I recently wrote about lessons that could be learned from the ongoing insurance coverage jurisprudence related to the coronavirus / Covid-19 pandemic.  That article discussed broad trends that had developed and cohered across this vast litigation landscape, through multiple decisions in many courts over the course of several months or more.  Although descriptive, most of those trends have been and are anti-plaintiff, anti-policyholder, and anti-insurance recovery.

Is a pro-policyholder trend on the horizon? 

This piece is different in two important respects.  First, it focuses on a point that has not yet achieved a level of pervasiveness that could be fairly characterized as a trend, although it should and hopefully will reach that point soon.  Second, this piece discusses a positive outcome for policyholders seeking to recover for their coronavirus- and Covid-19-related losses.Continue Reading Policyholders seeking coverage for Covid-19-related losses may have reason to be optimistic

In the past few months, in cases considering whether SARS-CoV-2/COVID-19 can cause direct physical loss or damage to property so as to trigger business income coverage, policyholders have secured three wins in state appellate courts: Ungarean in the Superior Court of Pennsylvania, Huntington Ingalls in the Vermont Supreme Court, and Cajun Conti in the Louisiana

Many commercial property insurance policies require that policyholders submit a Sworn Statement in a Proof of Loss (also referred to as “Proof of Loss”) in order to receive benefits under the policy. A Proof of Loss provides the insurer with specific information about the incident giving rise to the claim, such as the cause, the nature of any damage sustained, and the financial impact to the business, if any. In the event a policyholder suffers a financial loss as a result of an insured event, it is essential that the policyholder understands how to calculate business income losses covered under its policy so it can attest to that amount in the Proof of Loss. Ultimately, the specific language in the policy will dictate the policyholder’s approach for calculating business income losses, but there are two general approaches typically used by insurance industry experts.

Top-Down or Gross Receipts Method

The first approach is referred to as the “Top-Down or Gross Receipts Method”.  Under this approach, the policyholder must (1) calculate the lost sales resulting from covered property damage and then (2) subtract expenses that were saved as a result of not achieving those sales.          

(1)        Projected Sales – Actual Sales = Lost Sales

(2)        Lost Sales – Saved Expenses = Business Income Losses

  • Projected Sales

“Projected Sales” (also referred to as “but for revenue”) is the revenue the policyholder would have earned between the date covered property damage forced the policyholder to suspend its operations and the date when the policyholder resumed, or reasonably could have resumed, normal operations (the “Period of Restoration”) if the insured event had not occurred. To develop a foundation for Projected Sales, the policyholder may consider:

(a) the history of sales in the years leading up to the incident;

(b) the pre-loss average monthly sales achieved in those years;

(c) actual purchase orders and/or contracts that could not be fulfilled/satisfied due to the covered event;

(d) the rate of inflation; and

(e) any other factors that could influence the expected sales volume or price offered for impacted products 

These other factors may include seasonality, growth, industry trends, and other outside factors (e.g., political changes, changes in industry regulations, competition, economic forecasts and conditions, etc.).Continue Reading Calculating business income losses for a business interruption claim

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

How cryptocurrencies are viewed by courts can be determinative when seeking coverage for a cryptocurrency-related loss, and whether cryptocurrency is “money,” “securities,” or “property” has been the subject of heavy debate.

In our previous blog post, we explored how your current D&O and/or cyber insurance policies may provide coverage for crypto-related losses. In this article, we discuss whether and how coverage may also exist for certain losses under typical property and/or specie insurance policies.

Is cryptocurrency “property”?

When determining whether your loss of or inability to access your cryptocurrency is covered under your property and/or specie policy, the first question to ask is whether cryptocurrency constitutes covered “property.”

The Internal Revenue Service (“IRS”) has provided some guidance.  In March 2014, the IRS declared that “virtual currency”, such as Bitcoin and other cryptocurrency, will be taxed as “property” and not currency. See IRS Notice 2014-21, Guidance on Virtual Currency (March 25, 2014); see also IRS Has Begun Sending Letters to Virtual Currency, Internal Revenue Serv. (July 26, 2019), (“IRS Notice 2014-21 … states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions.”). Continue Reading Can property or specie insurance provide coverage for crypto losses?

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  

When applying for insurance, prospective (or existing) insureds are frequently asked to confirm, either in a formal application or in a side letter, that they are not aware of any circumstances, incidents or events that could result in a claim being made against it.  If the insured identifies any potential claim, the insurer will either decline coverage or exclude the identified, potential claim from coverage. 

But if the insured answers “no,” which is typically the case, the insurer issues the policy and collects the premium.  If a claim is eventually made under the policy, the insurer will often review the insured’s application answers to determine if the claim should have been disclosed and whether there is a basis for denying coverage based on misrepresentation or concealment.  But does an insured’s application answer truly justify such a defense?  In answering application questions, is the insured supposed to speculate about future events?  Maybe not, at least in some states.

California Civil Code  Section 339 rejects subjective judgments as a basis for misrepresentation defenses

In California, for example, application answers that are based on an insured’s opinion cannot be the basis for rescission.  California Insurance Code § 339 states: “Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question.”  In other words, questions in an insurance application that require an insured’s subjective judgment cannot be the grounds for a claim of misrepresentation or concealment.

Insurance application questions that ask the insured to identify circumstances that it believes may result in a future claim, or ask the insured to opine on the likelihood that it could be held liable in the future, seek the insured’s subjective opinion.  That type of judgment call cannot justify a defense of misrepresentation or concealment in California under Section 339.  What a party believes or does not believe is not objective factual information.

The Ninth Circuit agrees that statements of opinion cannot support a misrepresentation defense

The Ninth Circuit is in accord.  It has reviewed the same issue with respect to an insured’s answers in a professional liability insurance policy application.  In James River Ins. Co. v. Schenk, 523 F.3d 915 (9th Cir. 2008), the insurance application at issue read:

After inquiry, are any [lawyers within the firm] aware of any circumstances, allegations, Tolling [sic] agreements or contentions as to any incident which may result in a claim being made against the Applicant or any if [sic] its past or present Owners, Partners, Shareholders, Corporate Officers, Associates, Employed Lawyers, Contract Lawyers or Employees or its predecessor in business?

Id. at 918 (emphasis added).

The question sought the insured’s subjective assessment as to whether past occurrences might give rise to future claims.  The Ninth Circuit found that a reasonable person could conclude that the question “elicited a statement of opinion” and held that a statement of opinion could not be the basis of a claim for legal fraud.  Id. at 922.  The James River court found that questions asking the insured as to whether an incident “may result” denotes something more than a purely theoretical possibility of a lawsuit.  The court reasoned: “Whether the factual circumstances concerning any individual client gave rise to a sufficient probability of legal action was a judgment call reflecting an analysis of those circumstances.”  Id. at 921-22 (emphasis added). Continue Reading Insurance applications seeking an insured’s subjective opinions cannot support insurer defenses of misrepresentation or concealment

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

Evidenced by its $1.29 trillion market cap, (CoinMarketCap, May 17, 2022) interest in cryptocurrency has skyrocketed in recent years (Haar, 2022). Indeed, as of April 2, 2022, the cryptocurrency market was larger than Italy’s GDP, the eighth largest in the world (Adams and Walker, 2022).

Of course, with more interest and value comes more risk, such as theft of digital assets, cyber security concerns, and regulatory impacts. With respect to the evolving crypto markets, this increase in risk is widespread and readily apparent.  Indeed, President Biden signed an executive order on March 9, 2022 requiring the government to assess the risks and benefits of creating a central bank digital dollar, as well as other cryptocurrency issues (Johnson and Shalal, 2022; White House, 2022).

Who is at risk?

If you or your company trade cryptocurrencies on your own behalf or on behalf of clients, make or receive payments in cryptocurrency, store the keys and digital wallets that secure cryptocurrencies and other digital assets like NFTs, develop blockchain technologies, or advise whether cryptocurrencies are a sound investment, then you or your company may be exposed to crypto-related losses.

As an example, companies and their directors and officers could face shareholder or derivative actions alleging gross negligence or breach of fiduciary duties based on allegedly unsound advice relating to the investment in, use of, or management of cryptocurrencies or other digital assets. Public companies may also be subject to regulatory investigations involving cryptocurrencies.

Cryptocurrency is also a popular target for ransomware hackers. Since the first bitcoin block was mined in 2009, more than $1.3 billion has been stolen from cryptocurrency exchanges (Kenneth, 2021).

Will insurance cover crypto-related losses?

Given that cryptocurrency is in its infancy, most insurance policy forms do not expressly address crypto-related losses or risks. That said, specific coverage for such losses may be available, particularly under D&O (directors’ and officers’ liability or management liability) coverage or cyber (network security/privacy liability) coverage.  Depending on the text of the policy and the nature of the loss at issue, coverage may lie under existing E&O, crime, and property policies as well.

D&O insurance

D&O insurance protects the personal assets of and provides armor for a company’s board and management. More specifically, it insures (1) claims made against the directors and officers when the company cannot indemnify them (“Side A” coverage); (2) the company itself when the company is required to indemnify its insured directors and officers for claims made against them (“Side B” coverage); and (3) the company against its own liability in a securities claim or (in the case of private companies) any non-excluded claim made against the company as an insured entity (“Side C” coverage).

The policy’s definitions of “Claim” and “Loss” are a good place to start to determine whether D&O coverage may be triggered for crypto-related losses.  The term “Claim” should be broad enough to include civil lawsuits, criminal proceedings, administrative proceedings, and investigations against directors and officers, and sometimes include demands to enter into a tolling agreement or requests for interviews or to produce documents made to directors and officers.  The term “Loss” should include defense costs, damages, settlements, judgments, and pre- and post-judgment interest, and also should include certain fines and penalties, punitive, exemplary, and multiplied damages (when insurable under applicable law), and awards of plaintiff’s attorney’s fees, among other items.Continue Reading Are your crypto risks insured? Look at D&O and cyber policies first

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