Insurance coverage for sexual abuse in New York

With the passage of New York’s Child Victim’s Act (the “CVA”) and similar revival statutes around the United States, there have been literally thousands of formerly time-barred actions commenced against institutions such as churches and other religious organizations, schools, camps, and other groups working with children for damages on account of sexual abuse by their employees, volunteers or agents allegedly occurring years or even decades in the past. When these institutions turn to their insurers seeking coverage under old insurance policies for injuries occurring during the relevant policy periods, they are often confronted with the defense that, because the institution may have been aware of an alleged perpetrator’s “propensity” to commit acts of abuse, the resulting injury was “expected and intended” and, therefore, excluded from coverage.

Abuse claims generally allege that the institution failed to use due care to protect children from abusive perpetrators for whom the institution is alleged to be responsible. Sexual abuse complaints typically allege that, as a result of the policyholder’s negligence in hiring, retention, supervision, or training, the claimants suffered bodily injury for which the policyholder is legally liable. In resisting coverage for sexual abuse claims, insurers typically assert that, if the institution knew of a perpetrator’s “proclivities” or “propensities,” then the injury arising from child abuse should not be deemed an “occurrence” because it should be considered “expected or intended” from the standpoint of the insured.

Negligent conduct is insurable

These arguments ignore the very high burden insurers must carry on such a defense. Like environmental litigation that preceded it, the insurers attempt to use a modern lens to evaluate policies and procedures adopted many decades earlier. While a church might have at one time believed that a perpetrator could be safe to return to the care of children after an intensive religious retreat and/or psychiatric treatment, one would be unlikely to find any now holding similar views. Thus, what might now seem outrageous, should be seen as negligent (and eligible for insurance coverage) in light of the understanding at the time the conduct occurred.

This is the approach adopted by New York courts. As an initial matter, New York holds that negligence in hiring or retaining an employee who commits a sexual assault can constitute an “occurrence” that is not “expected or intended” from the standpoint of the insured. See RJC Realty Holding Corp. v. Republic Franklin Ins. Co., 808 N.E.2d 1263 (N.Y. 2004). In the context of a suit against a massage parlor, the court explained that, although the assault was not an “accident” from the masseur’s point of view because he expected and intended it, the masseur’s expectations or intentions were irrelevant in determining the applicability of the insurance policy to his employer. Under New York law, the perpetrator’s abusive conduct is not imputed to his employer. Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932 (1999). Instead, the institution is only liable for its own negligence in hiring or retaining such perpetrators. Accordingly, the court did not ascribe the masseur’s expectations or intentions to his employer in determining the applicability of the insurance policy. Id. See also Jewish Cmty. Ctr. of Staten Island v. Trumbull Ins. Co., 957 F. Supp. 2d 215, 233-34 (E.D.N.Y. 2013) (following the RJC court’s interpretation of “accident” in the context of sexual harassment and assault of children at a community center); NYAT Operating Corp. v. GAN National Insurance Co., 46 A.D.3d 287, 287-88 (1st Dep’t 2007) (“[it] does not avail [the insurer] to argue that the assault was foreseeable.”).

Continue Reading

Key considerations for companies in procuring or renewing D&O coverage

Directors’ and Officers’ liability (“D&O”) insurance offers key protections to a company’s board members and management by serving as a financial backstop for their indemnification rights as well as their personal assets in the event directors or officers are the subject of claims or investigations based on their service to the company.  D&O insurance also adds value and financial protection directly to the company that purchases it, including by reimbursing the company when it indemnifies a director or officer, and insuring the company directly against its own liability for securities claims or (in the case of private companies) certain other claims.

Given the importance of D&O insurance to a company’s corporate governance and risk management, it is critical that companies carefully approach the procurement and renewal process for their D&O insurance.  Unlike many other types of insurance policies, D&O policies are neither standardized nor regulated, and the procurement and renewal process can be more complex to navigate.  Although, the individual facts and circumstances of each particular company will dictate the coverages that are needed, there are a number of key issues and policy provisions that should be at the forefront for every company engaged in the procurement or renewal process.  We address a few of these considerations here. 

Key definitional terms

Certain key definitions found in D&O policies impact whether and when coverage will be owed, including who is an insured and the types of matters that constitute a “Claim” for which coverage may be owed.

With respect to the term “Insured Person” (or similar terms), definitions vary widely as to who qualifies for coverage.  Despite being called “directors and officers” insurance, D&O policies often insure individuals who are neither directors nor officers of the company.  To determine what policy language is necessary for a particular company, it is imperative to closely evaluate the proposed language and ensure that the definition captures the company’s decision-makers—whether that includes just directors and officers, or other employees or consultants beyond those individuals.

Continue Reading

A tightening cyber insurance market: War exclusions in the wake of Merck v. Ace

As cyber risks continue to grow and evolve, the cyber insurance market is increasingly likely to take steps to limit its risk profile, often in the form of new or broadened policy exclusions. Cyber insurers are continuously evaluating, amending, and restructuring their insurance products (including their capacity, and, importantly, their pricing) to reflect what they perceive to be growing risks and threats to the bottom line.

A perceived new risk: Merck v. Ace

In some cases, insurers perceive an evolving risk through a development in court decisions interpreting policy terms. The decision of a New Jersey Superior Court earlier this year in Merck & Co., Inc. et al. v. Ace American Ins. Co. et al., Case No. UNN-L-2682-18, appears to exemplify this type of situation. There, the court determined that a “hostile or warlike action” exclusion did not preclude coverage for losses caused by a “NotPetya” ransomware attack, despite insurance company arguments that the malware used in the NotPetya attack was an instrument of the Russian government “as part of its ongoing hostilities with Ukraine.”  The court reasoned that “hostile or warlike action” required “actual hostilities” and that “no court has applied a war (or hostile acts) exclusion to anything remotely close to the facts herein.”

Although Merck involved a first-party property insurance policy, its holding elicited a significant reaction from the cyber insurance market because it involved a coverage dispute related to a cyberattack. With the warning provided by Merck that courts may not be inclined to interpret traditional war exclusions as precluding coverage for state-backed cyberattacks, some insurers appear to be reevaluating their existing war exclusions and amending their policy forms to respond to Merck.

Continue Reading

A policyholder win: Court finds coverage for COVID-19 related losses

Recently, a California federal court issued a favorable decision for policyholders seeking coverage for losses arising from COVID-19 who paid significant premiums to purchase substantial coverage limits including “coverage for business interruption losses from a virus.”  Sunstone Hotel Investors, Inc. v. Endurance Am. Spec. Ins. Co., Case No. SACV 20-02185 (C.D. Cal., June 15, 2022).

The facts

In Sunstone Hotel Investors, Inc., the Boston Marriott Long Wharf (the “Marriott”) hosted a three-day conference in February 2020.  Following the event, the Boston Public Health Department informed the hotel that three attendees tested positive for COVID-19.  Sunstone, the operator of the Marriott, timely filed an initial notice of loss with Endurance under its environmental impairment liability policy for the losses stemming from the presence of COVID-19.

In exchange for the placement of the policy, Sunstone paid a significant premium for an aggregate maximum of $40 million limit of insurance to protect itself against all kinds of events, including $25 million for “business interruption losses from a virus.”

After receiving the notice, Endurance denied the claim in full.  Following the notice but prior to denial, the Boston public health authorities informed the Marriott that the City would force it to quarantine and close immediately if the hotel failed to suspend its operations.  The Marriott thereafter suspended its operations for a period of 14 days.  Prior to the hotel’s reopening date, the State of Massachusetts issued a governmental order mandating the closure of all non-essential businesses, which included the hotel.  The Marriott thus remained closed until July 7, 2020, when the State permitted it to reopen at limited capacity. 

Continue Reading

Court’s denial of employment liability coverage for Biometric Information Privacy Act litigation should not discourage policyholders

Although the policyholder bar has previously had success obtaining coverage for Biometric Information Privacy Act (BIPA) litigation under an employment practices liability (EPL) policy, insurers recently notched a win by convincing a court to deny EPL coverage for an employee-based BIPA class action.  In Church Mutual Insurance Company v. Prairie Village Supportive Living, LLC, the insured’s former employee brought a class action alleging the insured unlawfully collected, used, and disseminated employee biometric identifiers (fingerprints) in violation of BIPA, and the insured sought coverage from its insurer under its general liability (GL) and EPL policies.  No. 21 C 3752, 2022 U.S. Dist. LEXIS 143495 (N.D. Ill. Aug. 11, 2022).  Based on a unique combination of policy provisions not previously addressed in BIPA coverage litigation, the court declined to find coverage under either policy.  Rather than be discouraged from pursuing coverage for BIPA class actions involving employee biometrics, however, there are some important lessons policyholders can glean from this opinion.

The unique terms of the insured’s EPL policy precluded coverage under all policies

The combination of policy terms at issue in Church Mutual was quite unique and does not appear to be typical of those found in most insureds’ policies.  As an initial matter, although the insured had purchased both GL and EPL coverage, the EPL coverage form stated:  “Except for the insurance provided by this coverage form, the policy to which this coverage form is attached does not apply to any claim or ‘suit’ seeking damages arising out of any ‘wrongful employment practice.’”  Right off the bat, therefore, the insured was limited to seeking EPL coverage because it did not dispute that it was seeking coverage for a “wrongful employment practice” as defined in its EPL policy.  Any coverage that may have existed under the insured’s GL policy was irrelevant.

After limiting its analysis to whether EPL coverage existed, the court then focused on an exclusion in the EPL policy entitled “Violation of Laws Applicable to Employers.” Pursuant to that exclusion, the policy precluded coverage for, in relevant part:

“Any claim based on, attributable to, or arising out of any violation of any insured’s responsibilities or duties required by any other federal, state, or local statutes, rules, or regulations, and any rules or regulations promulgated therefor or amendments thereto. However this exclusion does not apply to: Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act, the Age Discrimination in Employment Act, the Equal Pay Act, the Pregnancy Discrimination Act of 1978, the Immigration Reform and Control Act of 1986, the Family and Medical Leave Act of 1993, and the Genetic Information Nondiscrimination Act of 2008 or to any rules or regulations promulgated under any of the foregoing and amendments thereto or any similar provisions of any federal, state, or local law.”

Continue Reading

Don’t forget the supplementary payments solution to the defense cost recoupment problem

States continue to disagree about whether an insurer that defends its insured in a lawsuit can reserve a right to recoup its defense costs from the policyholder if the carrier wins a declaratory judgment that it owed no duty to defend.  Courts in New York and Nevada recently took opposite positions on the issue, but both cited an article that described a simple policy language-based approach policyholders can urge to resolve the issue in their favor. 

The California Buss case permitted recoupment

The California Supreme Court issued a famous opinion favoring recoupment in Buss v. Superior Court, 939 P.2d 766 (Cal. 1997).  It held an insurer has an implied in law right to seek recoupment to avoid unjustly enriching its policyholder if the insurer establishes that a suit’s claims were not even potentially covered. The court said recoupment would not disturb the parties’ arrangement because standard insurance policies do not obligate the insurer to bear those costs.

Continue Reading

You’ve been sued: An insurance attorney’s top tips for securing (and preserving) coverage

Do not assume insurance coverage is unavailable  

Today’s insurance market is complex.  It encompasses a wide range of insurance policies covering all manner of events and circumstances.  Beyond more traditional coverage for personal injury or property damage (under commercial general liability (CGL) policies), companies now routinely purchase Directors & Officers (D&O) policies, Errors & Omissions (E&O) policies, and Employment Practices Liability (EPL) policies, among others.  These policies can cover everything from claims of wrongful termination (EPL) to breach of contract (E&O) to shareholder class actions (D&O).  Further, many CGL policies are “occurrence” based.  This means that if the loss occurred during the policy period, the policy may provide coverage even if the claim is not made until decades later (presuming you recently learned about the loss).  Accordingly, when you or your company faces a lawsuit, never assume insurance coverage is unavailable.

Immediately notice the claim to all relevant insurers 

Beyond identifying potential coverage under existing policies, it is important to promptly place the insurers on notice of the lawsuit.  A failure to give timely notice could result in a waiver of coverage.  Many policies require the insured to give notice “as soon as practicable” or even “immediately” after learning about the occurrence (e.g., accident harming another’s person or property) or claim (e.g., a lawsuit).  These policies often treat delayed notice as a breach of a condition precedent to providing coverage under the policy.  The insurer will likely then deny coverage based on this breach.  While most jurisdictions require an insurer to show prejudice from a delayed notice of an occurrence, claim or suit, some do not.  Providing prompt notice avoids what could be a costly dispute, especially if the insurers succeeds in avoiding coverage.  Therefore, even where you believe a lawsuit will resolve quickly, it is still imperative to give timely notice (and, thereby, avoid forfeiting the coverage purchased).  

Continue Reading

Looking beyond “Physical Damage to Property”: Is Marina Pacific Hotel a winning framework for policyholders?

It’s no secret that businesses of all shapes and sizes have suffered tremendous losses during the COVID-19 pandemic. From closures to the “Great Resignation” to ever-changing consumer demands, businesses have dealt with one problem after another. One of those problems is the denial of insurance coverage under  “all risk” commercial property policies. For the last two years, courts across the country have found in favor of insurers, ruling that SARS-CoV-2, the virus underlying the COVID-19 pandemic, does not cause physical damage to property.

Enter Marina Pacific Hotel, LLC, et al. v. Fireman’s Fund Insurance Company, 2022 Cal. App. LEXIS 608 (2nd Dist. 2022), a case in which the California Appellate Court looked beyond the preliminary question of whether SARS-CoV-2 causes damage to property and got back to legal basics in its analysis of the plaintiffs’ complaint. With Marina Pacific Hotel, policyholders landed a major victory, and the case may provide a winning framework for plaintiff-insureds facing similar legal battles in the future.

The Marina Pacific Hotel Case

The policy at issue in Marina Pacific Hotel contained much of the standard coverage language which has been heavily debated over the last two years, namely, that the insurer will pay for “direct physical loss or damage” caused by or resulting from a covered cause of loss. This language has proven problematic for policyholders dealing with COVID-19 losses as judges have been reluctant to find that a virus physically alters property when viewed through the lens of what is traditionally considered “property damage.”

However, the Marina Pacific Hotel plaintiffs set out detailed allegations of physical damage, including the fact that SARS-CoV-2 can bond with the surfaces of objects it touches altering the cells and surface proteins of that object. Like insurers around the country, Fireman’s Fund argued that SARS-CoV-2 cannot physically damage property, and that the insured’s loss of use of a piece of property does not constitute physical damage.

Continue Reading

Tailoring insurance to protect transactions and contingent risks

Parties to business transactions frequently seek to protect themselves against specific financing, litigation and transactional risks through insurance.  The types of insurance to protect business’s interests and risks in M&A is growing: 

  • Insurance for breaches of contractual representations and warranties have become increasingly common, both for buyers and sellers.
  • Standard-form policies may provide coverage for physical property being conveyed.
  • Bespoke policies protect significant deal assets with contingent value, such as litigation judgments or tax claims. 
  • Other policies protect against known contingent risks of a deal, such as pending litigation risk, fraudulent conveyance risk, tax risk, or successor liability risk.

These and other risk management techniques are tools to help sophisticated businesses reach agreement in valuing and exchanging assets.  Where insurance coverage is available, parties have greater flexibility to allowing modification of  key deal terms, including in valuing assets with uncertain future value, or in modifying or eliminating indemnification provisions, escrow requirements, and materiality caveats. 

Continue Reading

Pet insurance: Proposed model rules may afford better protection to paw-licyholders

Pet insurance is becoming a popular choice for pet owners, fueled by an increase in pet ownership during the pandemic, advancements in veterinary medicine, and a growing recognition that pets (or “companion animals”) are members of the family. Although the pet insurance industry is accelerating at a record pace, many owners have been irritated by the claims process and the surprising lack of sufficient coverage. To address some of these concerns, the National Association of Insurance Commissioners (NAIC) is working on a proposed model law that may offer better protection to owners and ensure a consistent regulatory framework among states.

The basics of pet insurance coverage

Pet insurance is a unique product. Although it contains many elements of human health insurance, it is considered a type of property and casualty insurance. On the marketplace, an owner generally has three coverage options: (1) accident only, (2) accident and illness (the most popular), or (3) accident, illness, and wellness (preventive).

The first pet insurance policy in the United States was issued by Veterinary Pet Insurance (now Nationwide) in 1982 for the famous TV dog, Lassie. Nearly 40 years later in 2021, the North American Pet Health Insurance Association (NAPHIA) reported that pet insurers collected $2.6 billion in premiums – 88% of which came from policies insuring dogs. And, insurers are not just collecting; they are paying some significant claims. The highest paid claim in 2021 was $50,602 for a 5-year old terrier mix in New York who was hit by a car.

Major concerns

The largest drawback of currently available policies is that they all exclude coverage for “pre-existing conditions.” This exclusion may mean that conditions diagnosed or treated in a particular coverage period would be excluded in a subsequent policy period, to the surprise of many owners. For example, one insurer denied a claim for a dog’s hospitalization after swallowing a stuffed animal, citing the dog’s “pre-existing condition” for eating objects. Policies also generally exclude coverage for hereditary conditions and may require a month-long waiting period before coverage even kicks in.

Some pet insurers have also been the subject of consumer fraud claims. One pet insurance broker was the subject of a class action lawsuit in 2020 for its violation of various states’ consumer protection laws because it allegedly misrepresented the basis for changes to an insured’s monthly premiums – some of which increased nearly 200% over a certain period. In addition, the Office of the Insurance Commissioner in Washington found that two insurers, ACE American Insurance Company and Indemnity Insurance Company of North America (Chubb), overcharged consumers through rate increases and did not disclose the increases to their customers. It ordered the companies to repay $4.7 million – including interest – to policyholders.

Continue Reading

LexBlog