privacy Act (“BIPA”), 740 ILCS 14 et seq.  BIPA regulates how businesses may record and store biometric data from customers or employees, and these actions create the potential for significant losses, including the costs of defending class action litigation and potential awards of statutory damages. Defending, settling and paying judgments in claims under BIPA may be covered in whole or in part under cyberliability, media liability, and/or employment practices liability insurance. Businesses operating in Illinois and states with similar laws (such as Texas and Washington) should carefully review their liability insurance programs to determine whether they may respond to a claim under BIPA or a similar statute, and should provide prompt notice of claim in the event of a suit.

The Illinois BIPA requires written consent before any biometric data can be collected and stored; requires companies to develop a publicly available written policy disclosing its schedule and guidelines for its retention of, and eventual permanent destruction of, employees’ biometrics; and mandates how companies must handle biometric data once in possession. If a company fails to abide by the consent, disclosure, or handling requirements, an employee may recover the greater of either (i) actual damages, (ii) $1,000 for a negligent violation, or (iii) $5,000 for an intentional or reckless violation. Awards of plaintiffs’ attorneys’ fees and injunctive relief are also available. Continue Reading

Insurance Recovery Tips for Companies Suffering Damage after Recent Disasters: 2017 Hurricanes (Harvey, Irma, Maria, Nate), Earthquake (Mexico City), and Wine Country Wildfires (California)

Companies are facing operational and logistical challenges in recovering from the widespread destruction caused by these natural disasters. They will be looking to property damage and business interruption insurance to get them back on track. The time and cost to return to normal operations could be unusually long given the widespread destruction and the lack of labor and resources. Multiple causes of loss impacted many properties, while others endured more than one disaster event. Service interruptions may last well beyond the norm in some areas. All of these severe circumstances could lead to disputes with insurers over maximum coverage for losses if the claim is not carefully handled.

To assist with this insurance recovery process, Reed Smith teamed up with Brad Murlick and Drew Olson from BDO USA to provide an informative free webinar on: “Insurance Recovery for Natural Disasters: Hurricanes, Fires and Earthquakes.” The audio from this webinar can be heard here, and the slides are available here. The webinar contains a wealth of helpful knowledge in handling these claims, such as: the importance of specific policy language, the types of coverage typically available, tips on preparation of your claim, expected areas of dispute with insurers, and thoughts on assembling a team of experts to assist with the claim.

 

 

 

 

 

 

 

 

In Wake of Disasters, Do Not Just Assume No Coverage Available for Cannabis-Related Losses

As reported extensively in the media over the past week, the cannabis industry has been hit hard by recent natural disasters. While companies doing business in this industry may face some unique challenges in purchasing insurance, and when attempting to obtain coverage for losses, insurance coverage – contrary to certain media reports – nevertheless may be available to them.  As such, cannabis-related companies should not just pass on submitting claims to their insurers when they experience losses.  Nor should they reflexively forego obtaining insurance in the first place.

Recent media reports

Both the Northern California wildfires and Hurricane Maria have caused extensive cannabis-related losses:

  • On October 13, 2017, The New York Times reported: “Fatal fires that have consumed nearly 200,000 acres in Northern California, devastating the region’s vineyards particularly in Napa and Sonoma Counties, are also taking a toll on a fledgling industry just months before its debut: recreational marijuana. Many of the region’s farms, including those that harvest cannabis, have been scorched, including those in Sonoma County and in Mendocino County, the center of California’s marijuana industry. Mendocino is one of three California counties that comprise [the] Emerald Triangle, where much of the United States’ marijuana is produced.”
  • On October 12, 2017, cnn.com reported: “Blazes have destroyed a number of farms in Mendocino County right before legal recreational sales begin in California.”
  • Also on October 12, 2017, the USA Today reported that “[m]arijuana farmers and dispensary owners across Northern California are nervously watching as wildfires burn through some of the state’s prime cannabis growing areas and destroy valuable crops ….”
  • On October 11, 2017, Marijuana Business Daily reported: “Hurricane Maria devastated Puerto Rico’s medical marijuana industry, setting back its development at least six months – if not much longer – and causing millions of dollars in damage to [medical marijuana] businesses. No outdoor marijuana cultivation facilities survived ….”

Often citing industry insiders, some of these publications have reported that insurance is not available to cover cannabis-related losses. The New York Times, for example, reported that “reliable insurance [is] difficult to acquire.”  Other publications went further, stating categorically that no insurance is available to the cannabis industry.  CNN reported:  “Cannabis cultivators cannot insure their businesses because federal law prohibits marijuana, which means that financial institutions can’t go near it.”  Likewise, the USA Today reported that “pot growers can’t get crop insurance like traditional farmers ….” Continue Reading

“Smoking Gun” Still Not Necessary To Prove Insurer Violated Pennsylvania’s Bad-Faith Statute

In Rancosky v. Washington National Insurance Company, No. 28 WAP 2016, the Pennsylvania Supreme Court confirmed that, to prevail on a claim pursuant to Pennsylvania’s bad-faith statute, a policyholder does not have to prove that an insurance company acted with a “motive of self-interest or ill-will.”  While the Pennsylvania Superior Court had reached the same conclusion more than 20 years ago, the Supreme Court had never addressed the issue until just recently.

Proving that an insurance company acted with a bad motive can be quite challenging. As Reed Smith explained in an amicus brief it filed on behalf of its client in Rancosky, requiring “a policyholder to prove (by clear and convincing evidence, no less) the insurer’s bad motive (i.e., what was in the insurer’s head) … would make it exceedingly difficult to prove statutory bad faith, a task which is sufficiently difficult as is. This is especially true since insurers routinely seek to shield their true motives under the attorney-client privilege or attorney work product doctrine.”

Writing for a unanimous court, Justice Baer agreed, rejecting the insurance industry’s long-running attempt to add just such a requirement to the elements of statutory bad faith in the commonwealth: Requiring “an ill-will level of culpability would limit recovery in any bad faith claim to the most egregious instances only where the plaintiff uncovers some sort of ‘smoking gun’ evidence indicating personal animus towards the insured.”  Justice Baer explained that the court did not believe that Pennsylvania’s legislature “intended to create a standard so stringent that it would be highly unlikely that any plaintiff could prevail thereunder when it created the remedy for bad faith.”

As addressed in more detail in Reed Smith’s recent client alert, “Pennsylvania Supreme Court Agrees That, to Prevail on Claim for Statutory Bad Faith, Policyholder Need Not Prove Insurer Acted with Self-Interest or Ill Will,” the Supreme Court’s decision in Rancosky is a welcome, albeit not unexpected, ruling for policyholders.  It confirms what has been the law of the commonwealth for more than two decades already:  Policyholders are not required to find the “smoking gun” to prevail on a claim for statutory bad faith.

Disaster Relief Resources For Individuals After Hurricanes Harvey And Irma

Hurricanes Harvey and Irma have brought widespread destruction and extraordinary damage to property that will require a long recovery. Individuals will need substantial relief to replace and repair homes and personal property. This blog provides guidance about insurance and governmental resources available to assist individuals after these Hurricanes and discusses common issues and questions arising in seeking aid. Topics covered are disaster issues relating auto insurance, flood insurance, homeowners insurance, SBA disaster relief loans and refinancing, FEMA aid, mortgage forbearance, replacement of original documents, legal aid for low income individuals, and other related questions. For a helpful written compilation of links to resources: Reed Smith Harvey Relief Guide, Reed Smith Irma Relief Resources Guide, and Know Your FEMA Rights.

For information on Disaster Relief Resources For Individuals After Hurricanes Harvey And Irma, please view our video with partner James Davis and associate Emily Garrison.

When Assessing Insurance Needs, Medical-Marijuana Dispensaries Must Consider Pennsylvania Regulations

Pennsylvania’s burgeoning medical-marijuana industry is and will be carefully regulated. When purchasing insurance, medical-marijuana dispensaries should pay careful attention to the Commonwealth’s regulations, in particular to the regulations relating specifically to dispensaries. Pennsylvania’s medical-marijuana regulations are only temporary, and most of them (including the ones relating to dispensaries) will expire in 2018

Certain of those regulations directly address insurance. For example, Pennsylvania requires that dispensaries “obtain and maintain an appropriate amount of insurance coverage that insures the site and facility and equipment used in the operation of the facility.” 28 Pa. Code § 1141.44(a). “An adequate amount of comprehensive liability insurance covering the [dispensary’s] activities authorized by the permit shall begin on the date the initial permit is issued by the Department and continuing for as long as the [dispensary] is operating under the permit.” Id.

Pennsylvania also requires that all dispensaries “obtain and maintain workers’ compensation insurance coverage for employees at the time the [dispensary] is determined to be operational by the Department.” 28 Pa. Code § 1141.44(b). Continue Reading

Texas Legislature Votes to Restrict Policyholders’ Rights

Texas lawmakers are now on the fast track to restrict policyholders’ rights when their insurance companies fail to pay property insurance claims arising out of weather events, such as storms involving heavy winds and hail. Now that the Texas Senate has approved House Bill 1774, Governor Abbott is almost sure to sign it.  Unfortunately, this will unleash unexpected and unpleasant surprises for Texas businesses and other insurance policyholders.

Most significantly, this harmful piece of legislation is designed to cut back on penalties that are intended to deter bad faith conduct by insurance companies, as well as to empower policyholders to fight back when their claims are denied, delayed or handled in inappropriate ways. The new legislation seeks to diminish these substantial penalties that previous Texas legislatures created for the purpose of deterring such bad faith conduct by insurance companies.  Interest that can be awarded by Texas courts for certain property insurance claims would drop from 18 percent to 10 percent.  This is a dramatic reduction in the damages that can be awarded against insurers, and the impact must be understood as encouraging abuse and delay by insurers.

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Reps & Warranties Insurance Case Highlights the Need for New Expertise and Old-Time Common Sense

A rare lawsuit concerning coverage under a reps & warranties policy presents two issues of interest to M&A lawyers:

  1. If the insured under a reps & warranties insurance policy fails to obtain the insurer’s consent to a settlement, coverage for that settlement is forfeited, even if the settlement was “panicked” and on a short timeframe.
  2. Sell-side policies do not cover allegations of seller fraud. This is why buy-side policies are preferred – they cover the buyer’s losses resulting from seller fraud.

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