Guaranteed Rate v. Ace American Insurance – a victory for policyholders seeking coverage for government investigations

Government investigations by SEC, DOJ, and state attorney generals are a significant source of exposure for companies and their directors and officers. Companies can spend millions of dollars responding to a government subpoena or investigative demand. The broadly worded demands for information or testimony typically require extensive searches through mountains of paper documents and electronically stored information (“ESI”).

As investigation defense costs rise, the question inevitably follows: Will the company’s D&O or professional liability insurance cover the costs of responding to a formal investigative order, civil investigative demand or subpoena? The answer to this question is not always clear-cut. Given the stakes, insurers and policyholders frequently litigate this issue, with courts across the country reaching different conclusions depending on the unique terms, definitions, and conditions of the policies and the type of investigation at issue. A recent decision in Delaware addressing insurance coverage for the costs of responding to a civil investigative demand provides helpful guidance for policyholders seeking coverage for these costs.

In Guaranteed Rate, Inc. v. Ace Am. Ins. Co., No. N20C-04-268 MMJ CCLD (Del. Super. Ct. Aug. 18, 2021), appeal refused, 266 A.3d 212 (Del. 2021), the Delaware Superior Court considered whether a civil investigative demand – issued by the U.S. Attorney’s Office for the Northern District of New York and the U.S. Department of Justice – qualified as a “Claim” as required to trigger coverage under the policyholder’s Private Company Management Liability Policy. The civil investigative demand was issued pursuant to the False Claims Act “in the course of an investigation to determine whether there is or has been a violation of 31 U.S.C. § 3729.”

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D&O insurance to counter ESG litigation – new issues for insurers and policyholders

Strong environmental, social and corporate governance (ESG) business policies are critical to address the fluctuating, unprecedented risks in this changing climate. Any company planning to expand and thrive in the next few decades must evaluate its collective conscientiousness for social and environmental factors, including preparing for the social and market upheavals resulting from greenhouse gas emissions, gender and diversity policies, and shareholder interest in income equality. Implementing forward-looking ESG policies is vital to a modern company’s success, and its retention and management of a socially conscious workforce and investor pool.

Obtaining insurance coverage in this climate of activist shareholders

The evolving ESG landscape requires companies to plan for claims that did not exist just a few years ago. Shareholders are actively requiring boards to be more transparent and responsive to ESG issues, and regulators are enforcing new disclosure requirements. Sometimes disclosure alone is not enough: businesses are scrutinized by shareholders and regulatory entities for underestimating their environmental impact, or over promising their efforts to minimize climate change contributions, known as greenwashing.

Even companies doing their best in ESG governance face the risk of shareholder and regulatory litigation. These risks can be addressed by directors and officers insurance coverage, which generally protects companies, their directors, managers and employees against claims for a “wrongful act.” Unless excluded as a specific type of claim, companies routinely look to their D&O policies to address shareholder claims and defray the costs of regulatory investigations.

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“Illinois’ ‘targeted tender’ rule – a powerful strategy for insureds to select and deselect triggered policies to maximize coverage

Businesses with liability insurance coverage governed by Illinois law should be mindful to take advantage of Illinois’ “targeted tender” rule, which provides insureds a unique strategy for maximizing insurance recoveries for claims triggering multiple different policies. This rule recognizes an insured’s right to “target tender” one or more concurrent insurance policies from a group of policies that potentially apply to a claim against the insured, regardless of insurer efforts to offset their insuring obligations through “other insurance” or contribution.  Kajima Constr. Svcs., Inc. v. St. Paul Fire & Marine Ins. Co., 227 Ill.2d 102 (2007); John Burns Constr. Co. v. Indiana Ins. Co., 189 Ill.2d 570 (2000). Once an insured targets its tender to a particular insurer, “[t]hat insurer may not in turn seek equitable contribution from the other insurers who were not designated by the insured,” who may knowingly forgo an insurer’s involvement. John Burns, 189 Ill.2d at 575.

Illinois insureds can “target tender” away from policies with high retentions or deductibles

The “targeted tender” rule thus is particularly powerful for insureds trying to avoid or minimize the amount of risk they must absorb from “fronting” coverage or policies with substantial self-insured retentions or deductibles. For example, assume a construction company is sued in a wrongful death lawsuit after one of its truck drivers hauling heavy equipment to a job site runs over a pedestrian. The underlying complaint alleges liability triggering the construction company’s commercial auto coverage, which provides dollar-one defense coverage outside of policy limits, as well as the company’s professional liability coverage, which is subject to a $2 million retention before any coverage attaches.  After the construction company notifies both insurers of the lawsuit, they agree to split the insured’s defense costs 50/50, but the professional liability insurer refuses to reimburse any of its 50% share of the defense costs until the $2 million retention has been satisfied. Working with knowledgeable coverage counsel, the insured construction company can obtain a fully funded defense of these lawsuits by “targeting” its tender solely to the commercial auto insurer.

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Responding to a cyber-related business interruption: best practices

One of the top issues facing business today is the risk of business interruption resulting from a cyber-related attack. Regardless of the form of attack – ransomware, denial of service, data theft, or other form of malware – any resulting failure of an organization’s network systems can have severe consequences, financial and otherwise. These may include loss of productivity, lack of or impaired access to websites, and, importantly, loss of sales or income.

Given the potential for significant losses, a strategy for calculating and minimizing losses, and maximizing insurance recoveries for damage from a business interruption should be part of every organization’s cyber incident response plan.  Because every business is unique, there is no “one size fits all” plan that will neatly apply to all businesses or to all business interruption claims. Nevertheless, certain best practices exist and can be applied and adapted to individual businesses to facilitate an efficient and effective response to a cyber-related business interruption.

1. Know your insurance coverage

The first step to maximizing recovery for business interruption is understanding the coverage provided under the applicable insurance policies. Many stand-alone cyber liability insurance policies provide coverage for lost net profits and mitigation costs, and may also cover continuing expenses, such as employee salaries, resulting from a cyber incident. However, there are also certain limitations to such coverage common in most cyber policy forms, even though they are far from standardized. For example, most business interruption coverage includes a waiting period of a certain number of hours before coverage begins. The length of that waiting period can be critical as losses attributable to the business interruption may continue to grow until the network system and level of service has been fully restored.  Insurers also may limit the “period of interruption,” the period of time for which the policy will pay for losses. Depending on the policy language, coverage may end before operations are fully restored.

It is important to understand these limitations when purchasing cyber insurance and to obtain the insurance that best fits the needs of your business. For this reason, we recommend involving insurance coverage counsel to assist in the insurance placement and renewal process.

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The duty to defend requires an early judgment

If an insurance company owes a duty to defend, the dispute should be decided promptly, on the pleadings. Any delay undermines the duty to defend. The scope of the duty to defend should be adjudicated on the pleadings as quickly as possible to give policyholders the true value of their policies and the benefit of their contracts.

The value and purpose of the duty to defend

The duty to defend is one of the most valuable components of an insurance policy. Like it or not, American society is litigious. Companies cannot prevent lawsuits through good conduct, laudable intentions, or strong compliance programs.  Refuting liability and damages is expensive even if the core facts are undisputed or the case is frivolous.

For a single company or individual, the frequency and size of litigation generally is unpredictable, making budgeting for defense costs a difficult task.  In any single year, the risk of litigation is low, but when a claim does come in, defense costs can be significant.  This litigation landscape is a problem for legal departments trying to budget or reserve for litigation costs.

The duty to defend addresses this problem using the principles of risk transfer and risk pooling.

  • Risk transfer: the risk and costs of defending litigation is transferred to the insurance company in exchange for a premium payment.
  • Risk pooling: the insurance company takes the collective risks of litigation against all policyholders in a pool large enough that aggregate defense costs can be statistically analyzed and predicted on an annual basis.

This way no one has to assess the risk that any individual company is sued or anticipate those defense costs. Policyholders can include insurance premium costs in their legal budgets, and shift covered defense costs onto the insurer. The insurance company underwriters can evaluate the aggregate defense spend at a gross systemic level and charge premiums to cover those costs (with a healthy profit margin).

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“Mind the gap”: Guarding against unintended gaps in coverages

As a recent decision from the Eleventh Circuit highlights, when purchasing insurance for workplace bodily injuries, policyholders need to be mindful of how all of their policies fit together, keeping an eye out for policy language that insurers may exploit to manufacture unexpected and unintended gaps in coverage.

Covering the workplace

Typically, employers seek three types of coverage to manage liabilities arising from accidents in the workplace: workers’ compensation coverage, employer’s liability coverage, and comprehensive general liability (“CGL”) coverage. These three types of policies are designed to work together, with workers’ compensation coverage providing protection against most bodily injury claims sustained by employees while working; CGL coverage providing protection against most bodily injury claims asserted by third parties; and employer’s liability coverage filling in any coverage gaps for bodily injury claims brought by employees. To avoid duplicative coverage, employer’s liability policies typically include a workers’ compensation exclusion and CGL policies typically include both a workers’ compensation exclusion and an employer’s liability exclusion.

The intent of these coverages (and exclusions) is to meet the twin goals of ensuring seamless coverage to the employer without having to pay for needless overlapping of coverage. As one treatise explains:

The intent of the employment exclusion [in a CGL policy] appears to be to avoid duplication of coverage provided under Workers’ Compensation and Employers Liability policies.  Accordingly, any interpretation of the commercial general liability exclusion that bars coverage for claims not covered under a Workers’ Compensation and Employers Liability policy would appear to deny coverage erroneously and to create a gap in coverage that almost surely was not intended by the policyholder.

See 21-132 Appleman on Insurance Law & Practice Archive § 132.5 (2nd 2011).

Unfortunately, such intentions may not always align with its insurer’s resolve to avoid paying claims. Just last month, the Eleventh Circuit rejected an insurer’s attempt to improperly expand the scope of a CGL policy’s employer’s liability exclusion. That decision provides helpful ammunition for policyholders to resist similar efforts, and serves as a useful reminder to avoid complacency and watch out for potential ambiguities when purchasing coverage.

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Lessons from Merck v. Ace: A cyberattack does not amount to an ‘act of war’

Cyberattacks continue to grow in sophistication and frequency, with attackers targeting businesses of all industries and sizes with seeming impunity. In the wake of this ongoing pervasive and indiscriminate threat, corporate risk departments are taking measures to assess cyber risks and update network security and protocol in hopes of staying one step ahead of potential hackers.

But just as risk departments are reacting in real time to this ever-growing threat, so too are members of the insurance industry. As cyberattacks grow in sophistication and frequency, costs expended to recover from these attacks grow in kind, which has led to an explosion in insurance claims under cyber insurance policies and other responsive coverage. With insurers obligated to pay substantial sums to settle these claims, the result has been a tightening of the cyber insurance and related markets for renewals and placements and, with respect to claims under existing policies, heightened scrutiny and application of existing terms in rendering claims decisions.

The Court’s decision

An example of such novel application became front and center in a recent decision in Merck & Co., Inc. et al. v. Ace American Ins. Co. et al., Case No. UNN-L-2682-18 (N.J. Sup. Ct.). Merck, a multinational pharmaceutical company, sued its insurers after they denied coverage under an “all risks” insurance policy for a 2017 cyberattack that crippled Merck’s computer systems and caused an alleged $1.4 billion in losses to the company.

Although it was undisputed that the policies at issue provide coverage for “loss or damage resulting from the destruction or corruption of computer data and software,” insurers pointed to an unusual exclusion to support their argument that coverage must be denied: the “Hostile/Warlike Action Exclusion.”

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“Occurrences” in COVID-19 business interruption litigation

Nearly two years into the COVID-19 pandemic, the battles over threshold business interruption coverage issues like the presence of physical loss or damage, causation, and the applicability of policy exclusions continue to rage.  Results have been mixed, with insurers notching wins in federal courts, and policyholders faring better in state courts and in certain jurisdictions.

But scores of policyholders who have avoided pre-discovery dismissal are now grappling with how other policy terms will impact their recovery.

Chief among these – particularly for policyholders with diverse and widespread physical locations and operations – is the impact of a classic question typically dealt with in handling catastrophic liability claims: how many occurrences are there?

The answer has profound implications for the amount of recovery, as it affects not only how deductibles may (or may not) apply but also how primary and excess coverage might respond to a large loss.

Three “tests” have emerged in case law to deal with this problem in the liability context. The “cause” test (adopted by the majority of jurisdictions) determines the number of “occurrences” by looking to the number of causes of injury or loss. The “effect” test determines the number of “occurrences” by looking to the number of resulting injuries or losses. And the “continuous process” test determines the number of occurrences by looking at the number of processes resulting in damage that were continuous, repetitive, and interrelated. See, e.g., Unigard Ins. Co. v. United States Fid. & Guar. Co., 728 P.2d 780 (Idaho Ct. App. 1986).

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D&O insurance for the cannabis industry

Cannabis and the D&O market in 2022

In the early days of 2022, cannabis companies and investors have cause for guarded optimism. The once very real specter of federal intervention in the burgeoning industry seems to have faded into the background as successive presidential administrations have declined to push the issue, and now, all but two states have legalized cannabis in some form. With the cannabis industry reporting record profits despite a global pandemic and continued federal illegality, and numerous states and localities turning to it to fill revenue gaps left by COVID-19, it seems fair to say that cannabis has gone mainstream (see Earl Carr “What You Need to Know About Cannabis in 2022 and Beyond” Forbes).

Yet, as much as some things change, others stay the same. Despite the maturation and growth of the cannabis industry and its significant players, the directors and officers (D&O) insurance marketplace remains treacherous. Many major insurers still refuse to offer D&O coverage to the cannabis industry altogether (see Matthew Lerner “Finding D&O coverage remains a challenge for cannabis companies” Business Insurance), while a minority have decided that the opportunity outweighs the risk – with “opportunity” here meaning the ability to charge cannabis policyholders premiums between two and ten times the market average for coverage that is often quite limited. (See David Kennedy “Directors and officers liability insurance is increasingly important – and costly – for cannabis companies” MJBizDaily).

Cannabis companies, for their part, face a Hobson’s choice: either pay a substantial mark-up for a D&O policy that may or may not provide any meaningful coverage, or remain completely uncovered (others have turned to alternatives like captive insurance, a topic for another article (see, e.g., Ryan Smith, “ARS Launches Captive for Cannabis Company,” Insurance Business Magazine)). At a time when D&O insurance is increasingly expensive across all industry sectors, these factors have led some analysts to describe the cannabis D&O marketplace as “a hard market within a hard market.” (See Kimberly E. Blair, Jonathan E. Meer, & Ian A. Stewart “Cannabis Directors and Officers Liability: Cause for Optimism?” The National Law Review Vol. XI, 189, July 8, 2021)

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NY’s new comprehensive insurance disclosure law is in flux

On December 31, New York’s Governor Kathy Hochul signed into law a change to the insurance disclosure requirements that applies to all civil cases filed in New York state’s courts. CPLR section 3101(f).  The new statute by its terms applies to both pending cases and new filings, with continuing disclosure obligations through appeals, and places heavy burdens on defendants and their counsel, going far beyond the previous insurance disclosure rules for New York state courts and the rules that apply in federal courts.

In signing the statute, which had flown under the radar since being worked up by the legislature last spring, however, the governor signaled that changes were needed [Signing Memorandum], but it was unclear which of the many new requirements of the statute were the focus of her concern.  As of this week, however, we have some insights.  On January 18, the Senate Rules Committee took up Senate Bill 7882, and the Assembly’s Committee on Judiciary took up the parallel Assembly Bill 8852, containing a raft of amendments that would, if passed and signed by Governor Hochul, substantially limit the scope of the statute she signed less than a month ago.  Most significantly, the statute would no longer apply to cases pending prior to the statute’s effective date, only to those commenced on or after its effective date. S7882/A8852 section 4.

Narrowing new insurance disclosure requirements

For any potentially responsive “insurance agreement,” the statute requires production within 90 days of the defendant’s answer of:

all primary, excess and umbrella policies, contracts or agreements issued by private or publicly traded stock companies, mutual insurance companies, captive insurance entities, risk retention groups, reciprocal insurance exchanges, syndicates, including, but not limited to, Lloyd’s Underwriters as defined in section six thousand one hundred sixteen of the insurance law, surplus line insurers and self-insurance programs sold or delivered within the state of New York insofar as such documents relate to the claim being litigated;

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