Hurricane Beryl has caused destruction in the Caribbean, Mexico and Texas. Continuing issues include power outages, both rolling and continuous, issues regarding access to clean water, severed communications, roads that remain impassable and issues accessing necessities like food and fuel.
Hurricanes cause dramatic damage to businesses and commercial properties every year, totaling some $9 billion
Key Take-aways
Navigating the complex landscape of California’s insurance regulations, particularly when dealing with non-admitted insurers, is a challenge many policyholders face. At the heart of the non-admitted insurer challenge lies a powerful but underutilized tool: The Unauthorized Insurers Process Act, codified at California Insurance Code Section 1610, et seq. Section 1616, is a key component of the Act and yet is often overlooked by policyholders faced with a coverage dispute involving a non-admitted insurer.
Admitted versus non-admitted insurers in California
An “admitted” or “licensed” insurer is an insurance company that must file its rates with the Department of Insurance (“DOI”) and is required to participate in the California Insurance Guarantee Association (“CIGA”). In the event that an admitted insurer becomes insolvent, CIGA is supposed to step in and pay covered claims, subject to various statutory limitations.
Conversely, a “non-admitted” or “surplus lines” insurer is allowed to conduct business in California but is not required to file its rates with the DOI and is not a member of CIGA. By not filing rates with the DOI, non-admitted insurers sometimes have more flexibility in the coverage offered and the prices charged. The DOI maintains a List of Approved Surplus Lines Insurers (“LASLI”) that has met certain capitalization requirements, but the DOI also permits non-U.S. domiciled alien insurers to issue coverage in California that has not met those standards. Thus, the financial strength and stability of a non-admitted insurer can sometimes be significant issues.Continue Reading Empowering policyholders: Forcing non-admitted insurers to post a bond before answering a complaint
At $40-70 billion in estimated insured losses, Hurricane Ian is the nation’s second most expensive natural disaster for the insurance industry. Less than two months later, Hurricane Nicole made landfall in Florida. Securing insurance coverage for these losses will be an important part of rebuilding and recovery.
Recently, Reed Smith’s insurance coverage lawyers hosted a webinar, “Maximizing Insurance Recovery after Hurricane Ian,” to answer several frequently asked questions policyholders ask (or should ask) to ensure maximum recovery after these natural disasters. We summarize a few of those answers below.
What type of insurance coverage applies? Property Damage? Business Income? Ordinance and Law? Service Interruption? All of the above?
Put simply, the answer is: It depends on the facts and the language of the policy, but one or more types of coverage may apply. For example, a policyholder may have property damage coverage if they sustained physical damage to buildings, business property (e.g., machinery, equipment, raw materials, etc.), or property of others in the policyholder’s control. That same policyholder may also have service interruption coverage if they experienced dislocation of utility or telecommunications service and suffered business income losses as a result.
All types of common coverages are discussed during the webinar, which can be viewed on demand.Continue Reading Hurricane Ian and Hurricane Nicole: Answering questions policyholders frequently ask (or should ask) to ensure maximum recovery
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 Key considerations for companies in procuring or renewing D&O coverage
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 tightening cyber insurance market: War exclusions in the wake of Merck v. Ace
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 Pet insurance: Proposed model rules may afford better protection to paw-licyholders
The well-established principle that a policyholder may assign benefits under an insurance policy following a loss was recently reaffirmed by state supreme courts in two jurisdictions: South Carolina and Puerto Rico. These two jurisdictions join the majority rule, which holds that assignments following an insured loss are permissible because they do not change the scope of the insured risk. The majority rule makes commercial sense, as it ensures the free alienability of property, while at the same time maintaining the benefit of the bargain that was struck when the insurance company underwrote the policy.
San Luis Center Apartments v. Triple-S Propiedad, Inc., 2022 WL 611245 (P.R. Feb. 15, 2022)
In a February 2022 decision, the Supreme Court of Puerto Rico, addressing an issue of first impression, ruled that an insured property owner’s assignment of both the prosecution of its claim and a portion of claim proceeds to an investment company was proper, notwithstanding a non-assignment clause in the policy, because the assignment was made after the policyholder’s property sustained damage during Hurricane Maria. The court rejected the insurance company’s argument that the suit against it could not proceed because the policyholder, in making the assignment, had purportedly breached the insurance policy’s non-assignment clause, which provided that “[y]our rights and duties under this policy may not be transferred without our written consent.” In reaching its holding, the court reasoned that because the assignment was made after the property damage occurred, the change in the claimant’s identity did not alter the risk that had been underwritten, the scope of the policy’s coverage or the amount the insurance company would be obligated to pay. Therefore, the policyholder did not breach the contract by making the assignment. Continue Reading Two state Supreme Courts reach commercially reasonable results by permitting post-loss assignments
In early February of this year, we wrote about a New Jersey court’s 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.) regarding the applicability of a “war exclusion” for acts of cyberwarfare. Shortly thereafter, the Russian invasion of Ukraine once again brought to the forefront images of war—both in the traditional sense—as well as in the context of cyberwarfare. While the war in Ukraine has thus far comprised of mainly mostly low-impact cyberattacks by Russian-linked hackers, the perceived increased risk of cyber-attacks in the Russia/Ukraine conflict certainly has the insurance market evaluating its appetite for coverage in this area and looking for ways to clarify coverage in the event of a cyber-attack.
One way the market has sought to clarify coverage is through the use of the “war exclusion” that is typically found in property and casualty policies, cyberliability policies and other forms of coverage. This exclusion was originally designed to exclude damage arising from these “traditional” warlike acts between sovereign and/or quasi-sovereign entities. See Pan American World Airways, Inc. v. Aetna Casualty & Surety Company, 505 F.2d 989 (2nd Cir. 1974) (“[W]ar is waged by states or state-like entities and includes only hostilities carried on by entities that constitute governments, at least de facto in character”).
But, traditional notions of warfare are evolving. “Attacks” are now often committed behind the shield of computer screens and in a technological territory. Unsurprisingly, this evolving landscape of war is translating to evolving views on insurance coverage and evolving arguments around the interpretation of the “war exclusion.”Continue Reading War exclusion: changing battlefields and coverage implications
A fundamental canon of construction used to interpret statutes and contracts is noscitur a sociis, which translates to “it is known by the company it keeps.” In Virginia v. Tennessee, 148 U.S. 503, 519 (1893), the United States Supreme Court explained that “the meaning of a term may be enlarged or restrained by reference to the object of the whole clause in which it is used.” In other words, context is key.
Noscitur a sociis is often utilized when terms are used in a list, allowing words to draw meaning from the common elements of the list. To take a simple example, the word “mustang” could have a different intended meaning when used with “ranger” and “explorer” (vehicles manufactured by Ford) than if used with “filly” and “mare” (horses). Finding the common connection between words in a list is helpful in discerning meaning.
Insurance policies have special interpretive rules
An insurance policy is a special kind of contract, one where ambiguous insurance policy language must be interpreted in favor of insurance coverage for the policyholder. Provisions that grant insurance coverage are read broadly, and exclusions to insurance coverage are construed narrowly. In insurance law, noscitur a sociis is most often used to narrow the reach of exclusions, resolving contextual ambiguities in favor of finding coverage. It can also be used appropriately to construe insuring agreements broadly and to identify multiple reasonable meanings of insurance policy language. Noscitur a sociis should never be used to narrow insuring agreements or to expand exclusions by interpretation.
A provision can be ambiguous in context
Because insurance policies must be read as a whole, the doctrine of noscitur a sociis is an appropriate tool to identify an ambiguity in insurance policy language where a plain-meaning reading of isolated provisions could appear, at first blush, to lack ambiguity.
In Flagship Credit Corp. v. Indian Harbor Ins. Co., 481 F. App’x 907, 910-12 (5th Cir. 2012), the Fifth Circuit considered whether statutory damages for violations of the Texas Business and Commercial Code constituted a “penalty” that fell within an exclusion of “fines, penalties or taxes imposed by law.” The court determined that the word “penalties” gained meaning from the words “fines” and “taxes,” which are paid to the government. While the definition of “penalty” could possibly extend to private settlements for civil wrongs of the type prohibited by the Texas Business and Commercial Code, in context, the terms “fines” and “taxes” made clear that the term “penalties” should be limited to payments to the government.
Likewise, in Hunters Ridge Condo. Ass’n v. Sherwood Crossing, LLC, 395 P.3d 892 (Or. Ct. App. 2017), the court used the doctrine of noscitur a sociis to determine that the word “condominium” was ambiguous in the context of a building being used for both residential and commercial purposes. The other listed structures in the policy definition of “condominium”—“apartment” and “townhouse”—were residential in character, shedding “considerable light” on how a purchaser of insurance would interpret the term “condominium.” Accordingly, the court limited the exclusion to wholly residential structures.Continue Reading Reading insurance policies: context is key