Category Archives: policyholders

NEW YORK POLICYHOLDERS MAY BE ON THE HOOK FOR UNINSURED PERIODS EVEN WHEN INSURANCE WAS OTHERWISE UNAVAILABLE

Guest Blogger:  John G. Koch, Weisbrod Matteis & Copley PLLC

 The New York Court of Appeals recently struck a blow to policyholders by relieving an insurer of its obligation to indemnify for that part of a long-term harm that occurred when applicable insurance did not exist in the marketplace. See KeySpan Gas East Corp. v. Munich Reinsurance America Inc. et al., No. APL-2016-00236. As is often the case when a loss occurs over multiple, successive policy periods, gaps in available insurance coverage may appear. Gaps in coverage may exist for a number of reasons, including insurer insolvency, lost policies, policy exclusions or occasionally a policyholder’s failure to purchase insurance. Those gaps present problems when liability for long-term harm is allocated pro rata among triggered insurance policies. In such cases, courts are usually faced with two basic options, depending on the law of the jurisdiction: A court may either shift liability for those gaps in coverage to other insurers of the risk, or it may put policyholders on the hook for the gaps. In Keyspan, New York’s highest court opted for the second option, requiring the insured to shoulder the pro rata share of all those periods in which applicable insurance did not exist in the marketplace.

Keyspan’s basic facts are all too familiar. The insured, Keyspan, is statutorily liable for cleaning up contamination that resulted from years of operations beginning in the late 1800s. Keyspan sought coverage and asserted that any pro rata allocation of cleanup costs should not include periods where insurance covering pollution did not exist in the market place (whether due to a pollution exclusion or the fact that general liability coverage was unavailable to public utilities prior to 1925, as Keyspan’s expert testified).

One of Keyspan’s insurers, a Chubb company (Century Indemnity), challenged Keyspan’s position, asserting that insurance policies it issued in the 1950s and 60s obligate it to pay only for damages attributable to occurrences during those policy periods. Chubb argued the insured should have to pay for the coverage gap due to the unavailability of insurance coverage. The New York Court of Appeals agreed, stating that, in situations where cleanup costs must be allocated pro rata, the “during the policy period” proviso in the policies was inconsistent with excluding from the allocation years where insurance was unavailable. The Court essentially reasoned that the “during the policy period” language controlled and relieved insurers from having to pay damages attributable to periods when the insurer’s policies were not in force.

There are a number of takeaways from Keyspan worth noting.

First, and perhaps most importantly, Keyspan does not address the separate and distinct duty to defend. The duty to defend is not mentioned once in the entire opinion (or in the decisions below). This should come as no surprise because the question before the Court of Appeals was who had to pay damages in the form of cleanup costs. Neither defense costs nor the duty to defend were at issue. In fact, the Court never once mentioned its longstanding, oft-cited seminal decision addressing the duty to defend in long-tail cases: Continental Casualty Co. v. Rapid-American Corp., 609 N.E.2d 506, 514 (N.Y. 1993). Accordingly, Keyspan has no impact on the New York Court of Appeals’ several decisions stating that once the duty to defend is triggered by at least one potentially covered claim, the insurer owes a duty to defend the entire claim, including non-covered allegations, without foisting part of the defense onto its insured.  See, e.g., id.; Fieldston Prop. Owners Ass’n, Inc. v. Hermitage Ins. Co., 945 N.E.2d 1013, 1018 (N.Y. 2011).

Second, the Court of Appeals took care to note that the “unavailability” issue was irrelevant in cases where pro rata allocation is inappropriate, citing to its 2016 decision in Matter of Viking Pump, Inc., 27 NY.3d 244, 255 (2016). Pursuant to Viking Pump, if an insurance policy contains a non-cumulation or prior insurance or similar clause, the “all sums” method applies to the indemnity obligation. In such instances, the policy with the non-cumulation or similar clause and the insurance tower above it must pay all damages up to policy limits, with no proration to the insured for uninsured periods.

Third, Keyspan is at odds with the federal Second Circuit Court of Appeals’ Stonewall decision and the decisions of courts in several other “pro rata” jurisdictions that have refused to shift to the policyholder gaps in coverage due to the unavailability of insurance.  Compare Keyspan, No. APL-2016-00236, with Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178 (2d Cir. 1995); Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994). The Court defended its departure from other courts’ rulings by asserting that, in New York, the language of the policy is paramount, whereas other courts, it asserted, focused instead on the public policy of maximizing insurance coverage.

This justification illustrates the tension between touting the policy language as paramount while at the same time adopting the legal fiction that an indivisible long-term loss can be fairly allocated based on time on the risk. By way of illustration, isn’t it true that in most cases environmental damage continuing after 1986 is at least in part attributable to discharges from preceding decades? For example, a migrating contaminated groundwater plume may cause continuing damage, but that continuing damage is undoubtedly also due to the fact that the groundwater is contaminated in the first place from discharges long ago. How is it improper to ask an insurer that issued coverage while discharges were occurring to pay for a part of the damage that results from the continued presence of pollutants in periods where coverage is no longer available in the marketplace? What about the proviso that the insurance policy provides coverage for all sums the insured must pay as damages due to “continuous or repeated exposure to substantially the same general conditions”—i.e., the continued exposure of soil and groundwater to preexisting contamination?

For that matter, what if most of the harm at issue occurred during early operations when discharges were often unregulated, more frequent and more toxic? It may still be impossible to establish the precise quantity and quality of harm during every policy period, but generally speaking, why should insurers on the risk during those earlier years be allowed to pass off a disproportionate share of an “indivisible” liability to the insured for years when no coverage was available? Isn’t this especially odd when, often, the cause of the harm during that post-1986 period—continuing migration of groundwater contaminated by discharges from long ago—begins to attenuate in the later years? It is difficult to find justification for these incongruities in the policy language.

Fourth, one might expect the Keyspan ruling to raise a whole host of new problems in allocation cases where New York law applies. Perhaps some policyholders may be more likely to take on the fact burden of proving that a loss is divisible and can be attributed to certain policy periods on a principled basis—certainly not something that will promote judicial efficiency or economy. At the very least, policyholders will be sure to assert, rightly so, that the coverage block for purposes of allocation should end as soon as the potential liability for environmental harm became known, if not earlier. Indeed, how can an allocation fairly be accomplished with an open-ended coverage block? Will coverage end when a slurry wall is installed? When regulatory standards are met and there is no longer a legal obligation to remediate? When a remedial investigation/feasibility study is complete and estimated cleanup costs are more or less known? When “additional” or “new” damage is de minimis?

None of these latter end-dates makes sense, especially in the context of a pro rata allocation that rests on the legal fiction that an equal amount of harm resulted from every occurrence in every policy period from inception to the present. Needless to say, these issues may make pro rata allocation in New York more difficult, not less, and will likely require more guidance from New York courts. It’ll be interesting.

For more information on insurance coverage law, including news, updates and links to important information in the industry and how it may affect your business, follow my blog, or twitter handle: @CoverageLawAtty.

 

START SPREADIN’ THE NEWS…NEW YORK’S HIGHEST COURT SAYS PRO RATA ALLOCATION IS LEAVING TODAY

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Guest Blogger: John G. Koch, Weisbrod Matteis & Copley PLLC

In a much anticipated decision, New York’s highest court handed policyholders a significant victory in In re Viking Pump, Inc. & Warren Pumps, LLC, Insurance Appeals, No. 59 (N.Y. May 3, 2016).  In the context of long-tail bodily injuries or property damage spanning multiple policy periods, the Court declared that policy language is the King of New York and trumps all else when determining whether the “all sums” or “pro rata” allocation approach applies to a liability insurer’s indemnity obligation.  Specifically, the Court held that the “all sums” approach applies to an insurer’s indemnity obligation where the policy contains language inconsistent with a pro rata approach. In this case, the Court reasoned that a “non-cumulation” or “anti-stacking” clause is inconsistent with allocating an insurer’s liability on a pro rata basis.  Although Viking Pump dealt only with the duty to indemnify, its ruling applies to the broader duty to defend and bolsters existing case law recognizing that the duty to defend language in most general liability policies cannot be reconciled with a pro rata allocation approach.

To put the Viking Pump decision in context, insurers usually prefer a pro rata approach, meaning they can only be liable for their share of a loss based on the time period their policies were in force compared to the overall period that the long term injury or property damage occurred.  This rests on the legal fiction that a single indivisible loss taking place over many years can be treated as one occurrence in each successive policy period, which is an expedient method for dividing the indivisible loss among multiple successive policies based upon each policy’s time on the risk, as opposed to the extent of actual injury or damage that took place during any specific period.  Id.  As the Court stated, the foundation of this approach is that no insurer will have to pay for any injury or damage that occurs outside of its policy period.  Viking Pump, slip op. at 11-12.

Insurers usually prefer the pro rata approach because their risk is typically reduced and the risk of lost policies, insurer insolvencies or other gaps in coverage may fall upon the policyholder.  In contrast, under the “all sums” approach, each successive insurance policy triggered by a long term injury or damage is, essentially, jointly and severally liable for the entire loss up until the policy’s limits are exhausted.  Under this approach, the insured may target one or many insurers for the entire loss, leaving it to the insurers to seek contribution from one another.

Prior to Viking Pump, insurers often brandished Consolidated Edison Co. of New York v. Allstate Insurance Co., 98 N.Y.2d 208 (2002), to assert that New York is a “pro rata” state.  But in Viking Pump, the Court of Appeals distinguished and limited the reach of Consolidated Edison by pointing out that it never formed a blanket rule for pro rata allocation and that the policies in Consolidated Edison did not contain non-cumulation or similar clauses.  Viking Pump, slip op. at 11-12.

The Viking Pump Court held that non-cumulation clauses are antithetical to the concept of a pro rata allocation.  Non-cumulation clauses essentially provide that where a single loss triggers successive policies, any amount paid by a prior policy will reduce the limits of the policy containing the non-cumulation clause.  The original purpose of the clause was to prevent policyholders from double dipping when the industry made the switch from accident based policies to occurrence based policies.  Non-cumulation clauses are inconsistent with a pro rata allocation because they “plainly contemplate that multiple successive insurance policies can indemnify the insured for the same loss or occurrence,” whereas the entire premise underlying pro rata allocation is that an insurer cannot be liable for the same loss to the extent the loss occurs in another insurer’s policy period – hence the legal fiction that a separate occurrence takes place in each successive policy period.  Id. at 18 (emphasis added).  The two provisions are logically inconsistent.  Thus, adopting the pro rata approach would render the non-cumulation clause superfluous in violation of New York’s principles of policy interpretation. For this reason, the Court determined that the “all sums” approach applies to policies containing a non-cumulation clause.

In addition to the pro rata versus all sums allocation issue, the Court determined that the proper method for allocating between primary and excess layers of insurance under the “all sums” method is vertical exhaustion – meaning that a single primary policy may be required to respond to the long term loss up to its policy limits, at which time the excess coverage above that policy is pierced on an all sums basis.  The Court rejected the argument that horizontal exhaustion should apply, where all primary coverage would have to be exhausted before any excess coverage must respond to a loss, noting that the excess coverage was tied to the exhaustion of only the underlying policy, not prior or subsequent policies.  Thus, the Court ruled that vertical exhaustion is the appropriate method.

Although Viking Pump specifically addressed the effect of non-cumulation clauses, it undoubtedly stands for the propositions that: (1) no blanket rule controls how an  insurer’s indemnity obligation must be allocated, and (2), where language or a clause in an insurance policy is inconsistent with the pro rata approach, pro rata allocation does not apply.

The latter point is especially important when considering the issue of whether the duty to defend is subject to pro rata allocation.  Most general liability policies provide that the insurer has a duty to defend “any suit” in which at least one potentially covered claim is alleged.  New York courts have interpreted this language as requiring the defense of the entire lawsuit so long as at least one claim is at least in part potentially covered.  A pro rata allocation is inconsistent with the language obligating insurers to “defend” “any suit” if at least one potentially covered claim is alleged.  Thus, the reasoning in Viking Pump suggests that the “all sums” approach is the appropriate method respecting the duty to defend and is consistent with the duty to defend language found in most liability policies.

To learn more, contact John G. Koch

Weisbrod Matteis & Copley Uncovers Massive Fraud In the Adjustment Of Superstorm Sandy Claims

I, and several colleagues, recently had the good fortune of joining the law firm of Weisbrod Matteis & Copley (“WMC”) and opening its first office based outside of Washington, D.C. in Philadelphia, PA. In addition to representing corporate policyholders in maximizing insurance recoveries, WMC is one of the leading firms in the country representing individuals who have been left high and dry by their insurers after a major disaster, such as Hurricane Katrina or Superstorm Sandy, strikes.

For nearly ten years, the firm has represented the whistleblowers who first discovered fraudulent engineering reports after Hurricane Katrina. It remains the only firm in history to prove to a jury that a FEMA-contracted insurer committed fraud in adjusting Hurricane Katrina claims.

WMC is now bringing that experience to bear for the benefit of home and business owners who continue to suffer so greatly in the aftermath of Superstorm Sandy. The firm represents nearly 1300 Sandy victims who are seeking a fair adjustment of their flood insurance claims by FEMA. Unfortunately, that adjustment process is rife with fraud.

On the positive side, both congress and the media are taking note. Recently, WMC partner, August Matteis, appeared on a television news segment along with Congressman Tom MacArthur to discuss the fraud. You can view that segment by clicking here. Most recently, Matthew Krauss, another WMC attorney, appeared on Maggie Glynn’s radio show to further explain how Sandy victims are being underpaid. That interview can be heard by clicking here.

Victims of natural disasters have suffered enough. If nothing else, FEMA owes them an honest adjustment of their insurance claims.

 

For more information, please contact Lee M. Epstein.

Caveat Emptor in the Brave New World of Cyber Insurance Coverage

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Guest Blogger:  Martin Bienstock, Weisbrod Matteis & Copley PLLC

There are two types of entities in the world, goes the adage: those who have learned that their data was breached; and those who just don’t know it yet.  The cost of these data breaches is no laughing matter, however; according to a recent study sponsored by IBM, the average data breach costs a company more than $200 for each record lost.[1]  (In the health-care sector, the cost are even greater, approaching $400 per-record lost record.[2])  The more records that are lost, the greater the per-record expense, so that a large data breach may give rise to exorbitant costs.[3]

Thoughtful executives can mitigate these costs through effective utilization of insurance coverage.  Insurance companies aggressively are marketing new cyber-insurance policies that provide first-party and third-party coverage in the event of a data breach.  Often, the new policies are accompanied by an exclusion in the entity’s Commercial General Liability Policy for losses arising from a data breach.

Entities entering the market for cyber coverage therefore must be vigilant to ensure that, at the end of the day, their efforts not yield less coverage than previously had been available.

Cyber Insurance Policies Are Often Conditioned Upon Maintaining a Particular Level of IT Security.

The new cyber policies typically require an applicant to complete a comprehensive assessment of its cyber security measures, affirming, for example, that it has in place “up-to-date, active firewall technology,” and “updated anti-virus software active on all computers and networks.”[4]   Coverage may be conditioned on the accuracy of these representations.[5]   In the event of a breach, if it turns out that the IT security information represented in the application form was inaccurate, coverage might not be available.

Thus, in one recent case,[6] an insurer sought to deny coverage because, among other things, the insured health-care provider had not maintained the level of IT security described in its application.  The insurer argued that the policy therefore was void.[7]  Under cyber-liability policies, then, an insured might be excluded from coverage in the event that it was negligent in implementing cyber-security measures – hardly the result that the insured had in mind when it purchased the policy.

Traditional CGL Policies Offer Some Protection for Data Breaches Even When the Insured Failed to Maintain Adequate IT Security.

When a data breach arises from an entity’s failure to maintain security, third-party coverage likely would be available under a standard Commercial General Liability Policy.  The standard CGL Policy provides coverage for “advertising injury.”  It defines such advertising injury to include injury caused by “oral or written publication, including publication by electronic means,” which “disclosed information about a person’s private life.”

This definition of “advertising injury” is ill-suited for costs arising from a data breach since it depends upon “publication.”  In the event of a data breach, many of the costs are unrelated to the actual publication of private data; the costs arise from the mere possibility of publication, not its actuality.  Conditioning data-breach coverage upon an irrelevant “publication” standard makes little sense.

Two recent cases highlight the limitation of relying on the “publication” standard to provide protection against data-breach claims.  In one case, electronic data concerning 50,000 employees fell out of a transport van and never was recovered.  The Connecticut Supreme Court held that the data had not been “published,” since there no factual support for the conclusion that the data, which was not in a readily usable format, ever was accessed by anyone.[8]  In contrast, in another recent case, the Fourth Circuit Court of Appeals affirmed a district court decision that damages resulting from a data-breach did constitute “advertising injury” because the information had been made available on the internet, and therefore was “published.”[9]

Cyber-data and Cyber-security policies can be better designed than the CGL “advertising injury” coverage, so that coverage is not dependent on publication.  But as some insureds have learned to their dismay, cyber-liability policies may be drafted to shift the costs of negligence back to the insured, and to make coverage unavailable for the very data breaches for which the insured purchased the insurance in the first place.

Caveat Emptor

Cyber-risk insurance therefore may serve a useful purpose by providing coverage that is targeted specifically towards data breaches, and that covers damages that go beyond the scope of the traditional CGL Policy. Buyers must beware however that the extra financial and administrative burden they assume in buying such policies not leave them worse-off than before.

For more information, please contact Marty at mbienstock@wmclaw.com or 202.751.2002.

 

[1] IBM 2015 Cost of Data Breach Study United States, conducted by Ponemon Institute LLC (May 2015) at 1.

[2] Id. at 7.

[3] Id. at 7.

[4] A sample cyber-risk policy issued by Travelers Group and containing these representations (last accessed on the date of publication) is available here .

[5] Id., Cyber-Risk Policy at III.M. (p. 22).

[6] Columbia Cas. Co. v. Cottage Health Sys., 15-cv-3432 (2015 C.D. Cal.).

[7] Id., Dkt No. 22.

[8] Recall Total Info. Mgmt., Inc. v. Fed. Ins., 317 Conn. 46, 115 A.3d 458 (2015).  The Connecticut Supreme Court adopted the reasoning of the appellate court in Recall Total Information Management, Inc. v. Federal Ins. Co., 147 Conn.App. 450, 465, 83 A.3d 664 (2014).

[9] Travelers Indem. Co. of Am. v. Portal Healthcare Sols., L.L.C No. 14-1944, 2016 WL 1399517, at *2 (4th Cir. Apr. 11, 2016).

Loose Lips Sink Ships: Policyholder Communications with Insurance Brokers May Not Be Privileged and Immune from Disclosure

Insurance brokers play a vital role in the insurance process. Beyond assisting in the placement of the insurance program, they are often the first to be consulted by the policyholder after a major loss or liability. In fact, brokers are often so involved in the claim process that policyholders may consider their communications with brokers to be privileged and immune from discovery by insurers after a claim dispute arises. Unfortunately, that is not always the case.

Generally, the attorney-client privilege protects confidential communications between attorneys and their clients with regard to the rendering of legal advice. Communications are protected when they are necessary for the effective communication between attorneys and their clients. Protection may not be available when the communication is extended to someone outside of the attorney-client relationship or when the communication involves business, as opposed to legal advice.Man afloat on desk in sea of currency

Courts throughout the country are split on whether broker communications are privileged. Those courts that uphold the privilege recognize that insurance brokers negotiate the coverage and, thereafter, serve as necessary advisors to policyholders. Other courts uphold the privilege when the communications with the broker are made for the purpose of facilitating legal advice. Conversely, some courts refuse to extend the privilege after concluding that insurance brokers are outside the scope of the attorney-client relationship or that the broker provided business, as opposed to legal, advice.

Accordingly, any communications with brokers should be undertaken with an understanding that they may not be protected from disclosure. And, in order to maximize whatever protection that may be available, any sensitive communications with insurance brokers should be made pursuant to a confidentiality agreement and clearly marked as “Privileged and Confidential.”

Questions? Contact  Lee Epstein at Weisbrod Matteis & Copley PLLC.

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